<PAGE>
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
/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
<TABLE>
<CAPTION>
(Unaudited)
April 4, 1999 Dec. 31, 1998
(Restated) (Restated)
------------- -------------
(In millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 58 $ 421
Accounts receivable, less allowance for
doubtful accounts 885 618
Contracts in process 5,115 4,859
Inventories 2,017 1,991
Deferred federal and foreign income taxes 778 840
Prepaid expenses and other current assets 256 236
------- -------
Total current assets 9,109 8,965
Property, plant, and equipment, net 2,257 2,275
Goodwill, net of accumulated amortization 14,299 14,396
Other assets, net 2,777 2,596
------- -------
Total assets $28,442 $28,232
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion
of long-term debt $ 1,671 $ 827
Advance payments, less contracts in
process 1,072 1,251
Accounts payable 1,797 2,071
Accrued salaries and wages 597 703
Other accrued expenses 1,960 2,180
------- ------
Total current liabilities 7,097 7,032
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 10,895 10,797
------- -------
Total liabilities and stockholders' equity $28,442 $28,232
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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3
RAYTHEON COMPANY
STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 4, 1999 March 29, 1998
(Restated) (Restated)
------------- --------------
(In millions except per share amounts)
<S> <C> <C>
Net sales $5,025 $4,693
------ ------
Cost of sales 3,966 3,656
Administrative and selling expenses 342 346
Research and development expenses 111 144
------ ------
Total operating expenses 4,419 4,146
------ ------
Operating income 606 547
------ ------
Interest expense, net 177 171
Other expense (income), net 6 (3)
------ ------
Non-operating expense, net 183 168
------ ------
Income before taxes 423 379
Federal and foreign income taxes 165 151
------ ------
Income before accounting change 258 228
Cumulative effect of change in
accounting principle, net of tax 53 --
------ ------
Net income $ 205 $ 228
====== ======
Earnings per common share before
accounting change
Basic $ 0.77 $ 0.67
Diluted $ 0.76 $ 0.66
Earnings per common share
Basic $ 0.61 $ 0.67
Diluted $ 0.60 $ 0.66
Dividends declared per common share $ 0.20 $ 0.20
</TABLE>
The accompanying notes are an integral part of the financial statements.
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4
RAYTHEON COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 4, 1999 March 29, 1998
(Restated) (Restated)
------------- --------------
(In millions)
<S> <C> <C>
Cash flows from operating activities
Net income $ 205 $ 228
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
Increase in accounts receivable (267) (67)
Increase in contracts in process (254) (344)
Increase in inventories (25) (136)
Decrease in current deferred federal
and foreign income taxes 62 104
Increase in prepaid expenses and
other current assets (20) (10)
Decrease in advance payments (178) (96)
(Decrease) increase in accounts payable (273) 19
Decrease in accrued salaries and wages (105) (52)
Decrease in other accrued expenses (197) (327)
Other adjustments, net 19 (32)
------- -------
Net cash used in operating activities (855) (517)
------- -------
Cash flows from investing activities
Sale of financing receivables 241 160
Origination of financing receivables (302) (225)
Collection of financing receivables
not sold 4 8
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 (232) (192)
------- -------
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
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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5
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/A 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. Restatement of Financial Statements
On December 6, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101), which among other guidance,
clarifies certain conditions to be met in order to recognize revenue. After
reexamining the terms underlying certain transactions of Raytheon Aircraft, the
Company has determined that revenue related to these transactions should be
reversed. In view of the cumulative effect of the unrecorded adjustment on the
results of future periods, the Company has restated its annual and quarterly
consolidated financial statements. The restatements were required to reverse
sales that the Company believed were properly recorded as bill and hold sales
when the manufacturing process was substantially complete and the rights of
ownership of the aircraft had passed to the buyer, but before minor
modifications had been completed and the physical delivery of the aircraft
occurred. The restated financial statements reflect sales when final delivery of
the aircraft occurred. As these adjustments relate to the timing of revenue
recognition all reversals are recognized in later periods. The financial
statements and related notes set forth in this Form 10-Q/A reflect all such
restatements. A summary of the impact of the restatements for the periods ended
April 4, 1999 and March 29, 1998 follows (in millions except per share amounts):
Results of Operations
- ---------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
April 4, 1999 March 29, 1998
------------------ ------------------
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Net sales $4,903 $5,025 $4,574 $4,693
Cost of sales 3,870 3,966 3,558 3,656
Operating income 580 606 526 547
Net income 188 205 215 228
Diluted earnings per share $ 0.55 $ 0.60 $ 0.63 $ 0.66
<CAPTION>
Financial Position
- ------------------
April 4, 1999 December 31, 1998
------------------ ------------------
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Inventories $ 1,831 $ 2,017 $ 1,711 $ 1,991
Deferred taxes 755 778 809 840
Current assets 8,883 9,109 8,637 8,965
Total assets 28,251 28,442 27,939 28,232
Advance payments 811 1,072 865 1,251
Accounts payable 1,816 1,797 2,091 2,071
Other accrued expenses 1,969 1,960 2,194 2,180
Current liabilities 6,864 7,097 6,680 7,032
Stockholders' equity 10,937 10,895 10,856 10,797
</TABLE>
3. Restructuring
During the first quarter of 1999, the Company's activity related to previously
announced restructuring initiatives at the Electronics businesses and Raytheon
Engineers & Constructors (RE&C) was as follows:
<TABLE>
<CAPTION>
Electronics Electronics RE&C
Exit Costs Restructuring Restructuring
--------------- ------------------ ---------------
(In millions except employee data)
<S> <C> <C> <C>
Accrued liability at December 31, 1998 $ 399 $ 164 $ 66
----------- ------------- --------
Costs incurred
Severance and other employee related costs 24 8 4
Facility closure and related costs 44 4 4
----------- ------------- --------
68 12 8
----------- ------------- --------
Accrued liability at April 4, 1999 $ 331 $ 152 $ 58
=========== ============= ========
Cash expenditures $ 68 $ 12 $ 8
Number of employee terminations due to
restructuring actions during the first
three months of 1999 500 300 100
Number of square feet exited due to
restructuring actions during the first three
months of 1999 0.4 0.5 0.1
</TABLE>
The Company also incurred $25 million of capital expenditures and period
expenses during the first quarter of 1999 related to RSC restructuring
initiatives.
The cumulative number of employee terminations due to restructuring actions for
Electronics exit costs, Electronics restructuring, and RE&C restructuring was
4,100, 3,600, and 1,400, respectively. The cumulative number of square feet
exited due to restructuring actions for Electronics exit costs, Electronics
restructuring, and RE&C restructuring was 2.8 million, 1.4 million, and 1.0
million, respectively.
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6
4. 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
(Restated) (Restated)
------------- --------------
(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 622 578
------ ------
Total $5,025 $4,693
====== ======
Operating Income
Three Months Ended
April 4, 1999 March 29, 1998
(Restated) (Restated)
------------- --------------
(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 58 55
------ ------
Total $ 606 $ 547
====== ======
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7
Identifiable Assets
April 4, 1999 Dec. 31, 1998
(Restated) (Restated)
------------- -------------
(In millions)
Defense Systems $ 2,446 $ 2,286
Sensors and Electronic Systems 1,886 1,823
Command, Control, Communication, and
Information Systems 1,708 1,641
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 2,035 1,993
Unallocated Electronics Items 13,140 13,032
-------- --------
Total Electronics 21,215 20,775
Engineering and Construction 1,485 1,478
Aircraft 2,880 2,667
Corporate 2,862 3,312
------- -------
Total $28,442 $28,232
======= =======
5. Inventories
Inventories consisted of the following at:
April 4, 1999 Dec. 31, 1998
(Restated) (Restated)
------------- -------------
(In millions)
Inventories
Finished goods $ 288 $ 317
Work in process 1,308 1,315
Materials and purchased parts 570 507
Excess of current cost over LIFO values (149) (148)
------ ------
Total inventories $2,017 $1,991
====== ======
6. 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. The balance of receivables sold to banks or financial
institutions outstanding at April 4, 1999 was $2,845 million. No material gain
or loss resulted from the sales of receivables.
7. Stockholders' Equity
Stockholders' equity consisted of the following at:
April 4, 1999 Dec. 31, 1998
(Restated) (Restated)
------------- -------------
(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 4,966 4,829
------- -------
Total stockholders' equity $10,895 $10,797
======= =======
Common stock outstanding 336.1 336.8
===== =====
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8
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
(Restated) (Restated)
------------- --------------
(In millions)
Net income $205 $228
Other comprehensive income 8 (16)
---- ----
Total comprehensive income $213 $212
==== ====
8. 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.
9. 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.
<PAGE>
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated Results of Operations
On December 6, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101), which among other guidance,
clarifies certain conditions to be met in order to recognize revenue. After
reexamining the terms underlying certain transactions of Raytheon Aircraft, the
Company has determined that revenue related to these transactions should be
reversed. In view of the cumulative effect of the unrecorded adjustment on the
results of future periods, the Company has restated its annual and quarterly
consolidated financial statements. The restatements were required to reverse
sales that the Company believed were properly recorded as bill and hold sales
when the manufacturing process was substantially complete and the rights of
ownership of the aircraft had passed to the buyer, but before minor
modifications had been completed and the physical delivery of the aircraft
occurred. The restated financial statements reflect sales when final delivery of
the aircraft occurred. As these adjustments relate to the timing of revenue
recognition all reversals are recognized in later periods. The financial
statements and related notes set forth in this Form 10-Q/A reflect all such
restatements.
Net sales for the first quarter of 1999 were $5.0 billion, an increase of 7
percent versus $4.7 billion for the same period in 1998. Sales to the U.S.
Department of Defense were 48 percent of sales for the first quarter of 1999
versus 46 percent of sales for the first quarter of 1998. Sales to the U.S.
government, including foreign military sales, were 64 percent of sales for the
first quarter of 1999 versus 65 percent of sales for the first quarter of 1998.
Total international sales, including foreign military sales, were 27 percent of
sales for the first quarter of 1999 versus 24 percent of sales for the first
quarter of 1998.
Gross margin for the first quarter of 1999 was $1,059 million or 21.1 percent of
sales versus $1,037 million or 22.1 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 6.8 percent of sales
for the first quarter of 1999 versus $346 million or 7.4 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 2.2 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 $606 million or 12.1 percent of sales for the first quarter
of 1999 versus $547 million or 11.7 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 39.0 percent for the first quarter of 1999 versus
39.8 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.
<PAGE>
10
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 $258 million for the first quarter of 1999,
or $0.76 per diluted share on 340.2 million average shares outstanding versus
net income of $228 million for the first quarter of 1998, or $0.66 per diluted
share on 343.2 million average shares outstanding. Net income for the first
quarter of 1999 was $205 million, or $0.60 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.
Defense Systems reported first quarter 1999 sales of $1.3 billion, an increase
from $1.2 billion for the same period a year ago. Operating income was $219
million for the first quarter of 1999 versus $176 million for the first quarter
of 1998. Operating margin was 17.4 percent for the first quarter of 1999 versus
14.9 percent for the first quarter of 1998. The increase in operating margin was
primarily due to lower costs as a result of sales mix and restructuring actions.
Sensors and Electronic Systems reported sales of $748 million in the first
quarter of 1999, compared to $641 million for the first quarter of 1998.
Operating income was $126 million for the first quarter of 1999 versus $105
million for the same period a year ago. Operating margin was 16.8 percent for
the first quarter of 1999 versus 16.4 percent for the first quarter of 1998.
Command, Control, Communication, and Information Systems reported sales for the
first quarter of 1999 of $905 million compared to sales of $871 million for the
first quarter of 1998. Operating income was $103 million for the first quarter
of 1999 versus $85 million for the first quarter of 1998. Operating margin was
11.4 percent for the first quarter of 1999 versus 9.8 percent for the first
quarter of 1998. The increase in operating margin was primarily due to sales mix
and lower costs as a result of restructuring actions.
Aircraft Integration Systems, Training and Services, Commercial Electronics, and
Other reported sales of $800 million for the first quarter of 1999 versus $881
million for the first quarter of 1998. Operating income was $69 million for the
first quarter of 1999 versus $93 million for the first quarter of 1998.
Operating margin was 8.6 percent for the first quarter of 1999 versus 10.6
percent for the first quarter of 1998. The decrease in sales was a result of the
divestiture of the commercial laundry business in the second quarter of 1998.
The decrease in operating margin was primarily due to higher margin programs
completed in the prior year.
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 $622 million, an increase
of 8 percent compared with the same period a year ago and operating income of
$58 million, a 5 percent increase compared with the same period a year ago.
Operating margin was 9.3 percent for the first quarter of 1999, compared to 9.5
percent for the first quarter of 1998.
<PAGE>
11
Backlog consisted of the following at:
April 4, 1999 Dec. 31, 1998 March 29, 1998
(Restated) (Restated) (Restated)
------------- ------------- --------------
(In millions)
Electronics $17,641 $17,648 $16,495
Engineering and Construction 3,833 3,888 2,697
Aircraft 2,450 2,509 2,075
------- ------- -------
Total backlog $23,924 $24,045 $21,267
======= ======= =======
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 $855
million versus $517 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 of $57 million resulting
from problems encountered during a new financial software implementation, 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 $232 million in the first quarter of
1999 versus $192 million in the first quarter of 1998. Origination and sale of
financing receivables for the three months ended April 4, 1999 were $302 million
and $241 million, respectively, versus origination and sale of financing
receivables for the three months ended March 29, 1998 of $225 million and $160
million, respectively. 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 Hughes Defense in December 1997. Pursuant to the terms
of the Master Separation Agreement (the "Separation Agreement"), which requires
an adjustment based on net assets, the final purchase price for Hughes Defense
has not been determined. Based on the terms and conditions of the Separation
Agreement, the Company believes that it is entitled to a reduction in purchase
price, a position that Hughes Electronics disputes. The Company and Hughes
Electronics have begun the process of negotiating a possible resolution of this
matter. If the matter is not successfully resolved through negotiation, the
Separation Agreement provides for binding arbitration. Accordingly, 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. As a result of this uncertainty, no amounts have been recorded in
the financial statements related to this gain contingency.
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.
<PAGE>
12
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 47.4 percent, 45.4 percent, and 50.9 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. The Company sells receivables through
various special purpose entities and retains a partial interest that may include
servicing rights, interest only strips, and subordinated certificates.
<PAGE>
13
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 year 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 $1
million, after-tax. The hypothetical loss was determined by calculating the
aggregate impact of a one-year increase of 10 percent in the interest rate of
each variable rate financial instrument held by the Company at April 4, 1999.
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.
<PAGE>
14
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.
<PAGE>
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/A 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.
27.1 Restated Financial Data Schedule for the period ended April
4, 1999 (filed only electronically with the Securities and
Exchange Commission).
27.2 Restated Financial Data Schedule for the period ended March
29, 1998 (filed only electronically with the Securities and
Exchange Commission).
(b) Report s 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
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