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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 April 4, 1999
/ / 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 April 4, 1999: 336,128,000,
consisting of 100,968,000 shares of Class A common stock and 235,160,000 shares
of Class B common stock.
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2
RAYTHEON COMPANY
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYTHEON COMPANY
BALANCE SHEETS
(Unaudited)
April 4, 1999 Dec. 31, 1998
------------- -------------
(In millions)
ASSETS
Current assets
Cash and cash equivalents $ 58 $ 421
Accounts receivable, less allowance for
doubtful accounts 885 618
Contracts in process 5,098 4,842
Inventories 1,831 1,711
Deferred federal and foreign income taxes 755 809
Prepaid expenses and other current assets 256 236
------- -------
Total current assets 8,883 8,637
Property, plant, and equipment, net 2,257 2,275
Goodwill, net of accumulated amortization 14,334 14,431
Other assets, net 2,777 2,596
------- -------
Total assets $28,251 $27,939
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion
of long-term debt $ 1,671 $ 827
Advance payments, less contracts in
process 811 865
Accounts payable 1,816 2,091
Accrued salaries and wages 597 703
Other accrued expenses 1,969 2,194
------- ------
Total current liabilities 6,864 6,680
Accrued retiree benefits and other
long-term liabilities 1,702 1,679
Deferred federal and foreign income taxes 587 561
Long-term debt 8,161 8,163
Stockholders' equity 10,937 10,856
------- -------
Total liabilities and stockholders' equity $28,251 $27,939
======= =======
The accompanying notes are an integral part of the financial statements.
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RAYTHEON COMPANY
STATEMENTS OF INCOME (Unaudited)
Three Months Ended
April 4, 1999 March 29, 1998
(In millions except per share amounts)
Net sales $4,903 $4,574
------ ------
Cost of sales 3,870 3,558
Administrative and selling expenses 342 346
Research and development expenses 111 144
------ ------
Total operating expenses 4,323 4,048
------ ------
Operating income 580 526
------ ------
Interest expense, net 177 171
Other expense (income), net 6 (3)
------ ------
Non-operating expense, net 183 168
------ ------
Income before taxes 397 358
Federal and foreign income taxes 156 143
------ ------
Income before accounting change 241 215
Cumulative effect of change in
accounting principle, net of tax 53 --
------ ------
Net income $ 188 $ 215
====== ======
Earnings per common share before
accounting change
Basic $ 0.72 $ 0.63
Diluted $ 0.71 $ 0.63
Earnings per common share
Basic $ 0.56 $ 0.63
Diluted $ 0.55 $ 0.63
Dividends declared per common share $ 0.20 $ 0.20
The accompanying notes are an integral part of the financial statements.
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RAYTHEON COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
April 4, 1999 March 29, 1998
(In millions)
Cash flows from operating activities
Net income $ 188 $ 215
Adjustments to reconcile net income to net cash
used in operating activities, net of the
effect of acquisitions and divestitures
Depreciation and amortization 178 196
Sale of receivables 422 282
Increase in accounts receivable (689) (349)
Increase in contracts in process (254) (344)
Increase in inventories (119) (230)
Decrease in current deferred federal
and foreign income taxes 54 97
Increase in prepaid expenses and
other current assets (20) (10)
(Decrease) increase in advance payments (53) 23
(Decrease) increase in accounts payable (274) 19
Decrease in accrued expenses (307) (383)
Other adjustments, net (38) (90)
------- -------
Net cash used in operating activities (912) (574)
Cash flows from investing activities
Expenditures for property, plant,
and equipment (141) (115)
(Increase) decrease in other assets (34) 3
Payment for purchase of acquired companies -- (42)
Proceeds from sales of operating units and
investments -- 19
------- -------
Net cash used in investing activities (175) (135)
Cash flows from financing activities
Dividends (67) (68)
Increase (decrease) in short-term debt 844 (748)
(Decrease) increase in long-term debt (2) 1,584
Purchase of treasury shares (82) (56)
Proceeds under common stock plans 31 33
------- -------
Net cash provided by financing activities 724 745
------- -------
Net (decrease) increase in cash and cash equivalents (363) 36
Cash and cash equivalents at beginning of year 421 296
------- -------
Cash and cash equivalents at end of period $ 58 $ 332
======= =======
The accompanying notes are an integral part of the financial statements.
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RAYTHEON COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements of Raytheon Company (the
"Company") 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, 1998. 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. Restructuring
During the first quarter of 1999, the Company's activity related to previously
announced restructuring initiatives at Raytheon Systems Company (RSC) and
Raytheon Engineers & Constructors (RE&C) was as follows:
RSC RE&C
(In millions except employee data)
Accrued liability at December 31, 1998 $563 $ 66
Costs incurred
Severance and other employee related costs 32 4
Facility closure and related costs 48 4
---- ----
80 8
Accrued liability at April 4, 1999 $483 $ 58
==== ====
Cash expenditures $ 80 $ 8
Number of employee terminations due to
restructuring actions during the
first quarter of 1999 800 100
The Company also incurred $25 million of capital expenditures and period
expenses during the first quarter of 1999 related to RSC restructuring
initiatives.
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3. Business Segment Reporting
The Company operates in three major business areas: Electronics, both defense
and commercial, Engineering and Construction, and Aircraft. The Company
completed a reorganization of certain business segments within Total Electronics
to better align the operations with customer needs and to eliminate management
redundancy. Segment financial results were as follows:
Sales
Three Months Ended
April 4, 1999 March 29, 1998
(In millions)
Defense Systems $1,258 $1,178
Sensors and Electronic Systems 748 641
Command, Control, Communication, and
Information Systems 905 871
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 800 881
------ ------
Total Electronics 3,711 3,571
Engineering and Construction 692 544
Aircraft 500 459
------ ------
Total $4,903 $4,574
====== ======
Operating Income
Three Months Ended
April 4, 1999 March 29, 1998
(In millions)
Defense Systems $ 219 $ 176
Sensors and Electronic Systems 126 105
Command, Control, Communication, and
Information Systems 103 85
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 69 93
------ ------
Total Electronics 517 459
Engineering and Construction 31 33
Aircraft 32 34
------ ------
Total $ 580 $ 526
====== ======
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Identifiable Assets
April 4, 1999 Dec. 31, 1998
(In millions)
Defense Systems $ 2,446 $ 2,286
Sensors and Electronic Systems 1,886 1,823
Command, Control, Communication, and
Information Systems 1,691 1,624
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 2,035 1,993
Unallocated Electronics Items 13,175 13,067
-------- --------
Total Electronics 21,233 20,793
Engineering and Construction 1,485 1,478
Aircraft 2,671 2,356
Corporate 2,862 3,312
------- -------
Total $28,251 $27,939
======= =======
4. Inventories
Inventories consisted of the following at:
April 4, 1999 Dec. 31, 1998
(In millions)
Inventories
Finished goods $ 288 $ 317
Work in process 1,122 1,037
Materials and purchased parts 570 507
Excess of current cost over LIFO values (149) (150)
------ ------
Total inventories $1,831 $1,711
====== ======
5. Special Purpose Entities
In connection with the sale of receivables, the following special purpose
entities have been established as of April 4, 1999, Raytheon Receivables, Inc.,
Raytheon Aircraft Receivables Corporation, and Raytheon Engineers & Constructors
Receivables Corporation.
6. Stockholders' Equity
Stockholders' equity consisted of the following at:
April 4, 1999 Dec. 31, 1998
(In millions)
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 6,307 6,272
Accumulated other comprehensive income (42) (50)
Treasury stock (339) (257)
Retained earnings 5,008 4,888
------- -------
Total stockholders' equity $10,937 $10,856
======= =======
Common stock outstanding 336.1 336.8
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During the first quarter of 1999, outstanding shares were reduced by the
repurchase of 1.5 million shares offset by an increase of 0.8 million shares due
to common stock plan activity.
Share information used to calculate earnings per share (EPS) is as follows:
Three Months Ended
April 4, 1999 March 29, 1998
(In thousands)
Average common shares outstanding
for basic EPS 336,354 338,550
Dilutive effect of stock options
and restricted stock 3,871 4,698
--------- ---------
Average common shares outstanding
for diluted EPS 340,225 343,248
======= =======
Options to purchase 6.5 million and 0.3 million shares of common stock for the
three months ended April 4, 1999 and March 29, 1998 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.
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. The computation of comprehensive income is as follows:
Three Months Ended
April 4, 1999 March 29, 1998
(In millions)
Net income $188 $215
Other comprehensive income 8 (16)
---- ----
Total comprehensive income $196 $199
==== ====
7. Change in Accounting Principle
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. During
the first quarter of 1999, the Company recorded a 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.
8. Subsequent Events
On May 11, 1999 the Company filed a Registration Statement on Form S-4 to
register $250 million of 6.00% debentures due in 2010 and $550 million of 6.40%
debentures due in 2018 (collectively, the "Exchange Debentures"). These
debentures will be offered in exchange for the $800 million in debentures that
the Company placed privately in December 1998 (the "Original Debentures") and
are substantially identical to the Original Debentures. The Company will not
receive any cash proceeds from the issuance of the Exchange Debentures.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated Results of Operations
Net sales for the first quarter of 1999 were $4.9 billion, an increase of 7
percent versus $4.6 billion for the same period in 1998. Sales to the U.S.
Department of Defense were 49 percent of sales for the first quarter of 1999
versus 47 percent of sales for the first quarter of 1998. Total first quarter
1999 and 1998 sales to the U.S. government, including foreign military sales,
were 66 percent of sales. Total international sales, including foreign military
sales, were 27 percent of sales for the first quarter of 1999 versus 25 percent
of sales for the first quarter of 1998.
Gross margin for the first quarter of 1999 was $1,033 million or 21.1 percent of
sales versus $1,016 million or 22.2 percent for the first quarter of 1998. The
decrease in margin as a percent of sales was primarily attributable to the sales
mix at Aircraft and a change in estimate on certain contracts in the third
quarter of 1998 at Engineering and Construction. The margins within Total
Electronics were relatively unchanged year over year.
Administrative and selling expenses were $342 million or 7.0 percent of sales
for the first quarter of 1999 versus $346 million or 7.6 percent of sales for
the first quarter of 1998. The decrease in administrative and selling expenses
as a percent of sales was due primarily to increased efficiencies as a result of
restructuring initiatives at Raytheon Systems Company (RSC).
Research and development expenses decreased to $111 million or 2.3 percent of
sales for the first quarter of 1999 versus $144 million or 3.1 percent of sales
for the first quarter of 1998. The decrease in research and development expenses
was due primarily to the elimination of duplicate research and development
processes within RSC and a change in the timing of expenditures during the year.
Operating income was $580 million or 11.8 percent of sales for the first quarter
of 1999 versus $526 million or 11.5 percent of sales for the first quarter of
1998. The changes in operating income by segment are discussed below.
Interest expense, net for the first quarter of 1999 was $177 million compared to
$171 million for the first quarter of 1998.
Other expense, net for the first quarter of 1999 was $6 million versus other
income, net of $3 million for the first quarter of 1998.
The effective tax rate was 39.3 percent for the first quarter of 1999 versus
39.9 percent for the first quarter of 1998. 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.
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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. During
the first quarter of 1999, the Company recorded a 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.
Income before accounting change was $241 million for the first quarter of 1999,
or $0.71 per diluted share on 340.2 million average shares outstanding versus
net income of $215 million for the first quarter of 1998, or $0.63 per diluted
share on 343.2 million average shares outstanding. Net income for the first
quarter of 1999 was $188 million, or $0.55 per diluted share.
Total employment was approximately 107,200 at April 4, 1999, approximately
108,200 at December 31, 1998 and approximately 118,200 at March 29, 1998. The
decrease from the prior quarter and prior year is primarily a result of the
continuing restructuring initiatives at RSC and Raytheon Engineers &
Constructors (RE&C).
The Electronics businesses reported first quarter 1999 sales of $3.7 billion, an
increase of 4 percent compared with the same period a year ago and operating
income of $517 million, a 13 percent increase compared with the same period a
year ago. Operating margin was 13.9 percent for the first quarter of 1999 versus
12.9 percent for the first quarter of 1998. The increase in operating income as
a percent of sales was primarily a result of decreases in selling and
administrative expenses and research and development expenses made in
conjunction with the restructuring initiatives at RSC.
RE&C reported first quarter 1999 sales of $692 million, an increase of 27
percent compared with the same period a year ago. The increase in sales was due
to increased project work in the power, government, and infrastructure markets.
Operating income was $31 million, compared with $33 million for the same period
a year ago. Operating margin was 4.5 percent for the first quarter of 1999,
compared to 6.1 percent for the first quarter of 1998, and up as expected from
3.3 percent for the fourth quarter of 1998. The decrease in margin was a result
of the change in estimate on certain contracts as announced in the third quarter
of 1998.
Raytheon Aircraft reported first quarter 1999 sales of $500 million, an increase
of 9 percent compared with the same period a year ago and operating income of
$32 million, a 6 percent decrease compared with the same period a year ago. The
decline in operating margin was due to increased research and development
expenses for two new aircraft, the Premier I and Horizon. Also contributing to
the decrease in margin as a percent of sales was the sale of the Raytheon
Aircraft Montek subsidiary in the fourth quarter of 1998.
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Backlog consisted of the following at:
April 4, 1999 Dec. 31, 1998 March 29, 1998
(In millions)
Electronics $17,641 $17,648 $16,495
Engineering and Construction 3,833 3,888 2,697
Aircraft 2,196 2,133 1,929
------- ------- -------
Total backlog $23,670 $23,669 $21,121
U.S. government backlog
included above $13,605 $14,622 $12,566
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.
Financial Condition and Liquidity
Net cash used by operating activities for the first quarter of 1999 was $912
million versus $574 million for the first quarter of 1998. The increase was due
principally to increased working capital requirements in the Electronics
businesses as a result of increased sales volume, costs associated with
restructuring activities, delayed customer billings related to system
conversions, and an increase in inventory at Raytheon Aircraft for the Premier I
and Horizon aircraft. During the first quarter of 1999, the Company incurred $88
million of restructuring and exit costs and $25 million of other expenditures
related to restructuring and consolidation activities at RSC and RE&C combined.
Net cash used in investing activities was $175 million in the first quarter of
1999 versus $135 million in the first quarter of 1998. Capital expenditures were
$141 million for the first three months of 1999 versus $115 million for the
first three months of 1998. Capital expenditures including facilities
consolidation for the full year 1999 are expected to be approximately $550
million.
The Company merged with the defense business of Hughes Electronics Corporation
(Hughes Defense) in December 1997. 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.
Dividends paid to stockholders in the first quarter of 1999 were $67 million
versus $68 million in the first quarter of 1998. The quarterly dividend rate was
$0.20 per share for both the first quarter of 1999 and the first quarter of
1998.
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Outstanding shares were reduced by the repurchase of 1.5 million shares for $82
million during the first three months of 1999 and 0.9 million shares for $56
million during the same period a year ago.
In March 1999, the Board of Directors authorized the repurchase of up to six
million shares of the Company's Class A and Class B common stock over the next
three years.
Total debt was $9.8 billion, $9.0 billion, and $10.9 billion at April 4, 1999,
December 31, 1998, and March 29, 1998, respectively. Total debt, as a percentage
of total capital, was 47.3 percent, 45.3 percent, and 50.8 percent at April 4,
1999, December 31, 1998, and March 29, 1998, respectively.
On May 11, 1999 the Company filed a Registration Statement on Form S-4 to
register $250 million of 6.00% debentures due in 2010 and $550 million of 6.40%
debentures due in 2018 (collectively, the "Exchange Debentures"). These
debentures will be offered in exchange for the $800 million in debentures that
the Company placed privately in December 1998 (the "Original Debentures") and
are substantially identical to the Original Debentures. The Company will not
receive any cash proceeds from the issuance of the Exchange Debentures.
Lines of credit with certain commercial banks exist as standby facilities to
support the issuance of commercial paper by the Company. The lines of credit
were $4.1 billion and $4.4 billion at April 4, 1999 and December 31, 1998,
respectively. At April 4, 1999 and December 31, 1998, there were no borrowings
under these lines of credit. Given the present state of the financial markets
and economic conditions, the Company does not currently anticipate making future
borrowings 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 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.
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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 April 4, 1999 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 April 4, 1999 which is
subject to interest rate risk. Fixed rate financial instruments were not
evaluated, as the risk exposure is not material.
Year 2000 Date Conversion
The Year 2000 problem concerns the inability of information systems to recognize
properly and process date-sensitive information beyond January 1, 2000.
In January 1998, the Company initiated a formal comprehensive enterprise-wide
program to identify and to 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 99 percent
complete based on the tasks to be completed. On the basis of expected total
cost, the detection phase is 95 percent complete. The remaining work in this
phase is expected to be complete by the middle of 1999. The work in the
detection phase has involved all eight system types, including delivered product
and supply chain.
The Company has made substantial progress in the corrective action phase of the
program, with 94 percent of the tasks in this phase completed. On the basis of
expected total cost, the corrective action phase is 60 percent complete. The
Company expects to complete correction activities during 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.
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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 $89 million on the Year
2000 program, $20 million on the detection phase, and $69 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, $21 million relates
to the detection phase and $115 million is for correction. All costs, except 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.
The Company currently expects to resolve all Year 2000 issues for internally
used hardware and software systems by the end of 1999; however, there can be no
assurances as to the ultimate success of the program. The Company continues to
assess its exposure attributable to external factors, including uncertainties
regarding the ability of critical suppliers to avoid Year 2000 related service
and delivery interruptions. While the Company has no reason to conclude that any
specific supplier represents a significant Year 2000 risk, it is currently
unable to conclude that all of its critical suppliers will successfully resolve
all Year 2000 issues on a timely basis. The Company is considering various
contingency plans for problems that may result from a critical supplier's
inability to successfully resolve its Year 2000 issues. A "reasonably likely
worst case" scenario of Year 2000 risks for the Company could include isolated
interruption of deliveries from critical suppliers, increased manufacturing
costs until the problems are resolved, delayed product shipments, lost revenues,
lower cash receipts, and certain product liability issues. The Company is unable
to quantify the potential effect of these items which could have a material
adverse effect on its financial position or results of operations should some
combination of these events come to pass.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). This accounting standard, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 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.
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15
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, 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter of Agreement between Raytheon Company and
Daniel P. Burnham.
10.2 Letter of Agreement between Raytheon Company and
Franklyn A. Caine.
27 Financial Data Schedule (filed only electronically
with the Securities and Exchange Commission).
(b) Reports on Form 8-K
None
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/ Michele C. Heid
Michele C. Heid
Vice President and
Corporate Controller
(Chief Accounting Officer)
May 19, 1999
EXHIBIT LIST
No. EXHIBIT
10.1 Letter of Agreement between Raytheon Company and
Daniel P. Burnham.
10.2 Letter of Agreement between Raytheon Company and
Franklyn A. Caine.
27 Financial Data Schedule (filed only electronically with
the Securities and Exchange Commission).
<PAGE>
1
EXHIBIT 10.1
RAYTHEON MOST PRIVATE
PRIVILEGED AND CONFIDENTIAL
June 15, 1998
Mr. Daniel P. Burnham
6 Essex Road
Summit, NJ 07901
Dear Dan:
I am very pleased to confirm below the terms of Raytheon's employment offer
as we have discussed. All references to Raytheon stock mean Raytheon Class B
shares.
As agreed, the Board will immediately announce your employment as President
and Chief Operating Officer as of July 1, 1998, and that you will succeed me as
Chief Executive Officer effective December 1, 1998.
Your base salary will be set at an annualized rate of $850,000 which is the
rate of pay we discussed for the CEO position.
Your targeted annual incentive will be 200% of base salary as in effect at
the beginning of the fiscal year or $1.7 million at your initial base salary. In
addition, your target award for 1998 performance will be $1.7 million, with a
guaranteed minimum annual incentive payment of $1 million for the year.
The Board of Directors will award you restricted units in sufficient number
to replicate the market value of your current award of 60,000 units. Each
Raytheon unit will be valued at the fair market value (the average of the high
and low trading prices) for Raytheon shares over a 20-day trading period ending
June 16, 1998. The value of your current 60,000 units will be determined by
using the fair market value for Allied shares over the same 20-day period.
For example, the present value of your 60,000 restricted units at $43.50
totals $2,610,000. This would translate to a Raytheon award of 47,617 units at
about $54.8125.
Restrictions on the entire Raytheon award will lapse on the anniversary of
your date of hire in the year 2005. You will receive cash dividend equivalents
on the units in the amounts and at the times dividends may be declared for all
holders of Raytheon shares.
<PAGE>
2
Mr. Daniel P. Burnham
June 15, 1998
Page 2
To replicate the value of your 100,000 outstanding, in-the-money stock
options, with a current value of $663,000, the Board of Directors will award you
an estimated additional 12,000 restricted units with restrictions to lapse on
the anniversary of the award as follows: 4,800 units in 1999; 3,600 units in
2000; and 3,600 units in 2001.
The value of your in-the-money options will be determined using the fair
market value for Allied shares over the 20-day period less the option exercise
price times the number of shares. Conversion to Raytheon units will be based on
the example above.
Raytheon will replace the present value of your 700,000 stock options
through our Long-Term Achievement Plan (LTAP). The Board will award you 328,352
performance units valued at $17,997,000. You will receive cash dividend
equivalents on the units in the amounts and at the times dividends may be
declared for all holders of Raytheon shares. The units will vest in seven annual
increments with the first four increments of a projected 46,906 units each
vesting annually in 1999 through 2002.
Beginning in the fifth year, the payment will be based on the achievement
of performance goals to be mutually agreed upon between you and the Board. The
value of each annual payment will range from a threshold of not less than 80% of
the award rising to a maximum of 140% of the award.
As above, the value of your 700,000 option shares will be determined using
the fair market value for Allied shares over the 20-day period less the option
exercise price times the number of shares. Conversion to Raytheon units will be
based on the example on the previous page.
The Board will grant you options to purchase 250,000 shares under the terms
of Raytheon's 1995 Stock Option Plan. The full grant will vest on the first
anniversary of the date of grant. The Board will review future stock option
grants at their regular annual senior management compensation review currently
held in June of each year.
You will be eligible to participate in Raytheon's Voluntary Compensation
Deferment Plan which provides an opportunity for participants to defer until
retirement from 25% to 100% of annual incentive awards and annual salary above
$500,000.
<PAGE>
3
Mr. Daniel P. Burnham
June 15, 1998
Page 3
You will participate in Raytheon's Salaried Pension Plan with your total
benefit fixed at 50% of the average of covered compensation (base salary and
cash bonus) for your five highest consecutive years of employment at Raytheon
prior to retirement. This benefit is subject to an offset for your estimated
primary Social Security benefit and will also be reduced for pension benefits
received from any previous employer.
You will receive an additional payment of $15,000 annually to offset
ancillary expenses.
You will be eligible to participate in the following employee benefit plans:
- Medical, dental and vision care for you and your covered dependents.
- Senior Executive Life Insurance at the plan maximum of $3 million.
- Accidental Death & Dismemberment Insurance at the plan maximum of
$3 million.
- Travel Accident Insurance at the rate of 2 1/2 times your base salary,
initially $2,125,000, up to a maximum of $3 million.
- Basic and supplemental Long Term Disability Insurance plans.
- Raytheon's Savings & Investment Plan (a 401[k] plan) with a Company
match of 50% on up to 6% of covered pay subject to the IRS statutory
limit on employee contributions. The match is scheduled to increase to
4% on January 1, 1999.
- Raytheon's Stock Ownership Plan which provides an annual Company
contribution in stock of about 1/2% of eligible pay up to the IRS salary
limit of $160,000. This is also a tax qualified plan with payment
deferred to retirement.
Raytheon will also provide a Financial and Investment Planning Program, an
automobile similar to a Lincoln or Cadillac, and access to Company planes.
Finally, Raytheon will provide a three-year severance agreement as outlined
in the attached document. Also attached is a copy of this letter for your formal
acceptance.
<PAGE>
4
Mr. Daniel P. Burnham
June 15, 1998
Page 4
Similar to all Raytheon employment agreements, this offer is contingent
upon:
1. Your meeting the medical requirements for the position as determined by a
pre-employment physical examination that will include a drug test to
determine the presence of illegal or unauthorized drugs in your system. If
you fail to pass the Company's physical examination, including the drug
test, our offer of employment will be withdrawn;
2. Your meeting the Company's security standards as imposed by the US
Government, including the issuance to you by the US Government of any
necessary security clearance within a reasonable time after you begin work.
We would wish to make your relocation as pleasant and painless as possible.
To that end, Gail Anderson will work directly with you to arrange the details of
your relocation package to fit your particular needs within the framework of our
policies. If you wish to take advantage of our Third Party Home Purchase Plan,
this will of course be made available to you.
Dan, Tom Phillips, Warren Rudman and Dick Hill join me in offering sincere
congratulations as the Board's outstanding candidate for CEO and in an
expression of pleasure at your acceptance of our offer. We look forward to your
joining the Raytheon team as quickly as possible.
Sincerely,
Dennis J. Picard
Attachments
<PAGE>
1
EXHIBIT 10.2
February 22, 1999
Franklyn A. Caine
60 Cherrybrook Road
Weston, MA 02493
Dear Frank:
It is a sincere pleasure to extend to you the position of Senior Vice
President, Chief Financial Officer, for Raytheon Company, reporting to me. Your
position will be an officer of the corporation and, along with the compensation
outlined below, is subject to election by the Raytheon Board of Directors.
The offer is a base salary of $435,000 annually, residing in Raytheon's
Corporate Offices in Lexington, Massachusetts.
Additional elements of compensation will consist of the following:
In CY1999 you will be eligible for the Results Based Incentive Program with
a targeted incentive of 70% of base salary. This will not be pro-rated in
the first year.
We will authorize 200,000 shares of stock options that vest at 50% each
year, over 2 years, under the terms of our stock option program.
We will authorize 50,000 shares of stock options at annual review in July
1999, that vest at 50% each year, over 2 years, under the terms of our
stock option program.
You will be eligible to participate in Raytheon's Long Term Achievement
Program (LTAP). We will authorize 7,500 restricted units which are vested
based on Company performance metrics after the third year of plan
participation. In accordance thereafter, you will continue to participate
in the Long Term Achievement Program under the terms of the LTAP Program.
You will be provided with a Company automobile under the guidelines of the
Company automobile policy.
You are eligible for financial planning and tax preparation.
First class travel.
Company match, pre- and post-tax excess.
Executive life insurance at 4 times base salary.
Your retirement benefit will be calculated using your 26 years of combined
service with New Jersey Bell, Exxon Corp, Penn Central, RCA, United
Technology, and Wang plus any future Raytheon Service. Your retirement
benefit will be provided under the Raytheon Qualified and Supplemental
Executive Retirement plans. This will be offset by both social security and
any other retirement benefits you receive from previous employers.
<PAGE>
2
You will receive 20 days of paid time off (PTO).
You are eligible to participate in Raytheon's Deferred Bonus Program.
If the Company without cause involuntarily separates you from employment,
you will be entitled to a Separation Payment, to be paid in the lump sum
of 2 years' compensation (base/bonus). In addition, you shall be entitled
to the Separation Payment if as a result of a change of corporate control,
you are assigned, without your expressed written consent, to executive
duties inconsistent with the position of Chief Financial Officer for
Raytheon Company. Inconsistent duties shall include any material
diminution of your position, authority, duties or responsibilities as
constituted immediately prior to a change in corporate control, or a
requirement to be based at any office or location in excess of 50 miles
from your office or location immediately prior to a change in control. If
the Separation Payment under the terms of this agreement would subject you
to excise tax under section 4999 of Internal Revenue Code, then you shall
be entitled to receive an additional payment ("gross-up") in an amount
equal to the tax imposed.
This offer is contingent upon:
1. Your meeting the medical requirements for the position being offered as
determined by a pre-employment physical examination that will include a
drug test to determine the presence of illegal or unauthorized drugs in
your system. If you fail to pass the Company's physical examination,
including the drug test, our offer of employment will be withdrawn.
2. Your meeting the Company's security standards as imposed by the U.S.
Government, including the issuance to you by the U.S. Government of any
necessary security clearance within a reasonable time after you begin work.
If you accept our offer, the following documents will be required upon reporting
for work: proof that you are authorized to work in the USA, a document verifying
your identity (i.e., driver's license), and a social security card. See the
enclosed I-9 form for appropriate documentation.
We look forward to your accepting our offer of employment. The terms and
conditions of your employment are contained in this offer letter and will remain
open until February 12, 1999. In addition, as an employee of Raytheon Company,
you will be subject to all applicable company policies and procedures.
<PAGE>
3
If you believe any of the terms described in this letter are not consistent with
your understanding or if you have any questions, please call Dennis Donovan at
781-860-2685 before accepting this offer. Enclosed is a copy of this letter that
provides for your formal acceptance. Please sign and return the duplicate letter
in the enclosed envelope.
Very truly yours,
/s/ Daniel P. Burnham
Daniel P. Burnham
President and Chief Executive Officer
cc: D.M. Donovan
Enclosures: Duplicate Offer Letter
Employment Eligibility Verification (Form I-9)
<PAGE>
4
Franklyn A. Caine
I have read and accept this offer and acknowledge receipt of all attachments
referred to herein. I expect to report for work on
Signature: /s/ F. A. Caine Date: 2/22/99
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