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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 March 29, 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 02173
(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 March 29, 1998: 338,582,580,
consisting of 102,630,503 shares of Class A Common Stock and 235,952,077 shares
of Class B Common Stock.
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2
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS
(Unaudited)
March 29, 1998 Dec. 31, 1997
-------------- -------------
(In millions)
ASSETS
Current assets
Cash and marketable securities $ 332 $ 296
Accounts receivable, less allowance for
doubtful accounts 1,116 1,056
Federal and foreign income taxes,
including deferred 1,144 1,244
Contracts in process 5,000 4,661
Inventories 2,059 1,837
Prepaid expenses 150 139
------- -------
Total current assets 9,801 9,233
Property, plant and equipment, net 2,866 2,891
Other assets, net 16,525 16,474
------- -------
Total assets $29,192 $28,598
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion
of long-term debt $ 4,908 $ 5,656
Advance payments, less contracts in
process 549 525
Accounts payable 1,864 1,845
Accrued salaries and wages 629 680
Accrued expenses 2,862 3,180
------- -------
Total current liabilities 10,812 11,886
Accrued retiree benefits 1,069 1,095
Federal and foreign income taxes,
including deferred 786 786
Long-term debt 5,990 4,406
Stockholders' equity 10,535 10,425
------- -------
Total liabilities and
stockholders' equity $29,192 $28,598
======= =======
The accompanying notes are an integral part of the financial statements.
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3
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
Three Months Ended
March 29, 1998 March 30, 1997
-------------- --------------
(In millions except per share amounts)
Net sales $4,574 $2,899
------ ------
Cost of sales 3,558 2,221
Administrative and selling expenses 346 260
Research and development expenses 144 79
------ ------
Total operating expenses 4,048 2,560
------ ------
Operating income 526 339
------ ------
Interest expense 179 69
Interest and dividend income (8) (6)
Other income, net (3) (2)
------ ------
Non-operating expense, net 168 61
------- ------
Income before taxes 358 278
Federal and foreign income taxes 143 95
------- ------
Net income $ 215 $ 183
====== ======
Earnings per common share
Basic $0.63 $0.78
Diluted $0.63 $0.77
Dividends declared per common share $0.20 $0.20
The accompanying notes are an integral part of the financial statements.
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4
RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 29, 1998 March 30, 1997
-------------- --------------
(In millions)
Cash flows from operating activities
Net income $ 215 $ 183
Adjustments to reconcile net
income to net cash used in
operating activities, net of the
effect of acquired companies
Depreciation and amortization 196 94
Sale of receivables 282 327
Increase in accounts receivable (349) (292)
Increase in contracts in process (344) (294)
Increase in inventories (230) (118)
(Increase) decrease in
long-term receivables (26) 7
Increase in advance payments 23 72
Increase in accounts payable 19 39
Net change in federal and
foreign income taxes 97 67
Decrease in other current
liabilities (383) (37)
Other adjustments, net (74) (53)
----- -----
Net cash used in operating activities (574) (5)
----- -----
Cash flows from investing activities
Additions to property, plant and equipment (115) (108)
Increase in other assets (17) (36)
Payments related to the purchase of acquired
companies (42) (6)
Proceeds from sale of other assets 19 --
----- -----
Net cash used in investing activities (155) (150)
----- -----
Cash flows from financing activities
Dividends (68) (47)
(Decrease) increase in short-term debt (748) 177
Increase (decrease) in long-term debt 1,584 (2)
Purchase of treasury shares (56) (7)
Proceeds under common stock plans 33 10
All other, net -- 10
----- -----
Net cash provided by financing activities 745 141
----- -----
Effect of foreign exchange rates on cash -- (1)
----- -----
Net increase (decrease) in cash and
cash equivalents 16 (15)
Cash and cash equivalents at beginning of year 296 137
----- -----
Cash and cash equivalents at end of period 312 122
Marketable securities 20 --
----- -----
Total cash and marketable securities $ 332 $ 122
===== =====
The accompanying notes are an integral part of the financial statements.
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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 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 assets acquired and liabilities assumed
in connection with these two transactions have been included in the financial
statements based on preliminary estimates of fair value and may be revised, as
additional information becomes available. As a result, the financial information
included in the company's financial statements is subject to adjustment from
subsequent revisions in estimates of fair value, if any are necessary.
3. Restructuring
During the first quarter of 1998, the company incurred cash costs of $4 million
for facility and office closures and $4 million for employee severance and
related items.
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 March 29, 1998
and March 30, 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 March 30, 1997:
Raytheon Appliances/Amana Receivables Corporation, Raytheon Commercial
Appliances Finance Corporation and Raytheon Commercial Appliances Receivables
Corporation.
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6
5. Balance Sheet Details
Certain balance sheet accounts consisted of the following at:
March 29, 1998 Dec. 31, 1997
-------------- -------------
(In millions)
Inventories
Finished goods $ 339 $ 314
Work in process 1,141 1,168
Materials and purchased parts 733 509
Excess of current cost over LIFO values (154) (154)
------- -------
Total inventories $ 2,059 $ 1,837
======= =======
Property, plant and equipment
At cost $ 5,376 $ 5,250
Accumulated depreciation and amortization (2,510) (2,359)
------- -------
Property, plant and equipment, net $ 2,866 $ 2,891
======= =======
Other assets
Prepaid pension and other noncurrent assets $ 2,732 $ 2,638
Excess of cost over net assets of acquired
companies, net of accumulated amortization 13,793 13,836
------- -------
Other assets, net $16,525 $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 6,169 6,151
Equity adjustments (39) (23)
Retained earnings 4,402 4,294
------- -------
Total stockholders' equity $10,535 $10,425
======= =======
6. Long-term Debt
In March 1998, the company issued $500 million of notes due 2001 which have a
coupon rate of 5.95 percent, $450 million of notes due 2005 which have a coupon
rate of 6.3 percent, $300 million of notes due 2010 which have a coupon rate of
6.55 percent and $350 million of debentures due 2018 which have a coupon rate of
6.75 percent. The notes due in 2001 and 2005 are not redeemable prior to
maturity. The notes due in 2010 and the debentures due in 2018 are redeemable
under certain circumstances.
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7
7. Earnings per Share
Basic and diluted earnings per share (EPS) were calculated as follows:
Three Months Ended
March 29, 1998 March 30, 1997
-------------- --------------
Net income (in millions) $215 $183
Share information (in thousands)
Average common shares outstanding
for basic EPS 338,550 235,654
Dilutive effect of stock options
and restricted stock 4,698 3,085
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Average common shares outstanding
for diluted EPS 343,248 238,739
Basic EPS $0.63 $0.78
Diluted EPS $0.63 $0.77
Options to purchase 0.3 million and 3.7 million shares of common stock
outstanding at March 29, 1998 and March 30, 1997, respectively, did not effect
the computation of diluted EPS because the exercise prices for the options were
greater than the average market price of the company's common stock during the
period.
8. 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. Restatement of prior period information is
required. The computation of comprehensive income follows:
Three Months Ended
March 29, 1998 March 30, 1997
-------------- --------------
(In millions)
Net income $215 $183
Other comprehensive income (16) (20)
---- ----
Total comprehensive income $199 $163
==== ====
9. Subsequent Events
In May 1998, the company completed the sale of its commercial laundry business
for approximately $358 million.
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8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - First Quarter 1998 compared with First Quarter 1997
- -----------------------------------------------------------------------------
Raytheon Company reported record first quarter 1998 earnings of $215 million on
record sales of $4.6 billion. For the first quarter of 1997, earnings were $183
million on sales of $2.9 billion.
First quarter 1998 diluted earnings per share were $0.63 based on 343.2 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.
Diluted earnings per share for the first quarter of 1997 were $0.77 based on
238.7 million average shares outstanding.
The company's operating income was $526 million for the first quarter of 1998,
an increase of 55 percent over the company's net income of $339 million for the
same period last year. The increase was attributable to the financial
performance of both Raytheon Systems Company (RSC) and Raytheon Aircraft. RSC
was created in December 1997 and includes the former Raytheon Electronics
Systems, Raytheon E-Systems, TI Defense, which was acquired in July 1997, and
Hughes Defense, with which Raytheon merged in December 1997.
The electronics businesses reported record first quarter 1998 sales of $3.6
billion, an increase of 81 percent compared with the same period a year ago and
record operating income of $459 million, a 72 percent increase compared with the
same period a year ago. These increases were primarily due to the acquisition of
TI Defense and the merger with Hughes Defense.
Raytheon Aircraft reported record first quarter 1998 sales of $459 million, an
increase of 6 percent compared with the same period a year ago and record
operating income of $34 million, a 17 percent increase compared with the same
period a year ago. The improvement reflects better-than-expected results in the
aircraft group's new fractional share program, Raytheon Travel Air, now serving
60 customers. Raytheon Aircraft also reported increased shipments of general
aviation, regional and international special mission aircraft and support
services.
Raytheon Engineers & Constructors reported first quarter 1998 sales of $544
million, an increase of 10 percent compared with the same period a year ago.
Operating income was $33 million, compared with $43 million for the same period
a year ago. The overall business climate for the engineering and construction
industry continues to be an adverse factor in this segment. Delays in
international orders and slowdowns on several turnkey projects resulted in lower
overall margins for the business.
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9
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 planned 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. from
Engineering and Construction to Other Electronics.
Segment financial information follows:
Sales
Three Months Ended
March 29, 1998 March 30, 1997
-------------- --------------
(In millions)
Defense Systems $1,167
Sensors and Electronic Systems 645
Intelligence, Information and
Aircraft Integration Systems 655
Command, Control and Communication
Systems, Training, Services
and Other Electronics 1,104
------
Total Electronics 3,571 $1,969
Engineering and Construction 544 496
Aircraft 459 434
------ ------
Total $4,574 $2,899
====== ======
Segment Income
Three Months Ended
March 29, 1998 March 30, 1997
-------------- --------------
(In millions)
Defense Systems $177
Sensors and Electronic Systems 101
Intelligence, Information and
Aircraft Integration Systems 83
Command, Control and Communication
Systems, Training, Services
and Other Electronics 98
----
Total Electronics 459 $267
Engineering and Construction 33 43
Aircraft 34 29
---- ----
Total $526 $339
==== ====
Backlog consisted of the following at:
March 29, 1998 Dec. 31, 1997 March 30, 1997
-------------- ------------- --------------
(In millions)
Electronics $16,495 $16,641 $ 7,933
Engineering and Construction 2,697 2,900 3,362
Aircraft 1,929 1,709 1,353
------- ------- -------
Total backlog $21,121 $21,250 $12,648
U.S. government backlog
included above $12,566 $12,547 $ 5,732
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10
Sales to the U.S. Department of Defense were $2,162 million or 47 percent of
consolidated sales in the first quarter of 1998 versus $1,028 million or 35
percent of consolidated sales in the first quarter of 1997. Total sales to the
U.S. government were $3,035 million or 66 percent of consolidated sales in the
first quarter of 1998 versus $1,321 million or 46 percent of consolidated sales
in the first quarter of 1997. The increase was due principally to the
acquisition of TI Defense and the merger with Hughes Defense.
Administrative and selling expenses increased to $346 million in the first
quarter of 1998 from $260 million in the first quarter of 1997 due to the
acquisition of TI Defense and the merger with Hughes Defense, partially offset
by the sale of the company's home appliance, heating and air conditioning and
commercial cooking operations.
Research and development expenses increased to $144 million in the first quarter
of 1998 from $79 million in the first quarter of 1997 due principally to the
acquisition of TI Defense and the merger with Hughes Defense.
Raytheon Systems Company and Raytheon Engineers & Constructors, as announced in
January 1998, plan to reduce facility and office space by approximately 9
million square and to reduce employment by approximately 10 percent. The company
expects to meet the objectives of the plan and the total estimated cost of
planned restructuring actions remains unchanged from the original estimate.
Operating income was $526 million or 11.5 percent of sales in the first quarter
of 1998 versus $339 million or 11.7 percent of sales in the first quarter of
1997.
Interest expense in the first quarter of 1998 increased to $179 million from $69
million in the first quarter of 1997 due principally to the higher debt level
resulting from the acquisition of TI Defense and the merger with Hughes Defense.
Interest and dividend income in the first quarter of 1998 increased to $8
million from $6 million in the first quarter of 1997. Other income, net in the
first quarter of 1998 increased to $3 million from $2 million in the first
quarter of 1997.
The effective tax rate of forty percent for the first quarter 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, offset by non-deductible
amortization of goodwill.
Total employment was approximately 118,200 at March 29, 1998, approximately
119,200 at December 31, 1997 and approximately 74,000 at March 30, 1997. The
increase from March 29, 1997 was due principally to the acquisition of TI
Defense and the merger with Hughes Defense.
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11
Financial Condition and Liquidity
During the first quarter of 1998 funds used in operating activities were $574
million, $569 million more than during the first quarter of 1997, due
principally to increased working capital requirements in support of the
electronics businesses and Raytheon Aircraft.
Capital expenditures were $115 million in the first quarter of 1998 versus $108
million in the first quarter of 1997. Capital expenditures for the full year
1998 are expected to be above the 1997 level, due principally to the acquisition
of TI Defense and the merger with Hughes Defense.
During the first quarter of 1998, the company made payments of $42 million for
transaction related expenditures incurred in connection with the acquisition of
TI Defense and the merger with Hughes Defense.
In January 1998, the company sold the Monolithic Microwave Integrated Circuit
(MMIC) operation of TI Defense for $19 million in cash and $20 million in stock
of the acquiring company, completing a required divestiture related to the
acquisition of TI Defense. The company continues to own a highly successful MMIC
operation that was not affected by the TI Defense divestiture requirement.
In May 1998, the company completed the sale of its commercial laundry business
for approximately $358 million.
Dividends declared to stockholders in the first quarter of 1998 were $68 million
versus $47 million in the first quarter of 1997. The quarterly dividend rate was
$0.20 per share for both the first quarter of 1998 and the first quarter of
1997.
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. During the first
quarter of 1998, outstanding shares were reduced by the repurchase of 0.9
million shares on the open market at a cost of $56 million to offset 0.9 million
shares issued due to the exercise of employee stock options.
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 9.5 million shares purchased under
these authorizations through March 29, 1998. No shares were repurchased under
this program in the first quarter of 1998.
Debt, net of cash and marketable securities, was $10,566 million at March 29,
1998 as compared with $9,766 million at December 31, 1997 and $3,768 million at
March 30, 1997. Net debt, as a percent of capital was 50 percent at March 29,
1998 as compared with 48 percent at December 31, 1997 and 44 percent at March
30, 1997.
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12
During the first quarter of 1998, the company issued $1.6 billion of long-term
notes and debentures, reduced the company's short-term borrowings by $748
million and essentially completed the company's previously announced plans to
refinance the acquisition of TI Defense and merger with Hughes Defense.
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 $7.4 billion and $9.0 billion at
March 29, 1998 and December 31, 1997, respectively. At March 29, 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.
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 company is in the process of conducting a comprehensive review to identify
the computer systems that could be affected by the "Year 2000" issue, has
initiated an enterprise-wide program to resolve the issues and continues to
evaluate appropriate courses of corrective action. The company is also in the
process of evaluating potential product-related implications that may result
from the "Year 2000" issue. The "Year 2000" issue also creates risk for the
company from unforeseen problems from third parties with whom the company deals.
The company is in the process of contacting its key suppliers and other third
parties to determine the possible impact on its business. While the company
presently believes that the "Year 2000" issue will not pose significant
operational problems to the company, there can be no assurance that the
company's program will be successful.
Accounting Standards
The company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, in the first quarter of 1998. The adoption did
not have a material effect on the company's financial position or results of
operations.
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 effect
of adopting SOP 98-5 on the company's financial position and results of
operations has not yet been determined.
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13
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 Raytheon's reports filed with the Securities and Exchange
Commission, including our 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
Exhibit 27 Financial Data Schedule (filed only electronically
with the Securities and Exchange Commission).
(b) Reports on Form 8-K
Raytheon Company Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 26, 1998.
Raytheon Company Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 18, 1998.
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
May 13, 1998
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