1
EXHIBIT 13 DRAFT - 3/3098
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
1997 versus 1996
Raytheon Company reported 1997 earnings of $849 million, or $3.55 per
share, not including a restructuring and special charge, on sales of $13.7
billion. For 1996, earnings were $783 million, or $3.31 per share, not including
a special charge, on sales of $12.3 billion.
For 1997, operating income increased 28 percent on an 11 percent
increase in sales, before restructuring and special charges. Raytheon's 1997
results include only a partial year related to the July acquisition of the Texas
Instruments' defense business (TI Defense) and less than two weeks' results
related to the December merger with the defense business of Hughes Electronics
Corporation (Hughes Defense). On a pro forma 1997 basis, Raytheon's revenues
would have been in excess of $20 billion.
Raytheon's 1997 net income was $527 million, or $2.20 per share,
including a restructuring and special charge of $322 million. For 1996, net
income was $761 million, or $3.22 per share, including a special charge of $22
million.
The restructuring and special charge of $322 million, after tax ($495
million pre-tax), included $221 million ($340 million pre-tax) applicable to the
Electronics segment, principally Raytheon Systems Company, $81 million ($125
million pre-tax) applicable to the Engineering and Construction segment, and $20
million ($30 million pre-tax) applicable to the Aircraft segment. The charge
principally includes the costs of facility and office closures, employee
severance costs, one-time costs from the merger with Hughes Defense and the
acquisition of TI Defense, nonrecurring charges related principally to contract
valuations, and the write-down of non-current assets to fair market value to
recognize a permanent impairment.
The Raytheon Systems Company provision was made in conjunction with
the consolidation and reorganization of its four separate components into one
structure in order to remain competitive in the defense industry. As announced
on January 23, 1998, Raytheon Systems Company plans to make major changes at 26
facilities, closing 20 and partially closing six over the next two years. This
will result in a planned reduction of facility space from 42 million square feet
to 34 million square feet, or approximately 20 percent. In addition, Raytheon
Systems Company plans to reduce employment by approximately 10 percent - or
8,700 jobs - over the next two years and 2,700 engineers will be reassigned to
help fill technical positions. Raytheon Systems Company will also organize its
operations to bring together the best practices and technologies from across the
organization while optimizing the utilization of facilities and eliminating
duplication and excess capacity.
It was also announced on January 23, 1998, that Raytheon Engineers &
Constructors (RE&C) would close or partially close 16 offices in early 1998 and
reduce its workforce by approximately nine percent, or 1,000 positions. These
actions come in response to RE&C's 1997 profit performance, which declined from
1996. Raytheon believes that RE&C's results were adversely affected, in part, by
a slowdown in some of RE&C's served global engineering and construction markets.
2
Raytheon entered 1998 with a strong backlog of $21.3 billion,
including a U.S. government backlog of $12.5 billion.
The Segment Financial results are as follows:
The Electronics segment led Raytheon's sales and earnings performance
in 1997, with record sales and record operating income, not including the
restructuring and special charge. Both sales and operating income were up for
Raytheon Electronic Systems and Raytheon E-Systems, both of which are now part
of Raytheon Systems Company, as well as for Commercial Electronics. Raytheon's
1997 results include partial results for Raytheon TI Systems, formerly TI
Defense, which was acquired on July 11, 1997, for $2.95 billion in cash, subject
to post-closing adjustments, and for Hughes Defense, with which Raytheon merged
on December 17, 1997. The Hughes transaction was valued at $9.5 billion, subject
to post-closing adjustments, comprised of approximately $5.5 billion in common
stock and $4.0 billion in debt which was assumed by the merged company. These
two defense businesses are now also part of Raytheon Systems Company.
In December 1997, the company sold its Switchcraft and Semiconductor
divisions, which were part of Commercial Electronics, for $183 million in cash.
In March 1998, the company announced that it had reached an agreement
to sell its European-based Raytheon Elecronic Controls business. This sale will
be the last resulting from the company's strategic assessment of its appliance
business, which was begun in early 1997. In February 1998, the company announced
that it had entered into an agreement to sell its commercial laundry business.
There can be no assurance that these sales will be consummated. In September
1997, Raytheon completed the sale of its home appliance, heating and air
conditioning, and commercial cooking operations. As a result of these
dispositions, the company has included the remaining operations of the Major
Appliances segment within the Electronics segment in 1997.
For 1997, Raytheon Aircraft reported record sales and record operating
income, reflecting increased shipments of general aviation aircraft and
contracts for services. Based in Wichita, Kansas, Raytheon Aircraft offers one
of the broadest product lines in the general aviation market.
Sales for Raytheon Engineers & Constructors were essentially flat in
1997 compared with 1996, while income was lower than 1996 due, in part, to
delays in funding of new international orders and slowdowns on several turnkey
projects, along with the increased expenses required to develop international
opportunities, the benefits of which will not be realized until future periods.
Sales to the U.S. Department of Defense were $4.6 billion or 34
percent of consolidated sales in 1997 versus $4.0 billion or 33 percent of
consolidated sales in 1996. Total sales to the U.S. government were $6.3 billion
or 46 percent of consolidated sales in 1997 versus $5.1 billion or 42 percent of
consolidated sales in 1996.
Administration and selling expenses increased to $1,095 million, or
8.0 percent of sales in 1997, from $1,021 million, or 8.3 percent of sales in
1996, due principally to the acquisition of TI Defense.
3
Research and development expenses increased to $415 million, or 3.0
percent of sales in 1997, from $323 million, or 2.6 percent of sales in 1996,
due principally to the acquisition of TI Defense.
The company announced in the third quarter of 1996 that it would exit
the manual-clean range market and dispose of the assets related to that
operation, including its facility located in Delaware, Ohio, and recorded a $34
million pre-tax charge for this closing. The after tax effect was $22 million,
or $.09 per share.
Operating income in 1997, not including a restructuring and special
charge of $495 million pre-tax, was $1,579 million, or 11.5 percent of sales
versus $1,232 million, not including a special charge of $34 million pre-tax, or
10.0 percent of sales in 1996. A significant portion of the increase was due to
the acquisition of TI Defense. Operating income for 1997, including the
restructuring and special charge, was $1,084 million, or 7.9 percent of sales
versus $1,198 million, or 9.7 percent of sales, including the special charge in
1996.
Interest expense increased to $397 million in 1997 from $256 million
in 1996. The increase was due principally to the debt financed acquisitions of
TI Defense in July 1997, Chrysler Technologies and Rust Engineering in the
second quarter of 1996, and higher short-term interest rates available to the
company.
Interest and dividend income decreased to $38 million in 1997 from
$102 million in 1996. The 1996 amount included accrued interest on a retroactive
federal income tax refund claim.
Other income, net was $65 million in 1997 versus $39 million in 1996.
The 1997 amount includes a $72 million net pre-tax gain from the sale of certain
subsidiaries.
Federal and foreign income taxes were $263 million in 1997 compared
with $322 million in 1996. The 1997 effective tax rate was 33.3 percent versus
29.7 percent in 1996. The effective tax rate reflects the statutory rate of 35
percent reduced principally by Foreign Sales Corporation tax credits and
incremental research and development tax credits applicable to certain
government contracts, partially offset by non-deductible amortization of
goodwill. The increase in the effective tax rate in 1997 from 1996 was due to
accrued retroactive research and development tax credits applicable to certain
government contracts recorded in 1996.
For reasons discussed above, earnings, not including the after tax
effect of the restructuring and special charge of $322 million, were $849
million in 1997 versus $783 million in 1996, not including the special charge of
$22 million. Net income in 1997 was $527 million versus $761 million in 1996.
Basic earnings per share in 1997 were $3.55, not including the
restructuring and special charge of $1.35 per share versus $3.31 in 1996, not
including the special charge of $.09 per share. Basic earnings per share
including the restructuring and special charge were $2.20 in 1997 versus $3.22
in 1996, including the special charge.
4
Basic earnings per share calculations were based on 238.9 million
average shares outstanding in 1997 and 236.6 million average shares outstanding
in 1996. 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,
outstanding shares were reduced by the repurchase of 1.7 million shares on the
open market at a cost of $94 million, to offset 1.7 million shares issued due to
the exercise of employee stock options. Additionally, the company issued 102.6
million shares of Class A common stock in connection with the merger with Hughes
Defense. In January 1998, the Board of Directors authorized the purchase of up
to 5 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. In February
1995, the Board of Directors authorized the repurchase of up to 12 million
shares of the company's common stock. There have been 9.5 million shares
purchased under this authorization. In January 1998, the Board of Directors
authorized the repurchase of the remaining 2.5 million shares originally
authorized.
The book value of common shares outstanding at December 31, 1997, was
$30.79 as compared with $19.46 at December 31, 1996. The increase in book value
is primarily attributable to the issuance of approximately $5.5 billion of Class
A common stock in connection with the merger with Hughes Defense. Return on
average equity was 16.8 percent in 1997, not including the restructuring and
special charge versus 17.9 percent in 1996, not including the special charge.
Backlog consisted of the following at December 31:
(In millions) 1997 1996
- ---------------------------------------------------------
Electronics $16,302 $ 7,303
Engineering and Construction 3,239 3,565
Aircraft 1,709 1,163
Major Appliances -- 35
------- -------
Total backlog $21,250 $12,066
U.S. government-funded
backlog included above $12,547 $ 5,637
- ---------------------------------------------------------
For the year ended December 31, 1997, cash flows from operating
activities were $963 million as compared with $291 million for the year ended
December 31, 1996. In 1997, funds were used for additions to property, plant and
equipment of $459 million, dividends of $189 million, purchases of treasury
stock of $94 million, and net payments for acquired companies of $3,087 million.
Funds were provided primarily by increasing long-term debt by $2,889 million.
5
In August 1997, the company issued $3.0 billion of debt securities in
a public offering comprised of $500 million of notes due 2000 which have a
coupon rate of 6.3 percent, $1.0 billion of notes due 2002 which have a coupon
rate of 6.45 percent, $1.0 billion of notes due 2007 which have a coupon rate of
6.75 percent, and $500 million of debentures due 2027 which have a coupon rate
of 7.2 percent. Neither the notes nor the debentures are redeemable prior to
maturity. This financing, along with increased short-term borrowing, was used
principally to fund the acquisition of TI Defense and pre-fund the merger with
Hughes Defense.
In February 1998, the company filed a shelf registration with the
Securities and Exchange Commission registering the possible future issuance of
up to $3.0 billion of debt and/or equity securities. In March 1998, the company
issued $1.6 billion of debt off this shelf registration. Partial proceeds from
the issuance were used to refinance debt assumed in connection with the merger
with Hughes Defense. The company issued $500 million of notes due 2001 which
have a coupon rate of 5.95 percent, $450 million of notes due 2005 which have a
coupon rate of 6.3 percent, $300 million of notes due 2010 which have a coupon
rate of 6.55 percent, and $350 million of debentures due 2018 which have a
coupon rate of 6.75 percent. The notes due in 2001 and 2005 are not redeemable
prior to maturity. The notes due in 2010 and the debentures due in 2018 are
redeemable under certain circumstances. The issuance of $900 million of debt
securities essentially completes the company's previously announced plans to
refinance the acquisition of TI Defense and its merger with Hughes Defense. The
remaining $700 million is additional refinancing of bank and commercial paper
borrowings.
Debt, net of cash and marketable securities, was $9,766 million at
December 31, 1997, as compared with $3,588 million at December 31, 1996. The
increase is principally due to the financing requirements of the merger with
Hughes Defense and the acquisition of TI Defense, partially offset by the sale
of some appliance and other non-core operations. Net debt as a percent of
capital was 48.4 percent at December 31, 1997, as compared with 43.8 percent at
December 31, 1996.
Accounts receivable increased to $1,056 million at December 31, 1997,
from $809 million at December 31, 1996, due principally to the merger with
Hughes Defense and the acquisition of TI Defense.
Contracts in process increased to $4,661 million at December 31, 1997,
from $2,592 million at December 31, 1996, due principally to the merger with
Hughes Defense and the acquisition of TI Defense.
Property, plant and equipment, net, increased to $2,891 million at
December 31, 1997, from $1,802 million at December 31, 1996, due principally to
the merger with Hughes Defense and the acquisition of TI Defense.
Other assets increased to $16,474 million at December 31, 1997, from
$3,868 million at December 31, 1996, due principally to goodwill of $10,865
million arising from the merger with Hughes Defense and the acquisition of TI
Defense.
6
The changes in individual asset account balances noted above are due
to the overall increase in the company's asset base resulting from the merger
with Hughes Defense and the acquisition of TI Defense.
Capital expenditures were $459 million in 1997 versus $406 million in
1996. Capital expenditures in 1998 are expected to be slightly above the 1997
level, primarily due to the merger with Hughes Defense and the acquisition of TI
Defense.
Dividends declared to stockholders during 1997 were $209 million
versus $190 million in 1996. The quarterly dividend rate was $.20 for all
quarters of 1997 and 1996.
Total employment was approximately 119,200 at December 31, 1997, as
compared with approximately 75,300 at December 31, 1996. The increase was due
principally to the merger with Hughes Defense and the acquisition of TI Defense,
partially offset by employee reductions in the Aircraft and Engineering and
Construction segments and the sale of the home appliance, heating and air
conditioning, and commercial cooking operations.
Credit ratings for the company, based on the merger with Hughes
Defense and the acquisition of TI Defense, have been established by Moody's at
P-2 for short-term borrowing and Baa1 for senior debt, and by Standard and
Poor's at A-2 for short-term borrowing and BBB for senior debt. Duff & Phelps
has provided ratings of D-2 for short-term borrowing and BBB+ for senior debt.
The company expects that its cash flow from operations and asset reductions will
be sufficient to maintain investment grade credit ratings and available debt
financing will be sufficient to meet any additional funding requirements in
1998.
Lines of credit with certain commercial banks exist as sources of
direct borrowing and/or as a standby facility to support the issuance of
commercial paper by the company. The lines of credit were $9.0 billion and $3.5
billion at December 31, 1997 and 1996, respectively. At December 31, 1997, $3.5
billion had been borrowed under the lines of credit. During January 1998, the
lines of credit were reduced to $8.0 billion. The company does not currently
anticipate making future borrowings under the remaining lines of credit.
The following discussion covering quantitative and qualitative
disclosures about the company's market risk is "forward-looking" information.
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 with commercial banks primarily to
reduce the impact of changes in interest rates on short-term financing
arrangements. The company also enters into foreign exchange contracts with
commercial banks to minimize fluctuations in the value of payments due to
7
international vendors and the value of foreign currency denominated receipts.
The market risk sensitive instruments used by the company for hedging are
transaction driven, are directly related to a particular asset, liability or
transaction for which a commitment is in place, and are entered into with
commercial banks.
Financial instruments held by the company which are subject to
interest rate risk include notes payable, commercial paper, long-term debt,
marketable securities, long-term receivables, investments, and interest rate
swap agreements. The aggregate hypothetical loss in earnings for one month of
those financial instruments held by the company at December 31, 1997, which are
subject to interest rate risk resulting from a hypothetical increase in interest
rates of 10 percent is approximately $2 million, after tax. The hypothetical
loss was determined by calculating the aggregate impact of a one month increase
of 10 percent in the interest rate of each variable rate financial instrument
held by the company at December 31, 1997, which is subject to interest rate
risk. Fixed rate financial instruments were not evaluated as the risk exposure
is not material. In March 1998, the company issued fixed rate debt securities
and used the proceeds to pay down variable rate borrowings.
The company's outstanding foreign currency forward exchange contracts
include contracts to buy and/or sell British Pounds Sterling, Japanese Yen,
Netherlands Guilders, German Marks, Canadian Dollars, French Francs, and
Australian Dollars. All foreign exchange contracts were related to specific
transactions for which a firm commitment existed, and therefore the associated
market risk of the market risk sensitive instruments and the underlying firm
commitments in the aggregate is not material.
Recurring costs associated with the company's environmental compliance
program are not material and are expensed as incurred. Capital expenditures in
connection with environmental compliance are not material. The company is
involved in various stages of investigation and cleanup relative to remediation
of various sites. All appropriate costs expected to be incurred in connection
therewith have been accrued at December 31, 1997. 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, in the
opinion of management, any additional liability will not have a material effect
on the company's financial position, liquidity, or results of operations after
giving effect to provisions already recorded.
The company is in the process of conducting a comprehensive review of
its computer systems to identify the systems that could be affected by the "Year
2000" issue and has initiated an enterprise-wide program to resolve the issue
and continues to evaluate appropriate courses of corrective action, including
modification or replacement of certain systems. The total cost is not expected
to have a material effect on the company's financial position or results of
operations.
8
The company presently believes that, with modifications to existing
software and conversions to new software, the "Year 2000" issue will not pose
significant operational problems for the company's computer systems. The "Year
2000" issue also creates risk for the company from unforeseen problems from
third parties with whom the company deals. The company is in the process of
contacting its key suppliers and other third parties to determine the possible
impact on its business. There can be no assurance that their "Year 2000"
solutions will be successful. Such failures of the third parties' computer
systems could have a material impact on the company's ability to conduct its
business.
The company adopted the American Institute of Certified Public
Accountants' Statement of Position 96-1, Environmental Remediation Liabilities,
in 1997. The adoption of the standard did not have a material effect on the
company's financial position or results of operations.
The company adopted Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, in 1997. The adoption did not have a material
effect on the company's financial position or results of operations.
The company adopted Statement of Financial Accounting Standards No.
128, Earnings per Share, in the fourth quarter of 1997, which required
restatement of prior year information. The adoption did not have a material
effect on the company's financial position, results of operations, or earnings
per share.
In 1998, the company will adopt Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, and Statement of Financial Accounting Standards No. 132,
Employer's Disclosures about Pensions and Other Post-retirement Benefits by
making the appropriate disclosures.
1996 versus 1995
Raytheon Company reported 1996 earnings of $783 million, or $3.31 per
share, before a third quarter special charge of $22 million, or $.09 per share.
For 1995, earnings were $787 million, or $3.24 per share, before a one-time gain
of $5 million, or $.02 per share.
Total Raytheon sales in 1996 reached $12.3 billion, with sales up in
all four business segments.
Raytheon's total backlog at the end of 1996 stood at $12.1 billion, up
$1.5 billion, or 14 percent, compared with year-end 1995. The backlog increase
was driven principally by a 59 percent increase in the backlog of Raytheon
Engineers & Constructors at the end of 1996 compared with the end of 1995.
Raytheon Engineers & Constructors ended 1996 with a record backlog of $3.6
billion.
The company made three acquisitions in 1996: the aircraft modification
and defense electronics businesses of Chrysler Technologies, the engineering and
construction assets of Rust International, and the marine communication assets
of Standard Radio AB of Sweden.
9
The Segment Financial results are as follows:
The Electronics segment's 1996 sales and income increased over 1995's
results, which included a one-time special charge. Sales and income increased at
Raytheon E-Systems, reflecting inclusion of a full year of E-Systems results as
well as a partial year's results for the complementary acquisition of two
Chrysler Technologies defense businesses. Raytheon's Massachusetts-based defense
operations experienced declines in sales and income. Excluding D.C. Heath and
Xyplex, which were divested in late 1995 and early 1996, respectively, sales and
income increased in Raytheon's Commercial Electronics business.
Raytheon Aircraft, the world leader in general aviation, reported
record sales and increased income for the year over 1995, which included a
one-time special charge, due to increased aircraft shipments and services.
Raytheon Engineers & Constructors, one of the largest engineering,
construction, operations and maintenance firms in the world, reported record
sales for the year. Although sales were higher than 1995 due primarily to
increased engineering and construction effort, income was down due to the delay
of higher margin international turnkey projects combined with the effects of
strike-related losses at Cedarapids.
Raytheon Appliances had record sales for the year due to increased
shipments of heating and air conditioning products, refrigerators, and
self-clean ranges; however, income, before the special charge, was flat due
principally to competitive pressures in the retail market and increased sales
promotion costs.
Sales to the U.S. Department of Defense were $4.0 billion or 33
percent of consolidated sales in 1996 versus $4.0 billion or 34 percent of
consolidated sales in 1995. Total sales to the U.S. government were $5.1 billion
or 42 percent of consolidated sales in 1996 versus $4.7 billion or 40 percent of
consolidated sales in 1995.
Administration and selling expenses decreased to $1,021 million, or
8.3 percent of sales in 1996, from $1,086 million, or 9.2 percent of sales in
1995, due principally to the inclusion of a full year of E-Systems results and a
partial year's results for the acquired Chrysler Technologies businesses.
Research and development expenses increased to $323 million, or 2.6
percent of sales in 1996, from $316 million, or 2.7 percent of sales in 1995,
due principally to the inclusion of a full year of E-Systems results and a
partial year's results for the acquired Chrysler Technologies businesses.
Operating income in 1996, before the special charge of $34 million
pre-tax, was $1,232 million, or 10.0 percent of sales versus $1,320 million, or
11.2 percent of sales, in 1995. The 1995 operating income excludes a special
charge of $125 million and nonrecurring items of $77 million. Operating income
for 1996, including the special charge, was $1,198 million, or 9.7 percent of
sales, while operating income for 1995, including the special charge and
nonrecurring items, was $1,118 million.
10
In the fourth quarter of 1995, the company recorded, in accordance
with Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
the company's past practice, a special pre-tax charge of $125 million related
principally to a provision for idle real estate of $65 million and goodwill
valuation adjustments of $60 million. Of the $125 million charge, $115 million
applied to the Electronics segment and $10 million applied to the Engineering
and Construction segment. Raytheon also reported an additional pre-tax charge of
$77 million to cost of sales related principally to provisions for inventory of
$42 million and contracts of $35 million. Of the $77 million charge, $47 million
applied to the Electronics segment and $30 million applied to the Aircraft
segment.
The company announced in the third quarter of 1996 that it would exit
the manual-clean range market and dispose of the assets related to that
operation, including its facility located in Delaware, Ohio, and recorded a $34
million pre-tax charge for this closing. The after-tax effect was $22 million,
or $.09 per share.
The company recorded in the first quarter of 1994 a restructuring
provision of $250 million before tax. The restructuring was driven by the
significant reductions in the defense budget and increasing commercial
competition. Approximately 65 percent of the restructuring costs were
attributable to the company's defense business and the remainder to its
commercial business. The company completed personnel reductions of 4,400 people
under this restructuring provision, including both salaried and bargaining unit
employees located in Massachusetts and other states and in foreign locations.
Through December 31, 1996, $249 million of restructuring costs had been
incurred, of which $103 million were employee-related costs and $146 million
were related principally to asset disposals and idle facilities.
Interest expense for 1996 increased to $256 million from $197 million
in 1995. The increase was due principally to the higher average debt level.
Interest and dividend income increased to $102 million in 1996 from
$26 million in 1995, due principally to accrued interest before tax on a
retroactive federal income tax refund claim.
Other income, net was $39 million in 1996 versus $244 million in 1995.
The 1995 amount includes a $210 million net pre-tax gain from the sale of D.C.
Heath.
Federal and foreign income taxes were $322 million in 1996 compared
with $399 million in 1995. The 1996 effective tax rate was 29.7 percent versus
33.5 percent in 1995. The effective tax rate for 1996 reflects the statutory
rate of 35 percent reduced by accrued research and development tax credits and
Foreign Sales Corporation tax credits, partially offset by non-deductible
amortization of goodwill. The decrease in the effective tax rate in 1996 from
1995 was due to the accrued retroactive research and development tax credits
applicable to certain government contracts.
11
For reasons discussed above, earnings, before the special charge of
$22 million, were $783 million in 1996 versus $787 million in 1995, before the
one-time gain of $5 million.
The composition of the $5 million one-time gain recorded in 1995 is as
follows (in millions):
Pre-tax Tax After tax
------------------------------------
Sale of D.C. Heath $210 $(74) $136
Special charge (125) 44 (81)
Non-recurring charge (77) 27 (50)
---- ---- ----
$ 8 $ (3) $ 5
Basic earnings per share were $3.31, before the special charge of $.09
per share versus $3.24 per share in 1995, before the one-time gain of $.02 per
share. Basic earnings per share, including the special charge, were $3.22 in
1996 versus $3.26 in 1995, including the one-time gain.
Basic earnings per share calculations were based on 236.6 million
average shares outstanding in 1996 and 243.0 million average shares outstanding
in 1995. All share and per share amounts have been restated to reflect the
two-for-one stock split in October 1995. During 1996, outstanding shares were
reduced by 6.1 million shares as the result of the company's purchase of
outstanding shares at a cost of $306 million, partially offset by 1.8 million
shares issued upon the exercise of employee stock options.
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 1996,
1.8 million shares were purchased under this authorization. In February 1995,
the Board of Directors authorized the repurchase of up to 12 million shares of
the company's common stock. Through December 31, 1996, 9.5 million shares had
been purchased under this authorization.
The book value of common shares outstanding at December 31, 1996, was
$19.46 as compared with $17.83 at December 31, 1995. Return on average equity
was 17.9 percent in 1996, before the special charge versus 19.2 percent in 1995,
before the one-time gain.
Backlog consisted of the following at December 31:
(In millions) 1996 1995
- ----------------------------------------------------------
Electronics $ 7,303 $7,411
Engineering and Construction 3,565 2,240
Aircraft 1,163 836
Major Appliances 35 64
------- -------
Total backlog $12,066 $10,551
U.S. government-funded
backlog included above $ 5,637 $ 5,142
12
The Electronics backlog at December 31, 1996, included $1.1 billion
related to the SIVAM contract awarded by the government of Brazil to monitor and
protect the Amazon River rain forest. On March 14, 1997, the company announced
that the contract had been signed by the government of Brazil and all financing
agreements for the program had been finalized.
For the year ended December 31, 1996, cash flows from operating
activities were $291 million as compared with $1,175 million for the year
ended December 31, 1995. In 1996, funds were used for additions to property,
plant and equipment of $406 million, dividends of $190 million, purchases of
treasury stock of $306 million, and net payments for acquired companies of $584
million. Funds were provided by increasing short-term debt by $1,007 million.
In 1995, under the company's 1992 shelf registration of $500 million
of debt securities and a 1995 registration of $1,500 million of debt and/or
equity securities, the company issued $1,125 million of debt securities in a
public offering comprised of $750 million of notes due 2005, which have a coupon
rate of 6.5 percent and $375 million of debentures due 2025 which have a coupon
rate of 7.375 percent. The notes are not redeemable prior to maturity, and the
debentures are not redeemable prior to July 15, 2005. This financing, along with
increased short-term borrowing, was used principally to fund the 1995
acquisition of E-Systems.
Debt, net of cash and marketable securities, was $3,588 million at
December 31, 1996, as compared with $2,494 million at December 31, 1995. Net
debt as a percentage of capital was 43.8 percent at December 31, 1996, as
compared with 36.8 percent at December 31, 1995.
Accounts receivable decreased to $809 million at December 31, 1996,
from $927 million at December 31, 1995, due principally to the sale of
receivables to bank syndicates and other financial institutions.
Contracts in process increased to $2,592 million at December 31, 1996,
from $2,213 million at December 31, 1995, due principally to increased effort on
major foreign turnkey projects at the Engineering and Construction segment.
Property, plant and equipment, net, increased to $1,802 million at
December 31, 1996, from $1,584 million at December 31, 1995, due to increased
investment in the Aircraft segment and the acquisition of the Chrysler
Technologies businesses and Rust Engineering.
Other assets increased to $3,868 million at December 31, 1996, from
$2,884 million at December 31, 1995, due principally to goodwill arising from
the acquisitions of the Chrysler Technologies businesses and Rust Engineering.
Capital expenditures were $406 million in 1996 versus $329 million in
1995. The increase was due principally to higher expenditures in the Aircraft
segment.
Dividends declared to stockholders during 1996 were $190 million
versus $182 million in 1995. The quarterly dividend rate was $.20 for each
quarter of 1996 versus $.1875 for each quarter of 1995.
13
Total employment was approximately 75,300 at December 31, 1996, as
compared with approximately 73,200 at December 31, 1995. The increase was due
principally to the acquisitions of the Chrysler Technologies businesses and Rust
Engineering, partially offset by reductions in the defense electronics segment
and the sale of Xyplex.
FORWARD LOOKING STATEMENTS
Statements which are not historical facts contained in this Report are
forward-looking statements under the provisions of the Private Securities
Litigation Reform Act of 1995. All forward looking statements involve risks and
uncertainties. The company wishes to caution readers that several important
factors, including those noted in the Management's Discussion and Analysis
section of this Report, could affect the company's actual results and could
cause its actual results in fiscal 1998 and beyond to differ materially from
those expressed in any forward looking statements made by, or on behalf of, the
company. Further information regarding the factors that could cause actual
results to differ materially from projected results can be found in Raytheon's
reports filed with the Securities and Exchange Commission, including statements
under "Risk Factors" in our Consent Solicitation Statement/ Prospectus dated
November 10, 1997 or "Item 1 - Business" of our Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
FIVE YEAR STATISTICAL SUMMARY
(In millions except share data)
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
Results of Operations
Net sales $13,673 $12,331 $11,804 $10,098 $ 9,334
Operating income 1,084(1) 1,198(2) 1,118 896(4) 1,045
Interest expense 397 256 197 49 32
Net income 527(1) 761(2) 792(3) 597(4) 693
=======================================================================================================
Basic earnings per share $ 2.20(1) $ 3.22(2) $ 3.26(3) $ 2.27(4) $ 2.57
Cash dividends declared per
common share 0.80 0.80 0.75 0.738 0.70
Average common shares outstanding
(in thousands) 238,915 236,600 243,030 263,103 269,567
- -------------------------------------------------------------------------------------------------------
Financial Position at Year-End(5)
- -------------------------------------------------------------------------------------------------------
Current assets $ 9,233 $ 5,528 $ 5,187 $ 4,893 $ 4,525
Property, plant and equipment, net 2,891 1,802 1,584 1,361 1,422
Total assets 28,598 11,198 9,907 7,448 7,297
Current liabilities 11,886 4,692 3,690 3,283 2,796
Long-term debt 4,406 1,500 1,488 25 24
Total debt 10,062 3,727 2,704 1,058 898
Stockholders' equity 10,425 4,598 4,292 3,928 4,298
- --------------------------------------------------------------------------------------------------------
General Statistics
- --------------------------------------------------------------------------------------------------------
Total backlog $ 21,250 $12,066 $10,551 $ 8,070 $ 7,757
U.S. government-funded backlog
(included above) 12,547 5,637 5,142 3,641 4,519
Capital expenditures 459 406 329 267 256
Depreciation and amortization 457 369 371 304 296
Total number of employees (actual) 119,200 75,300 73,200 60,200 63,800
- ---------------------------------------------------------------------------------------------------------
14
(1) Includes restructuring and special charge of $495 million pre-tax,
$322 million after tax, or $1.35 per share.
(2) Includes special charge of $34 million pre-tax, $22 million
after tax, or $.09 per share.
(3) Includes one-time gain of $8 million pre-tax, $5 million after tax,
or $.02 per share.
(4) Includes restructuring charge of $250 million pre-tax, $162 million
after tax, or $.61 per share.
(5) Certain prior year amounts have been reclassified to conform with the
current year presentation.
Note: 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.
Raytheon Company and Subsidiaries Consolidated
BALANCE SHEETS
(In millions except December 31, 1997 December 31, 1996
share amounts)
- -------------------------------------------------------------------------------
Assets
- -------------------------------------------------------------------------------
Current assets
Cash and marketable
securities (notes A and D) $ 296 $ 139
Accounts receivable, less allowance
for doubtful accounts of $22 in
1997 and $20 in 1996 1,056 809
Federal and foreign income taxes,
including deferred (notes A and K) 1,244 318
Contracts in process (notes A and E) 4,661 2,592
Inventories (notes A and F) 1,837 1,591
Prepaid expenses 139 79
------ ------
Total current assets 9,233 5,528
Property, plant and equipment, net
(notes A and G) 2,891 1,802
Other assets (notes A and H) 16,474 3,868
- ----------------------------------------------------------------------------
Total assets $28,598 $11,198
============================================================================
15
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and current portion of
long-term debt (notes I and J) $ 5,656 $ 2,227
Payments, less contracts
in process of $420 in 1997
and $803 in 1996 525 341
Accounts payable 1,845 1,126
Accrued salaries and wages 680 273
Other accrued expenses (notes B and C) 3,180 725
----------------------------------
Total current liabilities 11,886 4,692
Accrued retiree benefits (note N) 1,095 250
Income taxes, including deferred
(notes A and K) 786 158
Long-term debt (note J) 4,406 1,500
Commitments and contingencies (note L)
Stockholders' equity (note R)
Preferred stock, $.01 par value
Authorized: 200,000,000 shares
Outstanding: none in 1997 and 1996
Class A common stock, par value $.01 per share
Authorized: 450,000,000 shares
Outstanding: 102,630,000 shares in
1997 and none in 1996 1
Class B common stock, par value $.01 per share
Authorized: 1,000,000,000 shares
Outstanding: 235,935,000 shares in 1997
and 236,250,000 shares in 1996
after deducting no treasury shares
in 1997 and 69,124,000 treasury shares
in 1996 (note M) 2 236
Additional paid-in capital 6,151 308
Equity adjustments (note A) (23) (12)
Retained earnings 4,294 4,066
- --------------------------------------------------------------------------------
Total stockholders' equity 10,425 4,598
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $28,598 $11,198
================================================================================
The accompanying notes are an integral part of the financial statements.
16
Raytheon Company and Subsidiaries Consolidated
STATEMENTS OF INCOME
(In millions except per share amounts)
Years Ended December 31: 1997 1996 1995
- --------------------------------------------------------------------------------------
Net sales (note A) $13,673 $12,331 $11,804
- --------------------------------------------------------------------------------------
Cost of sales 10,584 9,755 9,159
Administrative and selling expenses 1,095 1,021 1,086
Research and development expenses (note A) 415 323 316
Restructuring and special charges (note C) 495 34 125
- --------------------------------------------------------------------------------------
Total operating expenses 12,589 11,133 10,686
- --------------------------------------------------------------------------------------
Operating income 1,084 1,198 1,118
- --------------------------------------------------------------------------------------
Interest expense 397 256 197
Interest and dividend income (38) (102) (26)
Other income, net (note C) (65) (39) (244)
- --------------------------------------------------------------------------------------
Non-operating expense (income), net 294 115 (73)
- --------------------------------------------------------------------------------------
Income before taxes 790 1,083 1,191
Federal and foreign income taxes
(notes A and K) 263 322 399
- --------------------------------------------------------------------------------------
Net income $ 527 $ 761 $ 792
======================================================================================
Earnings per share (note R)
Basic $2.20 $3.22 $3.26
Diluted $2.18 $3.17 $3.23
- --------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
17
Raytheon Company and Subsidiaries Consolidated
STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions except
per share amounts) Common Stock Additional Equity Retained
Years Ended December 31, Class A Class B Paid-in Capital Adjustments Earnings
1997, 1996, and 1995:
- -----------------------------------------------------------------------------------------
Balance at December 31, 1994 $247 $ 209 $ (9) $3,482
Net income 792
Dividends declared--
$.75 per share (182)
Proceeds under common
stock plans 2 65
Treasury shares purchased (8) (8) (305)
Treasury shares received on
exercise of stock options (7)
Foreign exchange translation
adjustments 10
SFAS No. 115 unrealized valuation
adjustment 3
SFAS No. 87 pension adjustment 1
- -----------------------------------------------------------------------------------------
Balance at December 31, 1995 241 259 5 3,787
Net income 761
Dividends declared--
$.80 per share (190)
Proceeds under common
stock plans 1 64
Treasury shares purchased (6) (7) (292)
Treasury shares received
on exercise of stock options (8)
Foreign exchange translation
adjustments (3)
SFAS No. 115 unrealized valuation
adjustment (15)
SFAS No. 87 pension adjustment 1
- -----------------------------------------------------------------------------------------
Balance at December 31, 1996 236 308 (12) 4,066
Net income 527
Dividends declared--
$.80 per share (209)
Common stock plan activity 2 172
Treasury shares purchased (2) (2) (90)
Treasury shares received on
exercise of stock options (21)
Reduction of par value (234) 234
Issuance of Class A
Common Stock $1 5,460
Foreign exchange translation
adjustments (32)
SFAS No. 115 unrealized valuation
adjustment 26
SFAS No. 87 pension adjustment (5)
- -----------------------------------------------------------------------------------------
Balance at December 31, 1997 $1 $ 2 $6,151 $ (23) $4,294
=========================================================================================
The accompanying notes are an integral part of the financial statements.
18
Raytheon Company and Subsidiaries Consolidated
STATEMENTS OF CASH FLOWS
(In millions) Years Ended December 31: 1997 1996 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 527 $ 761 $ 792
Adjustments to reconcile net income
to net cash provided by operating
activities, net of the effect of
acquired companies
Depreciation and amortization 457 369 371
Net gain on sale of operating units (72) -- (210)
Gain on sale of an investment -- -- (29)
Sale of receivables 1,752 1,209 1,081
Increase in accounts receivable (1,519) (994) (964)
(Increase) decrease in contracts in process (585) (581) 174
Decrease (increase) in inventories 54 (38) 45
Decrease (increase) in long term receivables 43 (57) (11)
Decrease in advance payments (49) (45) (217)
Increase in accounts payable 128 49 37
Net change in federal and
foreign income taxes 130 47 83
Increase (decrease) in other
current liabilities 83 (374) 81
Other adjustments, net 14 (55) (58)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 963 291 1,175
- --------------------------------------------------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment (459) (406) (329)
Disposals of property, plant and equipment 69 16 62
Increase in other assets (84) (31) (174)
Payment for purchase of acquired companies,
net of cash received (3,087) (584) (2,341)
Proceeds from sale of operating units
and investments 705 67 459
- --------------------------------------------------------------------------------
Net cash used in investing activities (2,856) (938) (2,323)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Dividends (189) (190) (182)
(Decrease) increase in short-term debt (597) 1,007 140
Increase in long-term debt 2,889 4 1,463
Purchase of treasury shares (94) (306) (320)
Proceeds under common stock plans 44 57 59
All other, net -- 3 (5)
- --------------------------------------------------------------------------------
Net cash provided by financing
activities 2,053 575 1,155
- --------------------------------------------------------------------------------
Effect of foreign exchange rates on cash (1) -- 1
- --------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 159 (72) 8
Cash and cash equivalents at beginning of year 137 209 201
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 296 $ 137 $ 209
================================================================================
The accompanying notes are an integral part of the financial statements.
19
NOTES TO FINANCIAL STATEMENTS
Note A: Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
parent company and all domestic and foreign subsidiary companies. The books of
the parent and all subsidiaries are maintained on a calendar year basis. All
material intercompany transactions have been eliminated. Certain amounts in the
1996 and 1995 financial statements and notes have been reclassified to conform
with the 1997 presentation.
Cash Equivalents and Marketable Securities
Cash and cash equivalents include only cash and short-term, highly
liquid investments (those with original maturities of 90 days or less when
purchased).
Cash equivalents and marketable securities are valued in accordance
with the provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115).
Dividends are recorded as income when declared.
Contracts in Process
Sales under long-term contracts are primarily recorded under the
percentage of completion method, wherein costs and estimated gross margin are
recorded as sales as the work is performed. Costs include direct engineering and
manufacturing costs, applicable overheads, and special tooling and test
equipment. Estimated gross margin provides for the recovery of allocable
research, development (including bid proposal), marketing, and administration
costs, and for accrued income. Accrued income is based on the percentage of
estimated total income that incurred costs to date bear to estimated total costs
after giving effect to the most recent estimates of cost and funding at
completion. When appropriate, increased funding is assumed based on expected
adjustments of contract prices for increased scope and other changes ordered by
the customer. Some contracts contain incentive provisions based upon performance
in relation to established targets to which applicable recognition has been
given in the contract estimates. 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 in the current period earnings applicable to
performance in prior periods. When the current contract estimate indicates a
loss, provision is made for the total anticipated loss. In accordance with these
practices, contracts in process are stated at cost plus estimated profit but not
in excess of realizable value.
Sales under certain fixed price contracts are recorded as products
are shipped or services are rendered.
20
Inventories
Aircraft inventories at Raytheon Aircraft, except finished goods, are
stated at the lower of cost (principally last-in, first-out) or market. Work in
process is stated at total cost incurred reduced by estimated costs of units
delivered.
All other inventories are stated at cost (principally first-in,
first-out or average cost) but not in excess of net realizable value.
Research and Development Expenses
Research and development expenditures for company-sponsored projects
are expensed as incurred.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Betterments and
major renewals are capitalized and included in property, plant and equipment
accounts while expenditures for maintenance and repairs and minor renewals are
charged to expense. When assets are retired or otherwise disposed of, the assets
and related allowances for depreciation and amortization are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Provisions for depreciation are computed generally on the
sum-of-the-years-digits method, except for certain operations, which use the
straight-line or declining-balance method. Depreciation provisions are based on
estimated useful lives: buildings--20 to 45 years, machinery and equipment,
including production tooling--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.
Excess of Cost Over Net Assets of Acquired Companies
The excess of cost over net assets acquired 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.
Investments
Investments, which are included in Other Assets, 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 market value and certain available for sale investments are accounted for
in accordance with the provisions of SFAS No. 115.
21
Commissions
The company pays commissions to sales representatives, distributors,
and agents under various arrangements in return for services rendered in
connection with obtaining orders. Such commissions are charged to income as
related sales are recorded and, for income statement purposes, are applied as a
reduction of sales. In some cases, payment of such commissions is made upon the
company's receipt of advance payments under the related contracts or in
accordance with schedules contained in the contracts governing commissions, and
such amounts are applied as a reduction of advance payments received. Sales have
been reduced by $31 million, $30 million, and $37 million in 1997, 1996,
and 1995, respectively, for commission expense.
Federal and Foreign Income Taxes
The company and its domestic subsidiaries provide for federal income
taxes on pre-tax accounting income at rates in effect under existing tax law.
The recovery of foreign tax credits related to foreign contracts, Foreign Sales
Corporation (FSC) tax benefits, and other tax credits are recorded on a
flow-through basis. Foreign subsidiaries have recorded provisions for income
taxes at applicable foreign tax rates in a similar manner.
Lease Accounting
Revenue from certain qualifying non-cancelable aircraft lease contracts
are accounted for as sales-type leases wherein the present values of all
payments, net of executory costs, are recorded currently 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.
Pension Cost
The company and its subsidiaries have several pension and retirement
plans covering the majority of employees, including certain employees in foreign
countries.
Annual charges to income are made for costs of the plans, including
current service costs, interest on projected benefit obligations, and net
amortization and deferral [unrecognized net obligation (asset) at transition,
unrecognized prior service costs, and actuarial net gains or losses], increased
or reduced by the return on assets. Unfunded accumulated benefit obligations are
accounted for as a long-term liability on the balance sheet. It is the company's
policy to fund annually those pension costs which are calculated in accordance
with Internal Revenue Service regulations and standards issued by the Cost
Accounting Standards Board.
22
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 equity adjustments in stockholders' equity. The
balance at December 31, 1997, 1996, and 1995 was ($28 million), $4 million,
and $7 million, respectively. Foreign exchange transaction gains and losses in
1997, 1996, and 1995 were not material.
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 of the stock option
price over par value is credited to additional paid-in capital. There are no
charges or credits to income for stock options. The market 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 market value is also
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 is disclosed in the notes to the financial statements.
Interest Rate and Foreign Currency Interest Rate Swap
Agreements and Foreign Exchange 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 with commercial banks primarily to
reduce the impact of changes in interest rates on short-term financing
arrangements. Interest rate swaps are used to provide purchasers of the
company's products with fixed financing terms over extended time periods.
Cross-currency interest rates swaps have allowed the company's foreign
subsidiaries to meet borrowing needs at lower interest rates compared to local
borrowing. Settlement accounting is used for interest rate swaps. The company
also enters into foreign exchange 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 exchange
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 and foreign exchange 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 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.
23
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. As a result
of the 1985 Balanced Budget and Emergency Deficit Reduction Control Act, the
federal deficit, and changing world order conditions, Department of Defense
(DoD) budgets have been subject to increasing pressure resulting in an
uncertainty as to the future effects of DoD budget cuts. Raytheon has,
nonetheless, maintained a solid foundation of defense systems which meet the
needs of the United States and its allies, as well as servicing a broad
government program base and range of commercial electronics businesses. These
factors lead management to believe that there is high probability of
continuation of Raytheon's current major defense programs.
The company provides long-term financing principally to its aircraft
customers. The company sells receivables, including appliance, general and
commuter aviation eligible long-term receivables and eligible engineering and
construction and appliance short-term receivables to a bank syndicate and other
financial institutions. The banks have recourse against the company, at varying
percentages, depending on the character of the receivables sold. 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
the company's experience to date with resale activities and pricing, management
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.
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 materially from those estimates.
Note B: 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 company also acquired
E-Systems in May 1995.
The following unaudited pro forma financial information combines the
results of operations of: Raytheon and Hughes Defense as if the merger had taken
place on January 1, 1997 and January 1, 1996, Raytheon and TI Defense as if the
acquisition had taken place on January 1, 1997 and January 1, 1996, and Raytheon
and E-Systems as if the acquisition had taken place on January 1, 1995.
24
(In millions except
per share amounts) 1997 1996 1995
- ---------------------------------------------------------------
Net sales $21,359 $20,514 $12,397
Net income 564 917 794
Basic earnings per share 1.67 2.70 3.27
Diluted earnings per share 1.66 2.68 3.24
- ---------------------------------------------------------------
The pro forma results are not necessarily indicative of what the
results of operations would have been if the transactions had occurred on the
applicable dates 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 was valued at $9.5 billion, subject to
post-closing adjustments, comprised of approximately $5.5 billion in common
stock and $4.0 billion in debt, which was assumed by the merged company. TI
Defense was acquired for $2.95 billion in cash, subject to post-closing
adjustments. The assets acquired and liabilities assumed in connection with
these two transactions have been included in the financial statements based on
preliminary estimates of fair value and may be revised as additional
information becomes available. As a result, the financial information included
in the company's financial statements is subject to adjustment from subsequent
revisions in estimates of fair value, if any are necessary.
Assets acquired in conjunction with the merger with Hughes Defense
include contracts in process of $1,820 million, inventories of $408 million,
other current assets of $337 million, property, plant and equipment of $942
million, and other assets of $1,776 million (primarily pension related).
Liabilities assumed include debt of $4,033 million, current liabilities of
$2,659 million and long-term liabilities of $961 million. Goodwill resulting
from the preliminary estimates of fair value associated with this transaction
was $7,950 million.
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 $598 million and
long-term liabilities of $147 million. Goodwill resulting from the preliminary
estimates of fair value associated with this transaction was $2,915 million.
In connection with the company's consolidation and organization of its
defense and electronics unit, a $300 million restructuring accrual was recorded
as an adjustment to the liabilities assumed in connection with the acquisition
of TI Defense and the merger with Hughes Defense. The accrual includes $98
million for the costs of facility and office closures and $202 million for
employee severance costs (covering approximately 6,650 employees).
The company has included in its consolidated results of operations the
acquisitions, under the purchase method of accounting, of the following
companies: the aircraft modification and defense electronics businesses of
Chrysler Technologies (from June 1996), the engineering and construction assets
of Rust International (from June 1996), and the marine communication assets of
Standard Radio AB of Sweden (from June 1996). The cash paid for the
acquisitions, net of cash acquired, was $584 million. No pro forma results have
been presented since they would not be material to the consolidated results.
25
In September 1997, the company sold the home appliance, heating and
air conditioning and commercial cooking operation of its Appliance Group. In
December 1997, the company sold its Switchcraft and Semiconductor divisions.
Total proceeds from these dispositions were $705 million. In April 1996, the
company sold Xyplex, its data networking subsidiary, for $118 million in cash
and securities.
Note C: Restructuring and Special Items
The company announced in the first quarter of 1998, the consolidation
and organization of its defense and electronics unit. At the same time, the
company announced a consolidation of operations at Raytheon Engineers &
Constructors. A $495 million pre-tax restructuring and special charge ($322
million after tax) was recorded in the fourth quarter of 1997 in connection with
these actions. The restructuring charge of $295 million includes $220 million
related to the Electronics segment, and $75 million related to the Engineering
and Construction segment consisting of $72 million for the costs of facility and
office closures and $148 million for employee severance costs (covering
approximately 5,150 employees). The special charge of $200 million includes $120
million related to the Electronics segment, $50 million related to the
Engineering and Construction segment, and $30 million related to the Aircraft
segment consisting of $46 million for one-time costs from the merger with Hughes
Defense and the acquisition of TI Defense, $67 million for nonrecurring charges
related principally to contract valuations, and $87 million for the write-down
of non-current assets to fair market value to recognize a permanent impairment.
For 1997, earnings, basic earnings per share, and diluted earnings per share
were $849 million, $3.55, and $3.51 respectively, excluding the restructuring
and special charge.
The company announced in the third quarter of 1996 that it would exit
the manual-clean range market and dispose of the assets related to that
operation, including its facility located in Delaware, Ohio, and recorded a $34
million pre-tax charge ($22 million after tax) for this closing. For 1996,
earnings, basic earnings per share, and diluted earnings per share were $783
million, $3.31, and $3.26 respectively, excluding the special charge.
The company recorded in the fourth quarter of 1995 a net pre-tax gain
of $210 million from the sale of D.C. Heath, its educational publishing unit.
The company adopted statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of, in the fourth quarter of 1995 which resulted in a $125 million
pre-tax special charge ($81 million after tax) related to specific assets,
liabilities, or commitments, and non-recurring charges of $77 million, related
principally to inventory and contract valuations. These transactions combined
resulted in a $5 million after tax one-time gain. For 1995, earnings, basic
earnings per share, and diluted earnings per share were $787 million, $3.24, and
$3.21 respectively, excluding the one-time gain.
26
Note D: Cash and Marketable Securities
(In millions) Cash and marketable securities consisted of
the following at December 31:
1997 1996
- -----------------------------------------------------------------
Cash and cash equivalents $ 296 $ 137
Marketable securities -- 2
----- -----
$ 296 $ 139
=================================================================
Under the company's cash management program, checks and amounts in
transit are not considered reductions of cash or accounts payable until
presented to the appropriate banks for payment. At December 31, 1997 and 1996,
checks and amounts in transit were $290 million and $178 million,
respectively.
Note E: Contracts in Process
(In millions) Contracts in process consisted of the following at
December 31, 1997
Cost Type Fixed Price Type Total
- --------------------------------------------------------------------------------
U.S. government end-use contracts
Billed $ 534 $ 400 $ 934
Unbilled 404 3,658 4,062
Less progress payments -- 1,968 1,968
- --------------------------------------------------------------------------------
Total 938 2,090 $3,028
- --------------------------------------------------------------------------------
Other customers
Billed 70 321 391
Unbilled 210 1,308 1,518
Less progress payments -- 276 276
- --------------------------------------------------------------------------------
Total 280 1,353 1,633
- --------------------------------------------------------------------------------
$1,218 $3,433 $4,661
================================================================================
(In millions) Contracts in process consisted of the following at
December 31, 1996
Cost Type Fixed Price Type Total
- --------------------------------------------------------------------------------
U.S. government end-use contracts
Billed $ 206 $ 140 $ 346
Unbilled 349 1,813 2,162
Less progress payments -- 1,069 1,069
- --------------------------------------------------------------------------------
Total 555 884 1,439
- --------------------------------------------------------------------------------
Other customers
Billed 63 164 227
Unbilled 124 1,265 1,389
Less progress payments -- 463 463
- --------------------------------------------------------------------------------
Total 187 966 1,153
- --------------------------------------------------------------------------------
$ 742 $1,850 $2,592
================================================================================
27
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. It is
anticipated that substantially all of these unbilled amounts, net of progress
payments, will be collected during 1998.
Billed and unbilled contracts in process include retentions arising
from contractual provisions. At December 31, 1997, retentions amounted to
$256 million and are anticipated to be collected as follows: 1998--$107
million, 1999--$72 million, and the balance thereafter.
Note F: Inventories
(In millions) Inventories consisted of the following
at December 31: 1997 1996
- ----------------------------------------------------------
Finished goods $ 314 $ 617
Work in process 1,340 702
Materials and purchased parts 509 482
Excess of current cost over
LIFO values (154) (158)
- ----------------------------------------------------------
2,009 1,643
Less progress payments 172 52
- ----------------------------------------------------------
$1,837 $1,591
==========================================================
Included in inventories at December 31, 1997, 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 $504 million and $424 million at December 31,
1997 and 1996, respectively.
Note G: Property, Plant and Equipment
(In millions) Property, plant and equipment
consisted of the following at
December 31:
1997 1996
- ------------------------------------------------------------
Land $ 78 $ 66
Buildings and leasehold
improvements 1,754 1,274
Machinery and equipment 3,299 3,077
Equipment leased to others 119 73
- ------------------------------------------------------------
5,250 4,490
Less accumulated depreciation
and amortization 2,359 2,688
- ------------------------------------------------------------
$2,891 $1,802
============================================================
28
Accumulated amortization of equipment leased to others was $8 million
and $6 million at December 31, 1997 and 1996, respectively.
Future minimum lease payments due to the company from non-cancelable
aircraft operating leases, which extend to 2012, amounted to $52 million.
At December 31, 1997, these payments were due as follows:
(In millions)
1998 14
1999 9
2000 8
2001 8
2002 5
Thereafter 8
Note H: Other Assets
(In millions) Other assets consisted of the following
at December 31:
1997 1996
- -------------------------------------------------------------
Long-term receivables
Due from customers in
installments to 2012 $ 148 $ 176
Sales-type leases, due
in installments to 2015 27 22
Other, principally due
through 2009 42 31
Investments 372 251
Prepaid pension and other noncurrent
assets 2,049 321
Excess of cost over net assets of
acquired companies (net of
accumulated amortization of
$308 million and $184 million
at December 31, 1997 and 1996,
respectively) 13,836 3,067
- -------------------------------------------------------------
$16,474 $3,868
=============================================================
Long-term receivables and sales-type leases due from customers of
$175 million and $198 million at December 31, 1997 and 1996, respectively,
included commuter airline receivables of $63 million and $116 million,
respectively. Since it is the company's policy to have the aircraft serve as
collateral for the commuter airline receivables, management does not expect to
incur any material losses against the net book value of the long-term
receivables. The company sold receivables, including appliance, general and
commuter aviation eligible long-term receivables and eligible engineering and
construction and appliance short-term receivables to a bank syndicate and other
financial institutions.
29
The interest rate on general and commuter aviation receivables is
LIBOR plus .525 percent, on warehousing receivables is the prime rate (8.5
percent at December 31, 1997), and on trade receivables is the commercial paper
rate of specific bank related finance companies plus .27 percent to .30 percent.
The interest rates are adjusted based on the company's debt rating.
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. The
balance of receivables sold to banks or financial institutions outstanding at
December 31, 1997 and 1996, was $2,909 million and $2,494 million, respectively,
of which 1997 net proceeds of $445 million included $502 million for commuter
and general aviation aircraft.
The company adopted Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, in 1997. The adoption did not have a
material effect on the company's financial position or results of operations.
Note I: Notes Payable
(In millions) Notes payable consisted of the
following at December 31:
1997 1996
- -----------------------------------------------------------
Notes payable $3,641 $ 63
Commercial paper 2,010 2,156
Weighted average interest rate
Average notes payable 6.37% 6.51%
Average commercial paper 6.11% 5.40%
Notes payable at December 31 6.30% 5.11%
Commercial paper at December 31 6.46% 5.53%
Aggregate borrowings outstanding
Maximum month-end balance $5,744 $3,136
Average during the year $3,472 $2,890
- -----------------------------------------------------------
Credit lines or commitments with banks were maintained by subsidiary
companies amounting to $252 million and $188 million in 1997 and 1996,
respectively. Compensating balance arrangements are not material. In addition,
lines of credit with certain commercial banks exist as sources of direct
borrowing and/or as a standby facility to support the issuance of commercial
paper by the company. The lines of credit were $9.0 billion and $3.5 billion at
December 31, 1997 and 1996, respectively. At December 31, 1997, $3.5 billion had
been borrowed under the lines of credit. Total interest payments were $295
million, $257 million, and $160 million for 1997, 1996, and 1995, respectively.
30
Note J: Long-term Debt
(In millions) Long-term debt consisted of the following at
December 31:
1997 1996
- -----------------------------------------------------------
3 year 6.3% notes due 2000, not
redeemable prior to maturity $ 498 $ --
5 year 6.45% notes due 2002, not
redeemable prior to maturity 975 --
10 year 6.5% notes due 2005, not
redeemable prior to maturity 733 730
10 year 6.75% notes due 2007, not
redeemable prior to maturity 957 --
30 year 7.375% debentures due
2025, redeemable after
July 15, 2005 362 362
30 year 7.2% debentures due
2027, not redeemable prior to
maturity 464 --
Commercial paper backed by 5 year
fixed for variable interest rate
swap at 6.40% 375 375
Notes (including $16 million and
$19 million at December 31,
1997 and 1996, respectively, 47 41
of mortgage notes and industrial
revenue bonds), interest in the
range of .1% to 11.01% in
installments, maturing at various
dates from 1999 to 2006
Less installments due within one year 5 8
- ------------------------------------------------------------
$4,406 $1,500
============================================================
The aggregate amounts of installments due for the next five years are:
- ------------------------------------------------------------
(In millions)
1998 $ 5
1999 11
2000 880
2001 5
2002 1,005
Interest expense on long-term debt was $190 million, $103 million, and
$52 million for 1997, 1996 and 1995, respectively.
31
Commercial paper in the amount of $375 million has been classified as
long-term due to company borrowings of that amount which are supported by a 5
year Syndicated Bank Credit Agreement combined with a 5 year fixed for variable
interest rate swap.
In 1997, the company issued $500 million of 7.20 percent debentures
due in 2027, $1,000 million of 6.75 percent notes due in 2007, $1,000 million of
6.45 percent notes due in 2002, and $500 million of 6.30 percent notes due in
2000. The proceeds from these issues were used for acquisition financing.
In 1995, the company issued $375 million of 7.375 percent debentures
due in 2025, redeemable after ten years, and $750 million of 6.50 percent notes
due in 2005. The proceeds from these issues were used for acquisition financing.
The principal amounts of debt were reduced by debt issue discounts and
interest rate hedging costs of $42 million and $105 million, on the date of
issuance, and are reflected as follows at:
(In millions) December 31, 1997 December 31, 1996
- ------------------------------------------------------------------
Principal $4,125 $1,125
Unamortized issue discounts (38) (17)
Unamortized interest rate
hedging costs (98) (16)
- --------------------------------------------------------------
Net debt $3,989 $1,092
==============================================================
The company has bank agreement covenants. The most restrictive
requires that the ratio of total debt to total capitalization not exceed 65%.
The company was in compliance with this covenant during 1997 and 1996.
Note K: Federal and Foreign Income Taxes
Income reported for federal and foreign tax purposes differs from
pre-tax accounting income due to variations between requirements of Internal
Revenue codes and the company's accounting practices. The provisions for federal
and foreign income taxes in 1997, 1996, and 1995 consisted of the following:
(In millions)
Years ending December 31: 1997 1996 1995
- ----------------------------------------------------------------
Current income tax expense
Federal $191 $170 $263
Foreign 9 34 (23)
Deferred income tax expense
Federal 61 151 124
Foreign 2 (33) 35
- -----------------------------------------------------------------
$263 $322 $399
==================================================================
32
The provision for income taxes for 1997, 1996, and 1995 differs from the
U.S. statutory rate due to the following:
Tax at statutory rate 35.0% 35.0% 35.0%
Research and development
tax credit (2.2)(1) (4.6)(1) (0.4)
FSC tax benefit (2.1) (2.5) (2.0)
Goodwill amortization 3.2 1.7 1.3
Recovery of foreign tax credits -- -- (0.5)
Other, net (0.6) 0.1 0.1
- -----------------------------------------------------------------
33.3% 29.7% 33.5%
=================================================================
(1) Accrued retroactive research and development tax credits applicable to
certain government contracts.
In 1997, 1996, and 1995, domestic profit before taxes amounted to $743
million, $1,061 million, and $1,126 million, respectively, and foreign profit
before taxes amounted to $47 million, $22 million, and $65 million,
respectively.
Actual cash income tax payments were $169 million, $275 million, and
$275 million for 1997, 1996, and 1995, respectively.
In 1997, 1996, and 1995 net deferred tax assets were increased by $393
million, $108 million, and $176 million, respectively, in connection with
acquisitions.
Federal and foreign income taxes, including deferred consisted of the following
at December 31:
(In millions) 1997 1996
- ----------------------------------------------------
Current deferred tax assets (liabilities)
Inventory and other $ 444 $ 10
Long-term contracts 582 199
Restructuring reserve 126 --
Inventory capitalization (24) 17
Other 85 28
- ----------------------------------------------------
Net current deferred tax assets 1,213 254
Current period tax prepaid 31 64
- ----------------------------------------------------
Federal and foreign income taxes,
including deferred--current $1,244 $ 318
====================================================
33
Noncurrent deferred tax assets (liabilities)
Depreciation $(284) $(126)
Revenue on leases (75) (58)
Pension (588) (66)
Postretirement benefits 247 105
Other (86) (13)
- ----------------------------------------------------
Net noncurrent deferred tax
liabilities (786) (158)
- ----------------------------------------------------
Income taxes, including
deferred -- noncurrent $(786) $ (158)
====================================================
Note L: Commitments and Contingencies
At December 31, 1997, the company had commitments under long-term
leases requiring approximate annual rentals on a net lease basis as follows:
(In millions)
- ---------------------------
1998 $231
1999 225
2000 204
2001 189
2002 151
Thereafter 868
- ---------------------------
Certain lease commitments will be terminated or reduced in connection
with facility and office closures and the optimization of facility utilization.
Rental expense for 1997, 1996, and 1995 amounted to $136 million,
$113 million, and $103 million, respectively.
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. Management believes that such
investigations, individually and in the aggregate, will not 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. Excess insurance is purchased
from third parties to cover excess aggregate liability exposure from $50 million
to $1 billion. This coverage also includes the excess of liability over $10
million per occurrence. The aircraft product liability reserve at December 31,
1997 was $29 million.
34
Recurring costs associated with the company's environmental compliance
program are not material and are expensed as incurred. Capital expenditures in
connection with environmental compliance are not material. The company is
involved in various stages of investigation and cleanup relative to remediation
of various sites. All appropriate costs expected to be incurred in connection
therewith have been accrued at December 31, 1997. 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, in the
opinion of management, any additional liability will not have a material effect
on the company's financial position, liquidity, or results of operations after
giving effect to provisions already recorded.
The company adopted the American Institute of Certified Public
Accountants' Statement of Position 96-1, Environmental Remediation Liabilities,
in 1997. The adoption of the standard did not have a material effect on the
company's financial position or results of operations.
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 $1,148 million, $1,363 million, and
$979 million of these contingent obligations, net of related outstanding advance
payments, were outstanding at December 31, 1997, 1996, and 1995, respectively.
These instruments expire on various dates through the year 2006.
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, in the
opinion of management, any additional liability will not have a material effect
on the company's financial position, liquidity, or results of operations after
giving effect to provisions already recorded.
Note M: 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% of the fair
market value on the date of grant. The 1991 Stock Plan provides for the grant of
incentive stock options at an exercise price which is 100% of the fair market
value, and nonqualified stock options at an exercise price which may be less
than the fair market 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% of the fair market value on the date
of grant.
The plans also provide that all stock options may be exercised in
their entirety 12 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,
Raytheon 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 10 years and
become exercisable at various times through January 2001. The number of shares
granted and option exercise prices are consistent with applicable provisions of
the Internal Revenue Code. These shares are included in the tables below and in
the reported shares reserved at December 31, 1997.
35
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 these plans after March 22, 1998,
March 26, 2001, March 21, 2005, and November 25, 2006, respectively.
All 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. Upon issuance of restricted shares,
unearned compensation is charged to stockholders' equity for the cost of
restricted stock and recognized as compensation expense ratably over the vesting
periods, as applicable. Awards of 115,920, 19,500, and 256,000 shares of
restricted stock were made to employees and directors at a weighted average
value at the grant date of $54.69, $50.87, and $38.07 in 1997, 1996 and 1995,
respectively. The amount of compensation expense recorded was $18 million, $7
million, and $5 million for 1997, 1996, and 1995, 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 52.8 million, 49.6 million, and 51.4 million shares of
common stock (including shares held in treasury) reserved for stock options and
restricted stock awards at December 31, 1997, 1996, and 1995, respectively.
Shares exercisable at the corresponding weighted average exercise
price at December 31, 1997, 1996, and 1995, respectively, were 13.0 million at
$37.35, 8.8 million at $31.32, and 7.3 million at $26.71.
Information for 1995, 1996, and 1997 follows:
Shares Weighted Average
Option Price
- ------------------------------------------------------------------
(Share amounts in thousands)
Outstanding at December 31, 1994 9,158 $ 26.30
Granted 4,071 36.61
Exercised (2,132) 22.92
Expired (316) 34.04
- -------------------------------------------------------------
Outstanding at December 31, 1995 10,781 $ 30.63
Granted 3,890 52.53
Exercised (1,845) 26.91
Expired (256) 45.47
- -------------------------------------------------------------
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
=============================================================
36
The following table summarizes information about stock options
outstanding at December 31, 1997 (share amounts in thousands):
Options Outstanding Options Exercisable
Weighted Average Weighted Weighted
Shares Contractual Average Shares Average
Exercise Outstanding at Remaining Exercise Exercisable at Exercise
Price Range December 31, 1997 Life Price December 31, 1997 Price
- ------------------------------------------------------------------------------------------------------
$14.51 to $29.63 3,735 5.9 years $22.68 3,231 $22.31
$31.13 to $46.50 7,499 7.5 years $37.41 5,816 $35.55
$47.13 to $58.16 8,276 8.7 years $52.21 3,907 $52.49
- ------------------------------------------------------------------------------------------------------
Total 19,510 12,954
======================================================================================================
The 1976 Stock Option Plan, 1991 Stock Plan, 1995 Stock Option Plan,
and 1997 Nonemployee Directors Restricted Stock Plan utilize Class B common
stock.
The company applies Accounting Principles Board Opinion No.25,
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its 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,
accordingly, no compensation expense was recognized for the stock option
plans. Had compensation cost 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:
(n millions except
per share amounts) 1997 1996 1995
- -----------------------------------------------------------
Net income-as reported $527 $761 $792
Net income-pro forma $484 $739 $779
Basic earnings per
share-as reported $2.20 $3.22 $3.26
Basic earnings per
share-pro forma $2.02 $3.12 $3.21
Diluted earnings
per share-as reported $2.18 $3.17 $3.23
Diluted earnings
per share-pro forma $2.00 $3.08 $3.18
The weighted-average fair value of each option granted in 1997, 1996,
and 1995, respectively, is estimated as $17.41, $10.79, and $8.30 on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
37
Expected life 4 years
Assumed annual dividend
growth rate (5 year historical rate) 6%
Expected volatility 15%
Risk free interest rate
(month-end yields on 4 year
treasury strips equivalent zero coupon) 5% to 7.5% range
Assumed annual forfeiture rate 5%
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 and additional awards in future years are anticipated.
Note N: Pension and Other Employee Benefits
The company and its subsidiaries have several pension and retirement
plans covering the majority of employees, including certain employees in foreign
countries. The major plans covering salaried and management employees provide
pension benefits that are based on the five highest consecutive years of the
employee's compensation in the ten years before retirement. Plans covering
hourly and union employees generally provide benefits of stated amounts for each
year of service, but in some cases can also use a final average pay based
calculation. The company's funding policy for the salaried plans is to
contribute annually at a rate that is intended to remain at a level percentage
of compensation for the covered employees. The company's funding policy for the
hourly and union plans is to contribute annually at a rate that is intended to
remain level for the covered employees. Unfunded prior service costs under the
funding policy are generally amortized over periods from 10 to 30 years.
Total pension expense was $62 million, $93 million, and $31 million
in 1997, 1996, and 1995, respectively, including foreign pension expense of $11
million, $10 million, and $8 million in 1997, 1996, and 1995, respectively.
Net periodic pension cost for the company and its subsidiaries in 1997,
1996 and 1995 included the following components:
(In millions)
Years ending December 31: 1997 1996 1995(2)
- --------------------------------------------------------------------------
Service cost--benefits earned
during the period $ 143 $ 127 $ 98
Interest cost on projected
benefit obligation 332 307 268
Actual gain on assets (1,121) (670) (956)
Net amortization and deferral, net 711 325 626
Curtailment adjustments (6)(1) 1 (8)(3)
- --------------------------------------------------------------------------
Net periodic pension costs 59 90 28
Defined contribution
pension plans 3 3 3
- --------------------------------------------------------------------------
Total pension costs $ 62 $ 93 $ 31
==========================================================================
38
Assumptions used in the accounting were
Discount rate 7.25% 7.75% 7.50%
Expected long-term rate of
return on assets 9.25%-9.50% 9.25% 9.00%
Rate of increase in
compensation levels 4.25%-5.00% 4.50% 4.50%
- --------------------------------------------------------------------------
The following table sets forth the funded status of the plans at:
(In millions) December 31, 1997(4) December 31, 1996
- --------------------------------------------------------------------------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Benefits Exceed
Assets Assets
- ------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested benefit obligation $(7,869) $(314) $(3,603) $ (69)
==========================================================================================
Accumulated benefit obligation $(8,404) $(322) $(3,753) $ (71)
==========================================================================================
Projected benefit obligation $(9,577) $(350) $(4,184) $ (83)
Plan assets at fair value 12,141 47 4,961 --
- ------------------------------------------------------------------------------------------
Projected benefit obligation
(in excess of) less
than plan assets 2,564 (303) 777 (83)
Unrecognized net (gain) loss (973) 22 (763) 15
Prior service cost not yet
recognized in net periodic
pension cost 187 10 213 13
Unrecognized net obligation (asset)
at transition (26) 1 (35) 1
Adjustment required to recognize
additional minimum liability -- (24) -- (18)
- ------------------------------------------------------------------------------------------
Prepaid pension cost (liability) $ 1,752 $(294) $ 192 $ (72)
==========================================================================================
Plan assets consist primarily of equity and fixed income securities.
39
The company's salaried pension plan provides that in the event of a
termination of the plan within three years after an involuntary change of
control of the company, the assets of the plan will be applied to satisfy all
liabilities to participants and beneficiaries in accordance with section 4044 of
the Employee Retirement Income Security Act of 1974. Any remaining assets will
be applied on a pro rata basis to increase the benefits to the participants and
beneficiaries.
In addition to providing pension benefits, the company and most of its
subsidiaries provide 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 if they reach normal retirement age while working for the
company. Retiree health plans are paid for in part by retiree contributions,
which are adjusted annually. Benefits are provided through various insurance
companies whose charges are based either on the benefits paid during the year or
annual premiums. Health benefits are provided to retirees, their covered
dependents and beneficiaries. Retiree life insurance plans are noncontributory
and cover the retiree only.
In 1993, the company adopted Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other than
Pensions, which requires recognition of an accumulated postretirement benefit
obligation for retiree costs existing at the time of implementation, as well as
an incremental expense recognition for changes in the obligation attributable to
each successive year. Prior to 1995, all company segments had elected to
amortize past service costs over the allowable 20 year period. During 1995, the
company acquired E-Systems, Inc. that had elected in 1992 to recognize all its
past service cost immediately upon implementation.
The company is funding the liability for many salaried and hourly
employees and plans to continue to do so. The net postretirement benefit cost
for the company and its subsidiaries in 1997, 1996, and 1995 included the
following components:
(In millions) Years ending December 31: 1997 1996 1995(2)
- --------------------------------------------------------------------------------
Service cost--benefits
earned during the period $ 10 $ 9 $ 8
Interest cost on accumulated
postretirement benefit
obligation 57 52 48
Actual gain on assets (19) (29) (8)
Amortization of transition
obligation 27 27 27
Other amortizations and deferrals,
net (8) 7 (11)
Curtailment and other adjustments 11(1) 3(5) 19(5)
- --------------------------------------------------------------------------------
Net postretirement benefit cost $ 78 $ 69 $ 83
================================================================================
40
Assumptions used in the accounting were
Discount rate 7.25% 7.75% 7.50%
Expected long-term rate of
return on assets 8.50% 8.75% 8.50%
Rate of increase in compensation
levels 4.50% 4.50% 4.50%
Health care trend rate in the next year 6.50% 7.00% 7.50%
Gradually declining to a trend rate of 5.00% 5.00% 5.00%
In the years 2001 & beyond 2001 & beyond 2001 & beyond
- --------------------------------------------------------------------------------
The following amounts are recognized in the balance sheet at:
(In millions) December 31: 1997 1996
- -----------------------------------------------------------------
Accumulated postretirement
benefit obligation
Retirees $ (871) $ (560)
Active employees eligible
for benefits (99) (41)
Active employees not yet
eligible for benefits (333) (131)
- -----------------------------------------------------------------
Total obligation (1,303) (732)
Plan assets at fair value 289 184
- -----------------------------------------------------------------
Total obligation in excess of
plan assets (1,014) (548)
Unrecognized net gain (15) (67)
Unrecognized prior service cost (13) (13)
Unrecognized net obligation at
transition 316 360
- -----------------------------------------------------------------
Accrued postretirement
benefit cost $ (726) $ (268)
=================================================================
The effect of a one percentage point increase in the assumed health care trend
rate for each future year on:
(In millions) 1997 1996 1995
- -----------------------------------------------------------------
Aggregate of service and
interest cost $ 5 $ 4 $ 3
Accumulated postretirement
benefit obligation $ 62 $ 44
Under the terms of the Raytheon Savings and Investment Plan, a defined
contribution plan, covered employees are allowed to contribute up to 17 percent
of their pay limited to $9,500 per year. The company contributes amounts equal
to 50 percent of the employee's contributions, up to a maximum of 3 percent of
the employee's pay. Total expense for the plan was $75 million, $68 million, and
$65 million for 1997, 1996, and 1995, respectively.
41
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 $160,000, of substantially all United States salaried and a majority
of hourly employees. The expense was $15 million, $15 million, and $12
million and the number of shares allocated to participant accounts was 290,000,
296,000, and 177,000 for 1997, 1996, and 1995, respectively.
(1) Reflects curtailment adjustment resulting from the sale of the home
appliance, heating and air conditioning, and commercial cooking operations of
the Appliance Group in September 1997.
(2) 1995 data, including $17 million of Net Periodic Pension Cost, $8 million
of Accrued Pension Cost, $15 million of Net Periodic Postretirement
Benefit Cost, and $235 million of Accrued Postretirement Benefit Cost,
were a result of having acquired E-Systems, Inc. in April 1995.
(3) Various plan curtailments were recognized as a result of workforce
reductions which were planned as part of the restructuring program.
(4) Increases from 1996 are primarily attributable to the acquisition of TI
Defense and the merger with Hughes Defense.
(5) Benefit enhancements were made to various plans during the year in order to
accelerate attrition through voluntary retirements.
Note O: Business Segment Reporting
The company continues to operate in three major business areas:
Electronics, both commercial and defense, Engineering and Construction, and
Aircraft. The principal contributors to Electronics sales and earnings are
defense missile systems and other products. The Engineering and Construction
segment does business in some 60 countries around the world. The Aircraft
segment manufactures, markets, and supports piston, jetprops, and medium and
light jet aircraft for commercial, regional airline, and military markets around
the world. The Major Appliances segment, which manufactured and sold household
and commercial appliances to dealers and distributors in the United States and
to foreign locations, was substantially divested in 1997. As a result of these
dispositions, the company has included the remaining operations of the Major
Appliances segment within the Electronics segment in 1997.
42
OPERATIONS BY BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
Sales to unaffiliated customers Segment income
------------------------------- --------------
(In millions) 1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------
Electronics $ 8,194 $ 5,424 $ 5,389 $1,159 $ 766 $ 740(4)
Engineering and
Construction 3,033 3,053 2,883 181 211(2) 262
Aircraft 2,446 2,345 2,060 239 181 167(5)
Major Appliances -- 1,509 1,472 -- 74 74
------- ------- ------- ------ ----- -----
Total operating
segments $13,673 $12,331 $11,804 1,579 1,232 1,243
======= ======= =======
Restructuring and
special charges (495)(1) (34)(3) (125)(6)
Gain on sale of
Switchcraft and
Semiconductor 59 -- --
Gain on sale of
Appliances 13 -- --
Gain on sale of
D.C. Heath -- -- 210
Net interest expense (359) (154) (171)
Other (expense) income (7) 39 5
Gain on sale of an
investment -- -- 29
------ ------ ------
Income before
taxes $ 790 $1,083 $1,191
====== ====== ======
- -------------------------------------------------------------------------------------
- ----------
(1) The restructuring and special charge relates to the business segments as
follows: Electronics, $340, Engineering and Construction, $125, and
Aircraft, $30.
(2) Excludes second quarter fee adjustment on a major foreign project which
was covered by a pre-existing contingency reserve.
(3) The special charge relates to the Major Appliances segment.
(4) Includes a nonrecurring charge of $47 million.
(5) Includes a nonrecurring charge of $30 million.
(6) The special charge relates to the business segments as follows:
Electronics, $115, and Engineering and Construction, $10.
43
Capital expenditures Depreciation and amortization
---------------------------------------------------------
(In millions) 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------
Electronics $239 $160 $147 $351 $220 $228
Engineering and
Construction 36 27 26 42 37 32
Aircraft 184 140 80 64 50 51
Major Appliances -- 79 76 -- 62 60
---- ---- ---- ---- ---- ----
Total $459 $406 $329 $457 $369 $371
==== ==== ==== ==== ==== ====
Identifiable assets at December 31,
- ----------------------------------------------------
(In millions) 1997 1996 1995
- ----------------------------------------------------
Electronics $24,171 $ 5,953 $5,539
Engineering and
Construction 2,188 2,059 1,544
Aircraft 2,239 2,372 1,832
Major Appliances -- 814 992
------- ------- ------
Total $28,598 $11,198 $9,907
======= ======= ======
OPERATIONS BY GEOGRAPHIC AREAS
- ------------------------------------------------------------------------------
(In millions) United States Outside United States Consolidated
(Principally Europe)
- ------------------------------------------------------------------------------
Sales to unaffiliated customers
- ------------------------------------------------------------------------------
1997 $12,907 $ 766 $13,673
1996 11,570 761 12,331
1995 11,017 787 11,804
Net income
- ------------------------------------------------------------------------------
1997 $ 491 $ 36 $ 527
1996 740 21 761
1995 738 54 792
Identifiable assets at
- ------------------------------------------------------------------------------
December 31, 1997 $27,976 $ 622 $28,598
December 31, 1996 10,545 653 11,198
December 31, 1995 9,237 670 9,907
- ------------------------------------------------------------------------------
44
Sales between business segments and between geographic areas are not
material. In the operations by geographic area, U.S. sales of $12,907 million,
$11,570 million, and $11,017 million include export sales, principally to
Europe, the Middle East, Far East, of $2,756 million, $2,137 million, and $1,907
million for 1997, 1996, and 1995, respectively.
Sales to major customers, principally in Electronics, for 1997, 1996,
and 1995, respectively, were: U.S. government (end user), $5,787 million, $4,638
million, and $4,079 million, U.S. government (foreign military sales), $483
million, $502 million, and $597 million.
Note P: Quarterly Operating Results (unaudited)
The fourth quarter of 1997 includes a restructuring and special charge
of $322 million after tax, or $1.29 per share principally including the costs of
facility and office closures, employee severance costs, one-time costs from the
merger with Hughes Defense and the acquisition of TI Defense, nonrecurring
charges related principally to contract valuations, and the write-down of non-
current assets to fair market value to recognize a permanent impairment.
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. Class A
common stock began trading on December 18, 1997.
The third quarter of 1996 includes a special charge of $22 million
after tax, or $.09 per share to exit the manual-clean range market and dispose
of the assets related to that operation including its facility located in
Delaware, Ohio.
At December 31, 1997, there were 441,356 record holders of Class A
common stock and 21,389 record holders of Class B common stock.
(In millions except
per share amounts) First Second Third Fourth
1997
- ------------------------------------------------------------------
Net sales $2,899 $3,325 $3,445 $4,004
Cost of sales 2,221 2,570 2,636 3,157
Net income 183 210 211 (77)
Earnings per share
Basic 0.78 0.89 0.90 (0.31)
Diluted 0.77 0.88 0.88 (0.31)
Cash dividends
per common 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 57.00
Class A - Low 48.00
Class B - High 51.25 53.88 60.56 60.50
Class B - Low 43.25 41.75 50.81 49.19
- ------------------------------------------------------------------
45
- ------------------------------------------------------------------
1996
- ------------------------------------------------------------------
Net sales $2,788 $3,127 $3,032 $3,384
Cost of sales 2,141 2,435 2,428 2,751
Net income 186 209 188 178
Earnings per share
Basic 0.78 0.89 0.80 0.75
Diluted 0.77 0.87 0.79 0.74
Cash dividends
per common share
Declared 0.20 0.20 0.20 0.20
Paid 0.1875 0.20 0.20 0.20
Common stock prices
per the Composite
Tape
High 54.13 53.63 55.00 56.13
Low 45.00 48.75 43.38 45.75
Note Q: Financial Instruments
The carrying value of certain financial instruments, including cash,
cash equivalents, marketable securities, and short-term debt, is estimated to
approximate fair value due to their short maturities and varying interest rates
of the debt.
The carrying value of notes receivable is estimated to approximate
fair value based principally on the underlying interest rates and terms,
maturities, collateral, and credit status of the receivables.
The carrying value of marketable securities and investments are based
on quoted market prices or the present value of future cash flows and earnings
which approximate fair value.
The value of the guarantees and letters of credit reflect fair value.
The fair value of long-term debt was estimated based on current rates
offered to the company for similar debt with the same remaining maturities and
approximates the carrying value.
At December 31, 1997 and 1996, the company had outstanding interest
rate swap agreements, with notional amounts, and foreign currency forward
exchange 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 and are
summarized as follows at December 31:
46
(In millions) 1997 1996
- ---------------------------------------------------
Interest rate swaps $386 $389
Foreign exchange contracts $425 $270
- ---------------------------------------------------
The following table summarizes major currencies and contract amounts associated
with foreign exchange contracts at December 31:
(In millions) 1997 1996
- -------------------------------------------------------------
Buy Sell Buy Sell
- -------------------------------------------------------------
Pound Sterling $ 70 $ 27 $ 95 $ 5
Japanese Yen 5 17 9 31
Netherlands Guilder 45 -- 3 76
German Mark 71 19 1 --
Canadian Dollar 13 66 17 1
French Franc 4 -- 11 --
Australian Dollar 38 -- 16 --
Danish Kroner -- 11 -- --
Hong Kong Dollar -- 21 -- --
All others 10 8 3 2
- -------------------------------------------------------------
Total $256 $169 $155 $115
=============================================================
Foreign currencies are translated at current rates at the reporting date.
"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.
Swap contracts mature at various dates through the year 2000 and
essentially fix the interest rates on that portion of debt at rates from 4.7
percent to 5.7 percent, and 4.7 percent to 9.5 percent at December 31, 1997
and 1996, respectively.
Foreign exchange forward contracts, used primarily to minimize
fluctuations in the values of foreign currency payments and receipts, have
maturities at various dates through June 2002. Fair values for these contracts
were determined by applying December 31, 1997 spot rates to the nine major
currencies and comparing the U.S. dollar equivalents to the U.S. dollar contract
amounts for the same currencies. The resulting difference was not material and
approximates the contract amounts.
The company, in order to lock in favorable interest rates, entered
into interest rate swaps and locks in connection with the 1997 issuance of $500
million three-year notes, $1.0 billion five-year notes, $1.0 billion ten-year
notes, and $500 million thirty-year debentures and the 1995 issuance of $750
million ten-year notes and $375 million thirty-year debentures. Both the
interest rate swaps and locks were unwound prior to the issuance of the 1997
and 1995 debt.
47
Note R: Common Stock
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% of the total voting power
and the Class B stockholders have the remaining 19.9%. 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
common 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 its 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.
In December 1997, the company retired 71.1 million shares of Class B
common stock previously held in treasury.
The company adopted Statement of Financial Accounting Standards No.
128, Earnings per Share, during 1997. This statement established new standards
for computing and presenting earnings per share (EPS) and required restatement
of all prior-period EPS data presented. It replaces the presentation of primary
EPS with basic EPS and requires dual presentation of basic and diluted EPS on
the face of the income statement. Basic 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:
Years ending December 31: 1997 1996 1995
- --------------------------------------------------------------------------------
Net income for basic and diluted EPS $ 527 $ 761 $ 792
Share information (in thousands):
Average common shares outstanding
- for basic EPS 238,915 236,600 243,030
Dilutive effect of stock options
and restricted stock 2,971 3,565 2,367
---------------------------------------
Shares for diluted EPS 241,886 240,165 245,397
Basic EPS $2.20 $3.22 $3.26
Diluted EPS $2.18 $3.17 $3.23
48
Stock options to purchase 8.2 million, 3.7 million, and .1 million
shares of common stock outstanding at December 31, 1997, 1996, and 1995,
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.
All share data have been restated to reflect the two-for-one stock
split in October 1995.
Note S: Subsequent Events
In January 1998, the company sold its Monolithic Microwave Integrated
Circuit (MMIC) operations for approximately $39 million.
In February 1998, the company announced that it had entered into
an agreement to sell its commercial laundry business for approximately $358
million. There can be no assurance that the sale will be consummated.
In March 1998, the company issued $1.6 billion of debt. Partial
proceeds from the issuance were used to refinance debt assumed in connection
with the company's recent merger Hughes Defense. The company issued $500 million
of notes due 2001 which have a coupon rate of 5.95 percent, $450 million of
notes due 2005 which have a coupon rate of 6.3 percent, $300 million of notes
due 2010 which have a coupon rate of 6.55 percent, and $350 million of
debentures due 2018 which have a coupon rate of 6.75 percent. The notes due in
2001 and 2005 are not redeemable prior to maturity. The notes due in 2010 and
the debentures due in 2018 are redeemable under certain circumstances. $900
million of the issuance essentially completes the company's previously announced
plans to refinance the acquisition of TI Defense and its merger with Hughes
Defense. The remaining $700 million is additional refinancing of bank and
commercial paper borrowings.
On March 26, 1998, the company announced that it had reached an
agreement to sell its European-based Raytheon Electronic Controls business for
$38 million. There can be no assurance that the sale will be consummated.
49
Company Responsibility for Financial Statements
Raytheon Company has prepared the financial statements and related data
contained in this Annual Report. 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. Raytheon is responsible for the integrity and
objectivity of the financial statements and other financial data included in
this 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/ Peter R. D'Angelo
Peter R. D'Angelo
Executive Vice President,
Chief Financial 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, Coopers & Lybrand L.L.P.,
independent accountants, have been selected by the Board of Directors to audit
the company's financial statements and their report follows.
/s/ Dennis J. Picard
Dennis J. Picard
Chairman and
Chief Executive Officer
50
Report of Independent Accountants
To the Board of Directors and Stockholders
Raytheon Company
Lexington, Mass.
We have audited the accompanying balance sheets of Raytheon Company and
Subsidiaries Consolidated as of December 31, 1997 and 1996, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Raytheon Company and
Subsidiaries Consolidated as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Mass.
January 26, 1998, except as to the information presented in note S for which the
date is March 26, 1998