1
EXHIBIT 13 DRAFT: 03/23/98
Five-Year Statistical Summary
(In millions except share amounts) 1998 1997 1996 1995 1994
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Results of Operations
=======================================================================================================
Net sales $ 19,530 $ 13,673 $ 12,331 $ 11,804 $ 10,098
Operating income 2,036(1) 1,084(2) 1,198(3) 1,118(4) 896(5)
Interest expense 739 397 256 197 49
Net income 864(1) 527(2) 761(3) 792(4) 597(5)
Diluted earnings per share $2.53(1) $2.18(2) $3.17(3) $3.23(4) $2.25(5)
Dividends declared per share 0.80 0.80 0.80 0.75 0.738
Average diluted shares
outstanding (in thousands) 341,861 241,886 240,165 245,397 265,650
Financial Position at Year-End
=======================================================================================================
Current assets $ 8,637 $ 9,233 $ 5,528 $ 5,187 $ 4,893
Property, plant, and
equipment, net 2,275 2,891 1,802 1,584 1,361
Total assets 27,939 28,598 11,198 9,907 7,448
Current liabilities 6,680 11,215 4,692 3,690 3,283
Long-term debt 8,163 4,406 1,500 1,488 25
Total debt 8,990 10,062 3,727 2,704 1,058
Stockholders' equity 10,856 10,425 4,598 4,292 3,928
General Statistics
=======================================================================================================
Total backlog $ 23,669(6) $ 21,250 $ 12,066 $ 10,551 $ 8,070
U.S. government backlog
included above 14,622(6) 12,547 5,637 5,142 3,641
Capital expenditures 509 459 406 329 267
Depreciation and amortization 761 457 369 371 304
Number of employees (actual) 108,200 119,200 75,300 73,200 60,200
2
(1) Includes restructuring and special charges of $252 million pretax, $158
million after-tax, or $0.46 per diluted share.
(2) Includes restructuring and special charges of $495 million pretax, $322
million after-tax, or $1.33 per diluted share.
(3) Includes special charge of $34 million pretax, $22 million after-tax, or
$0.09 per diluted share.
(4) Includes special charge of $125 million pretax, $81 million after-tax, or
$0.33 per diluted share.
(5) Includes restructuring charge of $250 million pretax, $162 million
after-tax, or $0.61 per diluted share.
(6) During 1998, the Company changed its method of reporting backlog at certain
locations as discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Note: Certain prior year amounts have been reclassified to conform to the
current year presentation. In December 1997, the Company issued 102.6 million
shares of Class A common stock and converted each share of Raytheon common stock
into one share of Class B common stock in connection with the merger with Hughes
Defense. All share and per share amounts have been restated to reflect the
two-for-one stock split in October 1995.
Overview
Raytheon Company (the "Company") is a global technology leader that
operates in three major business areas: Electronics, both defense and
commercial, Engineering and Construction, and Aircraft. The Electronics segments
were established in conjunction with the consolidation and reorganization of the
Company's Electronics businesses and the creation of Raytheon Systems Company in
December 1997 in order to create a premier electronics company. The Company is a
leader in defense electronics, including missiles; radar; sensors and
electro-optics; reconnaissance, surveillance, and intelligence; command,
control, communication, and information; training; simulation and services;
naval and air traffic control systems; and aircraft integration systems. The
Company's results of operations include the results of Texas Instruments'
defense business (TI Defense) which was acquired on July 11, 1997 and the
defense business of Hughes Electronics Corporation (Hughes Defense) which merged
with the Company on December 17, 1997. The Engineering and Construction segment
offers full-service engineering and construction capabilities to clients
worldwide. The Aircraft segment is one of the leading providers of business and
special mission aircraft and delivers a broad line of jet, turboprop, and
piston-powered airplanes to corporate and military customers worldwide.
3
Consolidated Results of Operations
Net sales in 1998 were $19.5 billion compared with $13.7 billion in 1997
and $12.3 billion in 1996. Sales to the U.S. Department of Defense were 55
percent of sales in 1998, 34 percent in 1997, and 33 percent in 1996. Total
sales to the U.S. government were 66 percent of sales in 1998, 46 percent in
1997, and 42 percent in 1996. The increases are primarily a result of the merger
with Hughes Defense and the acquisition of TI Defense. Total international
sales, including foreign military sales, were 26 percent of sales in 1998, 29
percent in 1997, and 28 percent in 1996. The decrease is due to lower
international sales at Hughes Defense and TI Defense; however, the Company is
working to increase its international presence and expects continued growth in
this area.
Gross margin in 1998 was $4.3 billion compared with $2.7 billion in 1997
and $2.5 billion in 1996. Excluding the restructuring and special charges
described below, gross margin was $4.4 billion in 1998, $3.1 billion in 1997,
and $2.6 billion in 1996 or 22.4 percent of sales in 1998, 22.6 percent in 1997,
and 20.9 percent in 1996. The increases in 1997 from 1996 are principally a
result of the acquisition of TI Defense.
Administrative and selling expenses increased to $1,664 million in 1998
from $1,189 million in 1997 due primarily to the merger with Hughes Defense and
the acquisition of TI Defense, partially offset by the sale of the Company's
home appliance, heating, air conditioning, and commercial cooking operations in
September 1997. Administrative and selling expenses were $1,021 million in 1996.
Excluding the special charges described below, administrative and selling
expenses decreased to 7.7 percent of sales in 1998 from 8.0 percent in 1997 and
8.3 percent in 1996 reflecting increased efficiencies resulting from the merger
with Hughes Defense and the acquisition of TI Defense.
Research and development expenses increased to $582 million in 1998 from
$415 million in 1997 and $323 million in 1996, due principally to the merger
with Hughes Defense and the acquisition of TI Defense. Research and development
expenses were 3.0 percent of sales in both 1998 and 1997 and 2.6 percent in
1996.
In January 1998, the Company announced plans to reduce the newly formed
Raytheon Systems Company (RSC) workforce by 8,700 employees, close 20
facilities, and partially close an additional 6 facilities, reducing space by
approximately 8 million square feet. This announcement was made in conjunction
with the consolidation and reorganization of RSC in order to remain competitive
in the defense industry. In October 1998, the Company announced previously
planned actions to accelerate and expand these initiatives, reducing employment
by approximately 14,000 positions by the end of 1999. RSC will also vacate an
additional 3 million square feet at 8 facilities through sales, subleases and
lease terminations. In addition, during the fourth quarter of 1998 the Company
committed to close two additional facilities and further reduce employment by
approximately 1,400 positions. The principal actions involve the consolidation
of missile and other electronics systems' manufacturing and engineering, as well
as the consolidation of certain component manufacturing into Centers of
Excellence.
4
The total program cost of the RSC actions is estimated at $1.1 billion, of
which $804 million pertains to exit costs. Approximately $385 million of the
exit costs relate to employee severance and $419 million relate to facilities
exit. In connection with these actions, the Company recorded a $220 million
restructuring charge in the fourth quarter of 1997, which is included in cost of
sales, and accrued $584 million in connection with the merger with Hughes
Defense and the acquisition of TI Defense. Through December 31, 1998, RSC
employment has been reduced by approximately 9,000 people (which includes a
2,400 net reduction due to attrition) to approximately 79,000 employees, and 3.3
million square feet have been vacated. The Company expects to essentially
complete these restructuring actions in 1999 and terminate an additional 8,800
employees which will be partially offset by new hire additions. Cash
expenditures pertaining to exit costs under the restructuring initiatives
outlined above were $104 million for employee severance and related items and
$130 million for facility and office closures. Lower than expected costs of
severance per employee have reduced the Company's estimates of employee related
costs; however, these cost savings have been more than offset by higher than
expected facilities exit costs and the cost of the additional fourth quarter
actions. While these actions are intended to improve the Company's competitive
position, there can be no assurances as to their ultimate success or that
additional restructuring actions will not be required.
In January 1998, the Company also announced plans to reduce the Raytheon
Engineers & Constructors (RE&C) workforce by 1,000 employees and close or
partially close 16 offices, or approximately 1.1 million square feet. In
connection with these actions and other committed but unannounced actions, the
Company recorded a $75 million restructuring charge in the fourth quarter of
1997, which is included in cost of sales. The restructuring charge included $31
million for employee severance for approximately 2,300 people, including the
1,000 positions announced in January 1998, and $44 million for facilities exit.
In the fourth quarter of 1998, the Company modified the plan that was announced
in January 1998 to close fewer facilities. As a result of this modification, the
number of employee terminations was reduced from approximately 2,300 people to
approximately 1,400 people; however, the cost savings realized as a result of
these reductions were offset by higher than expected facilities exit costs. In
October 1998, the Company also announced plans for an additional 260 person
reduction in the RE&C workforce and recorded an additional $33 million
restructuring charge, which is included in cost of sales. The total costs of
these actions are currently estimated at $108 million, of which $53 million
relate to employee severance and $55 million relate to facilities exit. In 1998,
the Company also recorded a $52 million special charge for asset impairment
related to the RE&C restructuring actions to exit two operations which are
scheduled to be closed in 1999. The charge, which is included in cost of sales,
consists of $45 million of goodwill associated with one of the operations to be
exited and $7 million for the estimated loss on disposition of the other
operation.
5
Through December 31, 1998, RE&C employment had been reduced by
approximately 1,200 people and 900,000 square feet had been vacated. Cash
expenditures in 1998 under the restructuring initiatives outlined above were $19
million for employee severance and related items and $23 million for facility
and office closures. While these actions are intended to improve the Company's
competitive position, there can be no assurances as to their ultimate success or
that additional restructuring actions will not be required.
In 1998, the Company recorded special charges of $167 million, discussed
below, which are included in administrative and selling expenses.
In the second quarter of 1998, the Company's partner in a Commercial
Electronics joint venture in Korea began to experience financial difficulties.
As a result, the Company recorded a $42 million special charge to recognize a
permanent impairment of its investment in the joint venture, reducing the book
value of the investment to estimated fair value. During the third quarter of
1998, the financial condition of the joint venture deteriorated further, and the
Company recorded an additional $83 million special charge to exit a line of
business, which included writing off its remaining investment in the Korean
joint venture.
Also in 1998, the Company recorded a $42 million special charge to write
down the assets of two operations in the Electronics businesses that the Company
had decided to sell to estimated fair value of approximately $125 million. One
sale was completed during 1998. The other sale is expected to close in 1999. The
operating results, which are not material, continue to be included in the
Company's results of operations.
In 1997, the Company recorded special charges of $200 million, discussed
below, of which $106 million is included in cost of sales and $94 million is
included in administrative and selling expenses.
In 1997, the Company recorded a $63 million special charge primarily for
one-time costs in the Electronics businesses associated with the merger with
Hughes Defense and the acquisition of TI Defense. The Company also recorded a
$57 million special charge primarily to write down to estimated fair value
certain assets in the Electronics businesses that the Company had decided to
sell. The sale of these assets was completed in 1998 and the proceeds and loss
on disposition were not material.
Also in 1997, the Company recorded a $50 million special charge for
contract valuations at RE&C and a $30 million special charge to recognize a
permanent impairment at Raytheon Aircraft.
In 1996, the Company recorded a $34 million special charge, which is
included in cost of sales, to close a Major Appliances operation.
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Operating income was $2,036 million or 10.4 percent of sales in 1998,
$1,084 million or 7.9 percent of sales in 1997, and $1,198 million or 9.7
percent of sales in 1996. Excluding the restructuring and special charges of
$252 million in 1998, $495 million in 1997, and $34 million in 1996, operating
income as a percent of sales was 11.7 percent, 11.5 percent, and 10.0 percent in
1998, 1997, and 1996, respectively. The changes in operating income by segment
are discussed below.
Interest expense in 1998 increased to $739 million from $397 million in
1997 due principally to the higher debt level resulting from the merger with
Hughes Defense and the acquisition of TI Defense. During 1998, the Company
issued $3.8 billion of long-term notes and debentures in order to secure
favorable long-term rates. The weighted average cost of borrowing was 6.9
percent in 1998 versus 6.8 percent in 1997. Interest expense increased to $397
million in 1997 from $256 million in 1996. The increase was due principally to
the debt-financed acquisition of TI Defense in July 1997 and higher short-term
interest rates available to the Company.
Interest and dividend income decreased to $28 million in 1998 from $38
million in 1997 and $102 million in 1996. The 1996 amount included accrued
interest on a retroactive federal income tax refund claim.
Other income, net of $142 million in 1998 includes a $141 million net gain
on sales of operating units. Other income, net was $65 million in 1997 versus
$39 million in 1996. The 1997 amount includes a $72 million net gain on sales of
operating units.
The effective tax rate was 41.1 percent in 1998, 33.3 percent in 1997, and
29.7 percent in 1996. The effective tax rate reflects primarily the United
States statutory rate of 35 percent reduced by foreign sales corporation tax
credits and research and development tax credits applicable to certain
government contracts, increased by non-deductible amortization of goodwill. The
increase in the effective tax rate in 1998 was primarily due to the increase in
non-deductible amortization of goodwill resulting from the merger with Hughes
Defense. 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.
Net income for 1998 was $864 million, or $2.53 per diluted share on 341.9
million average shares outstanding. Net income for 1997 was $527 million, or
$2.18 per diluted share on 241.9 million average shares outstanding. Net income
for 1996 was $761 million, or $3.17 per diluted share on 240.2 million average
shares outstanding. The Company issued 102.6 million shares of Class A common
stock in December 1997 in connection with the merger with Hughes Defense.
Total employment was approximately 108,200 at December 31, 1998,
approximately 119,200 at December 31, 1997, and approximately 75,300 at December
31, 1996. The decrease between 1998 and 1997 is primarily a result of the
restructuring initiatives at RSC and RE&C outlined above. The increase between
1997 and 1996 was due principally to the merger with Hughes Defense and the
acquisition of TI Defense.
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Segment Results
Sales (In millions) 1998 1997 1996
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Defense Systems $ 4,958
Sensors and Electronic Systems 3,011
Intelligence, Information, and Aircraft
Integration Systems 2,667
Command, Control, and Communication
Systems, Training and Services,
Commercial Electronics, and Other 4,186
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Total Electronics 14,822 $ 8,972 $ 6,186
Engineering and Construction 2,065 2,255 2,291
Aircraft 2,643 2,446 2,345
Major Appliances -- -- 1,509
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Total $19,530 $13,673 $12,331
===============================================================================
Operating Income (In millions) 1998 1997 1996
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Defense Systems $ 885
Sensors and Electronic Systems 540
Intelligence, Information, and Aircraft
Integration Systems 305
Command, Control, and Communication
Systems, Training and Services,
Commercial Electronics, and Other 302
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Total Electronics 2,032 $ 856 $ 793
Engineering and Construction (253) 19 184
Aircraft 257 209 181
Major Appliances -- -- 40
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Total $ 2,036 $ 1,084 $ 1,198
===============================================================================
Certain prior year segment amounts were reclassified to conform to the
current year presentation. The Major Appliances segment was substantially
divested in 1997 with the remaining operations sold in 1998. As a result of
these dispositions, the Company has included the remaining operations of the
Major Appliances segment within Total Electronics in 1998 and 1997. Information
for the segments that comprise Total Electronics has not been presented for 1997
and 1996 because the Company determined that it was impracticable to obtain the
comparative information due to the significant acquisitions, divestitures, and
reorganizations that took place during 1998 and 1997. During the first quarter
of 1999, the Company completed a reorganization of certain business segments to
better align the operations with customer needs and to eliminate management
redundancy. Note M to the financial statements contains additional information
about this change. This organizational change will be reflected in the Company's
1999 financial statements.
8
The Electronics businesses reported 1998 sales of $14.8 billion, an
increase of 65 percent compared with 1997, and 1998 operating income of $2,032
million, a 137 percent increase compared with 1997. The significant increase was
attributable primarily to the merger with Hughes Defense and the acquisition of
TI Defense. Additionally, the previously discussed restructuring and special
charges decreased to $167 million in 1998 from $340 million in 1997. The
Electronics businesses reported 1997 sales of $9.0 billion, an increase of 45
percent compared with 1996, and 1997 operating income of $856 million, an 8
percent increase compared with 1996. The increase was attributable primarily to
the acquisition of TI Defense offset by the restructuring and special charges
discussed above. The Electronics businesses reported 1996 sales of $6.2 billion
and operating income of $793 million.
RE&C reported 1998 sales of $2.1 billion and an operating loss of $253
million and 1997 sales of $2.3 billion and operating income of $19 million.
During 1998, RE&C recorded a non-recurring charge of $310 million for a change
in estimate on certain contracts and contract claims. In accordance with
contract accounting rules, this charge was recorded as a reduction in net sales.
In addition, RE&C recorded previously discussed restructuring and special
charges of $85 million in 1998 and $125 million in 1997. The decrease in sales
and operating income was due primarily to the $310 million charge. In addition,
new orders have not progressed as anticipated. This lower growth combined with
operational performance on certain contracts resulted in continued margin
pressure. In response to these circumstances, RE&C announced corrective actions
which included improving cash flow management, reducing the overhead structure,
and strengthening the management team. RE&C reported 1996 sales of $2.3 billion
and operating income of $184 million.
Raytheon Aircraft reported 1998 sales of $2.6 billion, up slightly compared
with 1997, and 1998 operating income of $257 million, an improvement of 23
percent compared with 1997. The increase in sales is primarily due to increased
shipments of general aviation aircraft. The increase in operating income is
primarily due to the 1997 special charge of $30 million discussed above.
Raytheon Aircraft reported 1997 sales of $2.4 billion, up slightly compared
with 1996, and 1997 operating income of $209 million, an increase of 15 percent
compared with 1996. The increases reflect increased shipments of general
aviation aircraft and contracts for services. The increase in operating income
was offset by the 1997 special charge discussed above. Raytheon Aircraft
reported 1996 sales of $2.3 billion and operating income of $181 million.
Backlog consisted of the following at:
(In millions) December 31: 1998 1997 1996
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Electronics $17,648 $16,641 $ 7,559
Engineering and Construction 3,888 2,900 3,309
Aircraft 2,133 1,709 1,163
Major Appliances -- -- 35
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Total backlog $23,669 $21,250 $12,066
U.S. government backlog
included above $14,622 $12,547 $ 5,637
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During the third quarter of 1998, the Company changed its method of
reporting backlog at certain locations in order to provide a consistent method
of reporting across and within the Company's businesses. Backlog includes the
full value of contract awards when received, excluding awards and options
expected in future periods. Prior to the change, contract values which were
awarded but incrementally funded were excluded from reported backlog for some
parts of the business. The one-time impact of this change was a $1.1 billion
increase to Electronics backlog and a $0.9 billion increase to Engineering and
Construction backlog, related principally to U.S. government contracts. Prior
periods have not been restated for this change. Excluding this change, backlog
remained essentially unchanged from December 31, 1997.
Financial Condition and Liquidity
Net cash provided by operating activities for the year ended December 31,
1998 was $820 million versus $963 million for the year ended December 31, 1997.
The decrease is due principally to increased working capital requirements and
restructuring activities at the Electronics businesses. In 1998, the Company
incurred cash expenditures of $276 million on restructuring and exit costs and
$56 million of capital expenditures and period expenses related to restructuring
and consolidation activities for RSC and RE&C combined. The Company expects to
spend approximately $534 million on exit costs and approximately $225 million on
capital expenditures and period costs related to restructuring actions in 1999.
For the year ended December 31, 1996, net cash provided by operating activities
was $291 million. While the Company expects that the completion of restructuring
and consolidation activities will reduce cash flow in the near term, over the
next five years the Company expects to generate significant cash from
operations.
Net cash provided by investing activities was $791 million in 1998 versus
net cash used in investing activities of $2,856 million and $938 million in 1997
and 1996, respectively.
Capital expenditures of $509 million in 1998 increased slightly from $459
million in 1997, primarily due to the merger with Hughes Defense and the
acquisition of TI Defense. Capital expenditures in 1999 are expected to
approximate 1998 levels. Capital expenditures were $406 million in 1996.
Proceeds from sales of property, plant, and equipment include a $490
million property sale and five-year operating lease facility. The transaction
was intended to diversify the Company's sources of funding and extend the term
for a portion of the Company's financing obligations. Remaining lease payments
approximate $109 million in 1999, $94 million in 2000, $77 million in 2001, $63
million in 2002, and $212 million in 2003. The lease facility contains covenants
that are substantially similar to those in the Company's senior credit
facilities. Also during 1998, the Company received proceeds of $210 million from
various property sales.
10
During 1998, the Company made net payments for the purchase of acquired
companies of $96 million, including $63 million for the acquisition of
AlliedSignal's Communications Systems business. During 1997, net payments of
$3,087 million were made in connection with the merger with Hughes Defense and
the acquisition of TI Defense. Pursuant to the terms of the merger agreement,
which requires an adjustment based on net assets, the final purchase price for
Hughes Defense has not been determined. While the Company expects a reduction in
purchase price from the original terms of the agreement, the amount, timing, and
effect on the Company's financial position are uncertain.
During 1998, the Company sold its commercial laundry business unit for $315
million in cash and $19 million in securities and its Raytheon Aircraft Montek
subsidiary for $160 million. Also during 1998, the Company sold other non-core
business operations for $273 million. Total sales and operating income related
to these divested businesses were $372 million and $8 million, respectively in
1998.
During 1997, the Company sold its home appliance, heating, air
conditioning, and commercial cooking operations for $522 million. Also during
1997, the Company sold its Switchcraft and Semiconductor divisions, which were
part of Commercial Electronics, for $183 million. The Company has been divesting
non-core assets as part of its strategy to focus and streamline its core
businesses.
Dividends paid to stockholders were $271 million in 1998, $189 million in
1997, and $190 million in 1996. The quarterly dividend rate was $0.20 per share
for each of the four quarters of 1998, 1997, and 1996. The increase in dividends
paid in 1998 was due to the issuance of 102.6 million shares in connection with
the merger with Hughes Defense.
Outstanding shares were reduced by the repurchase of 4.6 million shares for
$247 million in 1998 and 1.7 million shares for $94 million in 1997.
Total debt was $9.0 billion at December 31, 1998 as compared with $10.1
billion at December 31, 1997 and $3.7 billion 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
certain appliance and other non-core operations. Total debt, as a percentage of
total capital, was 45.3 percent, 49.1 percent, and 44.8 percent at December 31,
1998, 1997, and 1996, respectively.
The Company issued $3.8 billion of long-term notes and debentures during
1998 and $3.0 billion during 1997. These financings were used to refinance the
debt associated with the merger with Hughes Defense and the acquisition of TI
Defense and to take advantage of favorable long-term interest rates in order to
reduce short-term borrowings. Note H to the financial statements contains
additional disclosures related to long-term debt.
11
Credit ratings for the Company were established by Moody's at P-2 for
short-term borrowing and Baa1 for senior debt, Standard and Poor's at A-2 for
short-term borrowing and BBB for senior debt, and Duff & Phelps at D-2 for
short-term borrowing and BBB+ for senior debt.
Lines of credit with certain commercial banks totaling $4.4 billion at
December 31, 1998 exist as standby facilities to support the issuance of
commercial paper by the Company. At December 31, 1998, there were no borrowings
under these lines of credit. At December 31, 1997, the Company had lines of
credit totaling $9.0 billion as a source of direct borrowing and as a standby
facility to support the issuance of commercial paper of which $3.5 billion was
outstanding. Given the present state of the financial markets and economic
conditions, the Company does not currently anticipate making future borrowings
under the remaining lines of credit.
The Company's need for, cost of, and access to funds are dependent on
future operating results, as well as conditions external to the Company. The
Company believes that its cash position will be sufficient to maintain
investment grade credit ratings and its sources of and access to capital markets
are adequate to support current operations.
The following discussion covers quantitative and qualitative disclosures
about the Company's market risk. The Company's primary market exposures are to
interest rates and foreign exchange rates.
The Company meets its working capital requirements with a combination of
variable rate short-term and fixed rate long-term financing. The Company enters
into interest rate swap agreements 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 to international vendors and the
value of foreign currency denominated receipts. The market-risk sensitive
instruments used by the Company for hedging are entered into with commercial
banks and are directly related to a particular asset, liability, or transaction
for which a firm commitment is in place.
Financial instruments held by the Company which are subject to interest
rate risk include notes payable, commercial paper, long-term debt, long-term
receivables, investments, and interest rate swap agreements. The aggregate
hypothetical loss in earnings for one month of those financial instruments held
by the Company at December 31, 1998 which are subject to interest rate risk
resulting from a hypothetical increase in interest rates of 10 percent is not
material. 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, 1998
which is subject to interest rate risk. Fixed rate financial instruments were
not evaluated, as the risk exposure is not material.
12
The Company's outstanding foreign currency forward exchange contracts
include contracts to buy and/or sell British Pounds, Netherlands Guilders,
German Marks, Canadian Dollars, Swiss Francs, and Norwegian Kroner. 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.
On January 1, 1999, eleven participating countries of the European Union
converted to a common currency, the Euro, which became their official currency.
National currencies will initially remain legal tender. The Company recently
conducted an internal analysis to determine the impact of the Euro conversion
which is not expected to have a material impact on the Company's business.
Year 2000 Date Conversion
The Year 2000 problem concerns the inability of information systems to
recognize properly and process date-sensitive information beyond January 1,
2000.
In January 1998, the Company initiated a formal comprehensive
enterprise-wide program to identify and resolve Year 2000 related issues. The
scope of the program includes the investigation of all Company functions and
products, and all internally used hardware and software systems, including
embedded systems in what are not traditionally considered information technology
systems. The program has developed standard processes and an internal service
center in support of Year 2000 readiness. The Company is following an eight-step
risk management process grouped into two major phases, detection (planning and
awareness, inventory, triage, and detailed assessment) and correction
(resolution, test planning, test execution, and deployment).
The Company has identified eight system types that could have risk as
follows: application, infrastructure, test equipment, engineering computing,
manufacturing, delivered product, facilities, and supply chain. The completion
of several large acquisitions in recent years through which the Company
inherited a large number of systems, products, and facilities adds to the
complexity of this task. As the Company continues to acquire new businesses,
these businesses must then be brought into the program.
The detection phase of the program is currently estimated to be 95 percent
complete. On the basis of expected total cost, the detection phase is 73 percent
complete. The remaining work in this phase is expected to be completed in early
1999. The work in the detection phase has covered all eight system types,
including delivered product and supply chain.
13
The Company has made substantial progress in the corrective action phase of
the program, with 82 percent of the tasks required in this phase completed, up
from 19 percent at the end of the third quarter of 1998. On the basis of
expected total cost, the corrective action phase is 45 percent complete. The
Company expects to complete corrective activities by the third quarter of 1999.
The Company has instituted and is executing a formal audit program to assess the
state of readiness. Also, the Company is assessing the risk of supplier
readiness, and in selected cases will review the preparedness of individual
suppliers for Year 2000. Finally, the Company plans to audit Year 2000
compliance of selected vendors.
When the corrective action phase of the program is completed the Company
expects to have developed contingency plans, augmenting existing disaster
recovery plans and sourcing strategies, for identified risks.
Since January 1998, the Company has spent approximately $67 million on the
Year 2000 program, $16 million on the detection phase, and $51 million on the
corrective action phase. Prior to 1998, expenditures on the program were
insignificant. Total cost at completion of the program is currently estimated to
be $136 million. Of the total $136 million estimated costs, $22 million relates
to the detection phase and $114 million is for correction. All costs, except
those for long-lived assets, are expensed as incurred. These costs include
employees, inside and outside consultants and services, system replacements, and
other equipment requirements. The Company has employed consultants in an
advisory capacity, primarily in the detection phase. Total estimated costs of
the Year 2000 program are predominantly internal. Although a number of minor
information technology projects have been deferred as a result of the priority
given to the Year 2000 program, no significant projects which would materially
affect the Company's financial position or results of operations have been
delayed.
While the Company expects to resolve all Year 2000 risks without a material
adverse effect on its results of operations, liquidity, or financial condition,
there can be no assurances as to the ultimate success of the program.
Uncertainties exist as to the Company's ability to detect all Year 2000 problems
as well as its ability to achieve successful and timely resolution of all Year
2000 issues. Uncertainties also exist concerning the preparedness of the
Company's critical suppliers to avoid Year 2000 related service and delivery
interruptions. A "reasonably likely worst case" scenario of Year 2000 risks for
the Company could include isolated performance problems with manufacturing or
administrative systems, isolated interruption of deliveries from critical
suppliers, and product liability issues. The consequences of these issues may
include increases in manufacturing and administrative costs until the problems
are resolved, lost revenues, lower cash receipts, and product liability;
however, the Company is unable to quantify the potential effect of these items
on its results of operations, liquidity, or financial condition should some or a
combination of these events come to pass.
14
Accounting Standards
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities (SOP 98-5). This accounting standard requires
that certain start-up and pre-contract award costs be expensed as incurred. The
Company will report a first quarter 1999 charge of $53 million, or $0.16 per
diluted share, reflecting the initial application of SOP 98-5 and the cumulative
effect of the change in accounting principle as of January 1, 1999.
In March 1998, the AICPA issued Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use (SOP
98-1). This accounting standard, which is effective for fiscal years beginning
after December 15, 1998, requires that certain costs incurred in connection with
internal-use computer software projects be capitalized. The adoption of SOP 98-1
is not expected to have a material effect on the Company's financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). This accounting standard, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
requires that all derivatives be recognized as either assets or liabilities at
estimated fair value. The adoption of SFAS No. 133 is not expected to have a
material effect on the Company's financial position or results of operations.
Forward-Looking Statements
Statements which are not historical facts contained in this 1998 Annual
Report are forward-looking statements under the provisions of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
These risks include, in addition to the specific uncertainties referenced in
this report, the effect of worldwide political and market conditions, the impact
of competitive products and pricing, the timing of awards and contracts,
particularly international contracts, and risks inherent with large long-term
fixed price contracts. Further information regarding the factors that could
cause actual results to differ materially from projected results can be found in
"Item 1-Business" in Raytheon's Annual Report on Form 10-K for the year ended
December 31, 1998.
15
Raytheon Company Consolidated Balance Sheets
(In millions except share amounts) December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------
Assets
===============================================================================
Current assets
Cash and cash equivalents $ 421 $ 296
Accounts receivable, less allowance
for doubtful accounts of $21 in 1998
and $22 in 1997 618 1,056
Deferred federal and foreign income
taxes (note I) 809 1,244
Contracts in process (note D) 4,842 4,661
Inventories (note E) 1,711 1,837
Prepaid expenses and other current assets 236 139
- -------------------------------------------------------------------------------
Total current assets 8,637 9,233
Property, plant, and equipment, net (note F) 2,275 2,891
Goodwill, net of accumulated amortization
of $669 in 1998 and $308 in 1997 14,431 13,836
Other assets, net (notes G and L) 2,596 2,638
- -------------------------------------------------------------------------------
Total assets $27,939 $28,598
===============================================================================
16
Liabilities and Stockholders' Equity
===============================================================================
Current liabilities
Notes payable and current portion of
long-term debt (note H) $ 827 $ 5,656
Advance payments, less contracts
in process of $1,159 in 1998 and
$420 in 1997 865 525
Accounts payable 2,091 1,845
Accrued salaries and wages 703 680
Other accrued expenses (note C) 2,194 2,509
- ---------------------------------------------------------------------------
Total current liabilities 6,680 11,215
Accrued retiree benefits and other
long-term liabilities (notes C and L) 1,679 1,766
Deferred federal and foreign income
taxes (note I) 561 786
Long-term debt (note H) 8,163 4,406
Commitments and contingencies (note J)
Stockholders' equity (note P)
Preferred stock, $0.01 par value,
200,000,000 shares authorized, none
outstanding in 1998 and 1997
Class A common stock, par value
$0.01 per share, 450,000,000 shares
authorized, 101,503,000 and 102,630,000
shares outstanding in 1998 and 1997,
respectively after deducting 839,000
treasury shares in 1998 1 1
Class B common stock, par value
$0.01 per share, 1,000,000,000 shares
authorized, 235,295,000 and 235,935,000
shares outstanding in 1998 and 1997,
respectively after deducting 3,889,000
treasury shares in 1998 2 2
Additional paid-in capital 6,272 6,151
Accumulated other comprehensive income (50) (23)
Treasury stock (257) --
Retained earnings 4,888 4,294
- ------------------------------------------------------------------------------
Total stockholders' equity 10,856 10,425
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $27,939 $28,598
===============================================================================
17
Raytheon Company Consolidated Statements of Income
(In millions except per share amounts)
Years Ended December 31: 1998 1997 1996
- -------------------------------------------------------------------------------
Net sales $19,530 $13,673 $12,331
Cost of sales 15,248 10,985 9,789
Administrative and selling expenses 1,664 1,189 1,021
Research and development expenses 582 415 323
- -------------------------------------------------------------------------------
Total operating expenses 17,494 12,589 11,133
- -------------------------------------------------------------------------------
Operating income 2,036 1,084 1,198
- -------------------------------------------------------------------------------
Interest expense 739 397 256
Interest and dividend income (28) (38) (102)
Other income, net (142) (65) (39)
- -------------------------------------------------------------------------------
Non-operating expense, net 569 294 115
- -------------------------------------------------------------------------------
Income before taxes 1,467 790 1,083
Federal and foreign income taxes 603 263 322
- -------------------------------------------------------------------------------
Net income $ 864 $ 527 $ 761
===============================================================================
Earnings per common share
Basic $ 2.56 $ 2.20 $ 3.22
Diluted $ 2.53 $ 2.18 $ 3.17
18
Raytheon Company Consolidated Statements of Stockholders' Equity
(In millions except per share amounts) Accumulated Compre- Total
Years Ended December 31, Common Stock Additional Other Compre- Treasury Retained hensive Stockholders'
1998, 1997 and 1996: Class A Class B Paid-in Capital hensive Income Stock Earnings Income Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $241 $259 $ 5 $3,787 $ 4,292
Net income 761 $761 761
Other comprehensive income
Foreign exchange translation
adjustments (3) (3)
SFAS No. 115 valuation adjustment (15) (15)
SFAS No. 87 pension adjustment 1 1
Other comprehensive income (17) (17)
Comprehensive income-1996 $744
Dividends declared-$0.80 per share (190) (190)
Common stock plan activity 1 64 65
Treasury stock activity (6) (15) (292) (313)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 236 308 (12) 4,066 4,598
Net income 527 $527 527
Other comprehensive income
Foreign exchange translation
adjustments (32) (32)
SFAS No. 115 valuation adjustment 26 26
SFAS No. 87 pension adjustment (5) (5)
Other comprehensive income (11) (11)
Comprehensive income-1997 $516
Dividends declared-$0.80 per share (209) (209)
Common stock plan activity 2 172 174
Treasury stock activity (2) (23) (90) (115)
Reduction of par value (234) 234 --
Issuance of class A common stock $1 5,460 5,461
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 1 2 6,151 (23) 4,294 10,425
Net income 864 $864 864
Other comprehensive income
Foreign exchange translation
adjustments (9) (9)
SFAS No. 115 valuation adjustment (6) (6)
SFAS No. 87 pension adjustment (12) (12)
Other comprehensive income (27) (27)
Comprehensive income-1998 $837
Dividends declared-$0.80 per share (270) (270)
Common stock plan activity 121 121
Treasury stock activity (note P) $(257) (257)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $1 $2 $6,272 $(50) $(257) $4,888 $10,856
====================================================================================================================================
19
Raytheon Company Consolidated Statements of Cash Flows
(In millions) Years Ended December 31: 1998 1997 1996
- -------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 864 $ 527 $ 761
Adjustments to reconcile net income
to net cash provided by operating
activities, net of the effect of
acquisitions and divestitures
Depreciation and amortization 761 457 369
Net gain on sales of operating units (141) (72) --
Sales of receivables 1,860 1,752 1,209
Increase in accounts receivable (1,651) (1,519) (994)
Increase in contracts in process (746) (585) (581)
(Increase) decrease in inventories (168) 54 (38)
Increase (decrease) in advance payments 345 (49) (45)
Increase in accounts payable 265 128 49
Net change in deferred federal and
foreign income taxes 513 130 47
(Decrease) increase in accrued expenses (744) 83 (374)
Other adjustments, net (338) 57 (112)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 820 963 291
- -------------------------------------------------------------------------------
Cash flows from investing activities
Expenditures for property, plant, and equipment (509) (459) (406)
Proceeds from sales of property, plant,
and equipment 700 69 16
Increase in other assets (52) (84) (31)
Payment for purchase of acquired companies,
net of cash received (96) (3,087) (584)
Proceeds from sales of operating units
and investments 748 705 67
- -------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 791 (2,856) (938)
- -------------------------------------------------------------------------------
Cash flows from financing activities
Dividends (271) (189) (190)
(Decrease) increase in short-term debt (4,828) (597) 1,007
Increase in long-term debt 3,757 2,889 4
Purchase of treasury shares (247) (94) (306)
Proceeds under common stock plans 103 44 57
All other, net -- -- 3
- -------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,486) 2,053 575
- -------------------------------------------------------------------------------
Effect of foreign exchange rates on cash -- (1) --
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 125 159 (72)
Cash and cash equivalents at beginning of year 296 137 209
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 421 $ 296 $ 137
===============================================================================
20
Note A: Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Raytheon
Company (Raytheon or the "Company") and all domestic and foreign subsidiaries.
All material intercompany transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year presentation.
Revenue Recognition
Sales under long-term contracts are primarily recorded under the percentage
of completion method. Costs and estimated gross margins are recorded as sales as
work is performed based on the percentage that incurred costs bear to estimated
total costs utilizing the most recent estimates of costs and funding. Some
contracts contain incentive provisions based upon performance in relation to
established targets which are recognized in the contract estimates as deemed
appropriate. Since many contracts extend over a long period of time, revisions
in cost and funding estimates during the progress of work have the effect of
adjusting earnings applicable to performance in prior periods in the current
period. When the current contract estimate indicates a loss, provision is made
for the total anticipated loss in the current period.
Sales under certain fixed price contracts are recorded as products are
shipped or services are rendered.
Revenue from aircraft sales are generally recognized at the time of
shipment. Revenue from certain qualifying non-cancelable aircraft lease
contracts are accounted for as sales-type leases. The present value of all
payments, net of executory costs, are recorded as revenue, and the related costs
of the aircraft are charged to cost of sales. Associated interest, using the
interest method, is recorded over the term of the lease agreements. All other
leases for aircraft are accounted for under the operating method wherein revenue
is recorded as earned over the rental aircraft lives. Service revenue is
recognized ratably over contractual periods or as services are performed.
Research and Development Expenses
Expenditures for company-sponsored research and development projects are
expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid
investments with original maturities of 90 days or less. Under the Company's
cash management program, checks and amounts in transit prior to December 31,
1998 were not considered reductions of cash or accounts payable until presented
to the appropriate banks for payment. At December 31, 1997, checks and amounts
in transit were $290 million. Cash equivalents 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).
Contracts in Process
Contracts in process are stated at cost plus estimated profit but not in
excess of realizable value.
21
Inventories
Inventories at Raytheon Aircraft are stated at the lower of cost
(principally last-in, first-out) or market. All other inventories are stated at
cost (principally first-in, first-out or average cost) but not in excess of
realizable value.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Major improvements are
capitalized while expenditures for maintenance, repairs, and minor improvements
are charged to expense. When assets are retired or otherwise disposed of, the
assets and related accumulated depreciation and amortization are eliminated from
the accounts and any resulting gain or loss is reflected in income. Provisions
for depreciation are generally computed on a combination of accelerated and
straight-line methods. Depreciation provisions are based on estimated useful
lives as follows: buildings - 20 to 45 years, machinery and equipment - 3 to 10
years, and equipment leased to others - 5 to 10 years. Leasehold improvements
are amortized over the lesser of the remaining life of the lease or the
estimated useful life of the improvement.
Goodwill
Goodwill is amortized on the straight-line method over its estimated useful
life, but not in excess of 40 years. The Company evaluates the possible
impairment of goodwill at each reporting period based on the undiscounted
projected cash flows of the related business unit.
Impairment of Long-lived Assets
The Company evaluates the recoverability of long-lived assets by measuring
the carrying amount of the assets against the related estimated undiscounted
future cash flows. When an evaluation indicates that the future undiscounted
cash flows are not sufficient to recover the carrying value of the asset, the
asset is adjusted to its estimated fair value.
Investments
Investments include equity ownership of 20 percent to 50 percent in
affiliated companies and of less than 20 percent in other companies. Investments
in affiliated companies are accounted for under the equity method, wherein the
Company's share of earnings and income taxes applicable to the assumed
distribution of such earnings are included in net income. Other investments are
stated at the lower of cost or fair value, and certain available for sale
investments are accounted for in accordance with the provisions of SFAS No. 115.
Federal and Foreign Income Taxes
The Company and its domestic subsidiaries provide for federal income taxes
on pretax accounting income at rates in effect under existing tax law. Foreign
subsidiaries have recorded provisions for income taxes at applicable foreign tax
rates in a similar manner.
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 accumulated other comprehensive income in stockholders' equity.
The balance at December 31, 1998 and 1997 was $(37) million and $(28) million,
respectively. Foreign exchange transaction gains and losses in 1998, 1997, and
1996 were not material.
Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS No. 130), during 1998. SFAS No. 130
established standards for reporting comprehensive income and its components, and
is presented in the Consolidated Statements of Stockholders' Equity. The SFAS
No. 115 valuation adjustment is shown net of tax benefits (provisions) of $3
million, $(14) million, and $8 million in 1998, 1997, and 1996, respectively.
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (SOP 98-5). This accounting standard requires that
certain start-up and pre-contract award costs be expensed as incurred. The
Company will report a first quarter 1999 charge of $53 million, or $0.16 per
diluted share, reflecting the initial application of SOP 98-5 and the cumulative
effect of the change in accounting principle as of January 1, 1999.
Pension Costs
The Company has several pension and retirement plans covering the majority
of employees, including certain employees in foreign countries. Annual charges
to income are made for the cost of the plans, including current service costs,
interest on projected benefit obligations, and net amortization and deferrals,
increased or reduced by the return on assets. Unfunded accumulated benefit
obligations are accounted for as a long-term liability on the balance sheet. The
Company annually funds those pension costs which are calculated in accordance
with Internal Revenue Service regulations and standards issued by the Cost
Accounting Standards Board.
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.
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
Employee Stock Plans
Proceeds from the exercise of stock options under employee stock plans are
credited to common stock at par value, and the excess is credited to additional
paid-in capital. There are no charges or credits to income for stock options.
The fair value at the date of award of restricted stock is credited to common
stock at par value, and the excess is credited to additional paid-in capital.
The fair value is 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
non-qualified stock options are credited to additional paid-in capital. The
Company adopted Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123) in 1996. The standard defines a fair
value based method of accounting for employee stock options. The pro forma net
income and earnings per share effect of the fair value based accounting are
disclosed in Note K, Employee Stock Plans.
Risks and Uncertainties
Companies, such as Raytheon, which are engaged in supplying defense-related
equipment to the government, are subject to certain business risks peculiar to
that industry. Sales to the government may be affected by changes in procurement
policies, budget considerations, changing concepts of national defense,
political developments abroad, and other factors. The Company has maintained a
solid foundation of defense systems which meet the needs of the United States
and its allies, as well as serving a broad government program base and range of
commercial electronics businesses. These factors lead management to believe that
there is high probability of continuation of the Company's current major defense
programs. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
24
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 following unaudited pro forma financial information combines the
results of operations of Raytheon, TI Defense, and Hughes Defense as if the
acquisition and merger had taken place on January 1, 1997 and January 1, 1996:
(In millions except per share amounts) 1997 1996
- -------------------------------------------------------------------------------
Net sales $ 21,359 $ 20,514
Net income 564 917
Basic earnings per share 1.67 2.70
Diluted earnings per share 1.66 2.68
- -------------------------------------------------------------------------------
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, valued at $9.5 billion subject to post-closing
adjustments, was comprised of approximately $5.5 billion in common stock and
$4.0 billion in debt, which was assumed by the merged company. TI Defense was
acquired for $2.9 billion in cash. Pursuant to the terms of the merger
agreement, which requires an adjustment based on net assets, the final purchase
price for Hughes Defense has not been determined. While the Company expects a
reduction in purchase price from the original terms of the agreement, the
amount, timing, and effect on the Company's financial position are uncertain.
Assets acquired in conjunction with the merger with Hughes Defense include
contracts in process of $1,357 million, inventories of $259 million, other
current assets of $765 million, property, plant, and equipment of $924 million,
and other assets of $1,609 million (primarily pension related). Liabilities
assumed include debt of $4,033 million, current liabilities of $2,846 million,
and long-term liabilities of $986 million. Goodwill resulting from the fair
value of this transaction was $8,965 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 $646 million and long-term
liabilities of $147 million. Goodwill resulting from the fair value of this
transaction was $2,929 million.
In 1998, the Company acquired AlliedSignal's Communications Systems
business for $63 million. Also in 1998, the Company sold its commercial laundry
business unit for $315 million in cash and $19 million in securities, its
Raytheon Aircraft Montek subsidiary for $160 million, and other non-core
business operations for $273 million.
25
In 1997, the Company sold its home appliance, heating, air conditioning,
and commercial cooking operations for $522 million. Also in 1997, the Company
sold its Switchcraft and Semiconductor divisions for $183 million.
The Company has included in its consolidated results of operations the
following acquisitions made in June 1996, under the purchase method of
accounting: 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. The cost of the acquisitions, net of cash acquired, was $584 million. No
pro forma results have been presented since they would not be material to the
Company's consolidated results.
In April 1996, the Company sold Xyplex, its data-networking subsidiary, for
$118 million in cash and securities.
Note C: Restructuring and Special Charges
Restructuring charges and exit costs recognized in connection with business
combinations include the cost of involuntary employee termination benefits and
related employee severance costs, facility closures, and other costs associated
with the Company's approved plans. Employee termination benefits include
severance, wage continuation, medical, and other benefits. Facility closure and
related costs include disposal costs of property, plant, and equipment, lease
payments, lease termination costs, and net gain or loss on sales of closed
facilities.
In 1998, the Company recorded restructuring and special charges totaling
$252 million of which $85 million is included in cost of sales and $167 million
is included in administrative and selling expenses. The charges included $33
million for costs pertaining to restructuring actions taken by the Engineering
and Construction segment, $167 million for asset impairments in the Electronics
businesses, and $52 million for asset impairments in the Engineering and
Construction segment.
In 1997, the Company recorded restructuring and special charges totaling
$495 million of which $401 million is included in cost of sales and $94 million
is included in administrative and selling expenses. The charges included $295
million for costs related to restructuring actions at the Electronics businesses
($220 million) and at the Engineering and Construction segment ($75 million).
The charges also included $63 million for one-time costs associated with the
merger with Hughes Defense and the acquisition of TI Defense. Special charges of
$137 million related to asset impairments in the Electronics businesses ($57
million), contract valuations in the Engineering and Construction segment ($50
million), and a permanent impairment in the Aircraft segment ($30 million).
In 1996, the Company recorded a $34 million special charge, which is
included in cost of sales.
26
Restructuring Charges and Exit Costs -- Electronics
In January 1998, the Company announced plans to consolidate and reorganize
its Electronics businesses, including the operations of Hughes Defense and TI
Defense. In connection with these actions, the Company recorded $804 million of
restructuring and exit costs. The Company recorded a $220 million restructuring
charge in the fourth quarter of 1997, including $148 million for employee
separation costs and $72 million for facilities exit costs. While a higher than
planned rate of attrition and lower than expected cost of severance per employee
have reduced the Company's estimates of employee related costs, these costs
savings have been more than offset by higher than expected facilities exit
costs. In addition, during the fourth quarter of 1998, the Company committed to
close additional facilities and further reduce employment. The Company's revised
estimate of exit costs include $125 million for employee separation costs and
$95 million for facilities exit costs.
The remaining $584 million of exit costs were recorded as liabilities
assumed in connection with the merger with Hughes Defense and the acquisition of
TI Defense. Costs of $300 million were recorded in 1997, reflecting the
Company's initial plan related to the reorganization and consolidation of these
operations. In 1998, as a result of finalization of these plans, additional exit
costs of $284 million were accrued. The Company's final estimate of exit costs
include $260 million for employee separation costs and $324 million for
facilities exit costs.
The $804 million of restructuring and exit costs provides for severance and
related benefits for approximately 15,400 employees and costs to vacate and
dispose of approximately 11 million square feet of facility space. The Company
expects to essentially complete these actions by the end of 1999. While these
actions are intended to improve the Company's competitive position, there can be
no assurances as to their ultimate success or that additional restructuring
actions will not be required.
Electronics Restructuring and Exit Costs
- -------------------------------------------------------------------------------
(In millions) 1998 1997
- -------------------------------------------------------------------------------
Accrued liability at beginning of year $ 520 --
Charges and liabilities accrued
Severance and other employee related costs 35 $ 350
Facility closure and related costs 249 170
- -------------------------------------------------------------------------------
284 520
- -------------------------------------------------------------------------------
Costs incurred
Severance and other employee related costs 104 --
Facility closure and related costs 137 --
- -------------------------------------------------------------------------------
241 --
- -------------------------------------------------------------------------------
Accrued liability at end of year $ 563 $ 520
===============================================================================
Cash expenditures $ 234 --
Number of employee terminations
due to restructuring actions 6,600 --
- -------------------------------------------------------------------------------
27
In addition to the $241 million of restructuring and exit costs incurred in
1998, the Company also incurred $56 million of capital expenditures and period
expenses in 1998 related to the implementation of the Electronics businesses
consolidation and reorganization.
Restructuring Charges -- Engineering and Construction
In January 1998, the Company announced plans to reduce the Raytheon
Engineers & Constructors (RE&C) workforce by 1,000 employees and to close or
partially close 16 offices, or approximately 1.1 million square feet of
facilities. In connection with these actions and other committed but unannounced
actions, the Company recorded a $75 million restructuring charge in the fourth
quarter of 1997. The restructuring charge included $31 million for employee
severance for approximately 2,300 people, including the 1,000 positions
announced in January 1998, and $44 million for facilities exit. In the fourth
quarter of 1998, the Company modified the plan that was announced in January
1998 to close fewer facilities. As a result of the modification, the number of
employee terminations was reduced from approximately 2,300 people to
approximately 1,400 people; however, the cost savings realized as a result of
these reductions were offset by higher than expected facilities exit costs. In
October 1998, the Company also announced plans for an additional 260 person
reduction in the RE&C workforce and recorded an additional $33 million
restructuring charge.
While these actions are intended to improve the Company's competitive
position, there can be no assurances as to their ultimate success or that
additional restructuring actions will not be required.
Engineering and Construction Restructuring Costs
- -------------------------------------------------------------------------------
(In millions) 1998 1997
- -------------------------------------------------------------------------------
Accrued liability at beginning of year $ 75 --
Charges and liabilities accrued
Severance and other employee related costs 22 $ 31
Facility closure and related costs 11 44
- -------------------------------------------------------------------------------
33 75
- -------------------------------------------------------------------------------
Costs incurred
Severance and other employee related costs 19 --
Facility closure and related costs 23 --
- -------------------------------------------------------------------------------
42 --
- -------------------------------------------------------------------------------
Accrued liability at end of year $ 66 $ 75
===============================================================================
Cash expenditures $ 42 --
Number of employee terminations due to
restructuring actions 1,300 --
- -------------------------------------------------------------------------------
28
Special Charges
In the second quarter of 1998, the Company's partner in a Commercial
Electronics joint venture in Korea began to experience financial difficulties.
As a result, the Company recorded a $42 million special charge to recognize a
permanent impairment of its investment in the joint venture, reducing the book
value of the investment to estimated fair value. During the third quarter of
1998, the financial condition of the joint venture deteriorated further, and the
Company recorded an additional $83 million special charge to exit a line of
business, which included writing off its remaining investment in the Korean
joint venture.
In 1998, the Company also recorded a $52 million special charge for asset
impairment related to the RE&C restructuring actions to exit two operations
which are scheduled to be closed in 1999. The charge includes $45 million of
goodwill associated with one of the operations to be exited and $7 million for
the estimated loss on disposition of the other operation.
Also in 1998, the Company recorded a $42 million special charge to write
down the assets of two operations in the Electronics businesses that the Company
had decided to sell to estimated fair value of approximately $125 million. One
sale was completed during 1998. The other sale is expected to close in 1999. The
operating results, which are not material, continue to be included in the
Company's results of operations.
In 1997, the Company recorded a $63 million special charge primarily for
one-time costs in the Electronics businesses associated with the merger with
Hughes Defense and the acquisition of TI Defense. The Company also recorded a
$57 million special charge primarily to write down to estimated fair value
certain assets in the Electronics businesses that the Company had decided to
sell. The sale of these assets was completed in 1998 and the proceeds and loss
on disposition were not material.
Also in 1997, the Company recorded a $50 million special charge for
contract valuations at RE&C and a $30 million special charge to recognize a
permanent impairment at Raytheon Aircraft.
In 1996, the Company recorded a $34 million special charge to close a Major
Appliances operation.
29
Note D: Contracts in Process
(In millions)
Contracts in process consisted of the following at December 31, 1998:
Cost Type Fixed Price Type Total
- -------------------------------------------------------------------------------
U.S. government end-use contracts
Billed $ 374 $ 555 $ 929
Unbilled 928 4,150 5,078
Less progress payments -- (2,753) (2,753)
- -------------------------------------------------------------------------------
Total 1,302 1,952 3,254
- -------------------------------------------------------------------------------
Other customers
Billed 300 498 798
Unbilled 418 864 1,282
Less progress payments -- (492) (492)
- -------------------------------------------------------------------------------
Total 718 870 1,588
- -------------------------------------------------------------------------------
$ 2,020 $ 2,822 $ 4,842
===============================================================================
(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 $ 3,443 $ 4,661
===============================================================================
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.
Billed and unbilled contracts in process include retentions arising from
contractual provisions. At December 31, 1998, retentions amounted to $279
million and are anticipated to be collected as follows: 1999-$132 million,
2000-$90 million, and the balance thereafter.
30
Note E: Inventories
(In millions)
Inventories consisted of the following at December 31: 1998 1997
- -------------------------------------------------------------------------------
Finished goods $ 317 $ 314
Work in process 915 1,340
Materials and purchased parts 746 509
Excess of current cost over LIFO values (150) (154)
- -------------------------------------------------------------------------------
1,828 2,009
Less progress payments (117) (172)
- ------------------------------------------------------------------------------
$ 1,711 $ 1,837
==============================================================================
Included in inventories are amounts related to certain fixed price
contracts under which sales are recorded as products are shipped.
The inventory values from which the excess of current cost over LIFO values
are deductible were $564 million and $504 million at December 31, 1998 and 1997,
respectively.
Note F: Property, Plant, and Equipment
(In millions)
Property, plant, and equipment consisted of the following at
December 31: 1998 1997
- ------------------------------------------------------------------------------
Land $ 70 $ 78
Buildings and leasehold improvements 1,828 1,754
Machinery and equipment 2,376 3,299
Equipment leased to others 201 119
- ------------------------------------------------------------------------------
4,475 5,250
Less accumulated depreciation and
amortization (2,200) (2,359)
- ------------------------------------------------------------------------------
$2,275 $2,891
==============================================================================
Depreciation expense was $380 million, $318 million, and $276 million in
1998, 1997, and 1996, respectively. During September 1998, the Company entered
into a $490 million property sale and five-year operating lease facility.
Accumulated depreciation of equipment leased to others was $10 million and
$8 million at December 31, 1998 and 1997, respectively. Future minimum lease
payments from non-cancelable aircraft operating leases, which extend to 2013,
amounted to $90 million.
31
At December 31, 1998, these payments were due as follows:
- ------------------------------------------------------------------------------
(In millions) 1999 $ 16
2000 16
2001 16
2002 13
2003 8
Thereafter 21
- ------------------------------------------------------------------------------
Note G: Other Assets
(In millions)
Other assets consisted of the following at December 31: 1998 1997
- ------------------------------------------------------------------------------
Long-term receivables
Due from customers in installments to 2012 $ 222 $ 148
Sales-type leases, due in installments to 2015 20 27
Other, principally due through 2007 42 42
Investments 387 372
Prepaid pension and other noncurrent assets 1,925 2,049
- ------------------------------------------------------------------------------
$ 2,596 $ 2,638
==============================================================================
The Company provides long-term financing principally to its aircraft
customers. Long-term receivables include commuter airline receivables of $113
million and $63 million at December 31, 1998 and 1997, respectively. Since it is
the Company's policy to have the aircraft serve as collateral for the commuter
airline receivables, the Company does not expect to incur any material losses
against the net book value of the long-term receivables.
The Company sells receivables, including government short-term receivables,
general and commuter aviation long-term receivables, and engineering and
construction short-term receivables, to a bank syndicate and other financial
institutions. The banks have a first priority claim on all proceeds, including
the underlying equipment and any insurance proceeds, and have recourse against
the Company, at varying percentages, depending upon the character of the
receivables sold. For the general and commuter aviation long-term receivables,
the underlying aircraft serve as collateral for the aircraft receivables, and
the future resale value of the aircraft is an important consideration in the
transaction. Based on experience to date with resale activities and pricing, the
Company believes that any liability arising from these transactions will not
have a material effect on the Company's financial position, liquidity, or
results of operations.
32
In connection with the sale of receivables, the following special purpose
entities had been established as of December 31, 1998: Raytheon Receivables,
Inc., Raytheon Aircraft Receivables Corporation, and Raytheon Engineers &
Constructors Receivables Corporation. The Company sells receivables through
these special purpose entities, retains the servicing rights, and receives a
servicing fee which is recognized as collected over the remaining term of the
related receivables sold. Estimated gains or losses from the sale of receivables
are recognized in the period in which the sale occurs. In determining the gain
or loss on each qualifying sale of receivables, the investment in the sold
receivable pool is allocated between the portion sold and the portion retained
based on their relative estimated fair values at the date of sale. The retained
interest includes servicing rights, interest only strips, and subordinated
certificates. These financial instruments are recorded at estimated fair value.
The balance of receivables sold to banks or financial institutions outstanding
at December 31, 1998 and 1997, was $3,002 million and $2,909 million,
respectively.
Note H: Notes Payable and Long-term Debt
(In millions)
Debt consisted of the following at December 31: 1998 1997
- -------------------------------------------------------------------------------
Notes payable at a weighted average interest
rate of 6.71% for 1998 and 6.30% for 1997 $ 34 $ 3,641
Commercial paper at a weighted average interest
rate of 5.91% for 1998 and 6.46% for 1997 785 2,010
Current portion of long-term debt 8 5
- -------------------------------------------------------------------------------
Notes payable and current portion of
long-term debt 827 5,656
- -------------------------------------------------------------------------------
Notes due through 2005, 5.70% to 6.50%,
not redeemable prior to maturity 3,557 2,206
Notes due from 2007 to 2010, 6.15% to 6.75%,
redeemable at any time 2,002 957
Debentures due from 2010 to 2028, 6.00% to
7.375%, redeemable at varying dates 2,212 826
Commercial paper backed by five year fixed
for variable interest rate swap at 6.40% 375 375
Other notes with varying interest rates 25 47
Less installments due within one year (8) (5)
- -------------------------------------------------------------------------------
Long-term debt 8,163 4,406
- -------------------------------------------------------------------------------
Total debt $8,990 $10,062
===============================================================================
33
In 1998, the Company issued $500 million of 5.95% notes due in 2001, $450
million of 6.30% notes due in 2005, $400 million of 5.70% notes due in 2003,
$750 million of 6.15% notes due in 2008, $300 million of 6.55% notes due in
2010, $250 million of 6.00% debentures due in 2010, $550 million of 6.40%
debentures due in 2018, $350 million of 6.75% debentures due in 2018, and $250
million of 7.00% debentures due in 2028. The proceeds from these issues were
used for acquisition refinancing and to reduce short-term borrowings.
In 1997, the Company issued $500 million of 7.20% debentures due in 2027,
$1,000 million of 6.75% notes due in 2007, $1,000 million of 6.45% notes due in
2002, and $500 million of 6.30% notes due in 2000. The proceeds from these
issues were used for acquisition financing.
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 five
year Syndicated Bank Credit Agreement combined with a five year fixed for
variable interest rate swap which matures during 2000.
Excluding commercial paper classified as long-term, the aggregate amounts
of installments due on long-term debt for the next five years are:
- -------------------------------------------------------------------------------
(In millions) 1999 $ 8
2000 877
2001 502
2002 1,002
2003 403
- -------------------------------------------------------------------------------
Lines of credit with certain commercial banks totaling $4.4 billion at
December 31, 1998 exist as standby facilities to support the issuance of
commercial paper by the Company. At December 31, 1998, there were no borrowings
under these lines of credit. At December 31, 1997, the Company had lines of
credit totaling $9.0 billion as a source of direct borrowing and as a standby
facility to support the issuance of commercial paper of which $3.5 billion was
outstanding. Credit lines or commitments with banks were maintained by
subsidiary companies amounting to $202 million and $252 million at December 31,
1998 and 1997, respectively. Compensating balance arrangements are not material.
The principal amounts of long-term debt were reduced by debt issue
discounts and interest rate hedging costs of $76 million and $105 million
respectively, on the date of issuance, and are reflected as follows at:
(In millions) December 31: 1998 1997
- -------------------------------------------------------------------------------
Principal $8,317 $4,542
Unamortized issue discounts (66) (38)
Unamortized interest rate
hedging costs (88) (98)
- -------------------------------------------------------------------------------
Long-term debt $8,163 $4,406
===============================================================================
34
The Company has bank agreement covenants. The most restrictive requires
that the earnings before interest and taxes be at least three times net interest
expense for the prior four quarters. The Company was in compliance with this
covenant during 1998, 1997, and 1996.
Total interest payments were $778 million, $295 million, and $257 million
for 1998, 1997, and 1996, respectively.
Note I: Federal and Foreign Income Taxes
Income reported for federal and foreign tax purposes differs from pretax
accounting income due to variations between Internal Revenue Code requirements
and the Company's accounting practices. The provisions for federal and foreign
income taxes in 1998, 1997, and 1996 consisted of the following:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Current income tax expense
Federal $ 46 $191 $170
Foreign 7 9 34
Deferred income tax expense (benefit)
Federal 559 61 151
Foreign (9) 2 (33)
- -------------------------------------------------------------------------------
$603 $263 $322
===============================================================================
The provision for income taxes in 1998, 1997, and 1996 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 (0.3) (2.2) (4.6)
Foreign sales corporation tax benefit (1.3) (2.1) (2.5)
Goodwill amortization 7.7 3.2 1.7
Other, net -- (0.6) 0.1
- -------------------------------------------------------------------------------
41.1% 33.3% 29.7%
===============================================================================
In 1998, 1997, and 1996, domestic profit before taxes amounted to $1,431
million, $743 million, and $1,061 million, respectively, and foreign profit
before taxes amounted to $36 million, $47 million, and $22 million,
respectively.
Cash (refunds) payments were $(16) million, $169 million, and $275 million
in 1998, 1997, and 1996, respectively.
In 1998 and 1997, net deferred tax assets were increased by $371 million
and $393 million, respectively, in connection with acquisitions and subsequent
adjustments to acquisitions.
35
Deferred federal and foreign income taxes consisted of the following at:
(In millions) December 31: 1998 1997
- -------------------------------------------------------------------------------
Current deferred tax assets (liabilities)
Inventory and other $ 84 $ 444
Long-term contracts 459 582
Restructuring reserves 262 126
Inventory capitalization (27) (24)
Other 31 85
- -------------------------------------------------------------------------------
Net current deferred tax assets 809 1,213
Current period tax prepaid 31
Deferred federal and foreign income taxes
-- current $ 809 $1,244
- -------------------------------------------------------------------------------
Noncurrent deferred tax assets (liabilities)
Depreciation $(159) $ (284)
Revenue on leases (104) (75)
Pension (521) (588)
Postretirement benefits 249 247
Other (26) (86)
- -------------------------------------------------------------------------------
Deferred federal and foreign income taxes
-- noncurrent $(561) $ (786)
===============================================================================
At December 31, 1998, $105 million of taxes payable was included in
accounts payable.
Note J: Commitments and Contingencies
At December 31, 1998, the Company had commitments under long-term leases
requiring approximate annual rentals on a net lease basis as follows:
- -------------------------------------------------------------------------------
(In millions) 1999 $366
2000 331
2001 292
2002 236
2003 355
Thereafter 881
- -------------------------------------------------------------------------------
Remaining lease payments under the Company's $490 million property sale and
five-year operating lease facility, which are included in the table above,
approximate $109 million in 1999, $94 million in 2000, $77 million in 2001, $63
million in 2002, and $212 million in 2003. The lease facility contains covenants
that are substantially similar to those in the Company's senior credit
facilities.
Certain lease commitments will be terminated or reduced in connection with
facility and office closures and the optimization of facility utilization.
Rental expense for 1998, 1997, and 1996 amounted to $283 million, $136
million, and $113 million, respectively.
36
Defense contractors are subject to many levels of audit and investigation.
Among agencies that oversee contract performance are the Defense Contract Audit
Agency, the Inspector General, the Defense Criminal Investigative Service, the
General Accounting Office, the Department of Justice, and Congressional
Committees. Over recent years, the Department of Justice has convened Grand
Juries from time to time to investigate possible irregularities by the Company
in government contracting. Such investigations, individually and in the
aggregate, are not expected to have a material adverse effect on the Company's
financial position or results of operations.
The Company self-insures for losses and expenses for aircraft product
liability up to a maximum of $50 million annually. Insurance is purchased from
third parties to cover excess aggregate liability exposure from $50 million to
$1.2 billion. This coverage also includes the excess of liability over $10
million per occurrence. The aircraft product liability reserve was $30 million
at December 31, 1998.
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, 1998. Due to the complexity of
environmental laws and regulations, the varying costs and effectiveness of
alternative cleanup methods and technologies, the uncertainty of insurance
coverage, and the unresolved extent of the Company's responsibility, it is
difficult to determine the ultimate outcome of these matters; however, any
additional liability is not expected to have a material effect on the Company's
financial position, liquidity, or results of operations after giving effect to
provisions previously recorded.
The Company issues guarantees and has banks issue, on its behalf, letters
of credit to meet various bid, performance, warranty, retention, and advance
payment obligations. Approximately $1,527 million, $1,148 million, and $1,363
million of these contingent obligations, net of related outstanding advance
payments, were outstanding at December 31, 1998, 1997, and 1996, respectively.
These instruments expire on various dates through the year 2005.
Pursuant to the terms of the merger agreement, which requires an adjustment
based on net assets, the final purchase price for Hughes Defense has not been
determined. While the Company expects a reduction in purchase price from the
original terms of the agreement, the amount, timing, and effect on the Company's
financial position are uncertain.
In addition, various claims and legal proceedings generally incidental to
the normal course of business are pending or threatened against the Company.
While the ultimate liability from these proceedings is presently indeterminable,
any additional liability is not expected to have a material effect on the
Company's financial position, liquidity, or results of operations after giving
effect to provisions already recorded.
37
Note K: Employee Stock Plans
The 1976 Stock Option Plan provides for the grant of both incentive and
nonqualified stock options at an exercise price which is 100 percent of the fair
value on the date of grant. No further grants are allowed under this plan. The
1991 Stock Plan provides for the grant of incentive stock options at an exercise
price which is 100 percent of the fair value, and nonqualified stock options at
an exercise price which may be less than the fair value on the date of grant.
The 1995 Stock Option Plan provides for the grant of both incentive and
nonqualified stock options at an exercise price which is not less than 100
percent of the fair value on the date of grant.
The plans also provide that all stock options may be exercised in their
entirety 12 to 24 months after the date of grant. Incentive stock options
terminate 10 years from the date of grant, and those stock options granted after
December 31, 1986 become exercisable to a maximum of $100,000 per year.
Nonqualified stock options terminate 11 years from the date of grant or 10 years
and a day if issued in connection with the 1995 Stock Option Plan. In 1997, the
Company issued conversion stock options covering 4.8 million shares in
substitution of nonqualified stock options held by employees of TI Defense and
Hughes Defense. In accordance with the terms of the original grants, these
replacement stock options have remaining exercise periods of up to nine years
and become exercisable at various times through January 2001.
The 1991 Stock Plan also provides for the award of restricted stock and
restricted units. The 1997 Nonemployee Directors Restricted Stock Plan provides
for the award of restricted stock to nonemployee directors. Restricted awards
are made at prices determined by the Compensation Committee of the Board of
Directors and are compensatory in nature. Restricted stock and restricted unit
awards vest over a specified period of time of not less than one year and not
more than 10 years.
No further grants are allowed under the 1991 Stock Plan, 1995 Stock Option
Plan, and 1997 Nonemployee Directors Restricted Stock Plan after March 26, 2001,
March 21, 2005, and November 25, 2006, respectively.
Restricted stock awards entitle the participant to full dividend and voting
rights. Unvested shares are restricted as to disposition and subject to
forfeiture under certain circumstances. Compensation expense is recognized over
the vesting periods. Awards of 541,100, 315,900, and 19,500 shares of restricted
stock and restricted units were made to employees and directors at a weighted
average value at the grant date of $57.21, $47.92, and $50.87 in 1998, 1997, and
1996, respectively. There were 834,900, 1,678,700, and 1,443,400 shares of
restricted stock and restricted units outstanding at December 31, 1998, 1997,
and 1996, respectively. The amount of compensation expense recorded was $15
million, $22 million, and $7 million in 1998, 1997, and 1996, 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 53.7 million, 52.8 million, and 49.6 million shares of common
stock (including shares held in treasury) reserved for stock options and
restricted stock awards at December 31, 1998, 1997, and 1996, respectively.
The 1976 Stock Option Plan, 1991 Stock Plan, 1995 Stock Option Plan, and
1997 Nonemployee Directors Restricted Stock Plan utilize Class B common stock.
38
Information for 1998, 1997, and 1996 follows:
Weighted Average
(Share amounts in thousands) Shares Option Price
- -------------------------------------------------------------------------------
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
Granted 6,945 55.54
Exercised (2,917) 35.44
Expired (816) 51.13
- -------------------------------------------------------------------------------
Outstanding at
December 31, 1998 22,722 $45.68
===============================================================================
The following table summarizes information about stock options outstanding
at December 31, 1998 (share amounts in thousands):
- -------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ----------------------------------------------------- ------------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding Contractual Average Exercisable Average
Exercise at December 31, Remaining Exercise at December 31, Exercise
Price Range 1998 Life Price 1998 Price
- ----------------------------------------------------- ------------------------
$14.51 to $29.63 2,705 5.2 years $22.65 2,537 $22.41
$31.13 to $49.75 6,589 6.8 years $38.27 5,355 $36.68
$51.06 to $54.69 7,156 7.6 years $52.14 6,921 $52.11
$55.59 to $59.31 6,272 9.5 years $56.02 134 $56.16
- ----------------------------------------------------- ------------------------
Total 22,722 14,947
===================================================== ========================
Shares exercisable at the corresponding weighted average exercise price at
December 31, 1998, 1997, and 1996, respectively, were 14.9 million at $41.58,
13.0 million at $37.35, and 8.8 million at $31.32.
39
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:
(In millions except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------
Net income-as reported $ 864 $ 527 $ 761
Net income-pro forma $ 820 $ 484 $ 739
Basic earnings per share-
as reported $2.56 $2.20 $3.22
pro forma $2.43 $2.02 $3.12
Diluted earnings per share-
as reported $2.53 $2.18 $3.17
pro forma $2.40 $2.00 $3.08
- -------------------------------------------------------------------------------
The weighted average fair value of each option granted in 1998, 1997, and
1996, respectively, is estimated as $10.40, $17.41, and $10.79 on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
- -------------------------------------------------------------------------------
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) 4.4% to 5.7% 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 L: Pension and Other Employee Benefits
The Company has several pension and retirement plans covering the majority
of its employees, including certain employees in foreign countries. The major
plans provide pension benefits that are based on the five highest consecutive
years of the employee's annual compensation in the ten years before retirement.
Some of the plans covering hourly and union employees also contain provisions
based upon a stated benefit amount per year of service. The Company's funding
policy, for the majority of the plans, is to contribute annually at a rate that
is intended to remain at a level percentage of compensation for the covered
employees. Unfunded prior service costs under the funding policy are generally
amortized over periods from 10 to 30 years.
40
Total pension expense includes foreign pension expense of $10 million, $11
million, and $10 million in 1998, 1997, and 1996, respectively. Plan assets
consist primarily of equity securities (including 13,919,000 shares of Raytheon
Company Class A and Class B common stock combined, with a fair value of $736
million at December 31, 1998) and fixed income securities (including $15 million
of Raytheon Company 6.75% notes due in 2007).
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially all
of the Company's U.S. employees may become eligible for these benefits if they
reach normal retirement age while working for the Company. Some of the 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 cover the retiree only.
In 1993, the Company adopted Statement of Financial Accounting Standards
No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions.
At adoption, some of the plans began amortizing past service cost over 20 years,
while others recognized the past service cost immediately.
The Company is funding the liability for certain salaried and hourly
employees and plans to continue to do so. The information presented below
includes the effect of acquisitions, subsequent adjustments to acquisitions,
and divestitures.
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. This accounting standard revised the disclosure
requirements for pension and other postretirement benefit plans.
Change in Benefit Obligation
===============================================================================
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------
(In millions) December 31: 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Benefit obligation at
beginning of year $ 9,927 $ 4,267 $ 1,303 $ 732
Service cost 338 143 30 10
Interest cost 703 332 98 57
Plan participants' contributions 27 -- -- --
Amendments 3 3 (2) (1)
Actuarial loss 384 422 30 34
Acquisitions 182 5,088 75 547
Divestitures (28) (44) (1) --
Curtailments 2 (7) -- --
Benefits paid (744) (277) (107) (76)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $10,794 $ 9,927 $ 1,426 $1,303
===============================================================================
41
Change in Plan Assets
===============================================================================
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------
(In millions) December 31: 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Fair value of plan assets at
beginning of year $12,188 $ 4,961 $ 289 $ 184
Actual return on plan assets 1,388 1,097 22 18
Acquisitions (203) 6,388 -- 94
Divestitures (40) (47) -- --
Company contribution 175 66 107 69
Plan participants' contributions 27 -- -- --
Benefits paid (744) (277) (100) (76)
- -------------------------------------------------------------------------------
Fair value of plan assets at
end of year $12,791 $12,188 $ 318 $ 289
===============================================================================
Funded Status -- unrecognized components
===============================================================================
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------
(In millions) December 31: 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Funded status $1,997 $2,261 $(1,108) $(1,014)
Unrecognized actuarial (gain) loss (894) (953) 21 (15)
Unrecognized transition (asset)
obligation (18) (26) 288 316
Unrecognized prior service cost 182 200 (14) (13)
- -------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $1,267 $1,482 $ (813) $ (726)
===============================================================================
Funded Status -- recognized in balance sheets
===============================================================================
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------
(In millions) December 31: 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Prepaid benefit cost $1,674 $1,864 $ 11 $ 13
Accrued benefit liability (453) (406) (824) (739)
Intangible asset 15 11 -- --
Accumulated other
comprehensive income 31 13 -- --
- -------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $1,267 $1,482 $ (813) $ (726)
===============================================================================
42
Components of Net Periodic Benefit Cost
===============================================================================
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Service cost $ 338 $ 143 $ 127 $ 30 $ 10 $ 9
Interest cost 703 332 307 98 57 52
Expected return on plan
assets (1,016) (401) (352) (25) (19) (16)
Amortization of transition
(asset) obligation (7) (8) (8) 25 27 27
Amortization of prior
service cost 19 20 20 (2) (1) --
Recognized net actuarial
gain (30) (21) (5) (1) (7) (6)
(Gain) loss due to
curtailment -- (6) 1 1 11 3
- -------------------------------------------------------------------------------
Net periodic benefit cost $ 7 $ 59 $ 90 $126 $ 78 $ 69
===============================================================================
Weighted Average Assumptions
===============================================================================
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------
(In millions) December 31: 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Discount rate 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets 9.375% 9.375% 8.50% 8.50%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
Health care trend rate in the next year 6.00% 6.50%
Gradually declining to a trend rate of 5.00% 5.00%
In the years 2001 & Beyond
- -------------------------------------------------------------------------------
The effect of a one percent increase and decrease in the assumed health
care trend rate for each future year for the aggregate of service and interest
cost is $9 million and $(5) million, respectively, and for the accumulated
postretirement benefit obligation is $99 million and $(66) million,
respectively.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $515 million, $483 million, and $151 million,
respectively, as of December 31, 1998 and $350 million, $322 million, and $47
million, respectively, as of December 31, 1997.
Under the terms of various savings and investment plans (defined
contribution plans), covered employees are allowed to contribute up to a
specific percentage of their pay, generally limited to $30,000 per year. The
Company matches the employee's contribution, up to a maximum of generally
between three and four percent of the employee's pay. Total expense for defined
contribution plans was $121 million, $78 million, and $71 million in 1998, 1997,
and 1996, respectively. The increase in 1998 expense is attributable to the
merger with Hughes Defense in December 1997.
43
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 most United States salaried and hourly employees. The expense was
$18 million, $15 million, and $15 million and the number of shares allocated to
participant accounts was 271,000, 290,000, and 296,000 in 1998, 1997, and 1996,
respectively.
Note M: Business Segment Reporting
The Company operates in three major business areas: Electronics, both
defense and commercial, Engineering and Construction, and Aircraft. The Company
is a leader in defense electronics, including missiles; radar; sensors and
electro-optics; reconnaissance, surveillance and intelligence; command, control,
communication, and information; training; simulation and services; naval and air
traffic control systems; and aircraft integration systems. The Engineering and
Construction segment offers full-service engineering and construction
capabilities to clients worldwide. The Aircraft segment is one of the leading
providers of business and special mission aircraft and delivers a broad line of
jet, turboprop, and piston-powered airplanes to corporate and military customers
worldwide. The Major Appliances segment was substantially divested in 1997 with
the remaining operations sold in 1998. As a result of these dispositions, the
Company has included the remaining operations of the Major Appliances segment
within Total Electronics in 1998 and 1997.
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131) during the fourth quarter of 1998. SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments. It also established
standards for related disclosures about products, services, and geographic
areas.
Reportable segments within Electronics have been determined based upon
product lines and include the following: Defense Systems; Sensors and
Electronics Systems; Intelligence, Information, and Aircraft Integration
Systems; Command, Control, and Communication Systems; Training and Services;
Commercial Electronics, and Other. Certain operating segments within Electronics
have been aggregated as they exhibit similar long-term financial performance
characteristics and do not meet the quantitative threshold.
During the first quarter of 1999, the Company completed a reorganization of
certain business segments to better align the operations with customer needs and
to eliminate management redundancy. The Intelligence, Information, and Aircraft
Integration Systems segment, with the exception of its Aircraft Integration
Systems division, will merge with Command, Control, and Communication Systems to
create Command, Control, Communication, and Information Systems. The Aircraft
Integration Systems division was established as a separate segment called
Aircraft Integration Systems. This organizational change will be reflected in
the Company's 1999 financial statements.
44
Operations by Business Segments
===============================================================================
Sales Operating income
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Defense Systems $ 4,958 $ 885
Sensors and Electronics
Systems 3,011 540
Intelligence, Information,
and Aircraft Integration
Systems 2,667 305
Command, Control, and
Communication Systems,
Training and Services,
Commercial Electronics,
and Other 4,186 302
- -------------------------------------------------------------------------------
Total Electronics 14,822 $ 8,972 $ 6,186 2,032 $ 856 $ 793
Engineering and Construction 2,065 2,255 2,291 (253) 19 184
Aircraft 2,643 2,446 2,345 257 209 181
Major Appliances -- -- 1,509 -- -- 40
- -------------------------------------------------------------------------------
Total $19,530 $13,673 $12,331 $2,036 $1,084 $1,198
===============================================================================
Depreciation and
Capital expenditures amortization
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Defense Systems $ 79 $ 190
Sensors and Electronics
Systems 117 194
Intelligence, Information,
and Aircraft Integration
Systems 45 114
Command, Control, and
Communication Systems,
Training and Services,
Commercial Electronics,
and Other 79 158
- -------------------------------------------------------------------------------
Total Electronics 320 $ 257 $ 160 656 $ 360 $ 233
Engineering and Construction 41 18 27 28 33 24
Aircraft 148 184 140 77 64 50
Major Appliances -- -- 79 -- -- 62
- -------------------------------------------------------------------------------
Total $ 509 $ 459 $ 406 $ 761 $ 457 $ 369
===============================================================================
45
Identifiable assets Change in net debt
at December 31:
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Defense Systems $ 3,499 $ (396)
Sensors and Electronics
Systems 1,722 (101)
Intelligence, Information,
and Aircraft Integration
Systems 1,870 (161)
Command, Control, and
Communication Systems,
Training and Services,
Commercial Electronics,
and Other 3,297 (322)
Unallocated Electronics
Items 12,907 387
- -------------------------------------------------------------------------------
Total Electronics 23,295 $23,132 $ 6,177 (593)
Engineering and Construction 1,495 1,758 1,564 (239)
Aircraft 2,377 2,510 2,153 (130)
Major Appliances -- -- 815 --
Corporate 772 1,198 489 (235)
- -------------------------------------------------------------------------------
Total $27,939 $28,598 $11,198 $(1,197) $6,178 $1,095
===============================================================================
Identifiable assets attributed to Unallocated Electronics Items primarily
consist of goodwill and prepaid pension. While these assets have not been
allocated back to the segments, the associated income statement impact,
including goodwill amortization, has been included in the determination of the
Electronics segments operating income.
All material intercompany transactions have been eliminated at the segment
level for sales and operating income. Intercompany receivables are included in
identifiable assets. Change in net debt represents the Company's internal
criteria for evaluating cash flow performance by the segments. This amount
includes intercompany balances that are eliminated in consolidation and is not
necessarily representative of actual cash flows determined in accordance with
generally accepted accounting principles.
Information for the segments that comprise Total Electronics and all
information related to the change in net debt has not been presented for 1997
and 1996, because the Company determined that it was impracticable to obtain the
comparative information due to the significant acquisitions, divestitures, and
reorganizations that took place during 1998 and 1997.
46
Operations by Geographic Areas
===============================================================================
Outside United States
(In millions) United States (Principally Europe) Consolidated
- -------------------------------------------------------------------------------
Sales to unaffiliated customers
- -------------------------------------------------------------------------------
1998 $18,528 $1,002 $19,530
1997 12,907 766 13,673
1996 11,570 761 12,331
- -------------------------------------------------------------------------------
Identifiable assets at
- -------------------------------------------------------------------------------
December 31, 1998 $26,934 $1,005 $27,939
December 31, 1997 27,976 622 28,598
December 31, 1996 10,545 653 11,198
- -------------------------------------------------------------------------------
United States (U.S.) sales of $18,528 million, $12,907 million, and $11,570
million include export sales, principally to Europe, the Middle East, and Far
East, of $2,380 million, $2,756 million, and $2,137 million in 1998, 1997, and
1996, respectively.
Sales to major customers, principally in Electronics, in 1998, 1997, and
1996, were: U.S. government (end user), $11,167 million, $5,787 million, and
$4,638 million, respectively, U.S. Department of Defense, $10,816 million,
$4,591 million, and $4,032 million, respectively, and U.S. government (foreign
military sales), $1,660 million, $483 million, and $502 million, respectively.
Note N: Quarterly Operating Results (unaudited)
(In millions except
per share amounts) First Second Third Fourth
- -------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------
Net sales $4,574 $5,078 $4,436 $5,442
Cost of sales 3,558 3,939 3,678 4,073
Net income 215 270(1) 11(2) 368
Earnings per share
Basic 0.63 0.80(1) 0.03(2) 1.09
Diluted 0.63 0.79(1) 0.03(2) 1.08
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 59.50 59.19 59.63 58.56
Class A-Low 44.88 50.38 39.88 48.69
Class B-High 60.69 60.19 60.75 59.81
Class B-Low 45.75 51.44 40.69 49.31
47
- -------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------
Net sales $2,899 $3,325 $3,445 $4,004
Cost of sales 2,221 2,570 2,636 3,558
Net income 183 210 211 (77)(3)
Earnings per share
Basic 0.78 0.89 0.90 (0.31)(3)
Diluted 0.77 0.88 0.88 (0.31)(3)
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
- -------------------------------------------------------------------------------
(1) Includes special charges of $54 million after-tax, or $0.16 per diluted
share.
(2) Includes restructuring and special charges of $104 million after-tax, or
$0.30 per diluted share.
(3) Includes restructuring and special charges of $322 million after-tax, or
$1.29 per diluted share.
Note: Earnings per share are computed independently for each of the quarters
presented; therefore, the sum of the quarterly earnings per share may not
equal the total computed for the year.
Note O: Financial Instruments
The carrying value of certain financial instruments, including cash, cash
equivalents, and short-term debt approximates estimated fair value due to their
short maturities and varying interest rates of the debt.
The carrying value of notes receivable approximates estimated fair value
based principally on the underlying interest rates and terms, maturities,
collateral, and credit status of the receivables.
The carrying values of investments are based on quoted market prices or the
present value of future cash flows and earnings which approximate estimated fair
value.
The value of guarantees and letters of credit approximates estimated fair
value. The estimated fair value of long-term debt was based on current rates
offered to the Company for similar debt with the same remaining maturities and
approximates the carrying value.
48
At December 31, 1998 and 1997, the Company had outstanding interest rate
swap agreements 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.
The following table summarizes major currencies and the approximate
contract amounts associated with foreign exchange contracts at December 31:
(In millions) 1998 1997
- -------------------------------------------------------------------------------
Buy Sell Buy Sell
British Pounds $138 $100 $ 70 $ 27
Netherlands Guilders 41 89 45 --
German Marks 40 27 71 19
Canadian Dollars 20 50 13 66
Swiss Francs 12 85 -- 8
Norwegian Kroner 100 -- -- --
All other 49 25 57 49
- -------------------------------------------------------------------------------
Total $400 $376 $256 $169
===============================================================================
"Buy" amounts represent the U.S. dollar equivalent of commitments to
purchase foreign currencies and "sell" amounts represent the U.S. dollar
equivalent of commitments to sell foreign currencies. Foreign exchange contracts
that do not involve U.S. dollars have been converted to U.S. dollars for
disclosure purposes.
Swap contracts were $383 million and $386 million at December 31, 1998 and
1997, respectively. Swap contracts mature at various dates through the year 2000
and essentially fix the interest rates on a portion of variable rate debt. Under
these agreements, the Company will pay the counterparties interest at a weighted
average fixed rate of 6.5%, and the counterparties will pay the Company at a
variable rate primarily equal to three-month LIBOR. The weighted average
variable rate applicable to these agreements was 5.2% at December 31, 1998.
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 2003. Estimated fair values for these contracts,
which approximate the contract amounts, were determined by applying December 31,
1998 spot rates to the six major currencies and comparing the U.S. dollar
equivalents to the U.S. dollar contract amounts for the same currencies.
49
Note P: Stockholders' Equity
The Company has two classes of common stock-Class A and Class B. For all
matters other than the election and removal of directors, Class A and Class B
stockholders have equal voting rights. For the election or removal of directors
only, the Class A stockholders have 80.1 percent of the total voting power and
the Class B stockholders have the remaining 19.9 percent. Class A and Class B
stockholders are entitled to receive the same amount per share of any dividends
declared. Immediately following any dividend, split, subdivision, or other
distribution of shares of Class A or Class B common stock, the number of shares
must bear the same relationship to each other as immediately prior to such
distribution. Except as indicated above, the rights of Class A and Class B
stockholders are identical.
In December 1997, the Company issued 102.6 million shares of Class A common
stock and converted each share of Raytheon common stock into one share of Class
B common stock in connection with 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. Prior to this retirement, the excess of cost
over par value of treasury stock was charged proportionally to additional
paid-in capital and retained earnings.
In February 1995, the Board of Directors authorized the repurchase of up to
12 million shares of the Company's common stock and in January 1998, the Board
of Directors ratified and reauthorized the repurchase of the remaining 2.5
million shares originally authorized. There have been 11 million shares
purchased under these authorizations through December 31, 1998. There were 1.7
million shares repurchased under this program during 1998.
In January 1998, the Board of Directors authorized the purchase of up to 5
million shares of the Company's common stock per year to counter the dilution
due to the exercise of stock options. There were 2.9 million shares repurchased
under this program during 1998 to offset 2.9 million shares issued due to the
exercise of 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 1997,
outstanding shares were reduced by the repurchase of 1.7 million shares on the
open market to offset 1.7 million shares issued due to the exercise of stock
options.
Basic earnings per share (EPS) excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Class A
and B common stock have been aggregated in the basic and diluted EPS calculation
which follows:
50
1998 1997 1996
- -------------------------------------------------------------------------------
Net income for basic and diluted EPS $ 864 $ 527 $ 761
Share information (in thousands)
Average common shares
outstanding for basic EPS 337,882 238,915 236,600
Dilutive effect of stock options
and restricted stock 3,979 2,971 3,565
- -------------------------------------------------------------------------------
Shares for diluted EPS 341,861 241,886 240,165
Basic EPS $ 2.56 $ 2.20 $ 3.22
Diluted EPS $ 2.53 $ 2.18 $ 3.17
- -------------------------------------------------------------------------------
Stock options to purchase 6.7 million, 8.2 million, and 3.7 million shares
of common stock outstanding at December 31, 1998, 1997, and 1996, 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.
Company Responsibility for Financial Statements
The financial statements and related information contained in this Annual
Report have been prepared by and are the responsibility of Raytheon's
management. The Company's financial statements have been prepared in conformity
with generally accepted accounting principles and reflect judgments and
estimates as to the expected effects of transactions and events currently being
reported. Raytheon's management is responsible for the integrity and objectivity
of the financial statements and other financial information 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
Executive Vice President,
Chief Financial Officer
/s/ Daniel P. Burnham
President and
Chief Executive Officer
51
The Audit Committee of the Board of Directors is composed solely of outside
directors. The Committee meets periodically and, when appropriate, separately
with representatives of the independent accountants, Company officers, and the
internal auditors to monitor the activities of each.
Upon recommendation of the Audit Committee, PricewaterhouseCoopers LLP,
independent accountants, were selected by the Board of Directors to audit the
Company's financial statements and their report follows.
/s/ Dennis J. Picard
Chairman of the Board of Directors
Report of Independent Accountants
To the Board of Directors and
Stockholders of Raytheon Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of
Raytheon Company at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 26, 1999