1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 27, 1998
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ............
to ...............
Commission File Number 1-13699
RAYTHEON COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-1778500
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
141 SPRING STREET, LEXINGTON, MASSACHUSETTS 02421
(Address of Principal Executive Offices) (Zip Code)
(781) 862-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Number of shares of Common Stock outstanding as of September 27, 1998:
336,971,000, consisting of 101,997,000 shares of Class A Common Stock and
234,974,000 shares of Class B Common Stock.
2
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS
(Unaudited)
Sept. 27, 1998 Dec. 31, 1997
(In millions)
ASSETS
Current assets
Cash and marketable securities $ 111 $ 296
Accounts receivable, less
allowance for doubtful accounts 935 1,056
Deferred federal and foreign
income taxes 1,050 1,244
Contracts in process 5,126 4,661
Inventories 2,285 1,837
Prepaid expenses 127 139
------ ------
Total current assets 9,634 9,233
Property, plant and equipment, net 2,274 2,891
Other assets, net 16,804 16,474
------- -------
Total assets $28,712 $28,598
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion
of long-term debt $ 4,053 $ 5,656
Advance payments, less contracts
in process 741 525
Accounts payable 1,657 1,845
Accrued salaries and wages 683 680
Accrued expenses 3,105 3,180
------- -------
Total current liabilities 10,239 11,886
Accrued retiree benefits 1,045 1,095
Deferred federal and foreign
income taxes 869 786
Long-term debt 5,980 4,406
Stockholders' equity 10,579 10,425
------- -------
Total liabilities and
stockholders' equity $28,712 $28,598
======= =======
The accompanying notes are an integral part of the financial statements.
3
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
(In millions except per share amounts)
Net sales $4,436 $3,445 $14,088 $9,669
------ ------ ------- ------
Cost of sales 3,593 2,636 11,090 7,427
Administrative and selling expenses 321 269 1,039 812
Research and development expenses 134 121 432 290
Restructuring and special charges 168 -- 252 --
------ ------ ------- ------
Total operating expenses 4,216 3,026 12,813 8,529
------ ------ ------- ------
Operating income 220 419 1,275 1,140
------ ------ ------- ------
Interest expense 186 119 552 262
Interest and dividend income (6) (9) (19) (24)
Other income, net (7) (13) (109) (12)
------ ------ ------- ------
Non-operating expense, net 173 97 424 226
------ ------ ------- ------
Income before taxes 47 322 851 914
Federal and foreign income taxes 36 111 356 310
------- ------ ------- -----
Net income $ 11 $ 211 $ 495 $ 604
======== ====== ======= ======
Earnings per common share
Basic $0.03 $0.90 $1.46 $2.56
Diluted $0.03 $0.88 $1.45 $2.53
Dividends declared per common share $0.20 $0.20 $0.60 $0.60
The accompanying notes are an integral part of the financial statements.
4
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997
(In millions)
Cash flows from operating activities
Net income $ 495 $ 604
Adjustments to reconcile net income to net cash
(used in) provided by operating activities, net
of the effect of acquired companies
Depreciation and amortization 588 325
Net gain on sale of operating units (99) (13)
Sale of receivables 785 1,081
Increase in accounts receivable (811) (1,027)
Increase in contracts in process (464) (575)
Increase in inventories (551) (139)
(Increase) decrease in long-term receivables (80) 5
Increase in advance payments 217 48
(Decrease) increase in accounts payable (77) 171
Net change in deferred federal and foreign
income taxes 291 142
Decrease in other current liabilities (503) (72)
Other adjustments, net (110) (256)
------ -----
Net cash (used in) provided by operating activities (319) 294
------ -----
Cash flows from investing activities
Additions to property, plant and equipment (374) (305)
Proceeds from sale of property, plant and equipment 481 --
Increase in other assets (29) (9)
Payments related to the purchase of acquired
companies (96) (3,018)
Proceeds from sale of operating units 455 522
Proceeds from sale of other assets 42 --
Other adjustments, net -- (86)
------ ------
Net cash provided by (used in) investing activities 479 (2,896)
------ ------
Cash flows from financing activities
Dividends (203) (142)
Decrease in short-term debt (1,597) (52)
Increase in long-term debt 1,573 2,886
Purchase of treasury shares (186) (65)
Proceeds under common stock plans 68 49
All other, net -- 59
------ ------
Net cash (used in) provided by financing activities (345) 2,735
------ ------
Effect of foreign exchange rates on cash -- (3)
------ ------
Net (decrease) increase in cash and cash equivalents (185) 130
Cash and cash equivalents at beginning of year 296 137
------ ------
Cash and cash equivalents at end of period 111 267
Marketable securities -- 1
------ ------
Total cash and marketable securities $ 111 $ 268
====== ======
The accompanying notes are an integral part of the financial statements.
5
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared on
substantially the same basis as the company's Annual Consolidated Financial
Statements. These interim unaudited financial statements should be read in
conjunction with the company's Annual Report on Form 10-K for the year ended
December 31, 1997. The information furnished has been prepared from the accounts
without audit. In the opinion of management, these financial statements reflect
all adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the financial statements for the interim periods. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
2. Acquisitions
The company merged with the defense business of Hughes Electronics Corporation
(Hughes Defense) in December 1997. In addition, the company acquired Allied
Signal's Communication Systems business in August 1998. The assets acquired and
liabilities assumed in connection with these transactions have been included in
the financial statements based on preliminary estimates of fair value, and may
be revised as additional information becomes available. As a result, the
financial information included in the company's financial statements is subject
to adjustment from subsequent revisions in estimates of fair value, if any are
necessary.
3. Restructuring
In January 1998, the company announced plans to reduce the newly formed Raytheon
Systems Company (RSC) workforce by 8,700 employees and reduce facility space by
approximately 8 million square feet. In October 1998 the company announced plans
to accelerate and expand these actions, reducing employment by a total of 12
percent by the end of 1998 and another 4 percent in 1999, for a total reduction
of 16 percent, or approximately 14,000 positions by the end of 1999. Also, RSC
will vacate an additional 2 million square feet of facilities by the end of
1999. The total program cost of these new actions is estimated at $300 million
of which $206 million pertain to exit costs. Approximately $92 million of the
exit costs relate to employee severance and $114 million relate to facilities
exit. The incremental actions relate to employees and facilities obtained by the
acquisition of Texas Instruments' defense business (TI Defense) and the merger
with Hughes Defense. Accordingly, the exit costs have been accounted for as
liabilities assumed in connection with acquired business combinations. Through
September 27, 1998, RSC employment has been reduced by approximately 4,300
people and 2 million square feet have been vacated.
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 October
1998, RE&C announced plans for an additional 260 person reduction in workforce
for a cost of $33 million and additional facilities downsizing at a cost of $7
million. Through September 27, 1998, RE&C employment has been reduced by 842
people and RE&C has vacated approximately 800,000 square feet.
6
Cash expenditures under the restructuring initiatives outlined above through
September 27, 1998 were $40 million for employee severance and related items and
$79 million for facility and office closures.
4. Special Purpose Entities
In connection with the sale of receivables noted in the Statement of Cash Flows,
the following special purpose entities had been established as of September 27,
1998 and September 28, 1997, in accordance with Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities: Raytheon Aircraft
Receivables Corporation and Raytheon Engineers & Constructors Receivables
Corporation. Additionally, the following special purpose entities had been
established as of September 28, 1997: Raytheon Commercial Appliances Finance
Corporation and Raytheon Commercial Appliances Receivables Corporation.
5. Balance Sheet Details
Certain balance sheet accounts consisted of the following at:
Sept. 27, 1998 Dec. 31, 1997
-------------- -------------
(In millions)
Inventories
Finished goods $ 331 $ 314
Work in process 1,314 1,168
Materials and purchased parts 791 509
Excess of current cost over LIFO values (151) (154)
-------- --------
Total inventories $ 2,285 $ 1,837
======== ========
Property, plant and equipment (1)
At cost $ 4,256 $ 5,250
Accumulated depreciation and amortization (1,982) (2,359)
-------- --------
Property, plant and equipment, net $ 2,274 $ 2,891
======== ========
Other assets
Prepaid pension and other noncurrent
assets $ 3,081 $ 2,638
Goodwill, net of accumulated amortization 13,723 13,836
-------- --------
Other assets, net $ 16,804 $ 16,474
======== ========
Stockholders' equity
Preferred stock, no outstanding shares $ -- $ --
Class A common stock, outstanding shares 1 1
Class B common stock, outstanding shares 2 2
Additional paid-in capital 6,162 6,151
Equity adjustments (49) (23)
Retained earnings 4,463 4,294
--------- ---------
Total stockholders' equity $10,579 $10,425
======= =======
7
(1) The reduction in property, plant and equipment is due to the sale and
leaseback arrangement described in the Commitments footnote.
6. Long-term Debt
In March 1998, the company issued $500 million of notes due in 2001 which have a
coupon rate of 5.95 percent, $450 million of notes due in 2005 which have a
coupon rate of 6.3 percent, $300 million of notes due in 2010 which have a
coupon rate of 6.55 percent and $350 million of debentures due in 2018 which
have a coupon rate of 6.75 percent. The notes due in 2001 and 2005 are not
redeemable prior to maturity. The notes due in 2010 and the debentures due in
2018 are redeemable under certain circumstances.
7. Commitments
In September 1998, the company entered into a $490 million property sale and
five-year operating lease facility. Lease payments over the five-year term are
approximately $29 million in 1998, $109 million in 1999, $94 million in 2000,
$77 million in 2001, $63 million in 2002 and $212 million in 2003. The synthetic
lease facility contains covenants that are substantially similar to those in the
company's other major credit facilities.
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8. Earnings per Share
Basic and diluted earnings per share (EPS) were calculated as follows:
Three Months Ended Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
Net income (in millions) $11 $211 $495 $604
Share information (in thousands)
Average common shares outstanding
for basic EPS 337,789 235,948 338,235 235,771
Dilutive effect of common
stock plans 3,694 4,366 4,223 3,232
------- ------- ------- -------
Average common shares outstanding
for diluted EPS 341,483 240,314 342,458 239,003
Basic EPS $0.03 $0.90 $1.46 $2.56
Diluted EPS $0.03 $0.88 $1.45 $2.53
9
Options to purchase 9.8 million and 0.2 million shares of common stock for the
three months ended September 27, 1998 and September 28, 1997, respectively, and
options to purchase 6.8 million and 7.5 million shares of common stock for the
nine months ended September 27, 1998 and September 28, 1997, respectively, did
not affect the computation of diluted EPS. The exercise prices for these options
were greater than the average market price of the company's common stock during
the respective periods.
9. Comprehensive Income
The company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS No. 130), in the first quarter of 1998.
SFAS No. 130 established standards for reporting comprehensive income and its
components, classified by their nature, in a full set of annual financial
statements. The components of other comprehensive income for the company
generally include foreign currency translation adjustments, minimum pension
liability adjustments and unrealized gains and losses on marketable securities
classified as available-for-sale.
10
The computation of comprehensive income follows:
Three Months Ended Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
(In millions)
Net income $ 11 $211 $495 $604
Other comprehensive income (5) (7) (26) (29)
------ ------ ----- -----
Total comprehensive income $ 6 $204 $469 $575
====== ==== ==== ====
11
10. Special Items
During the third quarter of 1998, the company recorded special items of $478
million before tax and $284 million after-tax. The special items include a $40
million restructuring charge for a 260 person workforce reduction and additional
facilities downsizing at Raytheon Engineers & Constructors (RE&C) and a $45
million charge for asset impairment related to these actions. Also included is a
pretax charge of $83 million related to the company's decision, events, and
activities to exit a Commercial Electronics business, which includes a Korean
joint venture. In addition, the company recorded a pretax charge of $310 million
for a change in estimate on certain contracts and contract claims at RE&C. In
accordance with contract accounting rules and the company's accounting
practices, this charge was recorded as a reduction in net sales.
11. Subsequent Events
In October 1998, the company announced that it had entered into an agreement to
sell its Raytheon Aircraft Montek subsidiary for $160 million. There can be no
assurance that this sale will be consummated. Also in October 1998, the company
announced it had completed the sale of a portion of its Second Generation Ground
Based Electro Optics assets and a portion of its Focal Plan Array assets for $45
million.
On October 29, 1998, the company announced its intent to offer $750 million of
senior debt, utilizing its existing shelf registration. Proceeds from the
offering will be used to repay outstanding short-term debt, extending the
maturity of the company's debt obligations. The company's total debt will not
increase as a result of this transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Third Quarter 1998 Compared With Third Quarter 1997
- -----------------------------------------------------------------------------
Net income for the three months ended September 27, 1998 was $11 million, or
$0.03 per diluted share on sales of $4.4 billion. Included in third quarter net
income were special items totaling $284 million after-tax, or $0.83 per diluted
share. Excluding the special items, third quarter 1998 net income was $295
million, or $0.86 per diluted share on sales of $4.7 billion. For the third
quarter of 1997, net income was $211 million or $0.88 per diluted share, on
sales of $3.4 billion. Diluted earnings per share was based on 341.5 million
average shares outstanding for the third quarter of 1998 and 240.3 million
average shares outstanding for the same period in 1997. The company issued 102.6
million shares of Class A common stock in December 1997 in connection with the
merger with Hughes Defense.
12
The special items of $478 before state and federal income tax, or $284 million
after-tax, include a $40 million restructuring charge for a 260 person workforce
reduction and additional facilities downsizing at RE&C and a $45 million charge
for asset impairment related to these actions. Also included is a pretax charge
of $83 million related to the company's decision, events, and activities to exit
a Commercial Electronics business, which includes a Korean joint venture. In
addition, the company recorded a pretax charge of $310 million for a change in
estimate on certain contracts and contract claims at RE&C. In accordance with
contract accounting rules and the company's accounting practices, this charge
was recorded as a reduction in net sales.
The electronics businesses reported third quarter 1998 sales of $3.6 billion, an
increase of 58 percent compared with the same period in 1997, and operating
income of $573 million, a 73 percent increase compared with the same period a
year ago. The significant increase was attributable primarily to the December
1997 merger with Hughes Defense. In January 1998, the company announced plans to
reduce the newly formed Raytheon Systems Company (RSC) workforce by 8,700
employees and reduce facility space by approximately 8 million square feet. In
October 1998 the company announced plans to accelerate and expand these actions,
reducing employment by a total of 12 percent by the end of 1998 and another 4
percent in 1999, for a total reduction of 16 percent, or approximately 14,000
positions by the end of 1999. Also, RSC will vacate an additional 2 million
square feet of facilities by the end of 1999. The total program cost of these
new actions is estimated at $300 million of which $206 million pertain to exit
costs. Approximately $92 million of the exit costs relate to employee severance
and $114 million relate to facilities exit. While these actions are intended to
improve the company's competitive position, there can be no assurances as to
their ultimate success.
Raytheon Engineers & Constructors (RE&C) reported third quarter 1998 sales of
$246 million and an operating loss of $261 million. Excluding special items,
1998 sales were $556 million compared with $554 million a year ago. Operating
income, excluding special items, was $16 million, a 41 percent decrease compared
with the same period a year ago. While revenues, excluding the $310 million
change in estimate associated with certain contracts and contract claims,
increased over the previous year, volume growth has not progressed as
anticipated. This lower volume growth combined with operational performance on
certain contracts resulted in continued margin pressure. In response to these
circumstances, in October 1998, RE&C announced corrective actions which will
include improving cash flow management, lowering the overhead structure,
strengthening the management team to improve project execution, and sharing
risks through partnerships. Through the third quarter of 1998, RE&C has reduced
its workforce by 842 people and vacated more than 800,000 square feet of space.
While these actions are intended to improve the company's competitive position,
there can be no assurances as to their ultimate success.
Raytheon Aircraft reported third quarter 1998 sales of $572 million, compared
with $594 million a year ago, and operating income of $68 million, an
improvement of 11 percent compared with the same period a year ago. The decrease
in sales is due in part to lower revenues from special mission aircraft.
Raytheon Aircraft continued to experience improved profit margins in all of its
turbine product lines. Raytheon Aircraft's Travel Air fractional ownership
program also contributed to the improvement in operating income.
13
Sales to the U.S. Department of Defense were 60 percent of sales in the third
quarter of 1998 versus 34 percent of sales in the third quarter of 1997. Total
sales to the U.S. government were 71 percent of sales in the third quarter of
1998 versus 47 percent of sales in the third quarter of 1997. Total
international sales were 21 percent of sales in the third quarter of 1998 versus
29 percent of sales in the third quarter of 1997.
Administrative and selling expenses increased to $321 million in the third
quarter of 1998 from $269 million in the third quarter of 1997. The increase was
due principally to the merger with Hughes Defense, partially offset by the sale
of the company's home appliance, heating, air conditioning and commercial
cooking operations in September 1997 and a state tax benefit recorded in
connection with the third quarter 1998 special items. Administrative and selling
expenses as a percent of sales decreased from 7.8 percent in the third quarter
of 1997 to 7.2 percent in the third quarter of 1998, reflecting increased
efficiencies resulting from the merger with Hughes Defense.
Research and development expenses increased to $134 million in the third quarter
of 1998 from $121 million in the third quarter of 1997 due principally to merger
with Hughes Defense. Research and development expenses as a percent of sales
decreased from 3.5 percent in the third quarter of 1997 to 3.0 percent in the
third quarter of 1998, reflecting increased efficiencies resulting from the
merger with Hughes Defense.
Operating income was $220 million or 5.0 percent of sales, including the special
items, in the third quarter of 1998. Excluding the special items, operating
income was $657 million or 13.8 percent of sales for the third quarter of 1998
versus $419 million or 12.2 percent of sales in the third quarter of 1997. The
increase in operating income as a percent of sales, excluding the special items,
was primarily due to increases in the electronics and aircraft segments of 1.4
percent and 1.6 percent, respectively.
Interest expense in the third quarter of 1998 increased to $186 million from
$119 million in the third quarter of 1997 due principally to the higher debt
level resulting from the merger with Hughes Defense.
Nine Months 1998 Versus Nine Months 1997
Net income for the first nine months of 1998 was $495 million, or $1.45 per
diluted share, including special items of $277 million after-tax, based on 342.5
million average shares outstanding. Excluding special items, net income for the
nine months ended September 27, 1998 was $772 million or $2.25 per diluted
share. Net income for the first nine months of 1997 was $604 million on sales of
$9.7 billion, or $2.53 per diluted share, based on 239.0 million average shares
outstanding.
The special items of $468 million before state and federal income tax, or $277
million after-tax, include third quarter 1998 charges totaling $284 million
after-tax as described above and a second quarter net gain of $10 million before
tax and $7 million after-tax from special items. The special items recorded in
the second quarter of 1998 consist of a $42 million pretax and $27 million
after-tax write-down to estimated realizable value certain assets the company
had decided to sell and a $42 million pretax and $27 million after-tax charge to
recognize an impairment of assets for a joint venture in Korea. Also included is
a second quarter 1998 gain of $94 million pretax, $61 million after-tax from
divestitures.
14
Sales to the U.S. Department of Defense were 57 percent of sales during the
first nine months of 1998 versus 34 percent of sales during the first nine
months of 1997. Total sales to the U.S. government were 68 percent of sales
during the first nine months of 1998 versus 45 percent of sales during the first
nine months of 1997. Total international sales were 24 percent of sales during
the first nine months of 1998 versus 29 percent of sales during the first nine
months of 1997.
Administrative and selling expenses increased to $1,039 million for the first
nine months of 1998 from $812 million for the first nine months of 1997 due
principally to the acquisition of TI Defense and the merger with Hughes 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 as a percent of sales decreased from 8.4 percent for the
first nine months of 1997 to 7.4 percent in the first nine months of 1998
reflecting increased efficiencies resulting from the acquisition of TI Defense
and the merger with Hughes Defense.
Research and development expenses increased to $432 million for the first nine
months of 1998 from $290 million for the first nine months of 1997 due
principally to the acquisition of TI Defense and the merger with Hughes Defense
as well as increased expenditures for Raytheon Aircraft new product
introductions. Research and development expenses as a percent of sales was 3.1
percent for the first nine months of 1998 versus 3.0 percent for the first nine
months of 1997.
Operating income was $1,275 million or 9.1 percent of sales, including the
special items, for the first nine months of 1998 versus $1,140 million or 11.8
percent of sales for the first nine months of 1997. Excluding the special items,
operating income was $1,796 million or 12.5 percent of sales for the nine months
ended September 1998.
Interest expense for the first nine months of 1998 increased to $552 million
from $262 million for the first nine months of 1997 due principally to the
higher debt level resulting from the acquisition of TI Defense and the merger
with Hughes Defense.
Other income, net for the first nine months of 1998 of $109 million included $99
million pretax gains from divestitures.
The effective tax rate of 41.8 percent for the first nine months of 1998
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.
Total employment was approximately 114,800 at September 27, 1998, approximately
119,200 at December 31, 1997 and approximately 80,700 at September 28, 1997. The
increase from September 28, 1997 was due principally to the merger with Hughes
Defense.
15
The company operates in three major business areas: Electronics, both commercial
and defense, Engineering and Construction and Aircraft. The business operations
within the Electronics segment outlined below were formed in conjunction with
the consolidation and organization of the company's electronics businesses and
the creation of Raytheon Systems Company in December 1997. Certain prior year
amounts were reclassified to conform with the current year presentation,
including the reclassification of Cedarapids, Inc. and the majority of Raytheon
Service Company from Engineering and Construction to Commercial Electronics.
16
Segment financial information follows (in millions):
Sales Segment Income
Three Months Ended Three Months Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27,1998 Sept. 28, 1997
Defense Systems $1,185 $250
Sensors and Electronic Systems 808 125
Intelligence, Information and Aircraft
Integration Systems 651 79
Command, Control and Communication
Systems, Training, Services, Commercial
Electronics and Other 974 119
----- ----
Total Electronics 3,618 $2,297 573 $331
Engineering and Construction 246 (1) 554 (261)(1) 27
Aircraft 572 594 68 61
------ ------ ---- ----
Total $4,436 $3,445 $380 (2) $419
====== ====== ==== ====
Sales Segment Income
Nine Months Ended Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
Defense Systems $3,616 $625
Sensors and Electronic Systems 2,195 347
Intelligence, Information and Aircraft
Integration Systems 2,021 241
Command, Control and Communication
Systems, Training, Services, Commercial
Electronics and Other 3,178 328
------- --------
Total Electronics 11,010 $6,402 1,541 $ 874
Engineering and Construction 1,408 (1) 1,618 (198)(1) 116
Aircraft 1,670 1,649 176 150
------- ------- -------- -------
Total $14,088 $9,669 $1,519 (3) $1,140
======= ====== ====== ======
17
(1) Includes a special item of $310 million related to Engineering and
Construction. Excluding this special item, sales and segment income would
have been $556 million and $16 million, respectively, for the three months
ended September 27, 1998 and $1,718 million and $79 million, respectively,
for the nine months ended September 27, 1998.
(2) Excludes restructuring charge of $85 million (not including $8 million
state tax benefit) related to Engineering and Construction and special
charge of $83 million related to Commercial Electronics. Segment income
including these charges was $220 million for the three months ended
September 27, 1998.
(3) Excludes Q3 restructuring charge of $85 million (not including $8 million
state tax benefit) related to Engineering and Construction, Q3 special
charge of $83 million related to Commercial Electronics and Q2 special
charge of $84 million related to Intelligence, Information and Aircraft
Integration Systems ($8 million) and Commercial Electronics ($76 million).
Segment income including these charges was $1,275 million for the nine
months ended September 27, 1998.
Backlog consisted of the following at:
Sept. 27, 1998 Dec. 31, 1997 Sept. 28, 1997
-------------- ------------- --------------
(In millions)
Electronics $15,996 $16,641 $ 9,107
Engineering and Construction 3,712 2,900 2,861
Aircraft 2,358 1,709 1,543
------- ------- -------
Total backlog $22,066 $21,250 $13,511
U.S. government
backlog included above $14,135 $12,547 $ 6,706
During the third quarter of 1998, Raytheon changed its method of reporting
backlog at certain locations in order to provide a consistent method of
reporting across and within Raytheon businesses. The company 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.
Financial Condition and Liquidity
Funds used for operating activities in the first nine months of 1998 were $319
million, $613 million more than during the first nine months of 1997, due
principally to increased working capital requirements in support of the
electronics businesses and Raytheon Aircraft.
18
Capital expenditures were $374 million during the first nine months of 1998
versus $305 million during the first nine months of 1997. Capital expenditures
for the full year 1998 are expected to approximate $500 million.
In September 1998, the company entered into a $490 million property sale and
five-year operating lease facility. Proceeds of $481 million from the facility
were received in September 1998. The transaction is intended to diversify the
company's capital structure and extend the term for a portion of the company's
financing obligations. Lease payments over the five-year term are approximately
$29 million in 1998, $109 million in 1999, $94 million in 2000, $77 million in
2001, $63 million in 2002 and $212 million in 2003. The synthetic lease facility
contains covenants that are substantially similar to those in the company's
other major credit facilities.
During the first nine months of 1998, the company made net payments for the
purchase of acquired companies of $96 million consisting of $33 million incurred
in connection with the acquisition of TI Defense and the merger with Hughes
Defense and $63 million for the acquisition of AlliedSignal's Communications
Systems business, subject to purchase price adjustments.
During the third quarter of 1998, the company sold Raytheon Systems Limited
Flight Training business and the EMASS tape storage business. Proceeds from
these third quarter dispositions were approximately $91 million. During the
second quarter of 1998, the company sold its commercial laundry business unit,
its European-based electronics controls business, and Seiscor Technologies,
Inc., a telephone transmission equipment business. Proceeds from these
divestitures were $364 million in cash and $19 million in securities. The
company has been divesting non-core assets as part of its strategy to focus and
streamline its core businesses.
Dividends paid to stockholders during the first nine months of 1998 were $203
million versus $142 million during the first nine months of 1997. The quarterly
dividend rate was $0.20 per share for the first three quarters of 1998 and the
first three quarters of 1997.
During the first nine months of 1998, outstanding shares were reduced by the
repurchase of 3.5 million shares on the open market at a cost of $186 million.
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 September 27, 1998. There were 1.6 million shares
repurchased under this program during the first nine months of 1998.
19
In January 1998, the Board of Directors authorized the purchase of up to 5
million shares of the company's common stock per year over the next five years
to counter the dilution due to the exercise of stock options. There were 1.9
million shares repurchased under this program during the first nine months of
1998 to offset 1.9 million shares issued due to the exercise of employee stock
options.
Debt, net of cash and marketable securities, was $9,922 million at September 27,
1998 as compared with $10,107 million at June 28, 1998 and $9,766 million at
December 31, 1997. Net debt, as a percent of capital, was 48 percent at
September 27, 1998.
During the first nine months of 1998, the company issued $1.6 billion of
long-term notes and debentures, reduced the company's short-term borrowings by
$1.6 billion and essentially completed the company's previously announced plans
to refinance the acquisition of TI Defense and the merger with Hughes Defense.
On October 29, 1998, the company announced its intent to offer $750 million of
senior debt, utilizing its existing shelf registration. Proceeds from the
offering will be used to repay outstanding short-term debt, extending the
maturity of the company's debt obligations. The company's total debt will not
increase as a result of this transaction.
Lines of credit with certain commercial banks exist as sources of direct
borrowing and/or as a standby facility to support the issuance of commercial
paper by the company. The lines of credit were $6.5 billion and $9.0 billion at
September 27, 1998 and December 31, 1997, respectively. At September 27, 1998,
there were no borrowings under these lines of credit. At December 31, 1997, $3.5
billion had been borrowed under the lines of credit.
On January 1, 1999, eleven participating countries of the European Union will
convert to a common currency, the Euro, which will become their official
currency. National currencies will initially remain legal tender. The company is
currently conducting an internal analysis to determine the impact of the Euro
conversion on its business; however, the Euro conversion is not expected to have
a material impact on the company's business.
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 and its sources of and access to capital markets
are adequate to support current operations.
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 to resolve Year 2000 related issues. The scope of the
program includes the investigation of all company functions and products,
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 basis of the program is
the ITAA (Information Technology Association of America) approved methodology,
How To 2000, developed by Raytheon. It is 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).
20
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 90 percent
complete. The remaining work in this phase is expected to be complete in early
1999. The work in the detection phase has covered all eight system types,
including delivered product and supply chain.
The corrective action phase of the program is currently estimated to be 19
percent complete. The company expects to complete correction activities in 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.
Since January 1998, the company has spent approximately $47 million on the Year
2000 program. Total cost at completion of the program is currently estimated to
be $180 million, with a range of plus or minus twenty-five percent. All costs,
except long-lived assets are expensed as incurred. These costs include the costs
of inside and outside consultants and services, system replacements and other
equipment requirements.
While the company expects to resolve all Year 2000 risks without material
adverse impact on 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 Raytheon 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 results of operations,
liquidity or financial condition, should some or a combination of these events
come to pass.
As the correction phase of the program is completed in mid-1999, the company
expects to have developed contingency plans, augmenting existing disaster
recovery plans and sourcing strategies, for then current risks.
21
Accounting Standards
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. 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 April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. This accounting standard, which is effective for
fiscal years beginning after December 15, 1998, requires that certain costs of
start-up activities and organization costs be expensed as incurred. The adoption
of SOP 98-5 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 (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. 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 fair
value. The effect of adopting SFAS No. 133 on the company's financial position
and results of operations has not yet been determined.
Forward-Looking Statements
Statements which are not historical facts contained in this Report are
forward-looking statements under the provisions of the Private Securities
Litigation Reform Act of 1995 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 and the timing of awards and contracts,
particularly international 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, 1997.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Ex 27: Financial Data Schedule (filed only electronically
with the Securities and Exchange Commission).
(b) Reports on Form 8-K
On October 23, 1998, after the end of the quarter, the company filed a
Current Report on Form 8-K with the Securities and Exchange Commission.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAYTHEON COMPANY (Registrant)
By: /s/ Peter R. D'Angelo
Peter R. D'Angelo
Executive Vice President and
Chief Financial Officer
November 2, 1998
EXHIBIT LIST
No. EXHIBIT
27 Financial Data Schedule (filed only electronically with
the Securities and Exchange Commission).
5
1,000,000
9-MOS
DEC-31-1998
SEP-27-1998
111
0
935
0
2,285
9,634
4,256
(1,982)
28,712
10,239
5,980
3
0
0
10,576
28,712
14,088
14,088
11,090
11,090
684
0
552
851
356
0
0
0
0
495
1.46
1.45
