-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KzDRkocpNMlGdT+cYdKfNXXTiExDeaCVvyV+MsVEskRE9V7I5sFRjg2g7OQKB2v8 Es344IvxQ2NJ4w0AlbaKHg== 0000082267-97-000002.txt : 19970329 0000082267-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000082267-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYTHEON CO CENTRAL INDEX KEY: 0000082267 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 041760395 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02833 FILM NUMBER: 97566987 BUSINESS ADDRESS: STREET 1: 141 SPRING ST CITY: LEXINGTON STATE: MA ZIP: 02173 BUSINESS PHONE: 6178626600 10-K 1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996. / / 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 1-2833 RAYTHEON COMPANY (Exact Name of Registrant as Specified in its Charter) DELAWARE 04-1760395 (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) Registrant's telephone number, including area code (617) 862-6600 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $1.00 par value New York Stock Exchange Preferred Stock, No par value Chicago Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 ... Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of February 23, 1997, was approximately $11,070,735,098. For purposes of this disclosure, non-affiliates are deemed to be all persons other than members of the Board of Directors of the Registrant. Number of shares of Common Stock outstanding as of February 23, 1997:236,293,354 Documents incorporated by reference and made a part of this Form 10-K: Portions of Raytheon's Annual Report to Stockholders Part I, Part II, Part IV for the fiscal year ended December 31, 1996 2 PART I Item 1. Business GENERAL Raytheon Company ("Raytheon" or the "Company") is an international, high technology company which operates in four businesses: commercial and defense electronics, engineering and construction, aircraft and major appliances. Historically the Company's principal business has been the design, manufacture and servicing of advanced electronic devices, equipment and systems for government and commercial use, and Raytheon remains a top tier defense contractor in the United States. Through a diversification program begun in 1964, Raytheon has become a major competitor in engineering and construction services, aircraft products and major appliances. In recent years, the Company has strengthened its businesses through consolidation, operational improvement and acquisitions and has diversified core defense technologies into commercial markets while remaining a strong defense company. Sales to the United States Government (the "Government"), principally to the Department of Defense ("DOD"), were $5.140 billion in 1996 and $4.677 billion in 1995 representing 41.7% of total sales in 1996 and 39.6% in 1995. Of these sales, $502 million in 1996 and $597 million in 1995 represented purchases made by the Government on behalf of foreign governments. RECENT DEVELOPMENTS On January 4, 1997, the Company entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Texas Instruments Incorporated ("Texas Instruments") pursuant to which the Company agreed to purchase substantially all of the assets of, and to assume substantially all of the liabilities related to, the Defense Systems and Electronics business (the "Defense Business") of Texas Instruments. The consideration to be paid by the Company in connection with the purchase of the Defense Business is $2.875 billion in cash, subject to adjustment for certain changes in the net assets of the Defense Business between September 30, 1996 and the closing date of the purchase (and not including an additional payment of $75 million in respect of a related assignment and license of certain related intellectual property). On January 16, 1997, Raytheon entered into an Agreement and Plan of Merger (the "Merger Agreement") with HE Holdings, Inc. ("Hughes"), a Delaware corporation and an indirect, wholly owned subsidiary of General Motors Corporation, a Delaware corporation ("GM"), pursuant to which Raytheon agreed to merge with and into Hughes (the "Merger"). 3 Immediately prior to the consummation of the Merger, Hughes will be spun off to the holders of GM's $1-2/3 and Class H common stocks in a transaction intended to be tax-free to Hughes, GM and such holders. Immediately prior to the spin-off, GM will consummate a series of transactions such that, at the time of the spin-off Hughes will consist primarily of the defense business of Hughes Electronics Corporation, the parent corporation of Hughes. In connection with the spin-off and subsequent merger, two classes of common stock will be created: Class A common stock, which will be held by GM $1-2/3 and Class H stockholders after the spin-off; and Class B common stock. Immediately following the spin-off of Hughes, Raytheon and Hughes will consummate the Merger. In the Merger, Raytheon stockholders will receive all of the Class B common stock of the combined company. The Class B common stock will represent approximately 70 percent of the equity of the combined company, and the Class A Common stock will represent the remaining equity, approximately 30 percent. The Merger Agreement provides that Hughes' total debt as of the time of the Merger will be adjusted to reflect variations in the market price of Raytheon stock, subject to specified limits. Prior to the Merger, Raytheon has agreed that Hughes may borrow, and become liable to repay, approximately $4.4 billion, which amount will be contributed by Hughes to GM or another affiliate of GM that is not a subsidiary of Hughes and the proceeds of which will therefore not be assets of Hughes as of the time of the Merger. The actual amount will be determined by subtracting from $9.5 billion any other outstanding debt of Hughes as of the effective time of the Merger and the product of (x) the number of shares of Class A common stock to be issued to GM stockholders (102,630,503 shares) and (y) the average closing market price of the Company's Common Stock during the 30-day period ending on the fifth day prior to consummation of the Merger; provided that in the event such average price is less than $44.42, it will be deemed to be $44.42, and in the event such price is more than $54.29, it shall be deemed to be $54.29. Based on the midpoint of this range, approximately $5.1 billion in common stock would be issued to the Class A stockholders. The balance of the $9.5 billion transaction value would then be made up of approximately $4.4 billion in Hughes debt. Such debt would become a liability of the combined company. The transaction is subject, among other things, to approval of the Company's stockholders, certain regulatory approvals (including Hart-Scott-Rodino antitrust review), approval by the holders of GM $1-2/3 and Class H common stocks and receipt by GM of rulings from the Internal Revenue Service relating to certain federal tax consequences of the transaction. On February 23, 1997, the Company announced its intention to explore strategic alternatives for the Appliance Group, including its possible sale. Proceeds from such a sale would be used to reduce the debt to be incurred in connection with the acquisition of the defense business of Texas Instruments and the merger with Hughes. The Company believes that the sale of the Appliance Group would allow the Company to focus on its core businesses, defense electronics, engineering and construction, and aircraft, while also helping to reduce its debt level. 4 ENGINEERING AND CONSTRUCTION SEGMENT The Engineering and Construction segment is one of the largest engineering, construction and operations and maintenance organizations in the world with approximately 16,800 employees. It offers a full range of program management capabilities including project planning, financing, process development, engineering, design, construction, start-up, operations and maintenance services. Its markets include: fossil and nuclear power; petroleum and gas; polymers and chemicals; pharmaceuticals and biotechnology; metals, mining, and light industry; pulp and paper; food and consumer products; environmental services, including chemical munitions destruction; infrastructure and transportation; test range, base and facilities management and maintenance; and air traffic control support services. Raytheon Engineers & Constructors was formed in 1993 through the consolidation of United Engineers & Constructors, Badger, Raytheon Service Company and Cedarapids. During 1993 Raytheon Engineers & Constructors acquired the infrastructure, power and construction operations of Ebasco Services Incorporated. In July 1995 Raytheon Engineers & Constructors purchased assets of Houston-based Litwin Engineers & Constructors, adding to the Company's refining and petrochemical capabilities. During 1996, Raytheon Engineers & Constructors acquired the pulp and paper, industrial process engineering and construction assets of Rust International Inc. Raytheon Engineers & Constructors undertakes some engineering and construction projects on a firm fixed price basis ("lump sum turnkey") and as a result benefits from cost savings and carries the burden of cost overruns. Raytheon Service Company is one of the nation's leading government technical support contractors. It provides operations, maintenance and support services for many U.S. defense systems, including SSPARS and BMEWS early warning radars; the U.S. Air Force's Eastern Range; the Army's Kwajalein Missile Range in the Pacific, and the Navy's Atlantic Undersea test and evaluation centers in the Atlantic. Raytheon also provides technical support services to the Federal Aviation Administration. The segment offers rock-crushing, asphalt-mixing and asphalt-paving equipment under the Cedarapids name to customers in the U.S. and internationally. It also performs steel and vessel fabrication and markets on-site soil remediation systems that remove gasoline and diesel fuel contaminants. AIRCRAFT SEGMENT In 1994 Raytheon combined Beech Aircraft and Raytheon Corporate Jets to form Raytheon Aircraft. The segment offers the broadest product line in general and business aviation manufacturing, marketing and supporting piston-powered aircraft, turboprops and midsize and light jets for the world's commercial, regional airline and military markets. Raytheon Aircraft remained the premier general aviation manufacturer in 1996, leading the industry in total fixed wing aircraft shipments for business and government customers. 5 Raytheon Aircraft's piston-powered aircraft line includes the famous single-engine Beech Bonanza and the twin-engine Beech Baron aircraft for business and personal flying. The segment's King Air jetprop series -- introduced in 1964 -- includes the Beech King Air's C90, B200 and 350, which have outsold every line of business jet and turboprop since entering the market. The jet line includes the Beechjet 400A and the Hawker midsize business jet line consisting of the Hawker 1000 and the Hawker 800XP (Extended Performance). Raytheon Aircraft is the leading producer of 19-passenger regional airliners, selling the Beech 1900D stand-up cabin aircraft to commuter airlines and corporate customers. In September 1995, Raytheon Aircraft introduced a new light business jet, the Raytheon Premier I. In November 1996, Raytheon Aircraft introduced a new super midsize business jet, the Hawker Horizon. The segment supplies aircraft training systems for the military, including the Beech Pilatus PC-9MkII trainer selected as the next-generation trainer for the U.S. Air Force and Navy under the Joint Primary Aircraft Training (JPATS) contract. Deliveries are scheduled to begin in 1998. Raytheon Aircraft also produces the U.S. Air Force's T-1A trainer, the military counterpart of the Beechjet 400A light jet, a C-12 militarized version of the King Air B200 and the U-125 search-and-rescue variant of the Hawker 800. The T-1A Jayhawk contract will be completed in 1997. It also produces two missile target drones for U.S. and allied forces. Raytheon Aerospace manages more than 1,700 aircraft at over 160 sites around the world and provides total contractor logistics and training support for military and other government aircraft and missile target systems. Raytheon Aircraft Services operates a network of business aviation service operations at airports across the U.S. MAJOR APPLIANCES SEGMENT The Major Appliances segment, which merged its Amana Refrigeration, Inc. and Speed Queen Company subsidiaries in 1996 to form Raytheon Appliances, manufactures and sells household and commercial appliances under the Amana, Speed Queen, UniMac, Huebsch and Menumaster brand names. Products include refrigerators, gas and electric ranges, cooktops, wall ovens and microwave ovens, home washers and dryers and commercial laundry equipment for use in coin laundries and institutional settings, freezers, dishwashers, room air conditioners, furnaces, package terminal air conditioners, central air conditioning systems, heat pumps and commercial microwave ovens. Home appliance products are sold to dealers for resale to the customer and to home builders for incorporation into new homes and apartments. Commercial appliances are sold to distributors for resale to installing dealers or contractors. Raytheon Appliances offers several industry-exclusive features including refrigerators with beverage chillers, Tempasure system, adaptive defrost control and the industry's only U.S. produced bottom mount freezer configuration; top load laundry equipment with stainless steel wash baskets and dryer drums; Quartz halogen cooktops with ten-position, variable intensity control systems for more even heating and the first compact commercial convection microwave oven in North America. The Company's heating and air conditioning, refrigerator and microwave oven, cooking appliance and laundry manufacturing facilities are the first U.S. plants in their respective industries to be certified to ISO 9001, the most stringent of the ISO 9000 international series of manufacturing quality standards. 6 ELECTRONICS SEGMENT Raytheon's principal business is the design, manufacture and servicing of advanced electronic devices, equipment and systems for governmental and commercial customers. Raytheon Electronic Systems (RES). RES produces the Patriot ground-based air defense missile system, which is capable of simultaneously tracking and intercepting enemy aircraft, cruise missiles, and tactical ballistic missiles. In addition to the U.S., seven foreign nations have selected Patriot as an integral part of their air defense systems, including Germany, The Netherlands, Israel, Japan, Saudi Arabia, Kuwait, and the Republic of China (Taiwan). Since the end of the Gulf War in 1991, Raytheon has received approximately $3 billion in foreign orders for Patriot equipment and services. RES is the prime contractor for the Hawk ground-launched missile, which is owned by 18 Allied nations in addition to the U.S. Recent major Hawk upgrade contracts have been received from Spain, Saudi Arabia and Egypt. A joint venture of RES and Hughes Aircraft Company is one of two contractors currently working on the program definition/validation phase of the Medium Extended Air Defense System (MEADS)--a U.S./European program with potential value in the billions of dollars. MEADS will provide U.S. and Allied Forces with missile batteries, sensors, and command and control systems that will move with and protect maneuver forces from observation and attack by enemy air forces and tactical missiles. One contractor team will be selected in 1999 to continue the program. RES is a major developer of ground-based phased-array radars, including the Ground-Based Radar (GBR) for the Theater High Altitude Area Defense (THAAD) system, the U.S. Army's newest Theater Missile Defense Program. In 1995 Raytheon and Hughes Aircraft Company formed a joint venture (Standard Missile Company) which is owned 50% by each partner. All orders for Standard Missile are contracted with Standard Missile Company by the Navy and subcontracted to Raytheon and Hughes. RES manufactures the U.S. Navy's Standard Missile at its Bristol, Tennessee factory and was the design agent for the next-generation Standard Missile-2 Block IV (Aegis-ER) which is now in low rate production. RES is the prime contractor for the NATO Sea-Sparrow Surface to Air Missile System (NSSMS) and produces the air and surface launched versions of the Sparrow missile, the MK-48 Vertical Launch System and the MK-73/93 CWI transmitters for both the U.S. and foreign Navies. RES manufactures the primary air-to-air missile for U.S. Air Force and Navy fighter aircraft--the Advanced Medium Range Air-to-Air Missile (AMRAAM). RES is the prime contractor for the U.S. Army's Enhanced Fiber Optic Guided Missile (EFOGM) demonstration program--a key part of the U.S. Army Rapid Force Projection Initiative, which will provide rapidly deployable, lethal and highly survivable technologies to the U.S. early entry forces. 7 RES produces a variety of shipboard radar systems for the Arleigh Burke-class destroyers, such as the Aegis AN/SPY-1D transmitters and Mk 99 fire control units. Nearly every U.S. Navy ship carries at least one Raytheon radar/fire control system, which includes the Tartar, SPS-49, and Seasparrow systems. RES is working on the engineering and manufacturing development of the Joint Tactical Combat Training System (JTCTS), a joint U.S. Navy and Air Force effort to develop and procure tactical training range systems configured for mobile, fixed, and transportable applications for both shore-based and forward deployed tactical training. RES builds military communications systems, including the Air Forces's Milstar satellite communications terminals and the Navy's Extremely High Frequency Satellite Communications Program (NESP) terminals. In 1996, RES was selected to develop and produce the U.S. Army's Secure Mobile Antijam Reliable Tactical Terminal (SMART-T) system, the Tri-Band Super High Frequency Tactical Terminals for HMMWV variant (T3[H]), and the high data rate submarine terminal (HDR) for the U.S. Navy. RES also builds a family of extended environment (E2) COTS computers and workstations and in 1995 won a contract to replace the mission computer on the Navy's E-2C surveillance aircraft using a Raytheon-developed Model 940 computer based on Digital Equipment Corporation's 64-bit Alpha chip technology. The French AWACS will also utilize E2 COTS computers. In Command, Communications, Control, Computer and Intelligence (C4I), RES is working on an Army contract to develop a high-speed intelligence correlation system called MICOR and a program to monitor weapon effectiveness known as the Joint Precision Strike Demonstration (JPSD). RES, through its UK subsidiary, Raytheon Cossor produces a full line of IFF interrogators and transponders as well as military global positioning system (GPS) receivers and nulling adaptive antennas. Raytheon Cossor is also a world leader in manufacturing airport secondary surveillance radars. RES develops sonars, combat control systems and minehunting equipment for submarines and ships in U.S. and allied fleets in addition to designing unmanned underwater vehicles and laser sensors. Examples include the CCS Mk 2 submarine combat control system upgrade, the AN/SQQ-32 minehunting sonar system and the Mk 30 Mod 2 training target system for antisubmarine warfare training. RES is part of a team that recently won a contract to design, develop, integrate, and test the command, control, communications and intelligence (C3I) sonar, combat control, and architecture subsystems for the U.S. Navy's next-generation attack submarine--the New Attack Submarine or NSSN. In addition, the GD Marine Bath Iron Works Raytheon SAIC team was one of three contractors down-selected for the Phase II functional design effort for the Navy's Arsenal Ship program. RES Engineering Laboratories perform applied research on advanced materials, electro-optics, infrared detectors, digital technology and microwave semiconductors. The laboratories are making important contributions in the areas of advanced microwave and millimeter-wave components for radar and missile guidance systems and military communications; flat panel field emission displays; electronically steered optical phased array development; surface acoustic wave stabilized oscillator technology; diamond coating technology; and free-standing diamond plate development. 8 Raytheon E-Systems, Inc. Acquired in May 1995, Raytheon E-Systems specializes in intelligence, reconnaissance and surveillance systems; command and control; specialized aircraft maintenance and modification; guidance, navigation and control, communications and data systems. Raytheon E-Systems' core business is focused on intelligence, reconnaissance and surveillance. Many of these programs are classified, involving the development or upgrading of sensors, platforms, ground processing for and integration of complex systems. Raytheon E-Systems is an industry leader in software development for highly complex information systems having developed millions of lines of code that is currently operational. Raytheon E-Systems is also a pioneer in the application of advanced high performance supercomputer systems. In 1996 this unit was awarded a contract valued at approximately $170 million to develop and maintain a major shared resource center at the U.S. Army Research Laboratory at Aberdeen Proving Ground in Maryland. The total contract encompasses a suite of computers, software, development tools, training, and user support. When completed, the Army Research Laboratory system will be one of the single largest computing engines in the world. In 1994, E-Systems won major P3-C airframe refurbishment contracts from the U.S. Navy and the Royal Australian Air Force. The Australian contract covers upgrades to all mission equipment and cockpit displays, communications and navigation systems and the integration of new equipment. The U.S. Navy project is designed to extend the operational life of its P-3C maritime aircraft fleet. During 1996, Raytheon acquired the aircraft modification and defense electronics businesses of Chrysler Technologies. These operations are now part of Raytheon E-Systems. The two Chrysler Technologies operations complement Raytheon E-Systems existing programs, technologies, and customers. They will supplement Raytheon E-Systems' expertise in engineering design and systems integration, aircraft modification and flight testing, corrosion control on large wide-body aircraft, and development and production of satellite communications, secure communications and electronic warfare systems. In the area of Command, Communications, Control, Computer and Intelligence (C4I) systems, Raytheon E-Systems was awarded a U.S. Navy contract in 1994 for the Cooperative Engagement Capability program. This system will network information from every ship in a battle group to extend perimeter defenses and vastly improve reaction time. Raytheon E-Systems has a number of other products in the C4I area including the Global Command and Control System maintenance and technical support contract award in 1996 to Raytheon E-Systems by Defense Information Systems Agency and a U.S. Navy contract for the E-6B command post modification. Raytheon E-Systems designs and builds advanced electronic countermeasures systems to protect U.S. and allied ships and planes against enemy strikes. These systems include the AN/ALQ-184 airborne countermeasures pod for the Air Force and AN/SLQ-32 shipboard jamming system for the Navy. Raytheon E-Systems also has considerable capabilities in large scale image processing and advanced signal processing. Commercial Initiatives. Raytheon has successfully expanded its defense capabilities into commercial markets such as environmental monitoring, air traffic control, transportation and data management. 9 A leader in the field of wide-area environmental surveillance, RES won an international competition to develop and produce the System for the Surveillance of the Amazon (SIVAM)--an environmental monitoring system that will help Brazil protect natural resources, sustain economic growth and support proper land use, conservation and development in the Amazon region. On March 14, 1997, Raytheon announced that the SIVAM contract had been signed by the government of Brazil and that all financing agreements for the program had been finalized. The system is based on an integrated network of telecommunications, remote satellite sensing and imagery and ground-based and airborne sensors controlled by regional and national coordination centers. Combining its pioneering electronics technology and aviation expertise, Raytheon has developed the Guardian airborne surveillance system. Using highly interactive surveillance capabilities, the flight-proven Guardian performs extensive data gathering activities for missions ranging from environmental control to drug interdiction. Raytheon E-Systems' capabilities in environmental monitoring include expertise ground-based image processing. Raytheon E-Systems has entered the commercial marketplace with satellite imagery applications based on precision technologies previously developed for military use. A strategic initiative in this area is Space Imaging, Inc., a partnership among Raytheon E-Systems, Lockheed Martin Corporation, Mitsubishi Corporation, and other investors. During 1996, Space Imaging merged with EOSAT Company, which gives it the capability to sell five-meter imagery Earth information from a constellation of satellites including the Indian Remote Sensing Satellite. In December 1997, Space Imaging plans to launch a satellite which will yield images with a resolution of one meter. RES designs and installs air traffic control (ATC) and weather systems at airports worldwide. Raytheon is the world's leading manufacturer and supplier of air traffic control systems and radars. Some of the countries Raytheon is providing ATC systems and radars for include The Netherlands, India, Norway, Switzerland, Australia, Germany, Oman, Hong Kong, Jamaica, Cyprus, China, and Taiwan. Raytheon is supplying the Royal Australian Air Force with a new defense and air traffic system under a $124 million contract. RES recently won a contract valued at $619.9 million for the Digital Airport Surveillance Radar (DASR) program--a joint procurement by the DOD for the U.S. Air Force and Navy, and the Federal Aviation Administration. RES's Raytheon Canada subsidiary is providing the primary surveillance radars for the program. In September 1996, a team led by RES won the FAA/DOD Standard Terminal Automation Replacement System (STARS) program, which is potentially worth $1 billion and will modernize and upgrade approximately 370 air traffic control sites across the United States. Raytheon's Terminal Doppler Weather Radar (TDWR) system is being installed at 42 sites across the U.S. and Puerto Rico, and the company in 1994 won its first international TDWR contract for the Hong Kong airport. TDWR uses Doppler radar technology to warn air traffic controllers of sudden wind shifts, such as microbursts, which have been blamed for numerous aircraft accidents, particularly during takeoff or landing. 10 In partnership with the Regional Transportation Authority of Northeastern Illinois, RES is developing a Personal Rapid Transit (PRT) system for Rosemont, Illinois that will enable people to travel to their destinations on demand and without intermediate stops. Raytheon has build a PRT test track at RES's Marlborough, Massachusetts facility, and operational testing is ongoing. Raytheon E-Systems has strong capabilities in communications and data management technologies, including data storage and retrieval systems; image management and communications networks for medical applications; and the development and maintenance of a nationwide computer network to catalog and track student loans for the U.S. Department of Education. Raytheon Electronics. Raytheon Electronics consists of Raytheon Marine Company, Raytheon Semiconductor, Seiscor Technologies, Inc., Raytheon Microelectronics and Switchcraft, Inc. Raytheon Marine supplies marine radars, depth sounders, radiotelephones, autopilots, fish finders, ECDIS and navigation aids, GPS and Loran receivers and other marine electronics under the Raytheon, Apelco and Autohelm labels in the U.S. and abroad. Acquired in 1995, Raytheon Anschtz GmbH, located in Kiel, Germany, is one of the world's leading manufacturers of gyro compasses, autopilots, steering control systems, and integrated bridge systems for the commercial and military marine market. In microelectronics and components Raytheon is developing the Main Mission Antenna transceiver systems for the IRIDIUM global satellite communications project, which is designed to provide voice, paging, data, facsimile and location services anywhere on Earth. The antenna systems use Raytheon Microelectronics' gallium arsenide monolithic microwave integrated circuit ("MMIC") technology. Raytheon is also using its MMIC technology to develop direct broadcast satellite television receivers, wireless local area networks and next-generation digital cellular phones. Raytheon also produces a line of silicon semiconductor components -- specializing in multi-media and PC voltage regulators -- at its Semiconductor Division. Raytheon provides a wide range of electronic components under the Switchcraft label, including jacks and plugs, switches and connectors. Raytheon designs and manufactures telephone transmission equipment, including state-of-the-art digital loop-carrier equipment at its Seiscor Technologies subsidiary. During the fourth quarter of 1995, Raytheon sold its D.C. Heath and Company publishing division to Houghton Mifflin Company for $455 million. Financial information about Operations by Business Segments and Operations by Geographic Areas is contained on page 46 of Raytheon's 1996 Annual Report to Stockholders and is incorporated herein by reference. GOVERNMENT CONTRACTS The Company and various subsidiaries act as a prime contractor or major subcontractor for many different Government programs including those that involve the development and production of new or improved weapons or other types of electronics systems or major components of such systems. Over its lifetime, a 11 program may be implemented by the award of many different individual contracts and subcontracts. The funding of Government programs is subject to congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue for many years. Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes further appropriations. The Government is required to adjust equitably a contract price for additions or reductions in scope or other changes ordered by it. Generally, Government contracts are subject to oversight audits by Government representatives, to profit and cost controls and limitations, and to provisions permitting termination, in whole or in part, without prior notice at the Government's convenience upon the payment of compensation only for work done and commitments made at the time of termination. In the event of termination, the contractor will receive some allowance for profit on the work performed. The right to terminate for convenience has not had any significant effect upon Raytheon's business in light of its total Government business. The Company's Government business is performed under both cost reimbursement and fixed price prime contracts and subcontracts. Cost reimbursement contracts provide for the reimbursement of allowable costs plus the payment of a fee. These contracts fall into three basic types: (i) cost plus fixed fee contracts which provide for the payment of a fixed fee irrespective of the final cost of performance; (ii) cost plus incentive fee contracts which provide for increases or decreases in the fee, within specified limits, based upon actual results as compared to contractual targets relating to such factors as cost, performance and delivery schedule; and (iii) cost plus award fee contracts which provide for the payment of an award fee determined in the discretion of the customer based upon the performance of the contractor against pre-established criteria. Under cost reimbursement type contracts, Raytheon is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. Some costs incident to performing contracts have been made partially or wholly unallowable by statute or regulation. Examples are charitable contributions, travel costs in excess of government rates and certain litigation defense costs. The Company's fixed price contracts are either firm fixed price contracts or fixed price incentive contracts. Under firm fixed price contracts, Raytheon agrees to perform the contract for a fixed price and as a result benefits from cost savings and carries the burden of cost overruns. Under fixed price incentive contracts, Raytheon shares with the Government savings accrued from contracts performed for less than target costs and costs incurred in excess of targets up to a negotiated ceiling price (which is higher than the target cost) and carries the entire burden of costs exceeding the negotiated ceiling price. Under such incentive contracts, the Company's profit may also be adjusted up or down depending upon whether specified performance objectives are met. Under firm fixed price and fixed price incentive type contracts, the Company usually receives progress payments monthly from the Government generally in amounts equaling 80% of costs incurred under the contract. The remaining amount, including profits or incentive fees, is billed upon delivery and final acceptance of end items under the contract. 12 The Company's Government business is subject to specific procurement regulations and a variety of socio-economic and other requirements. Failure to comply with such regulations and requirements could lead to suspension or debarment, for cause, from Government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes, including those related to employment practices, the protection of the environment, the accuracy of records and the recording of costs. The Company has not, at any time, been debarred or suspended. Under many Government contracts, the Company is required to maintain facility and personnel security clearances complying with DOD requirements. Companies which are engaged in supplying defense-related equipment to the Government are subject to certain business risks some of which are peculiar to that industry. Among these are: the cost of obtaining trained and skilled employees; the uncertainty and instability of prices for raw materials and supplies; the problems associated with advanced designs, which may result in unforeseen technological difficulties and cost overruns; and the intense competition and the constant necessity for improvement in facilities and personnel training. Sales to the Government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad and other factors. As a result of the 1985 Balanced Budget and Emergency Deficit Reduction Control Act, the federal deficit and changing world order conditions, DOD budgets have been subject to increasing pressure resulting in an uncertainty as to the future effects of DOD budget cuts. Raytheon has, nonetheless, maintained a solid foundation of tactical defense systems which meet the needs of the United States and its allies, as well as serving a broad government program base and wide range of commercial electronics businesses. These factors lead management to believe that there is high probability of continuation of Raytheon's current major tactical defense programs. In 1995 Raytheon initiated changes in its defense business in Massachusetts to achieve $600 million in cost savings to enable it to remain competitive in defense manufacturing in the state with companies based in lower-cost states. Raytheon worked with local unions to achieve cost controls and enhance productivity; it worked with Massachusetts lawmakers to enact tax reduction legislation for manufacturing firms in the state; and it worked with utility companies to cut electricity costs in the state. BACKLOG The Company's backlog of orders at December 31, 1996 was $12.066 billion compared with $10.551 billion at the end of 1995. The 1996 amount includes funded backlog of $5.637 billion from the Government compared with $5.142 billion at the end of 1995. Normally, the Government funds its major programs only to the dollar level appropriated annually by Congress, even though the total estimated program values are considerably greater. Accordingly, the Company's Government funded backlog represents only that amount which has been appropriated and against which the Company can be reimbursed for work performed. 13 Approximately $2.231 billion of the overall backlog figure represents the unperformed portion of multi-year direct orders from foreign governments, of which $1.180 billion is for air defense systems or components thereof and related services and $1.051 billion is for the SIVAM environmental monitoring system. Approximately $2.073 billion of the overall backlog represents non-government foreign backlog. Backlog in the Engineering and Construction segment was $3.565 billion at the end of 1996 compared with $2.240 billion at the end of 1995. The increase was due primarily to an increase in international turnkey energy projects. Design and construction contracts in this segment typically take from eighteen months to several years to perform. Aircraft segment backlog was $1.163 billion at the end of 1996 versus $836 million at the end of 1995. The increase was primarily due to the receipt of orders for Premier I. Approximately $5.129 billion of the $12.066 billion 1996 year-end backlog is not expected to be filled during the following twelve months. RESEARCH AND DEVELOPMENT During 1996, Raytheon derived net sales of $1,496 million ($982 million in 1995 and $450 million in 1994) pursuant to Government contracts for research and development. In addition, during 1996 Raytheon expended $323.3 million on research and development efforts compared with $315.6 million in 1995 and $269.6 million in 1994. These expenditures principally have been for product development for the Government and for aircraft products. SUPPLIERS Delivery of raw materials and supplies to Raytheon is generally satisfactory. Raytheon is sometimes dependent, for a variety of reasons, upon sole-source suppliers for procurement requirements. However, Raytheon has experienced no significant difficulties in meeting production and delivery obligations because of delays in delivery or reliance on such suppliers. COMPETITION The military and commercial industries in which Raytheon operates are highly competitive. Raytheon's competitors range from highly resourceful small concerns, which engineer and produce specialized items, to large, diversified firms. In the Engineering and Construction segment it is estimated that about 15 firms compete for major business opportunities worldwide. Competition is based primarily upon technical superiority, project experience and price. The ability to arrange or otherwise provide financing to customers is sometimes significant in attracting or retaining clients. Competition in the Aircraft segment comes from a number of domestic and foreign jet, turboprop and piston aircraft manufacturers. Principal elements of competition in the industry are price, financing, operating costs, reliability, cabin size and comfort, product quality, speed and service support. 14 In the Major Appliances segment, quality, warranty, price, advertising and marketing are all competitive factors. Approximately 34 firms compete with Raytheon in the various major appliance segments. Of these, Raytheon considers four firms to be significant competitors in Home Appliances, six firms in Commercial Laundry, eight firms in Heating and Air Conditioning and two firms in Commercial Cooking. The Electronics segment is a direct participant in most major areas of development in the defense, space, information gathering, data reduction and automation fields. Technical superiority and reputation, price, delivery schedules, financing and reliability are principal competitive factors considered by electronics customers. About half of the 30 largest defense contractors in the United States are competitors in the Electronics segment. PATENTS AND LICENSES Raytheon has long been an innovative leader in the development of new products and manufacturing technologies. Raytheon and its subsidiaries own a large number of United States and foreign patents and patent applications as well as trademark, copyright and chip mask work registrations which are necessary and contribute significantly to the preservation of the Company's strong competitive position in the market. In certain instances, Raytheon has augmented its technology base by licensing the proprietary intellectual property of others. Raytheon's patent position and intellectual property portfolio is deemed adequate for the conduct of its businesses. It is Raytheon's policy to enforce its own intellectual property rights and to respect the rights of others. Incidental to the normal course of business, infringement claims may arise or may be threatened both by and against Raytheon. In the opinion of management, these claims will not have a material adverse affect on the Company's operations. EMPLOYMENT As of December 31, 1996, Raytheon had 75,300 employees compared with 73,200 employees at the end of 1995. The increase is primarily due to the acquisitions of Chrysler Technologies and Rust Engineering, partially offset by reductions in the defense electronics segment and the sale of Xyplex. Subsidiaries of Raytheon Engineers & Constructors International, Inc. and certain other subsidiaries have craft employees engaged for individual projects not included in Raytheon's employee count. Raytheon considers its employee relations to be satisfactory. Raytheon has, for the most part, successfully negotiated labor agreements without significant work stoppages, with the exception of a nine week strike that occurred during the summer of 1996 at the Cedarapids, Inc. facility located in Cedar Rapids, Iowa. Negotiations with the primary union representing Raytheon Electronic Systems employees in Massachusetts occurred in the summer and fall of 1995. Due to the dramatic decline in defense procurement and the Company's need to achieve a competitive position in this increasingly cost sensitive market, the Company sought and received significant changes to the terms and conditions of the contract, including a three-year wage freeze, work rule changes and benefit changes. Negotiations for a five year agreement with the hourly employees represented by the International Association of Machinists (IAM) at Raytheon Aircraft in Wichita and Salina, Kansas were successfully completed in 1996. 15 FOREIGN SALES Of total sales, Raytheon's sales to customers outside the United States were 28%, 28% and 26% in 1996, 1995 and 1994, respectively. These sales were principally in the fields of air defense systems, air traffic control systems, sonar systems, aircraft products, petrochemical power and industrial plant design and construction, electronic equipment, computer software and systems, personnel training, equipment maintenance and microwave communication. Foreign working capital requirements generally are financed in the countries concerned. Sales and income from international operations are subject to changes in currency values, domestic and foreign government policies (including requirements to expend a portion of program funds in-country) and regulations, embargoes and international hostilities. Exchange restrictions imposed by various countries could restrict the transfer of funds between countries and between Raytheon and its subsidiaries. Raytheon generally has been able to protect itself against most undue risks through insurance, foreign exchange contracts, contract provisions, government guarantees or progress payments. Raytheon utilizes the services of sales representatives and distributors in connection with foreign sales. Normally representatives are paid commissions and distributors are granted resale discounts in return for services rendered. Licenses are required from Government agencies under the Export Administration Act, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976 (formerly the Foreign Military Sales Act) for export from the United States of many of Raytheon's products. In the case of certain sales of defense equipment and services to foreign governments, the Government's Executive Branch must notify Congress at least 30 days prior to authorizing such sales. During that time, Congress may take action to block the proposed sale. FACTORS THAT COULD AFFECT FUTURE RESULTS -- FORWARD LOOKING STATEMENTS Statements in this filing which are not historical facts are forward looking statements under the provisions of the Private Securities Litigation Reform Act of 1995. All forward looking statements involve risks and uncertainties. The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in fiscal 1997 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. Important factors that could cause actual results to differ materially include but are not limited to (i) the effect of global economic conditions, (ii) the success of and investment in new product development, (iii) product demand and market acceptance, (iv) the timing of new business awards, (v) the introduction of competing products or technologies by competitors, (vi) the successful conversion of defense products and technology to commercially viable products, (vii) the ability to protect proprietary information and technology or to obtain necessary licenses on commercially reasonable terms, (viii) obtaining and retaining skilled workers, (ix) the ability to obtain and maintain a strong supplier base and the capacity to meet product demand, (x) the trade policies of foreign governments and (xi) competitive pressures and other risks identified below by business segment. 16 Electronics Segment. In the domestic defense electronics segment, important factors that could cause actual results to differ materially include, in addition to those factors described in the preceding paragraph, (i) the uncertainties surrounding Congressional appropriations and/or Department of Defense funding, (ii) contract provisions for price determination, profit and cost controls and limitations and audit, (iii) the ability of government customers to terminate existing contracts, wholly or partially, for their own convenience with a requirement to pay only for work performed or committed with a reasonable allowance for profit, (iv) advanced design problems and associated technological difficulties with the potential for cost overruns, (v) changes in procurement policies, (vi) the changing needs for and changes in the type of weapon systems to be procured, (vii) political developments domestically and internationally and (viii) changes in the competitive landscape due to the consolidation of the U.S. or global defense industry. With respect to the international defense electronics market, important factors that could cause actual results to differ materially include, in addition to those noted above, (i) delays in placing orders, (ii) the ability of foreign customers to finance purchases, (iii) uncertainties and restrictions concerning the availability of funding credit or guarantees, (iv) changing military and political alliances, (v) U.S. or foreign export controls and trade restrictions, (vi) government policies with respect to restrictions on doing business with certain countries, (vii) governmental industrial cooperation requirements, (viii) foreign exchange risks, (ix) increased international competition, (x) the adequacy and availability of transportation, (xi) the complexity and necessity of using foreign representatives and consultants and (xii) the uncertainty of complying with the laws of specific countries and of U.S. laws affecting the activities of U.S. companies abroad. In the commercial electronics segment, important factors that may cause actual results to differ materially include, in addition to those noted above, (i) product demand, including continued expansion of the satellite telecommunications and telecommunications systems markets, (ii) consumer spending patterns affecting recreational boat sales and favorable economic conditions for commercial marine product sales, (iii) consumer demand for PC's and audio entertainment components and (iv) the successful introduction of new products, including the multiple Wireless LAN Systems. Engineering and Construction Segment. In the engineering and construction segment, important factors that could cause actual results to differ materially include, in addition to those noted above, (i) the effects of global, regional and country specific economic conditions due to its increasing international backlog, (ii) performance risks for existing and future contracts, (iii) conditions in the capital markets and the availability of project financing, (iv) international political conditions and (v) the timing of contract receipt and funding. Aircraft Segment. In the aircraft segment, important factors that could cause actual results to differ materially include, in addition to those noted above, (i) market perceptions of and government regulations affecting regional aircraft, (ii) product availability for the Hawker 800XP as a result of the line transfer from the U.K. to the U.S., (iii) price pressures within the market, (iv) the ability to meet scheduled timetables for the introduction of new products, (v) delays in U.S. Government export approvals and (vi) third party financing availability. 17 Appliances Segment. In the appliance segment, important factors that could cause actual results to differ materially include, in addition to those noted above, (i) modifications to actual purchases under agreement, (ii) weather conditions that may affect seasonal product demand, (iii) the effect of increasing U.S. Department of Energy regulations and of federal and state regulations regarding the protection of the environment, (iv) the effect of lower consumer demand fueled by higher interest rates and lower disposable income and (v) given the Company's announced intention to evaluate strategic alternatives regarding its appliance business, including possible divestiture, the continued ability of the appliance group to attract and maintain key employees and to maintain its customer base. Acquisitions. In January 1997, the Company entered into definitive agreements to acquire the defense systems and electronics business of Texas Instruments Incorporated and to bring about the merger of the Company with the defense business of Hughes Electronics Corporation. These transactions will require, among other things, integration of the TI and Hughes defense organizations, business infrastructure and products with those of the Company in a way that enhances the performance of the combined businesses. The challenges posed by these transactions include the integration of numerous geographically separated manufacturing facilities and research and development centers. The success of this transition to an integrated entity will be significantly influenced by the Company's ability to retain key employees, to integrate differing management structures and to realize anticipated cost synergies, all of which will require significant management time and resources. Item 2. Properties The Company and its subsidiaries operate in a number of plants, laboratories, warehouses and office facilities in the United States and abroad. At December 31, 1996, the Company utilized approximately 38.4 million square feet of floor space in manufacturing, engineering, research, administrative, sales and warehouses, approximately 96% of which was located in the United States. Of such total, approximately 51% was owned, approximately 43% was leased and approximately 6% was made available under facilities contracts for use in the performance of United States Government contracts. At December 31, 1996 the Company had approximately 1.3 million square feet of additional floor space that was not in use, including approximately 1.2 million square feet in Company-owned facilities. There are no major encumbrances on any of the Company's plants or equipment other than financing arrangements which in the aggregate are not material. In the opinion of management, the Company's properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels. In connection with the restructuring plan announced in March 1994, the Company has disposed and will continue to dispose of certain facilities. A summary of the utilized floor space at December 31, 1996, by business segment, follows: (in square feet with 000's omitted) Leased Owned Gov't Owned TOTAL Electronics 7,516 10,025 1,905 19,446 Engineering & Construction 3,364 1,169 360 4,893 Aircraft 3,149 3,860 0 7,009 Appliances 2,153 4,571 0 6,724 Corporate (includes 156 206 0 362 international sales offices) ------ ------ ----- ------ TOTAL 16,338 19,831 2,265 38,434 18 Information regarding the effect of compliance with environmental protection requirements and the resolution of environmental claims against the Company and its operations is contained in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 41 through 45 of Raytheon Company's Annual Report to Stockholders for the year ended December 31, 1996 and is incorporated herein by reference. See also Item 3, Legal Proceedings, immediately below. Item 3. Legal Proceedings The Company is involved in various stages of investigation and cleanup relative to remediation of various sites. All appropriate costs incurred in connection therewith have been expensed. Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage and the unresolved extent of the Company's responsibility, it is difficult to determine the ultimate outcome of these matters. However, in the opinion of management, any liability will not have a material effect on the Company's financial position, liquidity or results of operations after giving effect to provisions already recorded. Accidents involving personal injuries and property damage occur in general aviation travel. When permitted by appropriate government agencies, Raytheon Aircraft investigates accidents related to its products involving fatalities or serious injuries. Through a relationship with FlightSafety International, Raytheon Aircraft provides initial and recurrent pilot and maintenance training services to reduce the frequency of accidents involving its products. Raytheon Aircraft is a defendant in a number of product liability lawsuits which allege personal injury and property damage and seek substantial recoveries including, in some cases, punitive and exemplary damages. Raytheon Aircraft maintains partial insurance coverage against such claims and maintains a level of uninsured risk determined by management to be prudent. (See Note J to Raytheon's Financial Statements for the years ended December 31, 1996, 1995 and 1994.) The insurance policies for product liability coverage held by Raytheon Aircraft do not exclude punitive damages, and it is the position of Raytheon Aircraft and its counsel that punitive damage claims are therefore covered. Historically, the defense of punitive damage claims has been undertaken and paid by insurance carriers. Under the law of some states, however, insurers are not required to respond to judgments for punitive damages. Nevertheless, to date no judgments for punitive damages have been sustained. Defense contractors are subject to many levels of audit and investigation. Agencies which oversee contract performance include: the Defense Contract Audit Agency, the Department of Defense Inspector General, the General Accounting Office, the Department of Justice and Congressional Committees. The Department of Justice from time to time has convened grand juries to investigate possible irregularities by the Company in governmental contracting. 19 Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened against the Company. While the Company cannot predict the outcome of these matters, in the opinion of management, any liability arising from them will not have a material effect on the Company's financial position, liquidity or results of operations after giving effect to provisions already recorded. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters This information is contained in the Annual Report to Stockholders for the year ended December 31, 1996 on page 1, on page 47 under the caption "Quarterly Financial Data" and on the back cover and is incorporated herein by reference. Item 6. Selected Financial Data This information is included in the "Ten Year Statistical Summary" contained in the Annual Report to Stockholders for the year ended December 31, 1996 on pages 48 and 49 and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This information is contained in the Annual Report to Stockholders for the year ended December 31, 1996 on pages 41 through 45 and is incorporated herein by reference. Item 8. Financial Statements and Supplemental Data Selected quarterly financial data and the financial statements and supplementary data of the Registrant are contained in the Annual Report to Stockholders for the year ended December 31, 1996 on page 47 and pages 50 through 66, respectively, and are incorporated herein by reference. Schedules required under Regulation S-X are filed as "Financial Statement Schedules" pursuant to Item 14 hereof. Item 9. Changes in and Disagreements with Accountants and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Board of Directors The Board of Directors met sixteen times during 1996. All directors attended at least 75% of the aggregate number of meetings of the Board of Directors and the Committees on which they served. Overall attendance at such meetings was approximately 95%. 20 The Audit Committee of the Board of Directors consists of Francis H. Burr, Richard D. Hill, L. Dennis Kozlowski and James N. Land, Jr. The Audit Committee met three times during 1996. The Committee's duties are to consult with and make inquiry of the Company's outside auditors from time to time; to review procedures followed and reports submitted by such outside auditors; to make such further investigations of the Company's financial affairs as it deems appropriate; to report to the Board of Directors on the results of such consultation and investigation; and to recommend to the Board of Directors the engagement of the Company's outside auditors. The Compensation Committee of the Board of Directors consists of Charles F. Adams, Barbara B. Hauptfuhrer, Richard D. Hill, Warren B. Rudman, Joseph J. Sisco and Alfred M. Zeien. The Compensation Committee met twelve times during 1996. The Committee's duties are to develop, review and recommend to the Board of Directors compensation programs for the executive officers of the Company. The Executive Committee of the Board of Directors consists of Charles F. Adams, Francis H. Burr, Ferdinand Colloredo-Mansfeld, Thomas L. Phillips and Dennis J. Picard. The Executive Committee met seven times during 1996. The Committee is empowered to act for the full Board during intervals between Board meetings, with the exception of certain matters that by law may not be delegated. The Planning and Nominating Committee of the Board of Directors consists of Charles F. Adams, Francis H. Burr, Theodore L. Eliot, Jr., John R. Galvin, James N. Land, Jr., Thomas L. Phillips, Warren B. Rudman and Joseph J. Sisco. The Planning and Nominating Committee met twice during 1996. The Committee's duties are to study strategies for achieving corporate goals, to propose to the Board of Directors candidates for election to the Board and to make other recommendations relating to Board membership. The Planning and Nominating Committee will consider nominees recommended by stockholders. No formal procedures are required to be followed by stockholders in submitting such recommendations. During 1996, each Board member, other than Messrs. Picard and Lawson, was paid a quarterly retainer of $6,500 and, in addition, was paid a fee of $1,000 for attendance at each meeting of the Board and each committee meeting other than telephonic meetings and committee meetings of less than two hours' duration held on the day of full Board meetings for which the fee was $500. Pursuant to the Company's Deferral Plan for Directors (the "Deferral Plan"), adopted by the Board on November 26, 1996, beginning in 1997, directors may defer receipt of their quarterly retainer and/or meeting fees until retirement from the Board. Deferred payments accrue interest (payable by the Company) at the same prescribed government rate applicable to compensation deferred by employees under the Company's Voluntary Deferment Plan. Prior to adoption of the Deferral Plan, directors not eligible for benefits under any Company-sponsored pension plan, who have served on the Board for at least five years, and who complied with a prescribed non-competition agreement, were entitled to a monthly payment equal to one-twelfth the amount of the director's annual retainer in effect at the time of the director's retirement from the Board under the Raytheon Company Retirement Plan for Directors. Payments under the plan terminated upon the earlier of the death of the retiree and his/her spouse or the expiration of fifteen consecutive years from the initial payment under the plan. 21 Pursuant to the Deferral Plan, benefits to be provided to all current and future directors under the Retirement Plan for Directors have been terminated. In connection with this termination, the present value of each current director's pension benefit was converted into shares of the Company's Common Stock. In accordance with the terms of the Deferral Plan, these shares are held in trust for the benefit of the individual directors until their qualified retirement from the Board. The shares issued to the current directors are included in the Beneficial Ownership Table set forth in Part III, Item 12 below and each director has the power to vote these shares at any meeting of the stockholders of the Company. Executive Officers of the Registrant Gail P. Anderson: Vice President - Human Resources since December 1994. Prior to assuming his present position Mr. Anderson was Vice President - Human Resources, Phillips Petroleum Company from 1986. Age: 54 Shay D. Assad: Vice President - Contracts since July 1994. Prior to assuming his present position Mr. Assad was Manager-Contracts, Missile Systems Division from 1985. Age: 46 Renso L. Caporali: Senior Vice President Engineering and Business Development since January 1997. Prior to assuming his present position Mr. Caporali was Senior Vice President - Government and Commercial Marketing since April 1995 and Chairman and Chief Executive Officer of the Grumman Corporation from 1991. Age: 63 Philip W. Cheney: Vice President and Group Executive - Commercial Electronics since July 1994. Prior to assuming his present position Dr. Cheney was Vice President - Engineering from February 1990. Age: 61 Kenneth H. Colburn: Vice President - Project and International Finance since January 1995. Prior to assuming his present position Mr. Colburn was Managing Director-Investment Banking Department-East Coast Group, CS First Boston Corporation from January 1991. Age: 45 Peter R. D'Angelo: Executive Vice President, Chief Financial Officer and Controller since March 1995. Prior to assuming his present position Mr. D'Angelo was Vice President, Chief Financial Officer and Controller from January 1995; Vice President and Corporate Controller from 1992 and Controller - Missile Systems Division from 1984. Age: 58 Herbert Deitcher: Senior Vice President-Treasurer since November 1989. Age: 63 David S. Dwelley: Vice President - Strategic Business Development since April 1991. Prior to assuming his present position Mr. Dwelley was Vice President and President of Raytheon Europe Limited from 1989. Age: 57 Michele C. Heid: Vice President - Investor Relations since September 1995. Prior to assuming her present position Ms. Heid was Vice President - Investor Relations & Strategic Planning, Cummins Engine Company from 1993 and Vice President - Investor Relations, Cummins Engine Company from 1991. Age: 42 22 Christoph L. Hoffmann: Executive Vice President - Law, Corporate Administration, and Secretary since March 1995. Prior to assuming his present position Mr. Hoffmann was Senior Vice President - Law, Human Resources and Corporate Administration, and Secretary from February 1994; Vice President, Secretary and General Counsel from July 1991, Vice President from April 1991 and Senior Vice President, General Counsel and Secretary of Pneumo Abex Corporation from 1986. Age: 52 Thomas D. Hyde: Vice President and General Counsel since February 1994. Prior to assuming his present position Mr. Hyde was Assistant General Counsel from August 1992; Senior Vice President, General Counsel and Chief Financial Officer of MNC Financial Inc. Special Assets Bank from 1991; and Vice President, Finance of Manville Sales Corporation from 1988. Age: 48 A. Lowell Lawson: Executive Vice President since May 1995. Chairman and Chief Executive Officer of E-Systems, Inc. since August 1994. Mr. Lawson was President of E-Systems from 1989. Age: 59 Robert S. McWade: Vice President - Corporate Affairs and Communications since January 1997. Prior to assuming his present position Mr. McWade was Vice President - Corporate Affairs since February 1996; Director, Corporate Communications, Textron, Inc. from September 1994; and Director, Corporate Relations, Bank of Boston from 1988. Age: 40 Charles Q. Miller: Executive Vice President and Chairman and Chief Executive Officer of Raytheon Engineers & Constructors International, Inc. since March 1995. Prior to assuming his present position Mr. Miller was Senior Vice President and Group Executive and Chairman and Chief Executive Officer of Raytheon Engineers & Constructors International, Inc. from March 1993; and President, United Engineers & Constructors, Inc. from 1990. Age: 51 Dennis J. Picard: Director since 1989 and Chairman and Chief Executive Officer since March 1991. Prior to assuming his present position Mr. Picard was President from 1989. Age: 64 Robert A. Skelly: Vice President - Assistant to the Executive Office. Prior to assuming his present position Mr. Skelly was Vice President - Administration, Environmental Quality and Procurement from September 1992 and Vice President - Public and Financial Relations from January 1991. Age: 54 Robert L. Swam: Executive Vice President and Chairman and Chief Executive Officer of Raytheon Appliances, Inc. since March 1995. Prior to assuming his present position Mr. Swam was Senior Vice President and Group Executive - Appliance Group from January 1992 and an independent consultant from 1989. Age: 56 William H. Swanson: Executive Vice President and General Manager - Raytheon Electronic Systems Division since March 1995. Prior to assuming his present position Mr. Swanson was Senior Vice President and General Manager - Missile Systems Division from 1990. Age: 48 Arthur E. Wegner: Executive Vice President and Chairman and Chief Executive Officer of Raytheon Aircraft Company since March 1995. Prior to assuming his present position Mr. Wegner was Senior Vice President and Chairman and Chief Executive Officer of Raytheon Aircraft from July 1993 and Executive Vice President and President of the Aerospace/Defense Sector of United Technologies Corporation from 1989. Age: 59 23 Each executive officer was elected by the Board of Directors to serve for a term of one year and until his or her successor is elected and qualified or until his or her earlier removal, resignation or death. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than ten percent of the Company's Common Stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Directors, officers and ten-percent shareholders are also required to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of such forms furnished to the Company and written representations that no other reports were required, the Company believes that during the fiscal year ended December 31, 1996 all such Section 16(a) filing requirements were complied with except that one filing covering one transaction by Thomas D. Hyde, Vice President and General Counsel of the Company, was filed late. Item 11. Executive Compensation Set forth below is information concerning the annual and long-term compensation for the Company's chief executive officer and the four other most highly compensated executive officers for the fiscal years ending December 31, 1996, 1995 and 1994. 24
Summary Compensation Table Long-Term Annual Compensation Compensation Awards ------------------- ------------------- Restricted All Other Name and Salary(1) Bonus Stock Awards(2) Options Compensation(3) Principal Position Year ($) ($) ($) (#) ($) (a) (b) (c) (d) (f) (g) (i) Dennis J. Picard 1996 $1,015,002 $1,870,000(4) 0 270,000(5) $714,222 Chairman of 1995 $ 999,996 $ 870,000 0 220,000 $ 12,906 the Board 1994 $ 965,754 $ 870,000 0 130,000 $ 12,507 and Chief Executive Officer A. Lowell 1996 $ 575,000 $ 450,000 0 40,000 $ 5,293 Lawson 1995 $ 573,908(6) $ 425,000 $1,560,000 0 $ 7,872 Executive Vice 1994 N/A N/A N/A N/A N/A President, Chairman and CEO - Raytheon E-Systems, Inc. William H. 1996 $ 419,520 $ 305,000 0 40,000 $ 6,932 Swanson 1995 $ 419,520 $ 290,000 0 30,000 $ 6,787 Executive Vice 1994 $ 411,450 $ 290,000 0 20,000 $ 7,068 President and General Manager-Raytheon Electronic Systems 25 Arthur E. 1996 $ 403,464 $ 255,000 0 40,000 $ 9,233 Wegner 1995 $ 397,500 $ 240,000 0 40,000 $ 8,931 Executive Vice 1994 $ 386,250 $ 175,000 $ 648,750 40,000 $332,204 President and Chairman and CEO-Raytheon Aircraft Company Christoph L. 1996 $ 385,194 $ 250,000 0 30,000 $ 7,415 Hoffmann 1995 $ 379,500 $ 235,000 0 30,000 $ 7,203 Executive Vice 1994 362,250 $ 225,000 $ 324,375 28,000 $ 7,392 President and Secretary
26 (1) The amounts reported in column (c) for 1995 reflect salary adjustments in the course of the normal compensation review cycle effective July 1, 1994 (except for Mr. Lawson, who was not an employee of the Company at that time). Pursuant to the Company's announced wage freeze for 1995, the salaries for Mr. Picard and the named executive officers (other than Mr. Lawson) in effect for 1995 remained frozen at the levels approved on July 1, 1994. Therefore, there was no increase for the salary year July, 1994 to July, 1995. Any increase shown in the 1995 amounts from 1994 is the result of the difference between the salary year and the calendar year. (2) The executive is not entitled to the cash amount shown in column (f) in the year the restricted stock award is made. The award vests over several years and is subject to the executive remaining employed by the Company. Dividends are paid on the restricted stock reported in column (f). The number and value at closing price on December 31, 1996 of the aggregate restricted stock holdings (over which the executive has voting but no investment power) of each of the named executives is as follows: Mr. Picard -- 66,668 shares, $3,208,398; Mr. Lawson -- 40,000 shares, $1,925,000; Mr. Swanson -- 19,200 shares, $924,000; Mr. Wegner -- 24,000 shares, $1,155,000; Mr. Hoffmann - -- 22,000 shares, $1,058,750. Mr. Hoffmann's 1994 restricted stock grant shown in column (f) consists of a total of 10,000 shares awarded on June 22, 1994. Shares subject to the award vest pro rata over a five year period beginning on the first anniversary of the award date. Accordingly, 4,000 shares have vested to date. Mr. Wegner's 1994 restricted stock grant shown in column (f) consists of a total of 20,000 shares awarded on June 22, 1994. Shares subject to the award vest pro rata over a five year period beginning on the first anniversary of the award date. Accordingly, 8,000 shares have vested to date (3) For 1996, the amounts in column (i) include: (a) the value of life insurance premiums paid by the Company (Mr. Picard -- $8,841; Mr. Lawson -- $2,162; Mr. Swanson -- $1,551; Mr. Wegner -- $3,852; and Mr. Hoffmann -- $2,034); (b) Company contributions of $881 for each executive under the Company's Stock Ownership Plan; and (c) Company contributions of $4,500 for each executive other than Mr. Lawson under the Company's Savings and Investment Plan. For Mr. Lawson, in addition to the value of life insurance premiums, the amount in column (i) also includes contributions by Raytheon E-Systems to the Raytheon E-Systems 401(K) plan of $2,250. For Mr. Picard the amount shown for 1996 includes a strategic accomplishment award of $700,000 made by the Board of Directors in special recognition of his outstanding contribution and success with regard to the Company's strategic plan since 1991. This includes, for example, the acquisitions of Ebasco, E-Systems, Litwin, Anschutz and Chrysler Technologies. For Mr. Wegner the amount shown for 1994 includes amounts paid in connection with his relocation from Connecticut to Raytheon Aircraft Company's headquarters in Wichita, Kansas consisting of $181,333 in respect of the loss incurred on the sale of his residence in Connecticut and $143,253 to reimburse him for tax liabilities associated with payments under the Company's relocation policies. 27 (4) The Compensation Committee of the Board of Directors was advised by its independent compensation consultant that despite the Company's performance ranking in the top 25th percentile of its peer group, Mr. Picard's compensation continued to rank below the average of those holding similar positions within the peer group. Based on key achievements realized in 1996, the Compensation Committee determined independently to award Mr. Picard an annual performance incentive bonus which recognized his value to the Company and its stockholders and took into account his below average compensation position. (5) In 1996, as part of a review of Mr. Picard's overall compensation, the Compensation Committee's independent compensation consultant presented information on predicted option values for the chief executive officers of companies within the Company's peer group. Based on this information, the Compensation Committee awarded Mr. Picard stock options designed to provide him with approximately the same hypothetical economic value as that accorded to the chief executives of these peer group companies. In fact, as of the date of this filing, no economic value has been derived from this award. (6) Includes all salary paid to Mr.Lawson during 1995, including the period prior to May 8, 1995 - the effective date of the merger of E-Systems with the Company. 28
Option Grants In Last Fiscal Year (1) Individual Grants Grant Date Value % of Total No. of Options Securities Granted to Underlying Employees in Exercise or Options Fiscal Base Price Expiration Grant Date Name Granted(#)(2) Year ($/Share)(3) Date Present Value(4) (a) (b) (c) (d) (e) (h) Dennis J. 1,902 0.05% $52.5625 06/09/06 $ 20,542 Picard 268,098 6.89% $52.5625 06/10/06 $2,895,458 A. Lowell 1,902 0.05% $52.5625 06/09/06 $ 20,542 Lawson 38,098 0.98% $52.5625 06/10/06 $ 411,458 William H. 1,902 0.05% $52.5625 06/09/06 $ 20,542 Swanson 38,098 0.98% $52.5625 06/10/06 $ 411,458 Arthur E. 1,902 0.05% $52.5625 06/09/06 $ 20,542 Wegner 38,098 0.98% $52.5625 06/10/06 $ 411,458 Christoph L. 1,902 0.05% $52.5625 06/09/06 $ 20,542 Hoffmann 28,098 0.72% $52.5625 06/10/06 $ 303,458
29 (1) The table contains two separate lines for each individual. The first line represents the grant of incentive stock options and the second represents the grant of nonqualified stock options. The option grants are reported separately because they have different expiration dates. (2) Options become exercisable one year after the grant date. (3) Fair market value of underlying shares on the date of grant. (4) As of December 31, 1996, the options set forth in this table had no value because at that date the market value of the underlying shares was below the option price. Furthermore, the ultimate values of the options will depend on the future market price of the Company's Common Stock, which cannot be forecast with reasonable accuracy. The actual value, if any, an optionee will realize upon exercise of an option will depend on the excess of the market value of the Company's Common Stock over the exercise price on the date the option is exercised. The estimated grant date present value reflected in the above table is determined using the Black-Scholes model. As required pursuant to the regulations of the Securities and Exchange Commission, the material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the options reflected in the above table include the following: an exercise price of $52.5625, equal to the fair market value of the underlying stock on the date of grant; an option term of 10 years; an interest rate of 6.41% that represents the interest rate on a U.S. Treasury security on the date of grant with a maturity date corresponding to that of the option term; volatility of 15.0% calculated using daily stock prices for an average of three years prior to the grant date; assumed dividend growth of 6.0%; and reductions of approximately 5.0% to reflect the probability of forfeiture due to termination prior to vesting. 30
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year End Option Values Value of Unexercised Number of Unexercised In-the-Money Options at FY End Options at FY End (#) $ (d) (e) -------------------- ----------------- Shares Acquired on Value Exercise Realized Name (#)(1) ($) Exercis- Unexer- Exercis- Unexer- (a) (b) (c) able cisable able cisable(1) - ------- --------- --------- -------- --------- ---------- ----------- Dennis J. -0- -0- 499,120 270,000 $7,430,250 $0 Picard A. Lowell -0- -0- -0- 40,000 $ 0 $0 Lawson 31 William H. -0- -0- 134,382 40,000 $2,730,475 $0 Swanson Arthur E. -0- -0- 100,000 40,000 $1,311,870 $0 Wegner Christoph 2,562 $31,464 65,842 30,000 $ 887,539 $0 L. Hoffmann
32 (1) Based on the $48.125 closing price per share of the Company's Common Stock at December 31, 1996. The Company's salaried pension plan (the "Salaried Pension Plan") covers all salaried employees, excluding those at certain subsidiaries, who have completed one year of service and attained age 21. The Salaried Pension Plan is Company funded and does not require or permit employee contributions. Benefits are computed by a formula which takes into account an employee's years of service and plan membership, final average compensation and an estimated primary Social Security benefit. The following table shows the estimated annual retirement benefits payable to salaried employees on normal retirement at age 65 under the Salaried Pension Plan and the Company's excess benefit plan, a separate non-funded plan adopted by the Board of Directors in 1980. The excess benefit plan provides benefits that would otherwise be denied participants due to certain Internal Revenue Code limitations on qualified benefit plans. Annual Estimated Benefits Under The Raytheon Company Pension Plan For Salaried Employees And Excess Benefit Plan Years of Pension Credit at Age 65 --------------------------------- Final Average Compensation 15 Years 20 Years 30 Years 40 Years - ------------ -------- -------- -------- -------- $ 200,000 $ 54,000 $ 72,000 $ 96,000 $ 120,000 400,000 108,000 144,000 192,000 240,000 600,000 162,000 216,000 288,000 360,000 800,000 216,000 288,000 384,000 480,000 1,000,000 270,000 360,000 480,000 600,000 1,200,000 324,000 432,000 576,000 720,000 1,400,000 378,000 504,000 672,000 840,000 1,600,000 432,000 576,000 768,000 960,000 1,800,000 486,000 648,000 864,000 1,080,000 2,000,000 540,000 720,000 960,000 1,200,000 Pension benefits shown in the above table are straight life annuity amounts and assume retirement at age 65 (normal retirement age). Under the plan formula, the amounts in the table will be reduced by a percentage of the employee's estimated primary Social Security benefit. Pension benefits are based on the average compensation (salary and bonus) paid during the sixty highest consecutive months of employment. For 1996, covered compensation for Messrs. Swanson, Wegner and Hoffmann is the same as their salary and bonus shown in the Summary Compensation Table set forth earlier in this Part III, Item 11. As of December 31, 1996, those executive officers had the following years of credited service: Mr. Swanson -- 23 years; Mr. Wegner -- 8 years; and Mr. Hoffmann -- 4 years. The years of credited service for Mr. Wegner include additional years of service granted to Mr. Wegner as an inducement to join the Company. 33 In 1996, the Board of Directors adopted a supplemental executive retirement plan (the "Supplemental Plan") similar to the plan covering certain Raytheon E-Systems employees (described below) and to plans currently in place at companies within the Company's peer group. Mr. Picard's total pension benefit from both the Salaried Pension Plan and the Supplemental Plan has been fixed at 65% of the average of his covered compensation (consisting of base salary, bonus and strategic accomplishment award as disclosed in the Summary Compensation Table set forth earlier in this Part III, Item 11) for the three consecutive years during the last ten years prior to retirement for which such covered compensation was the highest. The estimated annual pension benefit for Mr. Picard based on his current compensation level, assuming retirement at age 65, is $1,591,417. As of December 31, 1996, Mr. Picard had 41 years of credited service with the Company. Employees of Raytheon E-Systems, including A. Lowell Lawson, do not participate in the Salaried Pension Plan. Mr. Lawson participates in the Raytheon E-Systems Salaried Retirement Plan and the supplemental executive retirement plan (the "SERP"). The SERP provides selected Raytheon E-Systems executives with retirement income as a supplement to compensation and employee benefits that would otherwise be denied them by reason of certain Internal Revenue Code limitations on qualified benefit plans. Specifically, the SERP provides to participants attaining age 60 and having 10 years of credited service a retirement benefit in an amount equal to 65% of the participant's "Average Monthly Compensation." Amounts payable under the SERP are reduced by payments under the Raytheon E-Systems Salaried Retirement Plan and the recipient's primary Social Security benefit. "Average Monthly Compensation" is defined as the sum of the salary and bonus paid the employee during the three consecutive years out of the ten years preceding retirement or disability which yields the highest monthly amount when divided by 36. The estimated annual SERP benefit for Mr. Lawson based on his current compensation level, assuming retirement at age 65, is $518,702. The Company has entered into Change-in-Control Severance Agreements (the "Severance Agreements") with the executive officers named in the Summary Compensation Table. The Severance Agreements provide severance pay and continuation of certain benefits upon the occurrence of a Change in Control. Entry into the Severance Agreements was unanimously approved by the Board of Directors. The agreements with Messrs. Picard, Swanson, Wegner and Hoffmann are effective as of November 22, 1995. The agreement with Mr. Lawson becomes effective upon the termination of his employment agreement described below. Generally, a "Change in Control" will be deemed to have occurred in any of the following circumstances: (i) the acquisition of 25% or more of the outstanding voting stock of the Company by any person, entity or group; (ii) the persons serving as directors of the Company as of November 22, 1995, and replacements or additions subsequently approved by a majority vote of the Board, cease to make up at least a majority of the Board; (iii) a merger, consolidation or reorganization in which the stockholders of the Company prior to the merger wind up owning less than 50% of the voting power of the surviving corporation; (iv) a complete liquidation or dissolution of the Company or disposition of all or substantially all of the assets of the Company. 34 The Severance Agreements contain a dual trigger which requires, in addition to a Change in Control, a qualifying termination of the executive's employment within two years following a Change in Control for the executive to receive benefits under the Severance Agreement, which include (i) a cash payment of three times his current compensation (including base salary plus targeted bonus); (ii) special supplemental retirement benefits determined as if the executive had three years additional credit service under the Company's pension plans as of the date of termination; and (iii) continuation of fringe benefits pursuant to all welfare, benefit and retirement plans under which the executive and his family are eligible to receive benefits for a period of up to three years. In addition, the Severance Agreements provide for a supplemental cash payment to the executive to the extent necessary to preserve the level of benefits provided in the event of the imposition on the executive of excise taxes payable in respect of "excess parachute payments" under the Internal Revenue Code. E-Systems entered into an employment agreement with Mr. Lawson as of September 27, 1989 which extends through May 8, 1998. Under the agreement, Mr. Lawson has agreed to render his exclusive services to E-Systems. Mr. Lawson's minimum annual compensation is the base salary most recently approved by the Board. The agreement provides for full vesting of Mr. Lawson's benefits under the SERP, which he may receive upon retirement following his attaining age 60. Mr. Lawson's employment agreement provides for the continuation of certain of his business and other perquisites upon retirement, including post-retirement life insurance benefits in an amount equal to two times his annual salary. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table lists those persons or groups known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock as of December 31, 1996: Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Ownership of Class FMR Corp. 16,324,235 (1) 6.92% 82 Devonshire Street Boston, MA 02109 (1) FMR Corp. has filed a Schedule 13G with the Securities and Exchange Commission disclosing that it was the beneficial owner of 16,324,235 shares of the Company's Common Stock as of December 31, 1996. This number includes: 15,372,792 shares beneficially owned by Fidelity Management & Research Company; 892,423 shares beneficially owned by Fidelity Management Trust Company; 59,020 shares beneficially owned by Fidelity International Limited; and 16,324,235 shares beneficially owned by Edward C. Johnson 3d and Abigail P. Johnson and members of the Edward C. Johnson 3d family. Edward C. Johnson 3d and FMR Corp. each has sole dispositive power over 16,265,215 shares and sole voting power over 570,723 shares. Fidelity International Limited has sole voting and dispositive power over 59,020 shares. As of March 15, 1997, the following directors and named executive officers and the directors and all executive officers as a group were the beneficial owners of the number of shares of Common Stock indicated below: 35 Number of Shares and Nature of Beneficial Owner or Group Beneficial Ownership Percent of Class Charles F. Adams 1,208,817(1) * Francis H. Burr 8,988(2) * Ferdinand Colloredo-Mansfeld 10,988(2) * Theodore L. Eliot, Jr. 6,988(2) * John R. Galvin 5,403(2,3) * Barbara B. Hauptfuhrer 6,988(2,4) * Richard D. Hill 11,743(2) * Christoph L. Hoffmann 107,774(5) * L. Dennis Kozlowski 9,988(2) * James N. Land, Jr. 10,988(2) * A. Lowell Lawson 40,018(6) * Thomas L. Phillips 217,648 * Dennis J. Picard 797,447(7) * Warren B. Rudman 5,588(2,8) * Joseph J. Sisco 7,883(2) * William H. Swanson 175,143(9) * Arthur E. Wegner 133,601(10) * Alfred M. Zeien 6,988(2) * All directors and executive officers as a group, (31 in number, including those listed above). 2,453,805(11),12) 1.0% - ------------------------------------------------ * Less than one percent of the class (1) All shares held in trust and voting and investment power is shared. (2) Includes 4,988 shares held in trust for the benefit of the individual director. Each director has the power to vote the shares held for his or her account. The shares were issued pursuant to the Company's Deferral Plan for Directors. See Part III, Item 10 of this Report. (3) Excludes shares held by various mutual funds of the Seligman Group of Investment Companies. As a director or trustee, Gen. Galvin shares voting and investment power in these shares with other Seligman directors and trustees. Gen. Galvin disclaims beneficial ownership of all such shares. (4) Excludes shares held by various mutual funds of the Vanguard Group of Investment Companies. As a director of Vanguard, Mrs. Hauptfuhrer shares voting and investment power in these shares with other Vanguard directors. Mrs. Hauptfuhrer disclaims beneficial ownership of all such shares. (5) Includes 17,543 shares as to which voting and investment power are shared, 65,842 shares as to which Mr. Hoffmann has the right to acquire beneficial ownership within sixty days of said date, 2,389 shares held in the Raytheon Stock Ownership/Savings and Investment Plan and 22,000 restricted shares over which he has voting power but no investment power. 36 (6) Includes 40,000 restricted shares over which Mr.Lawson has voting power but no investment power and 18 shares held in the Raytheon Stock Ownership/Savings and Investment Plan. (7) Includes 499,120 shares as to which Mr. Picard has the right to acquire beneficial ownership within sixty days of said date, 518 shares held in the Raytheon Stock Ownership/Savings and Investment Plan and 66,668 restricted shares over which he has voting power but no investment power. (8) Excludes shares held by any of the mutual funds of Dreyfus Corporation. As a director of several funds managed by Dreyfus Corporation, Mr. Rudman shares voting and investment power in the shares held by such funds with the other directors of those funds and with the directors of Dreyfus Corporation. Mr. Rudman disclaims beneficial ownership of all such shares. (9) Includes 134,382 shares as to which Mr. Swanson has the right to acquire beneficial ownership within sixty days of said date, 639 shares held in the Raytheon Stock Ownership/Savings and Investment Plan and 19,200 restricted shares over which he has voting power but no investment power. (10) Includes 100,000 shares as to which Mr. Wegner has the right to acquire beneficial ownership within sixty days of said date, 41 shares held in the Raytheon Stock Ownership/Savings and Investment Plan and 24,000 restricted shares over which he has voting power but no investment power. (11) Share ownership includes, in the case of certain officers, a minor number of shares held by trusts or family members as to which beneficial ownership is disclaimed. (12) Includes 1,674,900 shares as to which individual members of the group have the right to acquire beneficial ownership within sixty days of said date, 14,549 shares held in the Raytheon Stock Ownership/Savings and Investment Plan and 320,368 restricted shares over which individuals have voting power but no investment power. Item 13. Certain Relationships and Related Transactions During 1996 the Company retained the law firm of Ropes & Gray for various legal services. Francis H. Burr, a Director and member of the Audit, Planning and Nominating, and Policy Committees, is of counsel to such firm. During 1996 the Company retained the law firm of Paul, Weiss, Rifkind, Wharton and Garrison for various legal services. Warren B. Rudman, a Director and member of the Compensation, Planning and Nominating and Policy Committees, is a member of such firm. C-M Holdings L.P., of which Mr. Colloredo-Mansfeld is a principal owner, through a subsidiary, leases an office, service area/warehouse to a subsidiary of the Company at a rent of approximately $671,386 per year. Mr. Colloredo-Mansfeld is a Director and member of the Executive, Finance and Policy Committees. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements and Schedules 37 (1) The following financial statements of Raytheon Company and Subsidiaries Consolidated, as contained in Raytheon's 1996 Annual Report to Stockholders, are hereby incorporated by reference: Balance Sheets at December 31, 1996 and 1995 Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 (2) The following financial statement schedule is included herein: Schedule II, Reserves for the Three Years Ended December 31, 1996 Schedules I, III and IV are omitted because they are not required, not applicable or the information is otherwise included. (b) Reports on Form 8-K During the first quarter of 1997, the Company made the following filings on Form 8-K: (1) Raytheon Company Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 1997. (2) Raytheon Company Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 1997. (c) Exhibits (2.1) Asset Purchase Agreement dated as of January 4, 1997 between Raytheon Company and Texas Instruments Incorporated, heretofore filed as an exhibit to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 1997, is hereby incorporated by reference. (2.2) Agreement and Plan of Merger dated as of January 16, 1997 by and between Raytheon Company and HE Holdings, Inc., heretofore filed as an exhibit to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 1997, is hereby incorporated by reference. (2.3) Implementation Agreement dated as of January 16, 1997 by and between Raytheon Company and General Motors Corporation, heretofore filed as an exhibit to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 1997, is hereby incorporated by reference. 38 (3.1) Raytheon Company Restated Certificate of Incorporation, as amended through September 27, 1995, heretofore filed as an exhibit to Raytheon's Form 10-Q for the quarter ended October 1, 1995, is hereby incorporated by reference. (3.2) Raytheon Company By-Laws, as amended and restated through October 25, 1995, heretofore filed as an exhibit to Raytheon's Form 10-Q for the quarter ended October 1, 1995, are hereby incorporated by reference. (4) Indenture dated as of July 3, 1995 between Raytheon Company and The Bank of New York, Trustee, relating to the Company's 6 1/2% Notes due July 15, 2005 and the Company's 7 3/8% Debentures due 2025, filed as an exhibit to Raytheon's Registration Statement on Form S-3, File No. 33-59241, is hereby incorporated by reference. (10.1) Raytheon Company 1976 Stock Option Plan, as amended, filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference. (10.2) Raytheon Company 1991 Stock Plan, as amended, filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference. (10.3) Raytheon Company 1995 Stock Option Plan, filed as an exhibit to the Company's Registration Statement on Form S-8, File No. 33-60635, is hereby incorporated by reference. (10.4) Raytheon Company Deferral Plan for Directors, filed as an exhibit to the Company's Registration Statement on Form S-8 File No. 333-22969, is hereby incorporated by reference. (10.5) Form of Raytheon Company Change in Control Severance Agreement, filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference.** (13) Raytheon Company 1996 Annual Report to Stockholders (furnished for the information of the Commission and not to be deemed "filed" as part of this Report except to the extent that portions thereof are expressly incorporated by reference). (21) Subsidiaries of Raytheon Company* (23.1) Consent of Independent Accountants* (23.2) Report of Independent Accountants* (27) Financial Data Schedule* 39 * Filed electronically herewith. ** The Company has entered into Change in Control Severance Agreements in the form of Agreement filed as Exhibit 10.5 with each of the following executives: Peter R. D'Angelo, Christoph L. Hoffmann, A. Lowell Lawson, Charles Q. Miller, Dennis J. Picard, Robert L. Swam, William H. Swanson and Arthur E.Wegner. The agreements are designed to provide the executive with certain severance benefits following a termination, including, without limitation, payment of an amount equal to three times the executive's salary and targeted bonus and the continuation of certain employee benefits for up to three years, all as more fully described in the form of Agreement. The Company has entered into Change in Control Severance Agreements in the form of Agreement filed as Exhibit 10.5 with nineteen other executives, but which are immaterial to the Company. The agreements are designed to provide the executive with certain severance benefits following a termination, including, without limitation, payment of an amount equal to two times the executive's salary and targeted bonus and the continuation of certain employee benefits for up to two years, all as more fully described in the form of Agreement. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) 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 /s/ Christoph L. Hoffmann Christoph L. Hoffmann Executive Vice President and Secretary for the Registrant Dated: March 26, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE Dennis J. Picard Chairman of the Board (Dennis J. Picard) and Director (Principal March 26, 1997 Executive Officer) Charles F. Adams Director March 26, 1997 (Charles F. Adams) Francis H. Burr Director March 26, 1997 (Francis H. Burr) Ferdinand Colloredo-Mansfeld Director March 26, 1997 (Ferdinand Colloredo-Mansfeld) Theodore L. Eliot, Jr. Director March 26, 1997 (Theodore L. Eliot, Jr.) 40 John R. Galvin Director March 26, 1997 (John R. Galvin) Barbara B. Hauptfuhrer Director March 26, 1997 (Barbara B. Hauptfuhrer) Richard D. Hill Director March 26, 1997 (Richard D. Hill) Director March 26, 1997 (L. Dennis Kozlowski) Director March 26, 1997 (James N. Land, Jr.) A. Lowell Lawson Director and March 26, 1997 (A. Lowell Lawson) Executive Vice President Thomas L. Phillips Director March 26, 1997 (Thomas L. Phillips) Warren B. Rudman Director March 26, 1997 (Warren B. Rudman) Joseph J. Sisco Director March 26, 1997 (Joseph J. Sisco) Alfred M. Zeien Director March 26, 1997 (Alfred M. Zeien) Peter R. D'Angelo Executive Vice President - Chief March 26, 1997 (Peter R. D'Angelo) Financial Officer, Controller (Chief Accounting Officer) 41
- ----------------------------------------------------------------------------------------------------------- RAYTHEON COMPANY AND SUBSIDIARIES CONSOLIDATED - ----------------------------------------------------------------------------------------------------------- ---------------------------------------------- SCHEDULE II - RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1996 ------------------------------------------- (In thousands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Balance at beginning Charged to costs Charged to other Deductions end of Description of period and expenses accounts Note (1) Period - ------------------------------------------------------------------------------------------------------------ Year ended December 31, 1996: Allowance for doubtful $22,043 $ 1,207 - $2,990 $20,260 accounts receivable Year ended December 31, 1995: Allowance for doubtful $21,290 $ 3,078 - $2,325 $22,043 accounts receivable Year ended December 31, 1994: Allowance for doubtful $25,891 $ 2,473 - $ 7,074 $21,290 accounts receivable Note (1) - Uncollectible accounts and adjustments, less recoveries
EX-99 2 1 INDEX TO EXHIBITS (2.1) Asset Purchase Agreement dated as of January 4, 1997 between Raytheon Company and Texas Instruments Incorporated, heretofore filed as an exhibit to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 1997, is hereby incorporated by reference. (2.2) Agreement and Plan of Merger dated as of January 16, 1997 by and between Raytheon Company and HE Holdings, Inc., heretofore filed as an exhibit to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 1997, is hereby incorporated by reference. (2.3) Implementation Agreement dated as of January 16, 1997 by and between Raytheon Company and General Motors Corporation, heretofore filed as an exhibit to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 1997, is hereby incorporated by reference. (3.1) Raytheon Company Restated Certificate of Incorporation, as amended through September 27, 1995, heretofore filed as an exhibit to Raytheon's Form 10-Q for the quarter ended October 1, 1995, is hereby incorporated by reference. (3.2) Raytheon Company By-Laws, as amended and restated through October 25, 1995, heretofore filed as an exhibit to Raytheon's Form 10-Q for the quarter ended October 1, 1995, are hereby incorporated by reference. (4) Indenture dated as of July 3, 1995 between Raytheon Company and The Bank of New York, Trustee, relating to the Company's 6 1/2% Notes due July 15, 2005 and the Company's 7 3/8% Debentures due 2025, filed as an exhibit to Raytheon's Registration Statement on Form S-3, File No. 33-59241, is hereby incorporated by reference. (10.1) Raytheon Company 1976 Stock Option Plan, as amended, filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference. (10.2) Raytheon Company 1991 Stock Plan, as amended, filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference. (10.3) Raytheon Company 1995 Stock Option Plan, filed as an exhibit to the Company's Registration Statement on Form S-8, File No. 33-60635, is hereby incorporated by reference. (10.4) Raytheon Company Deferral Plan for Directors, filed as an exhibit to the Company's Registration Statement on Form S-8, File No. 333-22969, is hereby incorporated by reference. (10.5) Form of Raytheon Company Change in Control Severance Agreement, filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference.** (13) Raytheon Company 1996 Annual Report to Stockholders (furnished for the information of the Commission and not to be deemed "filed" as part of this Report except to the extent that portions thereof are expressly incorporated by reference). 2 (21) Subsidiaries of Raytheon Company* (23.1) Consent of Independent Accountants* (23.2) Report of Independent Accountants* (27) Financial Data Schedule* * Filed electronically herewith. ** The Company has entered into Change in Control Severance Agreements in the form of Agreement filed as Exhibit 10.5 with each of the following executives: Peter R. D'Angelo, Christoph L. Hoffmann, A. Lowell Lawson, Charles Q. Miller, Dennis J. Picard, Robert L. Swam, William H. Swanson and Arthur E.Wegner. The agreements are designed to provide the executive with certain severance benefits following a termination, including, without limitation, payment of an amount equal to three times the executive's salary and targeted bonus and the continuation of certain employee benefits for up to three years, all as more fully described in the form of Agreement. EX-13 3 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1996 versus 1995 Raytheon Company reported 1996 earnings of $783.3 million, or $3.30 per share, before a third quarter special charge of $22.1 million or $.09 per share. For 1995, earnings were $787.3 million, or $3.23 per share before a one time gain of $5.2 million, or $.02 per share. Total Raytheon sales in 1996 reached $12.3 billion, the highest in the company's history, as sales were up in all four business segments. In January 1997, Raytheon entered into definitive agreements to purchase the assets of Texas Instruments' (TI) defense operations for $2.95 billion in cash and to merge with Hughes Electronics' defense operations, with the combined company to be called Raytheon. The Hughes transaction is valued at $9.5 billion, comprised of approximately $5.1 billion in common stock and $4.4 billion in debt to be assumed by the merged company. (Refer to Note R of the notes to the financial statements for a full description of the Hughes transaction). On a 1996 pro forma basis, the combined company will have revenues of approximately $21 billion, over $13 billion of which will be in defense electronics. The current backlog for the combined company will be approximately $23 billion, with defense electronics accounting for $18 billion. The Hughes transaction, coupled with the recently announced acquisition of TI's defense business, is expected to result in a slight dilution to the earnings of the combined company in 1997, as compared to the earnings of Raytheon on a stand-alone basis for the same period. The combined transactions should be minimally accretive in 1998 and increasingly accretive thereafter. The two transactions are subject to regulatory approvals, including Hart-Scott-Rodino antitrust review, with the Hughes transaction subject to a favorable ruling by the Internal Revenue Service and approval by Raytheon, GM and GM "H" stockholders. Raytheon's total backlog at the end of 1996 stood at a record $12.1 billion, up $1.5 billion, or 14.4 percent, compared with year-end 1995. The backlog increase was driven principally by a 59 percent increase in the backlog of Raytheon Engineers & Constructors at the end of 1996 compared with the end of 1995. Raytheon Engineers & Constructors ended 1996 with a record backlog of $3.6 billion. The company made three acquisitions in 1996: the aircraft modification and defense electronics businesses of Chrysler Technologies; the engineering and construction assets of Rust International; and the marine communication assets of Standard Radio AB of Sweden. 2 The Segment Financial results are as follows: The Electronics segment's 1996 sales and income increased over 1995's results, which included a one-time special charge. Sales and income increased at Dallas-based Raytheon E-Systems, reflecting inclusion of a full year of E-Systems results as well as a partial year's results for the complementary acquisition of two Chrysler Technologies defense businesses. Raytheon's Massachusetts-based defense operations experienced declines in sales and income. Excluding D.C. Heath and Xyplex, which were divested in late 1995 and early 1996, respectively, sales and income increased in Raytheon's Commercial Electronics business. Raytheon Aircraft of Wichita, Kansas, the world leader in general aviation, reported record sales and increased income for the year over 1995, which included a one-time special charge, due to increased aircraft shipments and services. Raytheon Engineers & Constructors, one of the largest engineering, construction, operations and maintenance firms in the world, reported record sales for the year. Although sales were higher than 1995 due primarily to increased engineering and construction effort, income was down due to the delay of higher margin international turnkey projects combined with the effects of strike-related losses at Cedarapids. Raytheon Appliances had record sales for the year due to increased shipments of heating and air conditioning products, refrigerators and self-clean ranges; however, income, excluding the special charge, was flat due principally to competitive pressures in the retail market and increased sales promotion costs. On February 23, 1997, the company announced that it is evaluating strategic alternatives for the Appliance Group, which may result in the sale or merger of the group at some time in the future. The company retained an advisor to assist with this evaluation. The decision to undertake this strategic reassessment was made in the context of Raytheon's financial priorities, and the belief that the Appliance Group may have greater value to another company with more focus on the markets served by the group. Sales to the U. S. Department of Defense were $4.032 billion or 32.7 percent of consolidated sales in 1996 versus $3.961 billion or 33.6 percent of consolidated sales in 1995. Total sales to the U. S. government were $5.140 billion or 41.7 percent of consolidated sales in 1996 versus $4.677 billion or 39.6 percent of consolidated sales in 1995. Administration and selling expenses decreased to $1,021.0 million, or 8.3 percent of sales in 1996, from $1,085.8 million, or 9.2 percent of sales in 1995, due principally to the sale of D.C. Heath and Xyplex. Research and development expenses increased to $323.3 million, or 2.6 percent of sales in 1996, from $315.6 million, or 2.7 percent of sales in 1995, due principally to the inclusion of a full year of E-Systems results and a partial year's results for the acquired Chrysler Technologies businesses. Operating income in 1996, excluding the special charge of $34.0 million pre-tax, was $1,232.2 million, or 10.0 percent of sales, versus $1,320.4 million, or 11.2 percent of sales, in 1995. The 1995 operating income excludes a special charge of $125.0 million and nonrecurring items of $77.0 million. Operating income for 1996, including the special charge, was $1,198.2 million, or 9.7 percent of sales, while operating income for 1995, including the special charge and nonrecurring items, was $1,118.4 million. The company announced in the third quarter of 1996 that it would exit the manual-clean range market and dispose of the assets related to that operation, including its facility located in Delaware, Ohio, and recorded a $34.0 million pre-tax charge for this closing. The after-tax effect was $22.1 million or $.09 per share. 3 The company recorded in the first quarter of 1994 a restructuring provision of $249.8 million before tax. The restructuring was driven by the significant reductions in the defense budget and increasing commercial competition. Approximately 65 percent of the restructuring costs were attributable to the company's defense business and the remainder to its commercial business. The company completed personnel reductions of 4,400 people under this restructuring provision, including both salaried and bargaining unit employees located in Massachusetts and other states and in foreign locations. Through December 31, 1996, $249.3 million of restructuring costs have been incurred, of which $103.4 million were employee-related costs and $145.9 million were related principally to asset disposals and idle facilities. Interest expense for 1996 increased to $256.3 million from $196.6 million in 1995. The increase was due principally to the higher average debt level. Interest and dividend income increased to $102.0 million in 1996 from $26.3 million in 1995 due principally to accrued interest before tax on a retroactive federal income tax refund claim. Other income, net was $39.5 million in 1996 versus $243.6 million in 1995. The 1995 amount includes a $210 million net pre-tax gain from the sale of D.C. Heath. Federal and foreign income taxes were $322.3 million in 1996 compared with $399.2 million in 1995. The 1996 effective tax rate was 29.7 percent versus 33.5 percent in 1995. The effective tax rate for 1996 reflects the statutory rate of 35 percent reduced by accrued research and development tax credits and Foreign Sales Corporation (FSC) tax credits, partially offset by nondeductible amortization of goodwill. The decrease in the effective tax rate in 1996 from 1995 was due to the accrued retroactive research and development tax credits applicable to certain government contracts. For reasons discussed above, income, excluding the special charge of $22.1 million, was $783.3 million in 1996 versus $787.3 million in 1995 before the 1995 one-time gain of $5.2 million. Earnings per common share were $3.30 before the special charge of $.09 per share, versus $3.23 per share in 1995 excluding the one-time gain of $.02 per share. Earnings per share including the special charge were $3.21 in 1996, versus $3.25 in 1995 including the one-time gain. Earnings per common share calculations were based on 237.4 million average shares outstanding in 1996 and 244.0 million average shares outstanding in 1995. Common shares outstanding and all per share data have been restated to reflect the two-for-one stock split effective October 23, 1995. During 1996, outstanding shares were reduced by 6.1 million shares as the result of the company's purchase of outstanding shares at a cost of $305.8 million, partially offset by 1.8 million shares issued upon the exercise of employee stock options. In November 1992, the Board of Directors authorized the purchase of up to 4 million shares of the company's common stock per year over the next five years to counter the dilution due to the exercise of stock options. During 1996, 1.8 million shares were purchased under this authorization. On February 23, 1994, the Board of Directors authorized the repurchase of up to 24 million shares of the company's common stock. Purchases under this authorization were completed in 1995. On February 22, 1995, the Board of Directors authorized the repurchase of up to 12 million shares of the company's common stock. Through December 31, 1996, 9.5 million shares have been purchased under this authorization. 4 The book value of common shares outstanding at December 31, 1996, was $19.46 as compared with $17.83 at December 31, 1995. Return on average equity was 17.9 percent in 1996 excluding the special charge, versus 19.2 percent in 1995 excluding the net one-time gain. Backlog consisted of the following at December 31: (In millions) 1996 1995 - ------------------------------------------------------- Electronics $ 7,303 $ 7,411 Engineering and Construction 3,565 2,240 Aircraft 1,163 836 Major Appliances 35 64 ------- ------- Total Backlog $12,066 $10,551 U.S. government-funded $ 5,637 $ 5,142 backlog included above - ------------------------------------------------------- The Electronics backlog at December 31, 1996, includes $1.1 billion related to the SIVAM contract awarded by the government of Brazil to monitor and protect the Amazon River rain forest. On March 14, 1997, the company announced that the contract had been signed by the government of Brazil and all financing agreements for the program had been finalized. For the year ended December 31, 1996, cash flows from operating activities were $291.3 million as compared with $1,174.6 million during the year ended December 31, 1995. In 1996 funds were used for additions to property, plant and equipment of $406.0 million; dividends of $189.6 million; purchases of treasury stock of $305.8 million and net payments for acquired companies of $584.4 million. Funds were provided by increasing short-term debt by $1,006.9 million. In 1995, under the company's 1992 shelf registration of $500.0 million of debt securities and a 1995 registration of $1.5 billion of debt and/or equity securities, the company issued $1.125 billion of debt securities in a public offering comprised of $750.0 million of notes due 2005, which have a coupon rate of 6 1/2 percent and $375.0 million of debentures due 2025 which have a coupon rate of 7 3/8 percent. The notes are not redeemable prior to maturity, and the debentures are not redeemable prior to July 15, 2005. This financing, along with increased short-term borrowing, was used principally to fund the 1995 acquisition of E-Systems. Debt, net of cash and marketable securities, was $3.589 billion at December 31, 1996, as compared with $2.493 billion at December 31, 1995. Net debt as a percentage of total capitalization was 43.8 percent at December 31, 1996, as compared with 36.7 percent at December 31, 1995. Accounts receivable decreased to $808.7 million at December 31, 1996, from $926.8 million at December 31, 1995 due principally to the sale of receivables to bank syndicates and other financial institutions. Contracts in process increased to $2.592 billion at December 31, 1996, from $2.213 billion at December 31, 1995, due principally to increased effort on major foreign turnkey projects at the Engineering and Construction segment. 5 Property, plant and equipment, net, increased to $1.802 billion at December 31, 1996, from $1.584 billion at December 31, 1995, due to increased investment at the Aircraft segment and the acquisition of the Chrysler Technologies businesses and Rust Engineering. Other assets increased to $3.720 billion at December 31, 1996, from $2.982 billion at December 31, 1995, due principally to goodwill arising from the acquisitions of the Chrysler Technologies businesses and Rust Engineering. Capital expenditures were $406.0 million in 1996 versus $328.6 in 1995. The increase was due principally to higher expenditures in the Aircraft segment. Capital expenditures in 1997 are expected to be above the 1996 level, excluding the effect of acquisitions. Dividends declared to stockholders during 1996 were $189.6 million versus $182.5 million in 1995. The quarterly dividend rate was $.20 for each quarter of 1996 versus $.1875 for each quarter of 1995. Total employment was 75,300 at December 31, 1996, as compared with 73,200 at December 31, 1995. The increase was due principally to the acquisitions of the Chrysler Technologies businesses and Rust Engineering, partially offset by reductions in the defense electronics segment and the sale of Xyplex. The company's debt of $3.727 billion at December 31, 1996, will increase by approximately $2.950 billion as a result of the planned acquisition of the defense operations of TI. The planned merger of the Hughes Electronics defense operations will add approximately $4.400 billion of additional debt and approximately $5.100 billion of additional equity through the issuance of additional common shares (refer to Note R of the notes to the financial statements for a full description of the transaction). The company intends to finance the additional debt initially through an expansion of the company's short-term borrowing facilities. Approximately $3.0 to $4.5 billion of the short-term borrowing is expected to be replaced with a combination of medium and long-term notes and bonds shortly after the closure of the transactions. The covenants applicable to the existing financing arrangements have been modified by the participating entities to accommodate the increase in debt. Total debt as a percentage of total capital was 44.8 percent at December 31, 1996, and 38.6 percent at December 31, 1995, and is expected to rise as a result of the acquisitions. Credit ratings for the company, based on the proposed acquisitions, have been lowered by Moody's to P-2 for short-term borrowing and A-3 for senior debt as of January 16, 1997, by Standard and Poor's to A-3 for short-term borrowing and BBB for senior debt as of January 17, 1997, and by Duff & Phelps to D-2 for short-term borrowing and BBB+ for senior debt as of February 26, 1997. Moody's and Standard and Poor's still have the company's ratings under review with negative implications. The company expects that its cash flow from operations and asset reductions will be sufficient to maintain investment grade credit ratings and available debt financing will be sufficient to meet any additional funding requirements in 1997. Lines of credit with certain commercial banks exist as a standby facility to support the issuance of commercial paper by the company. The lines of credit were $3.483 billion and $3.203 billion at December 31, 1996, and 6 December 31, 1995, respectively. Through the end of 1996, there were no borrowings under these lines of credit, as borrowings were via commercial paper supported by the lines of credit. Commencing on January 17, 1997 substantially all new borrowings have been under the committed lines of credit from the participating commercial banks. The company enters into interest rate swaps and locks and foreign currency forward agreements with commercial and investment banks to reduce the impact of changes in interest rates and foreign exchange rates on long-term debt and on purchases, sales, and financing arrangements with lenders, vendors, customers and foreign subsidiaries. The company meets its working capital requirements mainly with variable rate short-term financing. Interest rate swaps are primarily used to provide purchasers of the company's products with fixed financing terms over extended time periods. The company also enters into foreign exchange forward contracts to minimize fluctuations in the value of payments due to international vendors and the value of foreign currency denominated receipts. The hedges used by the company are directly related to a particular asset, liability, or transaction for which a firm commitment is in place. Swaps and foreign exchange contracts are normally held to maturity and no exchange traded or over-the-counter instruments have been purchased. The impact on the financial position, liquidity, and results of operations from likely changes in foreign exchange and interest rates is not material due to the minimizing of risk through the hedging of transactions related to specific assets, liabilities, or commitments. The company adopted Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, in 1996. The standard defines a fair value based method of accounting for employee stock options. The compensation expense arising from this method of accounting can be reflected in the financial statements or, alternatively, the pro forma net income and earnings per share effect of the fair value based accounting can be disclosed in the notes to the financial statements. The company adopted the disclosure alternative and the results are disclosed in the notes to the financial statements. Recurring costs associated with the company's environmental compliance program are not material and are expensed as incurred. Capital expenditures in connection with environmental compliance are not material. The company is involved in various stages of investigation and cleanup relative to remediation of various sites. All appropriate costs incurred in connection therewith have been expensed. Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage, and the unresolved extent of the company's responsibility, it is difficult to determine the ultimate outcome of these matters. However, in the opinion of management, any additional liability will not have a material effect on the company's financial position, liquidity, or results of operations after giving effect to amounts already recorded. The company will adopt Statement of Financial Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, in 1997. The adoption is not expected to have a material effect on the company's financial position or results of operations. 7 The company will adopt the American Institute of Certified Public Accountants Statement of Position 96-1, Environmental Remediation Liabilities, in 1997. The adoption of the standard will not have a material effect on the company's financial position or results of operations. 1995 versus 1994 Raytheon Company reported increased 1995 net income of $792.5 million, or $3.25 per share compared with 1994 net income of $596.9 million, or $2.26 per share. The 1994 results include a first quarter after-tax restructuring charge of $162.3 million, or $.61 per share. The 1994 earnings, excluding the restructuring charge, were $759.2 million, or $2.87 per share. Total Raytheon sales in 1995 reached $11.8 billion, the highest in the company's history, compared with sales of $10.1 billion in 1994. Raytheon's results in 1995 reflect the company's solid overall commercial sales and profits driven by continued strong performances at Raytheon Aircraft, Raytheon Engineers & Constructors, and Commercial Electronics, as well as the significant contribution of E-Systems, the Dallas-based defense and government electronics company acquired by Raytheon in 1995. Total debt came down substantially to $2.7 billion at year end compared with a peak of approximately $4 billion earlier in 1995 following the acquisition of E-Systems. Raytheon ended the year with debt, net of cash and marketable securities, of $2.5 billion, or 36.7 percent of total capitalization. Raytheon's total backlog ended the year at a record $10.551 billion reflecting a 47 percent increase in the backlog of Raytheon Engineers & Constructors compared with year-end 1994 and a record E-Systems backlog. The company made three acquisitions in 1995: E-Systems, a leader in intelligence, reconnaissance and surveillance systems was acquired on April 29, 1995; assets of Litwin Engineers & Constructors, an international leader in hydrocarbon refining and process technology were acquired on July 26, 1995; and Anschutz, one of the world's leading manufacturers of gyro compasses, autopilots, and steering control systems--a high seas product line that complements Raytheon's existing marine electronics line--was acquired on February 15, 1995. The company recorded in the fourth quarter of 1995 a net pre-tax gain of $210 million from the sale of D.C. Heath, its educational publishing unit. The company also recorded in the fourth quarter of 1995 a special pre-tax charge of $125 million related principally to real estate and goodwill valuation adjustments, and an additional charge of $77 million to cost of sales related principally to provisions for inventory and contracts. The above transactions resulted in a $5.2 million after-tax increase to net income, or $.02 per share. The segment financial results are as follows: The Engineering and Construction segment reported record sales and income for 1995. Sales increased to $2.883 billion in 1995. Income increased by 9.6 percent to $262 million due principally to higher returns on international projects. The Aircraft segment reported record sales for 1995. Sales of $2.060 billion were up 17.1 percent based on strong unit sales growth of regional and general aviation aircraft. Segment income was $197 million, before a nonrecurring charge of $30 million included as part of the previously mentioned $77 million charge. 8 Raytheon Aircraft was selected by the U. S. Air Force and U. S. Navy for the next generation primary trainer, the Joint Primary Aircraft Training System (JPATS). The JPATS program, a major win for Raytheon, is valued at up to $7 billion over more than 20 years. Additionally, there is the potential for significant international sales. The Major Appliances segment had increased sales to $1.472 billion in 1995 due principally to the acquisition of UniMac, while income was down due to strong competitive price pressures and higher material costs. The Electronics segment had increased sales and income in 1995 due to the contribution of E-Systems and commercial electronics. Segment income was $787 million before a nonrecurring charge of $47 million. Raytheon's Massachusetts-based defense operations experienced declines in sales and income; however, the rate of decline was not as great as in prior years. In 1995, Raytheon initiated sweeping changes in its defense business in Massachusetts, moving forward with management, workforce, legislative, and utility initiatives to achieve $600 million in cost savings to enable the company to remain competitive in defense manufacturing in the state. Raytheon Electronic Systems (RES) was formed through the consolidation of the Missile Systems and Equipment Divisions. In addition to management initiatives, Raytheon worked with local unions to achieve cost controls and enhance productivity. Working with Massachusetts lawmakers, the company won tax reduction legislation for manufacturing firms in the state and the company reached a groundbreaking agreement with a major Massachusetts utility to cut its electricity costs in the state. These initiatives are designed to make Raytheon more competitive with companies based in lower-cost areas. Sales to the U. S. Department of Defense were $3.961 billion, or 33.6 percent of consolidated sales in 1995, versus $3.546 billion, or 35.1 percent of consolidated sales, in 1994. Total sales to the U. S. government were $4.677 billion, or 39.6 percent of consolidated sales, versus $3.930 billion, or 38.9 percent in 1994. Administration and selling expenses increased to $1,085.8 million in 1995, versus $912.3 million in 1994, due principally to the acquisition of E-Systems. Research and development expenses increased to $315.6 million in 1995, versus $269.6 million in 1994, due principally to the acquisition of E-Systems. Operating income in 1995, excluding the special charge and nonrecurring items, was $1,320.4 million, or 11.2 percent of sales, versus $1,145.9 million, or 11.3 percent of sales, in 1994. The 1994 results exclude the effect of the first quarter 1994 restructuring provision. Operating income for 1995, including the special charge and nonrecurring items, was $1,118.4 million, or 9.5 percent of sales. The company recorded in the first quarter of 1994 a restructuring provision of $249.8 million before tax. The restructuring was driven by the significant reductions in the defense budget and increasing commercial competition. Approximately 65 percent of the restructuring costs are attributable to Raytheon's defense business and the remainder to its commercial business. The company completed personnel reductions of 4,400 people under this restructuring provision, including both salaried and bargaining unit employees located in Massachusetts and other states and in foreign locations. Through the 9 end of 1995, $240.4 million of restructuring costs have been incurred, of which $102.2 million were employee-related costs and $138.2 million were related principally to asset disposals and idle facilities. Cash flow expenditures, net of tax recovery of $87 million, were $67 million in 1994 and $32 million in 1995. Interest expense for 1995 increased to $196.6 million from $48.5 million in 1994. The increase was due to higher interest rates and higher average levels of debt outstanding, due principally to the acquisition of E-Systems. Interest and dividend income was $26.3 million in 1995 versus $19.6 million in 1994. This income arises principally from the financing of customer long-term receivables. Other income (net) for 1995 increased to $243.6 million from $32.7 million in 1994. The 1995 amount includes a $210 million net pre-tax gain from the sale of D.C. Heath. Federal and foreign income taxes were $399.2 million in 1995 compared with $303.1 million in 1994. The 1995 effective tax rate was 33.5 percent versus 33.7 percent in 1994. The effective tax rate for 1995 reflects the statutory rate of 35 percent reduced by Foreign Sales Corporation (FSC) tax credits, partially offset by non-deductible amortization of goodwill. For reasons discussed above, income increased by 4.4 percent to $792.5 million from the $759.2 million reported for 1994 before the restructuring provision. Earnings per common share increased 13.2 percent to $3.25 per share from $2.87 per share in 1994 before the restructuring provision. Earnings per common share calculations were based on 244.0 million average shares outstanding in 1995 and 264.7 million average shares outstanding in 1994. Common shares outstanding and all per share data have been restated to reflect the two-for-one stock split effective October 23, 1995. During 1995, outstanding shares were reduced by 8.1 million shares as a result of the company's purchase of outstanding shares at a cost of $320.0 million, partially offset by 2.2 million shares issued upon the exercise of employee stock options. In November 1992, the Board of Directors authorized the purchase of up to 4 million shares of the company's common stock per year over the next five years to counter the dilution due to the exercise of stock options. During 1995, 2.2 million shares were purchased under this authorization. On February 23, 1994, the Board of Directors authorized the repurchase of up to 24 million shares of the company's common stock. In 1994, 23.4 million shares were purchased under this authorization and the balance purchased in 1995. On February 22, 1995, the Board of Directors authorized the repurchase of up to 12 million shares of the company's common stock. In 1995, 5.3 million shares were purchased under this authorization The book value of common shares outstanding at December 31, 1995, was $17.83 as compared with $15.92 at December 31, 1994. Return on average equity was 19.3 percent in 1995 versus 17.4 percent in 1994 excluding the restructuring provision. 10 Backlog consisted of the following at December 31: (In millions) 1995 1994 - ---------------------------------------------------- Electronics $ 7,411 $5,287 Engineering and Construction 2,240 1,522 Aircraft 836 1,203 Major Appliances 64 58 ------- ------ Total Backlog $10,551 $8,070 U.S. government-funded $ 5,142 $3,641 backlog included above - ---------------------------------------------------- Raytheon's total backlog of $10,551 billion at year-end 1995 was up 31 percent from year-end 1994. The increase in the Electronics backlog and the U. S. government portion of the total backlog reflects the acquisition of E-Systems. The Electronics backlog includes $1.1 billion related to the SIVAM contract awarded by the government of Brazil to monitor and protect the Amazon River rain forest. For the year ended December 31, 1995, cash flows from operating activities were $1,174.6 million as compared to $1,157.9 million during the comparable 1994 period. In 1995 these funds were used for: additions to property, plant and equipment of $328.6 million; dividends of $182.5 million; the purchase of treasury shares of $260.7 million, net of the proceeds received on the exercise of employee stock options; and to pay down short-term debt. During 1995, $2.342 billion was expended for acquired companies, principally the acquisition of E-Systems. The funds for the acquisitions were provided by increasing long-term and short-term debt. In the fourth quarter of 1995, $449.2 million of funds were received from the sale of D.C. Heath and were used to reduce short-term debt. Debt, net of cash and marketable securities, was $2.494 billion at December 31, 1995, as compared with $855 million at December 31, 1994. Net debt as a percentage of total capitalization was 36.7 percent at December 31, 1995, as compared with 17.9 percent at December 31, 1994. Contracts in process increased to $2.213 billion at December 31, 1995, from $1.951 billion at December 31, 1994, due principally to the acquisition of E-Systems. Property, plant and equipment increased to $1.584 billion at December 31, 1995, from $1.361 billion at December 31, 1994, due principally to the acquisition of E-Systems. Other assets (net) increased to $2.982 billion at December 31, 1995, from $1.049 billion at December 31, 1994, due principally to the goodwill arising from the acquisition of E-Systems. Capital expenditures were $328.6 million in 1995 versus $267.4 million in 1994. The increase was due principally to the acquisition of E-Systems. Dividends declared to stockholders during 1995 were $182.5 million versus $192.7 million in 1994. The quarterly dividend rate was $.1875 for each quarter of 1995 versus $.175 in the first quarter of 1994 and $.1875 for the second, third, and fourth quarters of 1994. 11 Total employment was 73,200 at December 31, 1995, as compared with 60,200 at December 31, 1994. The increase in employment is principally due to the acquisition of E-Systems. FORWARD LOOKING STATEMENTS Statements in this Report which are not historical facts are forward looking statements under the provisions of the Private Securities Litigation Reform Act of 1995. All forward looking statements involve risks and uncertainties. The Company wishes to caution readers that several important factors, including those noted in the Management's Discussion and Analysis section of this Report at pages 41 through 45, could affect the Company's actual results and could cause its actual results in fiscal 1997 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. Further information regarding the important factors that could cause actual results to differ from projected results can be found in Raytheon's reports filed with the SEC, including our form 10-K for the year ended December 31, 1996. BUSINES SEGMENT REPORTING The company operates in four major business areas: Electronics, both commercial and defense; Engineering and Construction; Aircraft; and Major appliances. The principal contributors to Electronics sales and earnings are defense missile systems and other products. The Engineering and Construction segment does business in some 60 countries around the world. The Aircraft segment manufactures, markets and supports piston, jetprops and medium and light jet aircraft for commercial, regional airline and military markets around the world. The Major Appliance segment manufactures and sells household and commercial appliances to dealers and distributors in the United States and to foreign locations. Sales and segment income for 1995 and 1994 have been restated to conform with the 1996 presentation. Certain accounts were reclassified to reconicile segment income with operating income, as reported in the statements of income. The reclassifications did not have a material effect on the income of the segments other than the aircraft segment. Aircraft segment income was reduced in all years due to the inclusion of interest cost associated with the fnancing of off-balance sheet receivables. This cost was previously reported as a part of corporate interest expense. The change did not affect the company's income before taxes or net income. 12
OPERATIONS BY BUSINESS SEGMENTS - -------------------------------------------------------------------------------- (In millions) Sales to unaffiliated customers Segment income ------------------------------- -------------- 1996 1995 1994 1996 1995 1994 - -------------------------------------------------------------------------------- Electronics $ 5,424 $ 5,389 $ 4,057 $ 766 $ 740(3) $ 630 Engineering and Construction 3,053 2,883 2,827 211(6) 262 239 Aircraft 2,345 2,060 1,759 181 167(4) 195 Major Appliances 1,509 1,472 1,455 74 74 82 ------- ------- ------- ----- ----- ----- Total Operating Segments $12,331 $11,804 $10,098 $1,232 $1,243 $1,146 ======= ======= ======= ====== ====== ====== Restructuring and special charges (34)(1) (125)(2) (250)(5) Gain on sale of D.C. Heath - 210 - Net interest expense (154) (170) (28) Other income 39 5 1 Gain on sale of an investment - 29 31 ------ ------ ------- Income before taxes $1,083 $1,192 $ 900 ====== ====== ======= - ----------------------------------------------------------------------------------
- ---------- (1) The 1996 special charge of $34 million relates to the Major Appliances segment. (2) The special charge relates to the business segments as follows: Electronics, $115, and Engineering and Construction, $10. (3) Includes a nonrecurring charge of $47 million. (4) Includes a nonrecurring charge of $30 million. (5) The restructuring provision relates to the business segments as follows: Electronics, $193, Engineering and Construction, $37, Aircraft $13, and Major Appliances $7. (6) Excludes second quarter fee adjustment on a major foreign project which was covered by a pre-existing contingency reserve. 13
Capital expenditures Depreciation and Amortization --------------------------------------------------------- (In millions) 1996 1995 1994 1996 1995 1994 - -------------------------------------------------------------------------------- Electronics $160 $147 $120 $220 $228 $167 Engineering and Construction 27 26 22 37 32 31 Aircraft 140 80 74 50 51 52 Major Appliances 79 76 51 62 60 54 ---- ---- ---- ---- ---- ---- Total $406 $329 $267 $369 $371 $304 ==== ==== ==== ==== ==== ==== Identifiable assets at December 31, - ---------------------------------------------------- (In millions) 1996 1995 1994 - ---------------------------------------------------- Electronics $ 5,881 $5,473 $2,867 Engineering and Construction 2,059 1,544 1,359 Aircraft 2,372 1,832 2,171 Major Appliances 814 992 998 ------- ------ ------ Total $11,126 $9,841 $7,395 ======= ====== ======
14
OPERATIONS BY GEOGRAPHIC AREAS - ------------------------------------------------------------------------------ (In millions) United States Outside United States Consolidated (Principally Europe) - ------------------------------------------------------------------------------ Sales to unaffiliated customers - ------------------------------------------------------------------------------ 1996 $11,570 $ 761 $12,331 1995 11,017 787 11,804 1994 9,309 789 10,098 Net income - ------------------------------------------------------------------------------ 1996 740 21 761 1995 738 54 792 1994 547 50 597 Identifiable assets at - ------------------------------------------------------------------------------ December 31, 1996 10,473 653 11,126 December 31, 1995 9,171 670 9,841 December 31, 1994 6,929 466 7,395 - ------------------------------------------------------------------------------
15 Sales between business segments and between geographic areas are not material. In the data by geographic area, U.S. sales in millions of $11,570, $11,017, and $9,309 include export sales, in millions, principally to Europe, the Middle East, and Far East, of $2,137, $1,907, and $1,173 for 1996 through 1994, respectively. Sales in millions to major customers, principally in Electronics, for 1996 through 1994, respectively, are: U.S. government (end user), $4,638, $4,079, and $3,236; U.S. government (foreign military sales), $502, $597, and $694. QUARTERLY FINANCIAL DATA The third quarter of 1996 includes a special charge of $22.1 million after tax or $.09 per share to exit the manual-clean range market and close the Delaware, Ohio plant. The fourth quarter of 1995 includes a one-time gain of $5.2 million after tax or $.02 per share related to the sale of D.C. Heath, net of special charges. (In millions except per share data) First Second Third Fourth - ------------------------------------------------------------------ 1996 - ------------------------------------------------------------------ Net sales $2,787.6 $3,126.8 $3,032.4 $3,383.7 Cost of sales 2,141.3 2,435.4 2,428.1 2,749.2 Net income 186.5 209.4 187.9 177.4 Earnings per common share 0.78 0.88 0.80 0.75 Cash dividends per common share Declared 0.20 0.20 0.20 0.20 Paid 0.1875 0.20 0.20 0.20 Common stock prices per the Composite Tape High 54.13 53.63 55.00 56.13 Low 45.00 48.75 43.38 45.75 16 1995 - ------------------------------------------------------------------ Net sales $2,399.1 $2,844.6 $3,174.0 $3,386.5 Cost of sales 1,832.3 2,130.5 2,442.7 2,754.0 Net income 173.9 195.5 200.7 222.4 Earnings per common share 0.71 0.80 0.82 0.92 Cash dividends per common share Declared 0.1875 0.1875 0.1875 0.1875 Paid 0.1875 0.1875 0.1875 0.1875 Common stock prices per the Composite Tape High 37.19 39.81 42.69 47.25 Low 31.44 34.75 38.75 41.50 - ------------------------------------------------------------------ Note: Share data have been restated for the two-for-one stock split in October, 1995. 17 TEN YEAR STATISTICAL SUMMARY
(In millions except per share data) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------- Statements of Income - ----------------------------------------------------------------------------------------------------- Net sales $12,330.5 $11,804.2 $10,097.7 $ 9,334.1 $ 9,121.7 - ----------------------------------------------------------------------------------------------------- Cost of sales 9,754.0 9,159.4 7,769.9 7,181.8 7,064.1 Administrative and selling expenses (note A) 1,021.0 1,085.8 912.3 827.6 817.2 Research and development expenses 323.3 315.6 269.6 279.4 289.9 Special charge 34.0 125.0 249.8 -- -- - ----------------------------------------------------------------------------------------------------- Total operating expenses 11,132.3(3) 10,685.8 9,201.6(5) 8,288.8 8,171.2 - ----------------------------------------------------------------------------------------------------- Operating income 1,198.2(3) 1,118.4 896.1(5) 1,045.3 950.5 - ----------------------------------------------------------------------------------------------------- Interest expense 256.3 196.6 48.5 31.9 48.2 Interest and dividend income (102.0) (26.3) (19.6) (7.3) (9.2) Other income, net (note A) (39.6) (243.6) (32.7) (26.6) (44.5) - ----------------------------------------------------------------------------------------------------- Non-operating expense (income), net 114.7 (73.3) (3.8) (2.0) (5.5) - ----------------------------------------------------------------------------------------------------- Income before taxes 1,083.5(3) 1,191.7(4) 899.9(5) 1,047.3 956.0 Federal and foreign income taxes 322.3 399.2 303.0 354.3 320.9 - ----------------------------------------------------------------------------------------------------- Net income $ 761.2(3) $ 792.5(4) $ 596.9(5) $ 693.0 $ 635.1 ===================================================================================================== Return on sales 6.2% 6.7% 5.9% 7.4% 7.0% Return on average equity 17.4% 19.3% 14.1% 17.0% 17.7% Earnings per common share (1)(2) Outstanding shares $ 3.21(3) $ 3.25(4) $ 2.26(5) $ 2.56 $ 2.36 Fully diluted $ 3.16(3) $ 3.20(4) $ 2.24(5) $ 2.53 $ 2.34 Cash dividends declared per common share(2) $ 0.80 $ 0.75 $ 0.738 $ 0.70 $ 0.663 Average common shares (in thousands)(2) Outstanding shares 237,413 243,989 264,736 271,166 269,008 Fully diluted 240,736 247,780 266,490 273,594 271,290 - ----------------------------------------------------------------------------------------------------- Financial Position at Year-End - ----------------------------------------------------------------------------------------------------- Assets Current $ 5,603.9 $ 5,275.2 $ 4,985.5 $ 4,609.2 $ 3,775.8 Property, plant, and equipment, net 1,802.0 1,584.0 1,360.8 1,422.1 1,420.0 Total (including other non-current) 11,126.1 9,840.9 7,395.4 7,257.7 6,015.1 Working Capital Net working capital 912.1 1,584.8 1,702.4 1,809.0 1,639.0 Ratio of current assets to current liabilities 1.19 1.43 1.52 1.65 1.77 18 Financial Structure Long-term debt 1,500.5 1,487.7 24.5 24.4 25.3 Total debt 3,727.4 2,703.8 1,057.6 897.6 732.0 Stockholders' equity 4,598.0 4,292.0 3,928.2 4,297.9 3,843.2 Per common share(2) 19.46 17.83 15.92 15.89 14.16 Debt as a percentage of equity 81.1% 63.0% 26.9% 20.9% 19.0% - ----------------------------------------------------------------------------------------------------- General Statistics - ----------------------------------------------------------------------------------------------------- Total backlog $12,066.1 $10,550.5 $ 8,069.8 $ 7,756.5 $ 7,273.2 U.S. government-funded backlog (included above) 5,637.5 5,141.5 3,640.9 4,518.8 5,310.6 Property, plant, and equipment Capital expenditures 406.0 328.6 267.4 256.1 307.7 Depreciation and amortization 368.9 371.4 304.2 296.4 302.1 Total salaries and wages paid 3,710.2 3,450.7 2,894.7 2,731.5 2,957.7 Total number of employees (actual) 75,300 73,200 60,200 63,800 63,900 Outstanding shares of common stock (in thousands) 236,250 240,690 246,644 270,428 271,320 - -----------------------------------------------------------------------------------------------------
Notes: (1) Earnings per common share: outstanding shares computed on average number of common shares; fully diluted assumes exercise of dilutive stock options. (2) All share data have been restated for the two-for-one stock split in October 1995. (3) Includes special charge of $34.0 million pre-tax, $22.1 million after-tax, or $.09 per share. (4) Includes one-time gain of $8.0 million pre-tax, $5.2 million after-tax, or $.02 per share. (5) Includes restructuring charge of $249.8 million pre-tax, $162.3 million after-tax, or $.61 per share. 19 TEN YEAR STATISTICAL SUMMARY (continued)
(In millions except per share data) 1991 1990 1989 1988 1987 - ----------------------------------------------------------------------------------------------------- Statements of Income - ----------------------------------------------------------------------------------------------------- Net sales $ 9,359.4 $ 9,337.9 $ 8,852.4 $ 8,251.9 $ 7,695.0 - ----------------------------------------------------------------------------------------------------- Cost of sales 7,356.9 7,395.1 6,998.6 6,538.6 6,124.5 Administrative and selling expenses (note A) 822.1 809.8 779.3 743.5 668.9 Research and development expenses 278.5 267.6 274.7 271.0 266.1 Special charge -- -- -- -- -- - ----------------------------------------------------------------------------------------------------- Total operating expenses 8,457.5 8,472.5 8,052.6 7,553.1 7,059.5 - ----------------------------------------------------------------------------------------------------- Operating income 901.9 865.4 799.8 698.8 635.5 - ----------------------------------------------------------------------------------------------------- Interest expense 92.4 114.3 113.4 62.8 23.5 Interest and dividend income (10.3) (34.5) (32.4) (23.3) (29.1) Other (income) expense, net (note A) (52.9) (51.3) (38.9) (46.2) (44.8) - ----------------------------------------------------------------------------------------------------- Non-operating expense (income), net 29.2 28.5 42.1 (6.7) (50.4) - ----------------------------------------------------------------------------------------------------- Income before taxes 872.7 836.9 757.7 705.5 685.9 Federal and foreign income taxes 280.9 279.6 228.9 215.9 240.8 - ----------------------------------------------------------------------------------------------------- Net income $ 591.8 $ 557.3 $ 528.8 $ 489.6 $ 445.1 ===================================================================================================== 20 Return on sales 6.3% 6.0% 6.0% 5.9% 5.8% Return on average equity 19.2% 21.2% 23.3% 25.1% 22.0% Earnings per common share (1)(2) Outstanding shares $ 2.24 $ 2.14 $ 2.00 $ 1.84 $ 1.53 Fully diluted $ 2.22 $ 2.12 $ 1.99 $ 1.83 $ 1.52 Cash dividends declared per common share(2) $ 0.613 $ 0.60 $ 0.55 $ 0.50 $ 0.463 Average common shares (in thousands)(2) Outstanding shares 264,460 261,330 264,108 266,484 291,054 Fully diluted 266,092 262,482 265,642 267,786 293,592 - ----------------------------------------------------------------------------------------------------- Financial Position at Year-End - ----------------------------------------------------------------------------------------------------- Assets Current $ 3,747.6 $ 3,603.5 $ 3,104.5 $ 2,844.3 $ 2,451.9 Property, plant, and equipment, net 1,516.5 1,532.1 1,456.3 1,355.2 1,217.4 Total (including other non-current) 6,087.1 6,119.4 5,338.3 4,739.5 4,162.5 Working Capital Net working capital 1,031.5 457.8 282.4 267.1 183.2 Ratio of current assets to current liabilities 1.38 1.15 1.10 1.10 1.08 Financial Structure Long-term debt 39.3 46.4 46.0 41.3 44.7 Total debt 1,143.7 1,471.6 1,229.6 952.8 595.4 Stockholders' equity 3,323.4 2,846.5 2,426.1 2,121.0 1,849.1 Per common share(2) 12.45 10.89 9.24 7.99 6.83 Debt as a percentage of equity 34.4% 51.7% 50.7% 44.9% 32.2% - ----------------------------------------------------------------------------------------------------- 21 General Statistics - ----------------------------------------------------------------------------------------------------- Total backlog $ 7,969.4 $ 8,809.5 $ 9,595.3 $ 8,712.4 $ 8,470.0 U.S. government-funded backlog (included above) 5,759.2 6,566.4 6,973.5 6,759.1 6,362.3 Property, plant, and equipment Capital expenditures 348.5 390.7 413.9 421.3 354.2 Depreciation and amortization 306.1 303.5 281.6 259.0 236.5 Total salaries and wages paid 3,017.4 2,972.7 2,816.4 2,659.8 2,457.9 Total number of employees (actual) 71,600 76,700 77,600 76,200 76,500 Outstanding shares of common stock (in thousands) 266,880 261,420 262,480 265,494 270,796 - -----------------------------------------------------------------------------------------------------
Notes: (1) Earnings per common share: outstanding shares computed on average number of common shares; fully diluted assumes exercise of dilutive stock options. (2) All share data have been restated for the two-for-one stock split in October 1995. (3) Includes special charge of $34.0 million pre-tax, $22.1 million after-tax, or $.09 per share. (4) Includes one-time gain of $8.0 million pre-tax, $5.2 million after-tax, or $.02 per share. (5) Includes restructuring charge of $249.8 million pre-tax, $162.3 million after-tax, or $.61 per share. 22 Raytheon Company and Subsidiaries Consolidated BALANCE SHEETS
(In thousands) December 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------- Assets - ------------------------------------------------------------------------------- Current assets Cash and marketable securities (notes A and B) $ 138,821 $ 210,284 Accounts receivable, less allowance for doubtful accounts: 1996--$20,260,000; 1995--$22,043,000 808,715 926,800 Federal and foreign income taxes, including deferred (notes A and I) 246,120 196,711 Contracts in process (notes A and C) 2,592,006 2,212,689 Inventories (notes A and D) 1,590,967 1,502,983 Prepaid expenses (note L) 227,266 225,751 ----------- ----------- Total current assets 5,603,895 5,275,218 Property, plant, and equipment, net (notes A and E) 1,802,012 1,584,035 Other assets (notes A and F) 3,720,169 2,981,691 - ----------------------------------------------------------------------------- $11,126,076 $ 9,840,944 ============================================================================= 23 Liabilities and Stockholders' Equity Current liabilities Notes payable and current portion of long-term debt (notes G and H) $ 2,226,935 $ 1,216,039 Advance payments, less contracts in process: 1996--$803,056,000; 1995--$586,792,000 341,326 343,470 Accounts payable 1,125,881 1,041,848 Accrued salaries and wages 272,877 254,419 Other accrued expenses (note A) 724,814 834,647 - ------------------------------------------------------------------------------- Total current liabilities 4,691,833 3,690,423 Accrued retiree benefits (note L) 249,992 270,025 Income taxes, including deferred (notes A and I) 85,765 100,797 Long-term debt (note H) 1,500,476 1,487,735 24 Commitments and contingencies (note J) Stockholders' equity (note Q) Preferred stock, no par value Authorized: 3,000,000 shares Outstanding: 1996 and 1995--none Common stock, par value $1.00 per share Authorized: 400,000,000 shares Outstanding: 1996--236,250,000 shares; 1995--240,690,000 shares (after deducting shares in treasury: 1996--118,685,000; 1995--114,245,000) (note K) 236,250 240,690 Additional paid-in capital 307,451 258,708 Equity adjustments (note A) (11,966) 5,071 Retained earnings 4,066,275 3,787,495 - ----------------------------------------------------------------------------- Total stockholders' equity 4,598,010 4,291,964 - ----------------------------------------------------------------------------- $11,126,076 $ 9,840,944 =============================================================================
The accompanying notes are an integral part of the financial statements. 25 Raytheon Company and Subsidiaries Consolidated STATEMENTS OF INCOME
(In thousands except per share data) Years Ended December 31: 1996 1995 1994 - -------------------------------------------------------------------------------------- Net sales (note A) $12,330,538 $11,804,174 $10,097,662 - -------------------------------------------------------------------------------------- Cost of sales 9,753,970 9,159,447 7,769,882 Administrative and selling expenses 1,021,127 1,085,765 912,313 Research and development expenses (note A) 323,271 315,581 269,613 Restructuring and special charges (note A) 34,000 125,000 249,751 - -------------------------------------------------------------------------------------- Total operating expenses 11,132,368 10,685,793 9,201,559 - -------------------------------------------------------------------------------------- Operating income 1,198,170 1,118,381 896,103 - -------------------------------------------------------------------------------------- Interest expense 256,253 196,627 48,504 Interest and dividend income (101,996) (26,288) (19,611) Other income, net (note A) (39,549) (243,641) (32,729) - -------------------------------------------------------------------------------------- Non-operating expense (income), net 114,708 (73,302) (3,836) - -------------------------------------------------------------------------------------- Income before taxes 1,083,462 1,191,683 899,939 Federal and foreign income taxes (notes A and I) 322,311 399,195 303,063 - -------------------------------------------------------------------------------------- Net income (note A) $ 761,151 $ 792,488 $ 596,876 ====================================================================================== Earnings per common share (notes A and Q) Outstanding shares $3.21 $3.25 $2.26 Fully diluted $3.16 $3.20 $2.24 - --------------------------------------------------------------------------------------
26 Raytheon Company and Subsidiaries Consolidated STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands) Common Stock Additional Equity Retained Years Ended December 31, Shares Par Value Paid-in Capital Adjustments Earnings 1996, 1995, and 1994: - -------------------------------------------------------------------------------------------- Balance at December 31, 1993 (note Q) 270,428 $270,428 $193,275 $ (2,100) $3,836,257 Net income 596,876 Dividends declared-- $.738 per share (192,681) Proceeds under common stock plans 1,864 1,864 41,476 Treasury shares purchased (25,338) (25,338) (20,638) (758,933) Treasury shares received on exercise of stock options (310) (310) (4,645) Foreign exchange translation adjustments (3,613) FAS No. 87 pension adjustment (3,750) - -------------------------------------------------------------------------------------------- Balance at December 31, 1994 246,644 246,644 209,468 (9,463) 3,481,519 Net income 792,488 Dividends declared-- $.75 per share (182,487) Proceeds under common stock plans 2,388 2,388 64,502 Treasury shares purchased (8,144) (8,144) (7,844) (304,025) Treasury shares received on exercise of stock options (198) (198) (7,418) Foreign exchange translation adjustments 10,374 FAS No. 115 unrealized valuation adjustment 2,973 FAS No. 87 pension adjustment 1,187 - -------------------------------------------------------------------------------------------- Balance at December 31, 1995 240,690 240,690 258,708 5,071 3,787,495 Net income 761,151 Dividends declared-- $.80 per share (189,574) Proceeds under common stock plans 1,864 1,864 63,837 Treasury shares purchased (6,104) (6,104) (6,942) (292,797) Treasury shares received on exercise of stock options (200) (200) (8,152) Foreign exchange translation adjustments (3,071) FAS No. 115 unrealized valuation adjustment (15,045) FAS No. 87 pension adjustment 1,079 - -------------------------------------------------------------------------------------------- Balance at December 31, 1996 236,250 $236,250 $307,451 ($11,966) $4,066,275 ============================================================================================
The accompanying notes are an integral part of the financial statements. 27 Raytheon Company and Subsidiaries Consolidated STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31: 1996 1995 1994 - ------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 761,151 $ 792,488 $ 596,876 Adjustments to reconcile net income to net cash provided by operating activities, net of the effect of acquired companies Depreciation and amortization 368,923 371,399 304,166 Net gain on sale of operating division -- (210,000) - Gain on sale of an investment -- (27,846) (31,056) Sale of receivables 1,208,600 1,081,100 797,000 Increase in accounts receivable (993,944) (964,694) (332,218) (Increase) decrease in contracts in process (580,830) 173,655 72,875 (Increase) decrease in inventories (38,154) 44,748 23,826 Increase in long term receivables (57,014) (11,577) (305,744) (Decrease) increase in advance payments (44,861) (216,762) 90,351 Increase in accounts payable 48,510 37,003 71,820 Increase (decrease) in federal and foreign income taxes 47,341 83,322 (138,889) (Decrease) increase in other current liabilities (373,677) 80,876 32,135 Other adjustments, net (54,750) (59,122) (23,283) - ------------------------------------------------------------------------------------------- Net cash provided by operating activities 291,295 1,174,590 1,157,859 - ------------------------------------------------------------------------------------------- 28 Cash flows from investing activities Additions to property, plant, and equipment (406,005) (328,617) (267,376) Disposals of property, plant, and equipment 15,765 61,861 69,844 Increase in other assets (7,544) (113,599) (2,891) Payment for purchase of acquired companies, net of cash received (584,390) (2,341,522) (151,209) Proceeds from sale of operating units 66,551 449,200 -- Proceeds from sale of an investment -- 10,160 85,113 Additions to intangible assets (23,918) (60,551) (69,568) All other, net 2,059 355 (6,875) - ------------------------------------------------------------------------------------------- Net cash used in investing activities (937,482) (2,322,713) (342,962) - ------------------------------------------------------------------------------------------- Cash flows from financing activities Dividends (189,574) (182,487) (192,681) Increase in short-term debt 1,006,928 139,692 159,912 Increase (decrease) in long-term debt 4,149 1,463,213 (929) Purchase of treasury shares (305,842) (320,013) (804,910) Proceeds under common stock plans 57,348 59,274 38,386 All other, net 2,180 (4,612) (4,122) - ------------------------------------------------------------------------------------------- Net cash provided (used in) financing activities 575,189 1,155,067 (804,344) - ------------------------------------------------------------------------------------------- Effect of foreign exchange rates on cash (237) 732 264 - ------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (71,235) 7,676 10,817 Cash and cash equivalents at beginning of year 208,614 200,938 190,121 - ------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 137,379 $ 208,614 $ 200,938 ===========================================================================================
The accompanying notes are an integral part of the financial statements. 29 NOTES TO FINANCIAL STATEMENTS Note A: Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the parent company and all domestic and foreign subsidiary companies. The books of the parent and all subsidiaries are maintained on a calendar year basis. All material intercompany transactions have been eliminated. Certain amounts in the 1995 and 1994 financial statements and notes have been reclassified to conform with the 1996 presentation. Certain accounts were reclassified in the statements of income to reconcile operating income with segment income. Cash Equivalents and Marketable Securities Cash and cash equivalents include only cash and short-term, highly liquid investments (those with original maturities when purchased of 90 days or less). Cash equivalents and marketable securities are valued in accordance with the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115)(see note P). Dividends are recorded as income when declared. Contracts in Process Sales under long-term contracts are recorded under the percentage of completion method, wherein costs and estimated gross margin are recorded as sales as the work is performed. Costs include direct engineering and manufacturing costs, applicable overheads, and special tooling and test equipment. Estimated gross margin provides for the recovery of allocable research, development (including bid proposal), marketing and administration costs, and for accrued income. Accrued income is based on the percentage of estimated total income that incurred costs to date bear to estimated total costs after giving effect to the most recent estimates of cost and funding at completion. When appropriate, increased funding is assumed based on expected adjustments of contract prices for increased scope and other changes ordered by the customer. Some contracts contain incentive provisions based upon performance in relation to established targets to which applicable recognition has been given in the contract estimates. Since many contracts extend over a long period of time, revisions in cost and funding estimates during the progress of work have the effect of adjusting in the current period earnings applicable to performance in prior periods. When the current contract estimate indicates a loss, provision is made for the total anticipated loss. In accordance with these practices, contracts in process are stated at cost plus estimated profit but not in excess of realizable value. Inventories Aircraft inventories at Raytheon Aircraft, except finished goods, are stated at the lower of cost (principally last-in, first-out) or market. Work in process is stated at total cost incurred reduced by estimated costs of units delivered. 30 All other inventories are stated at cost (principally first-in, first-out or average basis) but not in excess of net realizable value. Research and Development Expenses Research and development expenditures for company-sponsored projects are expensed as incurred. Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Betterments and major renewals are capitalized and included in property, plant, and equipment accounts while expenditures for maintenance and repairs and minor renewals are charged to expense. When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in income. Provisions for depreciation are computed generally on the sum-of-the-years-digits method, except for certain operations, which use the straight-line or declining-balance method. Depreciation provisions are based on estimated useful lives: buildings--20 to 45 years; machinery and equipment, including production tooling--3 to 10 years; equipment leased to others--5 to 10 years. Leasehold improvements are amortized over the lesser of the remaining life of the lease or the estimated useful life of the improvement. Excess of Cost Over Net Assets of Acquired Companies The excess of cost over net assets acquired is amortized on the straight-line method over its estimated useful life but not in excess of 40 years. The company evaluates the possible impairment of goodwill at each reporting period based on the undiscounted projected cash flows of the related business unit. Investments Investments, which are included in Other Assets, include equity ownership of 20 percent to 50 percent in affiliated companies and of less than 20 percent in other companies. Investments in affiliated companies are accounted for under the equity method, wherein the company's share of their earnings and income taxes applicable to the assumed distribution of such earnings are included in net income. Other investments are stated at the lower of cost or fair market value and certain available for sale investments are accounted in accordance with the provisions of SFAS 115. Commissions The company pays commissions to sales representatives, distributors, and agents under various arrangements in return for services rendered in connection with obtaining orders. Such commissions are charged to income as related sales are recorded and, for income statement purposes, are applied as a reduction of sales. In some cases, payment of such commissions is made upon the company's receipt of advance payments under the related contracts or in accordance with schedules contained in the contracts governing commissions, and such amounts are applied as a reduction of advance payments received. Sales have been reduced by $30,337,000, $36,958,000 and $32,552,000 in 1996, 1995, and 1994, respectively, for commission expense. 31 Federal and Foreign Income Taxes The company and its domestic subsidiaries provide for federal income taxes on pretax accounting income at rates in effect under existing tax law. The recovery of foreign tax credits related to foreign contracts, Foreign Sale Corporation (FSC) tax benefits, and other tax credits are recorded on a flow-through basis. Foreign subsidiaries have recorded provisions for income taxes at applicable foreign tax rates in a similar manner. Lease Accounting Revenue from certain qualifying noncancelable aircraft lease contracts are accounted for as sales-type leases wherein the present values of all payments, net of executory costs, are recorded currently as revenues, and the related costs of the aircraft are charged to cost of sales. Associated interest, using the interest method, is recorded over the term of the lease agreements. All other leases for aircraft are accounted for under the operating method wherein revenues are recorded as earned over the rental aircraft lives. Service revenues are recognized ratably over contractual periods or as services are performed. Pension Cost The company and its subsidiaries have several pension and retirement plans covering the majority of employees, including certain employees in foreign countries. Annual charges to income are made for costs of the plans, including current service costs, interest on projected benefit obligations, and net amortization and deferral (unrecognized net obligation (asset) at transition, unrecognized prior service costs, and actuarial net gains or losses), increased or reduced by the return on assets. Unfunded accumulated benefit obligations are accounted for as a long-term liability on the balance sheet. It is the company's policy to fund annually those pension costs which are calculated in accordance with Internal Revenue Service regulations and standards issued by the Cost Accounting Standards Board. Translation of Foreign Currencies Assets and liabilities of foreign subsidiaries are translated at current exchange rates, and the effects of these translation adjustments are reported as a component of equity adjustments in stockholders' equity. The balances at December 31, 1996, 1995, and 1994 were $3,840,000, $6,911,000, and ($3,463,000), respectively. Foreign exchange transaction gains and losses in 1996, 1995, and 1994 were not material. Employee Stock Plans Proceeds from the exercise of stock options under the employee stock plans are credited to common stock at par value, and the excess of the option price over par value is credited to additional paid-in capital. There are no charges or credits to income with respect to the options. The market value at the date of award of restricted stock awards is credited to common stock at par value, and the excess is credited to additional paid-in capital. The market value is also charged to income as compensation expense over the vesting period. Income tax benefits arising from restricted stock transactions, employees' premature disposition of option shares, and exercise of nonqualified stock options are credited to additional paid-in capital. 32 The company adopted statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, in 1996. The standard defines a fair value based method of accounting for employee stock options. The pro forma net income and earnings per share effect of the fair value based accounting is disclosed in the notes to the financial statements. Earnings Per Common Share Earnings per common share are based upon the weighted average number of common shares outstanding during each year. Fully diluted earnings per common share include the additional shares resulting from the assumed exercise of all outstanding dilutive stock options reduced by the number of shares repurchasable from the assumed proceeds of such options. Restructuring and Special Items The company announced in the third quarter of 1996 that it would exit the manual-clean range market and dispose of the assets, including the facility of the Delaware, Ohio, operation. A $34.0 million pre-tax charge ($22.1 million after tax) was recorded for this closing. For 1996, earnings, earnings per share and fully diluted earnings per share were $783.3 million, $3.30 and $3.25 respectively, excluding the special charge. The company recorded in the fourth quarter of 1995 a net pre-tax gain of $210 million from the sale of D.C. Heath, its educational publishing unit. The company adopted statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed of, in the fourth quarter of 1995 which resulted in a $125 million pre-tax special charge ($81.2 million after tax) related to specific assets, liabilities or commitments, and nonrecurring charges of $77 million, related principally to inventory and contract valuations. The net gain resulted in a $5.2 million after-tax increase to net income, or $.02 per share. For 1995, earnings, earnings per share and fully diluted earnings per share were $787.3 million, $3.23 and $3.18 respectively, excluding the one-time gain. The company recorded in the first quarter of 1994 a restructuring provision of $249.8 million before tax. The restructuring was driven by the significant reductions in the defense budget and increasing commercial competition. Approximately 65 percent of the restructuring costs were attributable to Raytheon's defense business and the remainder to its commercial business. Through year-end 1996, $249.3 million of restructuring costs have been incurred, of which $103.4 million was employee-related costs and $145.9 million was related to asset disposals and idle facilities. For 1994, earnings, earnings per share and fully diluted earnings per share were $759.2 million, $2.87 and $2.85 respectively, excluding the restructuring provision. Interest Rate and Foreign Currency Interest Rate Swap Agreements, Rate Locks and Foreign Exchange Contracts The company enters into interest rate and foreign currency interest rate swap agreements with commercial banks to reduce the impact of changes in interest rates and foreign exchange rates on long-term debt and on financing arrangements with customers and foreign subsidiaries. The company meets its working capital requirements mainly with variable rate short-term financing. Interest rate swaps are used to provide purchasers of the company's products with fixed financing terms over extended time periods. Cross-currency interest rates swaps have allowed the company's foreign subsidiaries to meet borrowing 33 needs at lower interest rates compared to local borrowing. The company also enters into foreign exchange contracts to minimize fluctuations in the value of payments due to international vendors and the value of foreign currency denominated receipts. The hedges used by the company are transaction driven and are directly related to a particular asset, liability or transaction for which a commitment is in place. Swaps and foreign exchange contracts are held to maturity and no exchange traded or over-the-counter instruments have been purchased. The impact on the financial position and results of operations from likely changes in foreign exchange rates and interest rates is not material due to the minimizing of risk through the hedging of transactions related to specific assets, liabilities, or commitments. Risks and Uncertainties Companies such as Raytheon, which are engaged in supplying defense-related equipment to the government, are subject to certain business risks peculiar to that industry. Sales to the government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad and other factors. As a result of the 1985 Balanced Budget and Emergency Deficit Reduction Control Act, the federal deficit and changing world order conditions, Department of Defense (DoD) budgets have been subject to increasing pressure resulting in an uncertainty as to the future effects of DoD budget cuts. Raytheon has, nonetheless, maintained a solid foundation of tactical defense systems which meet the needs of the United States and its allies, as well as servicing a broad government program base and wide range of commercial electronic businesses. These factors lead management to believe that there is high probability of continuation of Raytheon's current major tactical defense programs. The company provides long-term financing principally to its aircraft customers. The company sells general and regional aviation long-term receivables to a bank syndicate and a fractional ownership in a defined pool of trade receivables to financial institutions. The banks have recourse against the company, at varying percentages, depending on the character of the receivables sold. The underlying aircraft serve as collateral for the receivables, and the future resale value of the aircraft is an important consideration in the transaction. Based on the company's experience to date with resale activities and pricing, management believes that any liability arising from these transactions will not have a material effect on the company's financial position, liquidity, or results of operations. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 34 Note B: Cash and Marketable Securities (In thousands) Cash and marketable securities consisted of the following at December 31: - ----------------------------------------------------------------- 1996 1995 Cash and cash equivalents $ 137,379 $ 208,614 Marketable securities 1,442 1,670 --------- --------- $ 138,821 $ 210,284 ================================================================= Under the company's cash management program, checks and amounts in transit are not considered reductions of cash or accounts payable until presented to the appropriate banks for payment. At December 31, 1996 and 1995, checks and amounts in transit amounted to $177,600,000 and $182,900,000, respectively. 35 Note C: Contracts in Process
(In thousands) Contracts in process consisted of the following at December 31, 1996 Cost Type Fixed Price Type Total - ---------------------------------------------------------------------------------- U.S. government end-use contracts Billed $ 205,643 $ 139,655 $ 345,298 Unbilled 348,971 1,813,148 2,162,119 Less progress payments - 1,068,638 1,068,638 - ----------------------------------------------------------------------------------- Total 554,614 884,165 1,438,779 - ----------------------------------------------------------------------------------- Other customers Billed 63,474 164,110 227,584 Unbilled 123,457 1,265,478 1,388,935 Less progress payments -- 463,292 463,292 - ----------------------------------------------------------------------------------- Total 186,931 966,296 1,153,227 - ----------------------------------------------------------------------------------- $ 741,545 $1,850,461 $2,592,006 =================================================================================== (In thousands) Contracts in process consisted of the following at December 31, 1995 Cost Type Fixed Price Type Total - ----------------------------------------------------------------------------------- 36 U.S. government end-use contracts Billed $ 251,462 $ 182,320 $ 433,782 Unbilled 303,148 2,239,814 2,542,962 Less progress payments -- 1,368,878 1,368,878 - ----------------------------------------------------------------------------------- Total 554,610 1,053,256 1,607,866 - ----------------------------------------------------------------------------------- Other customers Billed 29,915 95,470 125,385 Unbilled 154,665 692,069 846,734 Less progress payments -- 367,296 367,296 - ----------------------------------------------------------------------------------- Total 184,580 420,243 604,823 - ----------------------------------------------------------------------------------- $ 739,190 $1,473,499 $2,212,689 ===================================================================================
37 The U.S. government has a security title to unbilled amounts associated with contracts that provide for progress payments. Unbilled amounts are recorded on the percentage of completion method and are recoverable from the customer upon shipment of the product, presentation of billings, or completion of the contract. It is anticipated that substantially all of these unbilled amounts, net of progress payments, will be collected during 1997. Billed and unbilled contracts in process include retentions arising from contractual provisions. At December 31, 1996, retentions amounted to $65,285,000 and are anticipated to be collected as follows: 1997--$41,144,000, 1998--$6,352,000, and the balance thereafter. Note D: Inventories (In thousands) Inventories consisted of the following at December 31: 1996 1995 - ---------------------------------------------------------- Finished goods $ 616,660 $ 596,080 Work in process 702,180 728,792 Materials and purchased parts 482,152 456,402 Excess of current cost over LIFO values (157,977) (176,725) - ---------------------------------------------------------- 1,643,015 1,604,549 Less progress payments 52,048 101,566 - ---------------------------------------------------------- $1,590,967 $1,502,983 ========================================================== The inventory values from which the excess of current cost over LIFO values are deductible were $423,564,000 and $488,765,000 at December 31, 1996 and 1995, respectively. Note E: Property, Plant, and Equipment (In thousands) Property, plant, and equipment consisted of the following at December 31: 1996 1995 - ------------------------------------------------------------ Land $ 66,008 $ 53,090 Buildings and leasehold improvements 1,273,678 1,184,072 Machinery and equipment 3,077,606 2,852,721 Equipment leased to others 73,067 25,866 - ------------------------------------------------------------ 4,490,359 4,115,749 Less accumulated depreciation and amortization 2,688,347 2,531,714 - ------------------------------------------------------------ $1,802,012 $1,584,035 ============================================================ 38 Accumulated amortization of equipment leased to others was $5,508,000 and $3,981,000 at December 31, 1996 and 1995, respectively. Future minimum lease payments from noncancelable aircraft operating leases, which extend to 2006, amounted to $35,882,000. At December 31, 1996, these payments were due as follows: (In thousands) 1997 $ 5,717 1998 5,907 1999 5,537 2000 5,270 2001 5,270 Thereafter 8,181 Note F: Other Assets (In thousands) Other assets consisted of the following at December 31: 1996 1995 - ------------------------------------------------------------- Long-term receivables Due from customers in installments to 2009 $ 175,920 $ 102,261 Sales-type leases, due in installments to 2012 21,559 48,277 Other, principally due from 1997 through 2012 31,519 21,707 Investments 251,171 183,034 Deferred charges and other noncurrent assets 161,254 80,129 Excess of cost over net assets of acquired companies (net of accumulated amortization of 3,066,972 2,532,358 $183.6 million and $103.5 million at December 31, 1996 and 1995, respectively) Intangible pension asset 11,774 13,925 - ------------------------------------------------------------- $3,720,169 $2,981,691 ============================================================= Long-term receivables and sales-type leases due from customers, of $197.5 million at December 31, 1996, and $150.5 million at December 31, 1995, included commuter airline receivables of $116.1 million and $47.1 million, respectively. Since it is the company's policy to have the aircraft serve as collateral for the commuter airline receivables, management does not expect to incur any material losses against the net book value of the long-term receivables. The company sold general and commuter aviation long-term receivables to a bank syndicate and sold a fractional ownership in a defined pool of engineering & construction and commercial appliance trade receivables to financial institutions. The interest rate on the general aviation receivables is LIBOR+.55% and on the commuter receivables LIBOR+.4% and +.35% and on the trade receivables commercial paper rate +.225% to +.29%. The interest rates are adjusted based on the company's debt rating. The banks have a first priority claim on all proceeds, including the underlying equipment and any insurance proceeds, and have recourse against the company, at varying percentages, depending upon the character of the receivables sold. The balance of receivables sold to banks or financial institutions and outstanding at December 31, 1996 and December 31, 1995, was $2,493.7 million and $1,912.4 million, respectively, of which 1996 net proceeds of $581.3 million included $288.3 million for commuter and general aviation aircraft. 39 The company will adopt Statement of Financial Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, in 1997. The adoption is not expected to have a material effect on the company's financial position or results of operation. Note G: Notes Payable (In thousands) Notes payable consisted of the following at December 31: 1996 1995 - ----------------------------------------------------------- Notes payable $ 63,050 $ 56,086 Commercial paper 2,155,821 1,148,391 Weighted average interest rate on: Average notes payable borrowings 6.51% 6.30% Average commercial paper 5.40% 5.94% Notes payable borrowings at December 31 5.11% 5.70% Commercial paper at December 31 5.53% 5.83% Aggregate borrowings outstanding Maximum month-end balance $3,135,929 $4,051,846 Average during the year $2,890,261 $2,362,599 - ----------------------------------------------------------- Credit lines or commitments with banks were maintained by subsidiary companies amounting to $188.3 million in 1996 and $196.7 million in 1995. Compensating balance arrangements are not material. In addition, lines of credit with certain commercial banks exist as a standby facility to support the issuance of commercial paper by the company. These lines of credit were $3.5 billion at December 31, 1996 and $3.2 billion at December 31, 1995. Through December 31, 1996, there have been no borrowings under these lines of credit. Total interest payments were $257 million, $160 million, and $48 million for 1996, 1995, and 1994, respectively. 40 Note H: Long-term Debt (In thousands) Long-term debt consisted of the following at December 31: 1996 1995 - ----------------------------------------------------------- 30 year 7.375% debentures due 2025 and redeemable after July 15, 2005 $ 361,834 $ 361,373 10 year 6.5% long-term notes due 2005, not redeemable prior to maturity 730,499 728,216 Commercial paper backed by 5 year fixed for variable interest rate swap at 6.40% 375,000 375,000 Notes (including $19,392,000 and $17,639,000 at December 31, 1996 and 1995 respectively, 41,207 34,708 of mortgage notes and industrial revenue bonds), interest in the range of 2.04% to 10.0% in installments, maturing at various dates from 1997 to 2006 Less installments due within one year 8,064 11,562 - ------------------------------------------------------------ $1,500,476 $1,487,735 ============================================================ The aggregate amounts of installments due for the next five years are: - ------------------------------------------------------------ (In thousands) 1997 $8,064 1998 5,406 1999 9,718 2000 378,017 2001 2,937 Interest expense on long-term debt charged to income was $103,187,000, $52,122,000, and $1,158,000 for 1996 through 1994, respectively. Commercial paper in the amount of $375,000,000 has been classified as long-term due to company borrowings of that amount which are supported by a 5 year Syndicated Bank Credit Agreement combined with a 5 year fixed for variable interest rate swap. In 1995, the company issued $375,000,000 of 30 year, 7.375 percent debentures due in 2025, redeemable after ten years, and $750,000,000 of ten year 6.50 percent notes due in 2005. The proceeds from these issues were used for acquisition financing. The principal amounts of debt were reduced by debt issue discounts and costs at December 31, 1996, as follows: 41 (In thousands) 30 Year Debentures 10 Year Notes - --------------------------------------------------------------- Principal $375,000 $750,000 Unamortized issue discounts (8,879) (7,877) Unamortized interest rate hedging costs (4,287) (11,624) - -------------------------------------------------------------- Net debt $361,834 $730,499 ============================================================== The company has bank agreement covenants which require (1) That the ratio of total debt to total capitalization not exceed 55%, and (2) That the sum of profit before tax plus net interest expense be at least three times net interest expense over the prior four fiscal quarters. The company was in compliance with these covenants during 1996 and 1995. Note I: Federal and Foreign Income Taxes Income reported for federal and foreign tax purposes differs from pretax accounting income due to variations between requirements of Internal Revenue codes and the company's accounting practices. The provisions for federal and foreign income taxes consisted of the following for the years ended December 31: (In thousands) 1996 1995 1994 - ---------------------------------------------------------------- Current income tax expense Federal $169,870 $263,489 $400,482 Foreign 33,784 (23,347) 25,429 Deferred income tax expense Federal 150,983 123,858 (119,663) Foreign (32,326) 35,195 (3,185) - ----------------------------------------------------------------- $322,311 $399,195 $303,063 ================================================================== The provision for income taxes for 1996 through 1994 differs from the U.S. statutory rate due to the following: Tax at statutory rate 35.0% 35.0% 35.0% Research and development tax credit (4.6)(1) (0.4) -- FSC tax benefit (2.5) (2.0) (1.0) Goodwill amortization 1.7 1.3 0.3 Recovery of foreign tax credits -- (0.5) (1.1) Other, net 0.1 0.1 0.5 - ----------------------------------------------------------------- 29.7% 33.5% 33.7% ================================================================= (1) Accrued retroactive research and development tax credits applicable to certain government contracts. 42 In 1996, 1995, and 1994 domestic profit before taxes amounted to $1,061,335,000, $1,126,332,000, and $827,258,000, respectively, and foreign profit before taxes amounted to $22,127,000, $65,351,000, and $72,681,000, respectively. Actual cash income tax payments by year were $274,700,000, $275,300,000, and $425,800,000, respectively, for 1996, 1995, and 1994. In 1996 and 1995, net deferred tax assets were increased by $108,235,000 and $175,813,000, respectively, in connection with acquisitions. Details of the balance sheet captions, "Federal and foreign income taxes, including deferred," at December 31, 1996, 1995 and 1994 are as follows: (In thousands) 1996 1995 1994 - ---------------------------------------------------------------- Current deferred tax assets (liabilities): Inventory and other $ 10,215 $ 78,377 $ 50,078 Long-term contracts 198,861 115,992 97,054 Restructuring reserve 154 3,261 55,055 Inventory capitalization 16,611 27,689 29,546 Other (43,779) (17,803) (7,203) - ----------------------------------------------------------------- Net current deferred tax assets 182,062 207,516 224,530 Current period tax prepaid (liability) 64,058 (10,805) (58,915) - ----------------------------------------------------------------- Federal and foreign income taxes, including deferred--current $ 246,120 $ 196,711 $ 165,615 ================================================================= Noncurrent deferred tax assets (liabilities): Depreciation $(125,684) $(115,819) $ (97,095) Revenue on leases (58,096) (79,237) (27,596) Postretirement benefits 104,730 103,014 -- Other (6,715) (8,755) (9,880) - ----------------------------------------------------------------- Noncurrent deferred tax liabilities (85,765) (100,797) (134,571) - ----------------------------------------------------------------- Federal and foreign income taxes, including deferred -- noncurrent $ (85,765) $(100,797) $(134,571) ================================================================= Note J: Commitments and Contingencies At December 31, 1996, the company had commitments under long-term leases requiring approximate annual rentals on a net lease basis as follows: (In thousands) - --------------------------- 1997 $85,041 1998 69,677 1999 56,052 2000 46,655 2001 39,827 Thereafter 182,162 - --------------------------- 43 Rental expense for 1996, 1995, and 1994 amounted to $112,649,000, $102,925,000, and $79,887,000, respectively. Defense contractors are subject to many levels of audit and investigation. Among agencies that oversee contract performance are the Defense Contract Audit Agency, the Inspector General, the Defense Criminal Investigative Service, the General Accounting Office, the Department of Justice, and Congressional Committees. Over recent years, the Department of Justice has convened Grand Juries from time to time to investigate possible irregularities by the company in government contracting. Management believes that such investigations, individually and in the aggregate, will not have any material adverse effect upon the financial condition of the company. The company self-insures for losses and expenses for aircraft product liability up to a maximum of $50 million annually. Excess insurance is purchased from third parties to cover excess aggregate liability exposure from $50 million to $1 billion. This coverage also includes the excess of liability over $10 million per occurrence. The aircraft product liability reserve at December 31, 1996 was $27.5 million. Recurring costs associated with the company's environmental compliance program are not material and are expensed as incurred. Capital expenditures in connection with environmental compliance are not material. The company is involved in various stages of investigation and cleanup relative to remediation of various sites. All appropriate costs incurred in connection therewith have been expensed. Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage, and the unresolved extent of the company's responsibility, it is difficult to determine the ultimate outcome of these matters. However, in the opinion of management, any additional liability will not have a material effect on the company's financial position, liquidity, or results of operations after giving effect to provisions already recorded. The company will adopt the American Institute of Certified Public Accountants Statement of Position 96-1, Environmental Remediation Liabilities, in 1997. The adoption of the standard will not have a material effect on the company's financial position or results of operations. The company issues guarantees and has banks issue, on its behalf, letters of credit to meet various bid, performance, warranty, retention and advance payment obligations. Approximately $1,363 million, $979 million and $519 million of these contingent obligations, net of related outstanding advance payments, were outstanding at December 31, 1996, 1995, and 1994, respectively. These instruments expire on various dates through the year 2003. Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened against the company. While the ultimate liability from these proceedings is presently indeterminable, in the opinion of management, any additional liability will not have a material effect on the company's financial position, liquidity, or results of operations after giving effect to provisions already recorded. 44 Note K: Employee Stock Plans The 1976 Stock Option Plan provides for the grant of both incentive and nonqualified options at an exercise price which is 100% of the fair market value on the date of grant. The 1991 Stock Option Plan provides for the grant of incentive options at an exercise price which is 100% of the fair market value, and non-qualified options at an exercise price which may be less than the fair market value on the date of grant. The 1995 Stock Option Plan provides for the grant of both incentive and nonqualified options at an exercise price which is not less than 100% of the fair market value on the date of grant. The plans also provide that all options may be exercised in their entirety 12 months after the date of grant. Incentive options terminate 10 years from the date of grant, and those options granted after Dec. 31, 1986 become exercisable to a maximum of $100,000 per year. Nonqualified options terminate 11 years from the date of grant or 10 years and a day if issued in connection with the 1995 plan. The 1991 plan also provides for the award of restricted stock and restricted units. Restricted awards are made at prices determined by the Compensation Committee of the Board of Directors and are compensatory in nature. Restricted stock and restricted unit awards vest over a specified period of time of not less than one year nor more than 10 years. The plans' expiration dates are March 22, 1998, March 26, 2001 and March 21, 2005. All restricted stock awards entitle the participant to full dividend and voting rights. Unvested shares are restricted as to disposition and subject to forfeiture under certain circumstances. Upon issuance of restricted shares, unearned compensation is charged to share-owners' equity for the cost of restricted stock and recognized as compensation expense ratably over the vesting periods, as applicable. Awards of 19,500; 256,000; and 380,000 shares of restricted stock were made to employees at a weighted average value at the grant date of $50.87, $38.07, and $32.29 in 1996, 1995 and 1994, respectively. The amount of compensation expense recorded was $6.9 million, $4.8 million and $2.9 million for 1996, 1995 and 1994, respectively. There were 49,562,000; 51,383,000; and 13,765,000 shares of common stock(including shares held in treasury) reserved for stock options and restricted stock awards at December 31, 1996, 1995, and 1994, respectively. The following are the shares exercisable at the corresponding weighted average exercise price at December 31, 1996, 1995, and 1994, respectively: 8,820,000 at $31.32; 7,319,000 at $26.71; and 5,531,000 at $22.04. Information for the years 1993 through 1996 with respect to the plans are as follows: 45 Note K: Employee Stock Plans Stock Options Shares Weighted Average Option Price - ------------------------------------------------------------------ (In thousands) Outstanding at December 31, 1993 7,054 $ 21.64 Granted 3,688 32.79 Exercised (1,452) 20.00 Expired (132) 28.22 - ------------------------------------------------------------- Outstanding at December 31, 1994 9,158 $ 26.30 Granted 4,071 36.61 Exercised (2,132) 22.92 Expired (316) 34.04 - ------------------------------------------------------------- Outstanding at December 31, 1995 10,781 $ 30.63 Granted 3,890 52.53 Exercised (1,845) 26.91 Expired (256) 45.47 - ------------------------------------------------------------- Outstanding at December 31, 1996 12,570 $ 37.65 ============================================================= The following table summarizes information about stock options outstanding at December 31, 1996: Stock Options Outstanding Options Outstanding Options Exercisable Weighted Average Weighted Weighted Shares Contractual Average Shares Average Exercise Outstanding Remaining Exercise Exercisable Exercise Price Range At 12/31/96 Life Price at 12/31/96 Price - -------------------------------------------------------------------------------- $15.51 to $35.38 5,836,183 6.1 years $27.37 5,836,183 $27.37 $39.03 to $52.25 3,050,127 8.4 years $39.31 2,983,627 $39.06 $52.56 to $54.63 3,684,050 9.4 years $52.56 -- -- - -------------------------------------------------------------------------------- Total 12,570,360 8,819,810 ================================================================================ 46 The company applies Accounting Principles Board Opinion No.25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for restricted stock. The company has adopted the disclosure-only provisions of Financial Accounting Standards No.123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost was recognized for the stock option plans. Had compensation cost for the company's stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No.123, the company's net income and earnings per share would have approximated the pro forma amounts indicated below: (000's omitted) 1996 1995 - -------------------------------------------------------- Net income-as reported $ 761,151 $ 792,488 Net income-pro forma $ 739,165 $ 779,175 Earnings per share-as reported $3.21 $3.25 Earnings per share-pro forma $3.11 $3.19 Fully diluted-as reported $3.16 $3.20 Fully diluted-pro forma $3.06 $3.14 The weighted-average fair value of each option granted in 1996 and 1995 is estimated as $10.79 and $8.30 on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Expected life 4 years Assumed annual dividend 6% growth rate (5 year historical rate) Expected volatility 15% Risk free interest rate 5% to 7.5% range (the month-end yields on 4 year treasury strips equivalent zero coupon) Assumed annual forfeiture rate 5% The effects of applying SFAS No.123 in this pro forma disclosure are not indicative of future amounts. SFAS No.123 does not apply to awards prior to 1995 and additional awards in future years are anticipated. Note L: Pension and Other Employee Benefits The company and its subsidiaries have several pension and retirement plans covering the majority of employees, including certain employees in foreign countries. The major plans covering salaried and management employees provide pension benefits that are based on the five highest consecutive years of the employee's compensation in the ten years before retirement. Plans covering hourly and union employees generally provide benefits of stated amounts for each year of service, but in some cases can also use a final average pay based calculation. The company's funding policy for the salaried plans is to contribute annually at a rate that is intended to remain at a level percentage of compensation for the covered employees. The company's funding policy on the hourly and union plans is to contribute annually at a rate that is intended to remain level for the covered employees. Unfunded prior service costs under the funding policy are generally amortized over periods from 10 to 30 years. Total pension expense was $93,283,000; $31,156,000; and $29,908,000; in 1996 through 1994, respectively. Foreign pension expense was $9,937,000; $8,287,000; and $4,866,000 in 1996 through 1994, respectively. 47 Net periodic pension cost for the company and its subsidiaries in 1996 through 1994 included the following components:
(In thousands) Years ending December 31: 1996 1995(1) 1994 - -------------------------------------------------------------------------- Service cost--benefits earned during the period $ 126,589 $ 98,207 $ 95,537 Interest cost on projected benefit obligation 307,115 267,891 218,118 Actual (gain)/loss on assets (669,917) (955,942) 37,612 Net amortization and deferral 325,191 626,217 (323,866) Curtailment adjustments 1,176 (7,815)(2) -- - -------------------------------------------------------------------------- Net periodic pension costs 90,154 28,558 27,401 Defined contribution pension plans 3,129 2,598 2,507 - -------------------------------------------------------------------------- Total pension costs $ 93,283 $ 31,156 $ 29,908 ========================================================================== Assumptions used in the accounting were: Discount rate 7.75% 7.50% 8.25% Expected long-term rate of return on assets 9.25% 9.00% 9.00% Rate of increase in compensation levels 4.50% 4.50% 5.00% - --------------------------------------------------------------------------
48
The following table sets forth the funded status of the plans at: (In thousands) December 31, 1996 December 31, 1995 (1) - ------------------------------------------------------------------------------------------ Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits Benefits Exceed Benefits Exceed Assets Assets - ------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefit obligation $(3,603,273) $ (68,623) $ (3,399,386) $ (57,583) ========================================================================================== Accumulated benefit obligation $(3,752,844) $ (70,840) $ (3,538,658) $ (68,021) ========================================================================================== Projected benefit obligation $(4,183,811) $ (83,104) $ (3,998,382) $ (74,544) Plan assets at fair value 4,960,892 -- 4,451,725 -- - ------------------------------------------------------------------------------------------ Projected benefit obligation (in excess of) or less than plan assets 777,081 (83,104) 453,343 (74,544) Unrecognized net (gain) or loss (762,898) 15,199 (411,413) 11,907 Prior service cost not yet recognized in net periodic pension cost 212,641 12,544 212,270 13,723 Unrecognized net obligation (asset) at transition (34,423) 911 (42,652) 1,138 Adjustment required to recognize additional minimum liability -- (18,047) -- (21,330) - ------------------------------------------------------------------------------------------ Prepaid pension cost (liability) $ 192,401 $ (72,497) $ 211,548 $ (69,106) ==========================================================================================
49 Plan assets primarily include equity and fixed income securities and, in addition to normal funding contributions, include prepayments of $60,719,000; and $1,900,000 made in 1995 and 1994 respectively. The company's salaried pension plan provides that in the event of a termination of the plan within three years after an involuntary change of control of the company, the assets of the plan will be applied to satisfy all liabilities to participants and beneficiaries in accordance with section 4044 of the Employee Retirement Income Security Act of 1974. Any remaining assets will be applied on a pro rata basis to increase the benefits to the participants and beneficiaries. In addition to providing pension benefits, the company and most of its subsidiaries provide certain health care and life insurance benefits for retired employees. Substantially all of the company's U.S. employees may become eligible for these benefits if they reach normal retirement age while working for the company. Retiree health plans are paid for in part by retiree contributions, which are adjusted annually. Benefits are provided through various insurance companies whose charges are based either on the benefits paid during the year or annual premiums. Health benefits are provided to retirees, their covered dependents and beneficiaries. Retiree life insurance plans are noncontributory and cover the retiree only. In 1993, the company adopted Statement of Financial Accounting Standards No.106, Employers' Accounting for Postretirement Benefits Other than Pensions, which requires recognition of an accumulated postretirement benefit obligation for retiree costs existing at the time of implementation, as well as an incremental expense recognition for changes in the obligation attributable to each successive year. Prior to 1995, all company segments had elected to amortize past service costs over the allowable 20 year period. During 1995 the company acquired E-Systems, Inc. who had elected in 1992 to recognize all its past service cost immediately upon implementation. The company is funding the liability for many salaried and hourly employees and plans to continue to do so. The net postretirement benefit cost for the company and its subsidiaries in 1996, 1995 and 1994 included the following components: 50
(In thousands) Years ending December 31: 1996 1995(1) 1994 - ----------------------------------------------------------------------------------- Service cost--benefits earned during the period $ 9,297 $ 8,265 $ 5,546 Interest cost on accumulated postretirement benefit obligation 52,472 47,906 37,355 Actual (gain)/ loss on assets (29,482) (8,283) 600 Amortization of transition obligation 26,712 27,340 24,830 Other amortizations and deferrals (net) 7,146 (11,299) (6,316) Curtailment and other adjustments 3,159 18,900(3) -- - -------------------------------------------------------------------------------------- Net postretirement benefit cost $ 69,304 $ 82,829 $ 62,015 ====================================================================================== 51 Assumptions used in the accounting were: Discount rate 7.75% 7.50% 8.25% Expected long-term rate of return on assets 8.75% 8.50% 8.50% Rate of increase in compensation levels 4.50% 4.50% 5.00% Health care trend rate in the next year 7.00% 7.50% 8.00% Gradually declining to a trend rate of 5.00% 5.00% 5.00% In the years 2001 & beyond 2001 & beyond 2001 & beyond - -------------------------------------------------------------------------------------------
52 The following amounts are recognized in the balance sheet at:
(In thousands) Years ending December 31:1996 1995(1) 1994 - --------------------------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees $ (559,666) $ (516,767) $ (356,573) Active employees eligible for benefits (41,158) (32,339) (45,501) Active employees not yet eligible for benefits (131,260) (138,888) (73,674) - --------------------------------------------------------------------------------- Total obligation (732,084) (687,994) (475,748) Plan assets at fair value 183,750 175,172 105,983 - --------------------------------------------------------------------------------- Total obligation (in excess of) plan assets (548,334) (512,822) (369,765) Unrecognized net (gain) (67,258) (127,279) (89,074) Unrecognized prior service cost (12,969) (14,214) -- Unrecognized net obligation at transition 360,255 390,079 446,786 - --------------------------------------------------------------------------------- Accrued postretirement benefit cost $ (268,306) $ (264,236) $ (12,053) =================================================================================
53 The effect of a one percentage point increase in the assumed health care trend rate for each future year on: Aggregate of service and interest cost $ 3,576 $ 3,055 $ 3,706 Accumulated postretirement benefit obligation $ 43,596 $ 37,979 $ 38,262 (1) 1995 data, including $17,117,000 of Net Periodic Pension Cost, $7,853,000 of Accrued Pension Cost, $15,041,000 of Net Periodic Postretirement Benefit Cost. Benefit Cost and $235,383,000 of Accrued Postretirement Benefit Cost, were a result of having acquired E-Systems, Inc. in April 1995. (2) Various plan curtailments were recognized, as a result of workforce reductions which were planned as part of the restructuring program. (3) Benefit enhancements were made to various plans during the year in order to accelerate attrition through voluntary retirements. 54 The company has adopted Statement of Financial Accounting Standards No. 112 (FAS 112), Employers' Accounting for Postemployment Benefits, in 1994. FAS 112 requires that benefits to be paid for former or inactive employees after employment but prior to retirement must be accrued if certain criteria are met. The adoption of FAS 112 had no material financial impact on the company. Under the terms of the Raytheon Savings and Investment Plan, a defined contribution plan, covered employees are allowed to contribute up to 17 percent of their pay limited to $9,500. The company contributes amounts equal to 50 percent of the employee's contributions, up to a maximum of 3 percent of the employee's pay. Total expense for the plan was $68,090,000; $64,563,000; and $49,436,000 for 1996 through 1994, respectively. The company's annual contribution to the Raytheon Employee Stock Ownership Plans is approximately one-half of one percent of salaries and wages, limited to $150,000, of substantially all United States salaried and a majority of hourly employees. The expense was $14,670,000; $11,748,000; and $11,768,000 and the number of shares allocated to participant accounts was 296,000; 177,000 and 185,000 for 1996 through 1994, respectively. Note M: Business Segment Reporting For information regarding business segment reporting for 1996, 1995, and 1994, see page 46. 55 Note N: Acquisitions and Divestitures The company has included in its consolidated results of operations the acquisitions under the purchase method of accounting of the following companies: the aircraft modification and defense electronics businesses of Chrysler Technologies (from June 1996); the engineering and construction assets of Rust International (from June 1996); and the marine communication assets of Standard Radio ABof Sweden (from June 1996). The cash paid for the acquisitions, net of cash acquired, was $584.4 million. No pro forma results have been presented since they would not be material to the consolidated results. The following unaudited pro forma financial information combines Raytheon and E-Systems results of operations as if the acquisition had taken place on January 1, 1995, and on January 1, 1994. The pro forma results are not necessarily indicative of what the results of operations actually would have been if the transaction had occurred on the applicable dates indicated and are not intended to be indicative of future results of operations. (In millions except earnings per share) 1995 1994* - -------------------------------------------------------- Net sales $12,397 $12,046 Net income 794 584 Earnings per share 3.25 2.21 - -------------------------------------------------------- *includes after tax restructuring provision of $162.3 million, or $.61 per share. Also, in April 1996, the company sold Xyplex, its data networking subsidiary, for $117.5 million in cash and securities. Note O: Quarterly Operating Results (unaudited) For information regarding quarterly operating results for 1996 and 1995 see page 47. Note P: Financial Instruments For certain financial instruments, including cash, cash equivalents, marketable securities, and short-term debt, it is estimated that carrying value approximates fair value, due to their short maturities and varying interest rates of the debt. The carrying value of notes receivable at December 31, 1996 and 1995 is estimated to approximate fair value based principally on the underlying interest rates and terms, maturities, collateral, and credit status of the receivables. The carrying values of marketable securities and investments are based on quoted market prices or the present value of future cash flows and earnings which approximate fair value. The value of the guarantees and letters of credit reflect fair value. The fair value of long-term debt at December 31, 1996 and 1995 was estimated based on current rates offered to the company for similar debt with the same maturities and approximates the carrying value. 56 At December 31, 1996 and 1995, the company had outstanding interest rate swap agreements, with notional amounts, and foreign currency forward exchange contracts which minimized or eliminated risk associated with interest rate changes or foreign currency exchange rate fluctuations. All of these financial instruments were related to specific transactions and particular assets or liabilities for which a firm commitment existed. These instruments were executed with credit-worthy institutions and the majority of the foreign currencies were denominated in currencies of major industrial countries: (In thousands) 1996 1995 - -------------------------------------------------------- Interest rate swaps $388,785 $ 394,268 Foreign exchange contracts $270,017 $335,068 - -------------------------------------------------------- The following table summarizes major currencies and contract amounts associated with foreign exchange contracts: (In thousands) 1996 1995 - --------------------------------------------------------------- Buy Sell Buy Sell - --------------------------------------------------------------- Pound Sterling $ 94,742 $ 5,129 $ 25,007 $ 2,784 Japanese Yen 9,160 30,707 2,292 58,453 Netherlands Guilder 3,437 75,600 90,144 -- German Mark 1,153 - 16,410 390 Canadian Dollar 17,287 1,248 35,562 2,021 French Franc 10,400 -- 71,663 -- Australian Dollar 16,175 -- 20,015 -- All others 2,738 2,241 6,885 3,442 - --------------------------------------------------------------- Total $155,092 $114,925 $267,978 $ 67,090 =============================================================== Foreign currencies are translated at current rates at the reporting date. "Buy" amounts represents the U.S. dollar equivalent of commitments to purchase foreign currencies and "sell" amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. Swap contracts mature at various dates through the year 2000 and essentially fix the interest rates on that portion of debt at rates from 4.7 percent to 9.5 percent at December 31, 1996, and 1995, respectively. Foreign exchange forward contracts, used primarily to minimize fluctuations in the values of foreign currency payments and receipts, have maturities at various dates through April, 1999. Fair values for these contracts were determined by applying December 31, 1996, spot rates to the eight major currencies and comparing the U.S. dollar equivalents to the U.S. dollar contract amounts for the same currencies. The resulting difference was not material and approximates the contract amounts. The company, in order to lock in favorable rates, entered into interest rate swaps and locks in connection with the 1995 issuance of $750 million ten-year notes and $375 million thirty-year debentures. Both the interest rate swaps and locks were unwound prior to the issue of the 1995 debt. 57 Note Q: Stock Split All share data have been restated to reflect the stock split effective on October 23, 1995. Note R: Subsequent Events On January 6, 1997, the company announced that the Board of Directors approved a definitive agreement to purchase the assets of Texas Instruments' defense operations for $2.950 billion in cash. Texas Instruments Defense Systems and Electronics Group, headquartered in Lewisville, Texas will have 1996 revenues of approximately $1.8 billion. The group is a premier supplier of advanced defense systems, including precision-guided weapons, antiradiation and strike missiles, airborne radar, night vision systems and electronic warfare systems. The group has approximately 12,000 employees, based largely in Texas. The transaction is subject to Hart-Scott-Rodino antitrust review and is expected to close in the second quarter of 1997. On January 16, 1997, the company announced that it has entered into definitive agreements with Hughes Electronics Corporation to bring about the merger of the Hughes Electronics defense operations (Hughes Aircraft) and Raytheon. The combined company will be called Raytheon. The transaction is valued at $9.5 billion, comprised of approximately $5.1 billion in common stock and $4.4 billion in debt. The company's debt will increase as a result of the planned transactions and the covenants applicable to the existing financing arrangements have been modified by the participating entities to accommodate the increase in debt. Hughes Aircraft, the Hughes Electronics' defense business, will have 1996 revenues of approximately $6.3 billion. It has approximately 40,000 employees, principally in the states of California, Arizona, Indiana, Texas and Virginia. Hughes is a premier supplier of advanced defense electronics systems and services, principally in Naval systems, airborne and ground-based radars, ground, air and ship-launched missiles, tactical communications, and training simulators and services. Hughes also supplies Air Traffic Control systems to the U.S. Federal Aviation Administration and to foreign governments, and is active in the fields of global positioning systems and infrared/electro-optics. The transaction is subject to approval by Raytheon's stockholders, certain regulatory approvals (including Hart-Scott-Rodino antitrust review), approval by the holders of GM and GM "H" common stocks, and the receipt by GM of rulings from the Internal Revenue Service relating to certain federal income tax consequences of the transaction. Transaction Summary Hughes Aircraft will be spun off to the holders of GM's $1-2/3 and Class H common stocks in a transaction intended to be tax free. In connection with the spin-off and subsequent merger, two classes of common stock will be created: Class A common stock, which will be held by GM $1-2/3 and Class H stockholders after the spin-off and will be entirely held by the public; and Class B common stock. Immediately following the spin-off of Hughes Aircraft, Raytheon and Hughes Aircraft will merge. In the merger, Raytheon stockholders will receive all of the Class B common stock of the combined company. The Class B common stock will represent approximately 70 percent of the equity of the combined company, and the Class A common stock will represent the remaining, approximately 30 percent. 58 The merger terms provide that Hughes Aircraft's total debt will be adjusted to reflect variations in the market price of Raytheon stock, subject to specified limits, so that the two components of value will total $9.5 billion so long as such market price is between $44.42 and $54.29 per share. The approximately $5.1 billion in common stock issued to the Class A stockholders is based upon the midpoint of this range. The balance of the $9.5 billion transaction value will be made up of approximately $4.4 billion in Hughes Aircraft debt. In the election of directors to the combined company board, Class A common stock will have an 80.1 percent voting interest, and Class B common stock will have a 19.9 percent voting interest. The board of directors will have staggered terms for directors. Except as to voting rights for directors, each class will vote separately as to all other matters, and the Class A and Class B stock will have identical rights. In a merger, acquisition or any other type of reorganization, Class A and Class B common stock must receive the same consideration. On February 23, 1997, the company announced that it is evaluating strategic alternatives for the Appliance Group, which may result in the sale or merger of the group at some time in the future. The company retained an advisor to assist with this evaluation. The decision to undertake this strategic reassessment was made in the context of Raytheon's financial priorities, and the belief that the Appliance Group may have greater value to another company with more focus on the markets served by the group. Company Responsibility for Financial Statements Raytheon Company has prepared the financial statements and related data contained in this Annual Report. The company's financial statements have been prepared in conformity with generally accepted accounting principles and reflect judgments and estimates as to the expected effects of transactions and events currently being reported. Raytheon is responsible for the integrity and objectivity of the financial statements and other financial data included in this report. To meet this responsibility, the company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are properly executed and recorded. The system includes policies and procedures, internal audits, and company officers' reviews. /s/ Peter R. D'Angelo Peter R. D'Angelo Executive Vice President, Chief Financial Officer The Audit Committee of the Board of Directors is composed solely of outside directors. The Committee meets periodically and, when appropriate, separately with representatives of the independent accountants, company officers, and the internal auditors to monitor the activities of each. Upon recommendation of the Audit Committee, Coopers & Lybrand L.L.P., independent accountants, have been selected by the Board of Directors to audit the company's financial statements and their report follows. /s/ Dennis J. Picard Dennis J. Picard Chairman and Chief Executive Officer 59 Report of Independent Accountants To the Board of Directors and Stockholders Raytheon Company Lexington, Mass. We have audited the accompanying balance sheets of Raytheon Company and Subsidiaries Consolidated as of December 31, 1996 and 1995, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Raytheon Company and Subsidiaries Consolidated as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Mass. January 20,1997, except as to the information presented in note R for which the date is February 23, 1997. EX-21 4 1 EXHIBIT 21 SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT Subsidiary Where Organized Percentage Owned Raytheon E-Systems, Inc. Delaware 100% Raytheon Aircraft Company Kansas 100% Raytheon Engineers & Constructors Constructors International, Inc. Delaware 100% EX-23 5 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Raytheon Company and Subsidiaries Consolidated on Form S-8 (File Nos. 2-55841, 2-87308, 2-93903, 2-93871, 33-3720, 33-3723, 33-5650, 33-10811, 33-14165, 33-15242, 33-15396, 33-15397, 33-15398, 33-21454, 33-21741, 33-22211, 33-23449, 33-23751, 33-24695, 33-49041, 33-49033 and 333-22969) and on Form S-3 (File Nos. 33-49045, 33-49269 and 33-59241) of our reports dated January 18, 1997 except as to information presented in Note R for which the date is February 23, 1997, on our audits of the consolidated financial statements and financial statement schedules of Raytheon Company and Subsidiaries Consolidated as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996 which reports are incorporated by reference or included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand Coopers & Lybrand L.L.P. Boston, Massachusetts March 27, 1997 EX-23 6 1 EXHIBIT 23.2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Raytheon Company: Our report on the consolidated financial statements of Raytheon Company and Subsidiaries Consolidated has been incorporated by reference in this Form 10-K from page 66 of the 1996 Annual Report to Stockholders of Raytheon Company. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in Item 14(a) of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, represents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts January 20, 1997, except for the information presented in Note R for which the date is February 23, 1997 1 EX-27 7 ART. 5 FDS FOR YEAR 10-K
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 137,379 1,442 828,975 (20,260) 1,590,967 5,603,895 4,490,359 (2,688,347) 11,126,076 4,691,833 1,092,333 236,250 0 0 4,361,760 11,126,076 12,330,538 12,330,538 9,753,970 9,753,970 357,271 0 256,253 1,083,462 322,311 0 0 0 0 761,151 3.21 3.16
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