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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ...... to ......
Commission File Number 1-13699
RAYTHEON COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-1778500
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
141 SPRING STREET, LEXINGTON, MASSACHUSETTS 02421
(Address of Principal Executive Offices) (Zip Code)
(781) 862-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Number of shares of common stock outstanding as of June 30, 2002: 402,886,000
RAYTHEON COMPANY
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYTHEON COMPANY
- ----------------
BALANCE SHEETS (Unaudited)
June 30, 2002 Dec. 31, 2001
------------- -------------
(In millions)
ASSETS
Current assets
Cash and cash equivalents $ 1,642 $ 1,214
Accounts receivable, less allowance for
doubtful accounts 461 480
Contracts in process 3,563 3,204
Inventories 2,083 2,030
Deferred federal and foreign income taxes 649 669
Prepaid expenses and other current assets 119 309
Assets from discontinued operations 105 1,631
---------- ----------
Total current assets 8,622 9,537
Property, plant, and equipment, net 2,319 2,196
Goodwill, net 11,168 11,370
Other assets, net 3,588 3,572
---------- ----------
Total assets $ 25,697 $ 26,675
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion
of long-term debt $ 1,783 $ 1,363
Advance payments, less contracts in
process 845 883
Accounts payable 767 910
Accrued salaries and wages 560 573
Other accrued expenses 1,468 1,529
Liabilities from discontinued operations 609 550
---------- ----------
Total current liabilities 6,032 5,808
Accrued retiree benefits and other
long-term liabilities 1,269 1,283
Deferred federal and foreign income taxes 835 563
Long-term debt 6,038 6,874
Mandatorily redeemable equity securities 857 857
Stockholders' equity 10,666 11,290
---------- ----------
Total liabilities and stockholders' equity $ 25,697 $ 26,675
========== ==========
The accompanying notes are an integral part of the financial statements.
RAYTHEON COMPANY
- ----------------
STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In millions, except per share amounts)
Net sales $ 4,095 $ 4,097 $ 8,006 $ 7,869
-------- -------- -------- --------
Cost of sales 3,207 3,283 6,367 6,355
Administrative and selling expenses 313 296 607 566
Research and development expenses 121 123 225 245
-------- -------- -------- --------
Total operating expenses 3,641 3,702 7,199 7,166
-------- -------- -------- --------
Operating income 454 395 807 703
-------- -------- -------- --------
Interest expense 131 183 270 372
Interest income (10) (12) (17) (21)
Other expense (income), net 13 (18) 21 (48)
-------- -------- -------- --------
Non-operating expense, net 134 153 274 303
-------- -------- -------- --------
Income from continuing operations before taxes 320 242 533 400
Federal and foreign income taxes 97 106 161 170
-------- -------- -------- --------
Income from continuing operations 223 136 372 230
Discontinued operations
Loss from discontinued operations (530) (508) (546) (839)
Tax benefit (provision) 171 180 (37) 293
-------- -------- -------- --------
(359) (328) (583) (546)
-------- -------- -------- --------
Loss before extraordinary item and accounting change (136) (192) (211) (316)
Extraordinary gain from debt repurchases, net of tax - 4 1 4
Change in accounting principle, net of tax - - (509) -
-------- -------- -------- --------
Net loss $ (136) $ (188) $ (719) $ (312)
======== ======== ======== ========
Earnings per share from continuing operations
Basic $ 0.56 $ 0.39 $ 0.94 $ 0.67
Diluted $ 0.54 $ 0.38 $ 0.91 $ 0.66
Loss per share
Basic $ (0.34) $ (0.54) $ (1.81) $ (0.90)
Diluted $ (0.33) $ (0.53) $ (1.76) $ (0.89)
Dividends declared per share $ 0.20 $ 0.20 $ 0.40 $ 0.40
The accompanying notes are an integral part of the financial statements.
RAYTHEON COMPANY
- -----------------
STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30, 2002 July 1, 2001
------------- ------------
(In millions)
Cash flows from operating activities
Income from continuing operations $ 372 $ 230
Adjustments to reconcile income from continuing operations
to net cash used in operating activities, net of the
effect of divestitures
Depreciation and amortization 175 333
Net gain on sale of operating units - (74)
Increase in accounts receivable (41) (78)
(Increase) decrease in contracts in process (355) 56
Increase in inventories (74) (395)
Decrease (increase) in current deferred federal and foreign
income taxes 44 (159)
Decrease in prepaid expenses and other current assets 144 24
Decrease in advance payments (27) (109)
(Decrease) increase in accounts payable (115) 13
Decrease in accrued salaries and wages (13) (15)
Increase (decrease) in other accrued expenses 50 (161)
Other adjustments, net 303 260
----------- -----------
Net cash provided by (used in) operating activities from
continuing operations 463 (75)
Net cash used in operating activities from discontinued operations (483) (215)
----------- -----------
Net cash used in operating activities (20) (290)
----------- -----------
Cash flows from investing activities
Sale of financing receivables, net of repurchases 7 334
Origination of financing receivables (141) (394)
Collection of financing receivables not sold 68 55
Expenditures for property, plant, and equipment (190) (187)
Proceeds from sales of property, plant, and equipment 9 7
Expenditures for internal use software (52) (78)
Increase in other assets (27) (5)
Hughes defense settlement 134 -
Proceeds from sales of operating units and investments 1,123 266
----------- -----------
Net cash provided by (used in) investing activities from continuing
operations 931 (2)
Net cash used in investing activities from discontinued operations - (13)
----------- -----------
Net cash provided by (used in) investing activities 931 (15)
----------- -----------
Cash flows from financing activities
Dividends (159) (136)
Decrease in short-term debt (356) (822)
Decrease in long-term debt (98) (304)
Issuance of equity security units - 837
Issuance of common stock 61 376
Proceeds under common stock plans 69 12
----------- -----------
Net cash used in financing activities (483) (37)
----------- -----------
Net increase (decrease) in cash and cash equivalents 428 (342)
Cash and cash equivalents at beginning of year 1,214 871
----------- -----------
Cash and cash equivalents at end of period $ 1,642 $ 529
=========== ===========
The accompanying notes are an integral part of the financial statements.
RAYTHEON COMPANY
- ----------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
- -------------------------
The accompanying unaudited financial statements of Raytheon Company (the
"Company") have been prepared on substantially the same basis as the Company's
annual consolidated financial statements. These interim unaudited financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 and the Company's Current Report
on Form 8-K, filed on June 28, 2002. The information furnished has been prepared
from the accounts of the Company without audit. In the opinion of management,
these financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the financial statements
for the interim periods. The financial statements for all periods presented have
been restated to reflect the disposition of Aircraft Integration Systems (AIS)
as disclosed in Note 10, Discontinued Operations. Certain prior year amounts
have been reclassified to conform with the current year presentation.
2. Inventories
- ---------------
Inventories consisted of the following at:
June 30, 2002 Dec. 31, 2001
------------- -------------
(In millions)
Finished goods, including used aircraft $ 634 $ 642
Work in process 1,224 1,111
Materials and purchased parts 372 424
Excess of current cost over LIFO values (147) (147)
----------- -----------
Total $ 2,083 $ 2,030
=========== ===========
3. Other Assets
- ----------------
In 1994, the Company invested in Space Imaging and currently has a 31 percent
equity investment in Space Imaging LLC. Since 1996, the Company has guaranteed a
portion of Space Imaging's debt and currently guarantees 50 percent of a $300
million Space Imaging loan facility that matures in 2003. There were $260
million of Space Imaging borrowings outstanding under this facility at June 30,
2002. To date, Space Imaging has purchased a significant amount of equipment
from its primary investors, including the Company. The Company's investment in
and other assets related to Space Imaging totaled $68 million at June 30, 2002.
Space Imaging is pursuing its business plan, including assessments relative to
future investment in replacement satellites and related financing requirements,
and the Company, as an investor and partner, is working with its other partners
and Space Imaging in this regard. In light of current capital market conditions,
there can be no assurance that Space Imaging will be successful in attracting
additional outside funding.
In March 2002, the Company formed a joint venture with Flight Options, Inc.
whereby the Company contributed its Raytheon Travel Air fractional ownership
business and loaned the new entity $20 million. The Company's investment in and
other assets related to the joint venture totaled $85 million at June 30, 2002.
The new entity, Flight Options, LLC, is pursuing additional equity financing. In
light of current capital market conditions, there can be no assurance that
Flight Options will be successful in attracting additional outside funding. If
Flight Options is not successful in attracting additional outside funding, the
Company's ability to realize its investment may be impaired.
In the second quarter of 2002, the Company agreed to provide $30 million of
financing to JT3, L.L.C., a joint venture formed by the Company, under which $21
million was outstanding at June 30, 2002.
In connection with the sale of receivables, Raytheon Aircraft Receivables
Corporation, a special purpose entity, continued in existence at June 30, 2002.
The outstanding balance in the Company's off balance sheet receivables facility
at June 30, 2002 was $1,218 million versus $1,448 million at December 31, 2001.
No material gain or loss resulted from the sales of receivables.
In the third quarter of 2001, the Company recorded a charge of $345 million to
establish a reserve for estimated exposures on customer-financed assets due to
defaults, refinancings, and remarketing of used commuter aircraft. The balance
of this reserve was $361 million at December 31, 2001. In the first six months
of 2002, the Company utilized $77 million of this reserve, leaving a balance of
$284 million at June 30, 2002.
4. Notes Payable and Long-term Debt
- ------------------------------------
In the first quarter of 2002, the Company repurchased debt with a par value of
$96 million and recorded an extraordinary gain of $1 million, net of tax. In the
second quarter of 2001, the Company repurchased debt with a par value of $633
million and recorded an extraordinary gain of $4 million, net of tax.
The Company's most restrictive bank agreement covenant is an interest coverage
ratio that currently requires earnings before interest, taxes, depreciation, and
amortization (EBITDA), excluding certain charges, be at least 2.5 times net
interest expense for the prior four quarters. In July 2002, the covenant was
amended to exclude charges of $450 million related to discontinued operations.
The Company was in compliance with the interest coverage ratio covenant, as
amended, during the first six months of 2002.
5. Equity Security Units
- --------------------------
At June 30, 2002 and December 31, 2001, there were 17,250,000 equity security
units outstanding. Each equity security unit consists of a contract to purchase
shares of the Company's common stock on May 15, 2004 which will result in cash
proceeds to the Company of $863 million, and a mandatorily redeemable equity
security, with a stated liquidation amount of $50 due on May 15, 2006 which will
require a cash payment by the Company of $863 million. The contract obligates
the holder to purchase, for $50, shares of common stock equal to the settlement
rate. The settlement rate is equal to $50 divided by the average market value of
the Company's common stock at that time. The settlement rate cannot be greater
than 1.8182 or less than 1.4903 shares of common stock per purchase contract.
Using the treasury stock method, there is no effect on the computation of shares
for diluted earnings per share if the average market value of the Company's
common stock is between $27.50 and $33.55 per share. During the second quarter
of 2002 the average market value was $41.95 per share, therefore, the Company
included 5.2 million shares related to the equity security units in its
computation of shares for diluted earnings per share. During the first six
months of 2002, the average market value was $39.50 per share, therefore, the
Company included 3.9 million shares in its computation of shares for diluted
earnings per share. The contract requires a quarterly distribution, which is
recorded as a reduction in additional paid-in capital, of 1.25% per year of the
stated amount of $50 per purchase contract. The mandatorily redeemable equity
security pays a quarterly distribution, which is included in interest expense,
of 7% per year of the stated liquidation amount of $50 per mandatorily
redeemable equity security until May 15, 2004. On May 15, 2004, following a
remarketing of the mandatorily redeemable equity securities, the distribution
rate will be reset at a rate equal to or greater than 7% per year.
6. Stockholders' Equity
- -------------------------
Stockholders' equity consisted of the following at:
June 30, 2002 Dec. 31, 2001
------------- -------------
(In millions)
Preferred stock, no outstanding shares $ -- $ --
Common stock, outstanding shares 4 4
Additional paid-in capital 7,960 7,723
Accumulated other comprehensive income (193) (212)
Treasury stock (3) (1)
Retained earnings 2,898 3,776
----------- -----------
Total $ 10,666 $ 11,290
=========== ===========
Outstanding shares of common stock 402.9 395.4
During the first six months of 2002, the Company issued 4.2 million shares of
common stock related to its savings and investment plans and 3.3 million shares
in connection with stock plan activity.
The weighted average shares outstanding for basic and diluted earnings per share
(EPS) were as follows:
Three Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In thousands)
Average common shares outstanding for basic
EPS 399,970 349,872 397,827 344,961
Dilutive effect of stock options and
restricted stock 7,733 4,433 6,891 4,749
Dilutive effect of equity security units 5,150 - 3,870 -
---------- ----------- ----------- -----------
Shares for diluted EPS 412,853 354,305 408,588 349,710
========== =========== =========== ===========
Options to purchase 23.2 million and 21.8 million shares of common stock for the
three months ended June 30, 2002 and July 1, 2001, respectively, and options to
purchase 23.4 million and 21.8 million shares of common stock for the six months
ended June 30, 2002 and July 1, 2001, respectively, did not affect the
computation of diluted EPS. The exercise prices for these options were greater
than the average market price of the Company's common stock during the
respective periods.
Options to purchase 20.5 million and 19.4 million shares of common stock for the
three months ended June 30, 2002 and July 1, 2001 respectively, and options to
purchase 20.3 million and 19.4 million shares of common stock for the six months
ended June 30, 2002 and July 1, 2001, respectively, had exercise prices that
were less than the average market price of the Company's common stock during the
respective periods and are included in the dilutive effect of stock options and
restricted stock in the table above.
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
stock-based compensation 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 Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), therefore, no compensation expense was recognized for the
Company's stock option plans. Had compensation expense 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 estimates that its net income (loss) and diluted earnings
(loss) per share would have approximated $(149) million and $(0.36) and $(200)
million and $(0.56) in the second quarter of 2002 and 2001, respectively, and
$(745) million and $(1.82) and $(337) million and $(0.96) in the first six
months of 2002 and 2001, respectively. The weighted average fair value of each
stock option granted in 2002, 2001, 2000, and 1999, which are included in the
preceding amounts, was estimated using the Black-Scholes option-pricing model.
The effects of applying SFAS No. 123 in this disclosure are not indicative of
future amounts and are not representative of the amounts that would be reported
if the Company adopted SFAS No. 123 in this period.
The components of other comprehensive income for the Company generally include
foreign currency translation adjustments, minimum pension liability adjustments,
unrealized gains and losses on marketable securities classified as
available-for-sale, and unrealized gains and losses on effective hedges. The
computation of comprehensive income is as follows:
Three Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In millions)
Net loss $ (136) $ (188) $ (719) $ (312)
Other comprehensive income (loss) 25 (13) 19 (21)
--------- --------- --------- ---------
Total comprehensive loss $ (111) $ (201) $ (700) $ (333)
========= ========= ========= =========
7. Restructuring
- -----------------
All previously disclosed restructuring actions have been essentially completed,
except for ongoing idle facility costs for which the Company spent $3 million in
the first six months of 2002. The restructuring-related accrued liability at
June 30, 2002 was $21 million.
8. Business Segment Reporting
- ------------------------------
The Company operates in five segments: Electronic Systems; Command, Control,
Communication and Information Systems; Technical Services; Commercial
Electronics; and Aircraft. Segment net sales and operating income include
intersegment sales and profit recorded at cost plus a specified fee, which may
differ from what the selling entity would be able to obtain on external sales.
Corporate and Eliminations includes Company-wide accruals and over/under applied
overhead that have not been attributed to a particular segment and intersegment
sales and profit eliminations. In addition, the AIS segment was discontinued.
In July 2002, the Company announced plans to realign its defense businesses. As
part of the realignment, the Company will streamline operations and restructure
some existing business units.
Segment financial results were as follows:
Net Sales Operating Income
Three Months Ended Three Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In millions)
Electronic Systems $ 2,201 $ 2,055 $ 300 $ 266
Command, Control, Communication and
Information Systems 1,025 931 106 95
Technical Services 505 499 9 42
Commercial Electronics 105 117 (4) (15)
Aircraft 526 768 22 27
Corporate and Eliminations (267) (273) 21 (20)
----------- ----------- --------- ---------
Total $ 4,095 $ 4,097 $ 454 $ 395
=========== =========== ========= =========
Net Sales Operating Income
Six Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In millions)
Electronic Systems $ 4,311 $ 3,952 $ 595 $ 503
Command, Control, Communication and
Information Systems 1,995 1,786 208 179
Technical Services 1,033 982 46 77
Commercial Electronics 204 238 (10) (21)
Aircraft 1,020 1,405 (19) 23
Corporate and Eliminations (557) (494) (13) (58)
---------- ---------- --------- ---------
Total $ 8,006 $ 7,869 $ 807 $ 703
========== ========== ========= =========
Identifiable Assets
June 30, 2002 Dec. 31, 2001
------------- -------------
(In millions)
Electronic Systems $ 10,824 $ 10,483
Command, Control, Communication and
Information Systems 5,225 5,113
Technical Services 1,557 1,670
Commercial Electronics 673 683
Aircraft 3,172 3,126
Corporate 4,141 3,969
---------- ---------
Total $ 25,592 $ 25,044
========== =========
Net sales includes intersegment sales during the three months ended June 30,
2002 and July 1, 2001, respectively, of $73 million and $52 million for
Electronic Systems, $23 million and $28 million for Command, Control,
Communication and Information Systems, $141 million and $164 million for
Technical Services, $29 million and $28 million for Commercial Electronics, and
$1 million and $1 million for Aircraft.
Net sales includes intersegment sales during the six months ended June 30, 2002
and July 1, 2001, respectively, of $147 million and $101 million for Electronic
Systems, $55 million and $56 million for Command, Control, Communication and
Information Systems, $298 million and $282 million for Technical Services, $55
million and $53 million for Commercial Electronics, and $2 million and $2
million for Aircraft.
9. Other Income and Expense
- ----------------------------
The components of other expense (income), net were as follows:
Three Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In millions)
Gain on sale of the recreational marine business $ - $ - $ - $ (38)
Gain on sale of Raytheon Aerospace - (35) - (35)
Equity losses in unconsolidated affiliates 10 9 16 14
Other 3 8 5 11
--------- -------- ------- --------
Total $ 13 $ (18) $ 21 $ (48)
========= ======== ======= ========
Equity losses in unconsolidated affiliates include losses related to Space
Imaging, Flight Options, Raytheon Aerospace, and Exostar.
10. Discontinued Operations
- ---------------------------
In March 2002, the Company completed the sale of AIS for approximately $1,123
million, net, subject to purchase price adjustments. As part of the transaction,
the Company remained the prime contractor for the Airborne Stand-Off Radar
(ASTOR) program and retained the responsibility for performance of the Boeing
Business Jet (BBJ) program, which is nearing completion. The Company also
retained $106 million of BBJ-related assets, $18 million of receivables and
other assets, and rights to a $25 million jury award related to a 1999 claim
against Learjet. Schedule delays, cost growth, and other variables could
continue to have a negative effect on the BBJ-related assets. The timing and
amount of net realizable value of these retained assets are uncertain and
subject to a number of unpredictable market forces. The Company recorded a net
$2 million pretax gain on the sale of AIS. Due to the non-deductible goodwill
associated with AIS, the Company
recorded a tax provision of $213 million, resulting in a $211 million net loss
on the sale of AIS.
In the second quarter of 2002, the Company recorded an additional loss on
disposal of AIS of $14 million, which included a $23 million write-down of a
BBJ-related aircraft owned by the Company, offset by a $13 million gain
resulting from the finalization of the 1999 claim, described above. The
write-down of the BBJ-related aircraft resulted from the Company's decision to
market this aircraft unfinished due to the current environment of declining
prices for BBJ-related aircraft. The Company was previously marketing this
aircraft as a customized executive BBJ. In addition, the Company recorded a $4
million charge for cost growth on one of the two BBJ aircraft not yet delivered.
The summary of operating results for AIS was as follows:
Three Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In millions)
Net sales $ - $ 210 $ 202 $ 406
Operating expenses - 248 198 436
--------- --------- --------- ---------
Operating (loss) income - (38) 4 (30)
Other expense, net - - - -
--------- --------- --------- ---------
Income (loss) before taxes - (38) 4 (30)
Tax (benefit) provision - (15) 1 (10)
--------- --------- --------- ---------
Income (loss) from discontinued operations
$ - $ (23) $ 3 $ (20)
========= ========= ========= =========
The components of assets and liabilities for AIS were as follows:
June 30, 2002 Dec. 31, 2001
------------- -------------
(In millions)
Current assets $ 105 $ 495
Noncurrent assets - 1,136
--------- ----------
Total assets $ 105 $ 1,631
========= ==========
Current liabilities $ 46 $ 52
Noncurrent liabilities - 16
--------- ----------
Total liabilities $ 46 $ 68
========== ==========
In 2000, the Company sold its Raytheon Engineers & Constructors (RE&C) business
to Washington Group International (WGI). At the time of the sale, the Company
had, either directly or through a subsidiary that it still owns, outstanding
letters of credit, performance bonds, and parent guarantees of performance and
payment (the "Support Agreements") on over 100 long-term construction contracts.
The Support Agreements were provided to owners at the time of contract award as
security to the owners for the underlying contract obligations. Often the total
security was capped at the value of the contract price to secure full
performance, including the payment of liquidated damages available under the
contract. Some of these contingent obligations and guarantees include warranty
provisions and extend for a number of years.
In March 2001, WGI abandoned two Massachusetts construction projects, triggering
the Company's guarantees to the owners. The Company honored the guarantees and
commenced work on these projects. In the second quarter of 2002, the Company
revised its estimated cost to complete (ETC) for the two projects and recorded a
charge of $450 million. The previous ETC resulted in a total charge of $814
million in 2001, of which $633 million was recorded in the first six months of
2001. The revised ETC results from declining productivity, schedule delays,
misestimates of field engineered materials, and unbudgeted hours worked on the
two projects. Further deterioration in labor productivity or additional schedule
delays could have a material adverse effect on the Company's financial position
and results of operations. The Company expects to complete construction on the
two projects in 2002. The significant milestones related to the Mystic project
include for Mystic Block 8, customer acceptance in December 2002, and for Mystic
Block 9, back feed testing in August 2002, first fire in October 2002, and
customer acceptance in December 2002. The significant milestones related to the
Fore River project include chemical cleaning in August 2002, first fire in
October 2002, and customer acceptance in December 2002.
In May 2001, WGI filed for bankruptcy protection. In the course of the
bankruptcy proceeding, WGI rejected some ongoing construction contracts and
assumed others. For those contracts rejected, the Company's obligation to the
owners depends on the extent to which the Company has any outstanding Support
Agreements. The WGI rejected contracts included four large fixed price
international turnkey projects that were close to completion. Of the four
projects, construction has been completed on three, which are now in the claims
resolution phase. The fourth is nearing completion. In the second quarter of
2002, the Company recorded a charge of $14 million related to warranty and
startup costs associated with the fourth project. In 2001, the Company recorded
a total charge of $54 million, all of which was recorded in the first six months
of 2001, related to these projects. Additional risks and exposures on the three
completed projects are final resolution of contract closeout issues. Additional
risks and exposures on the fourth project include engineering support, equipment
performance, schedule delays, and contract closeout. The significant milestone
related to the fourth project is customer acceptance in September 2002.
Two WGI construction projects on which the Company has Support Agreements have
ongoing construction activity. The Company is paying to complete these projects
pursuant to its guarantees and the Company will receive the benefit of the
remaining contract payments from the owners. In the second quarter of 2002, the
Company recorded a charge of $21 million resulting from a contract adjustment on
one of these projects due to turbine-related delays. In 2001, the Company
recorded a total charge of $156 million, of which $49 million was recorded in
the first six months of 2001, related to these and the other WGI construction
projects on which the Company has Support Agreements. Additional risks and
exposures on the two projects with ongoing construction activity include labor
productivity, equipment performance, subcontractor performance, and schedule
delays. Additional risks and exposures on the other projects with Support
Agreements include adverse claim resolution and non-performance on projects
assumed by WGI and are subject to the letters of credit, performance bonds, and
parent guarantees noted above. One of the two projects has been provisionally
accepted by the customer. The significant milestone related to the other project
is customer acceptance in August 2002.
The Company is heavily dependent upon third parties, including WGI, to perform
construction management and other tasks that require industry expertise the
Company no longer possesses. In addition, there are risks that the ultimate
costs to complete and close-out the projects will increase beyond the Company's
current estimates due to factors such as labor productivity and availability of
labor, the nature and complexity of the work to be performed, the impact of
change orders, the recoverability of claims included in the ETC, and the outcome
of defending claims asserted against the Company. A significant change in an
estimate on one or more of the projects could have a material adverse effect on
the Company's financial position and results of operations.
In accordance with the purchase and sale agreement, the Company retained the
financial risks and rewards of certain claims, equity investments, and
receivables totaling $159 million that were sold to WGI. In addition, the
Company retained certain obligations and liabilities totaling $88 million
related to the purchase and sale agreement. As a result of WGI's bankruptcy
filing, the realization of these various assets through WGI was no longer
probable, however, the retained obligations and liabilities could be set off
against the retained assets pursuant to the terms of the purchase and sale
agreement. In the second quarter of 2001, the Company recorded a charge of $71
million to write off these assets and liabilities.
In the first six months of 2002, the Company recorded a charge of $30 million
for interest expense related to RE&C versus $2 million in the first six months
of 2001. Interest expense has been allocated to RE&C based upon actual cash
outflows since the date of disposition. Also in the first six months of 2002,
the Company recorded charges of $23 million for legal, management, and other
costs.
Liabilities from discontinued operations included current liabilities for RE&C
of $563 million and $482 million at June 30, 2002 and December 31, 2001,
respectively.
In the second quarter of 2002 the total loss from discontinued operations was
$530 million pretax, $359 million after-tax, or $0.87 per diluted share versus
$508 million pretax, $328 million after-tax, or $0.93 per diluted share in the
second quarter of 2001.
In the first six months of 2002 the total loss from discontinued operations was
$546 million pretax, $583 million after-tax, or $1.43 per diluted share versus
$839 million pretax, $546 million after-tax, or $1.56 per diluted share in the
first six months of 2001.
11. Commitments and Contingencies
- ----------------------------------
Defense contractors are subject to many levels of audit and investigation.
Agencies that 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 U.S. government contracting. Except as noted in
the following paragraphs, individually and in the aggregate, these
investigations are not expected to have a material adverse effect on the
Company's financial position or results of operations.
In June 2002, the Company received service of a grand jury subpoena issued by
the United States District Court for the District of California. The subpoena
seeks documents relating to the activities of an international sales
representative engaged by the Company relating to a foreign military sales
contract in Korea in the late 1990s. The Company has in place appropriate
compliance policies and procedures, and believes its conduct has been consistent
with those policies and procedures. The Company is cooperating fully with the
investigation.
The Department of Justice has informed the Company that the U.S. government has
concluded its investigation of the contemplated sale by the Company of
troposcatter radio equipment to a customer in Pakistan. The Company has produced
documents in response to grand jury subpoenas and grand jury appearances have
taken place. The Company has cooperated fully with the investigation. The U.S.
government has not informed the Company of a final decision with respect to this
matter. An adverse decision in this matter could have a material adverse effect
on the Company's financial position and results of operations.
The Company is permitted to charge to its U.S. government contracts an allocable
portion of the amount that the Company accrues for self-insurance. There is a
disagreement between the Company and the U.S. government about the way the
Company allocated self-insurance charges for product liability risks at Raytheon
Aircraft. The government
has not asserted a claim for a specific amount, but since the allocation
practice at issue was adopted in 1988, the government claim could have
a material adverse effect on the Company's financial position and results of
operations.
The Company is involved in various stages of investigation and cleanup related
to remediation of various environmental sites. The Company's estimate of total
environmental remediation costs expected to be incurred is $138 million. On a
discounted basis, the Company estimates the liability to be $86 million before
U.S. government recovery and has accrued this amount at June 30, 2002. A portion
of these costs are eligible for future recovery through the pricing of products
and services to the U.S. government. The recovery of environmental cleanup costs
from the U.S. government is considered probable based on the Company's long
history of receiving reimbursement for such costs. Accordingly, the Company has
recorded an unbilled receivable in contracts in process of $40 million at June
30, 2002 for the estimated future recovery of these costs from the U.S.
government. 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, any additional liability is not expected to have a
material adverse effect on the Company's financial position or results of
operations.
The Company has been advised by the staff of the Securities and Exchange
Commission (SEC) that an investigation, which began and was disclosed in May
2001, related to the Company's former engineering and construction business and
related accounting and other matters has been closed without action.
The Company is also involved in other legal matters as more fully described in
"Legal Proceedings" in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. An adverse resolution of any of these matters could
have a material adverse effect on the Company's financial position or results of
operations in the period in which they are resolved.
In addition, 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, any
additional liability is not expected to have a material adverse effect on the
Company's financial position or results of operations.
12. Accounting Standards
- -------------------------
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146) which nulifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This accounting standard, which is effective
for exit or disposal activities that are initiated after December 31, 2002,
addresses financial accounting and reporting for costs associated with exit or
disposal activities. The adoption of SFAS No. 146 is not expected to have a
material effect on the Company's financial position or results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No.
145). This accounting standard, which is effective for fiscal years beginning
after May 15, 2002, requires, among other things, that debt extinguishments used
as a part of an entity's risk management strategy no longer meet the criteria
for classification as extraordinary items. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's financial position or
results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). This accounting standard addresses financial accounting and
reporting for goodwill and other intangible assets and requires that goodwill
amortization be discontinued and replaced with periodic tests of impairment.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001,
and is required to be applied at the beginning of the fiscal year. Impairment
losses that arise due to the initial application of this standard will be
reported as a cumulative effect of a change in accounting principle as of
January 1, 2002.
In the first quarter of 2002, the Company recorded a goodwill impairment of
$360 million related to AIS as a cumulative effect of change in accounting
principle. The fair value of AIS was determined based upon the proceeds
received by the Company in connection with the sale of AIS. Due to the
non-deductibility of this goodwill, the Company did not record a tax
benefit in connection with this impairment. During the second quarter of
2002, the Company completed its transitional review for potential goodwill
impairment in accordance with SFAS No. 142, whereby the Company utilized a
market multiple approach to determine the fair value of reporting units
within the defense businesses and a discounted cash flow approach to
determine the fair value of the commercial business reporting units. As a
result, the Company recorded a goodwill impairment of $185 million pretax,
$149 million after-tax, which represented all of the goodwill at Raytheon
Aircraft, as a cumulative effect of change in accounting principle. The
Company has also determined that there is no impairment of goodwill related
to any of its defense businesses beyond the $360 million recorded in
connection with the sale of AIS. The total goodwill impairment charge for
the six months ended June 30, 2002 was $545 million pretax, $509 million
after-tax, or $1.25 per diluted share. The Company will perform the annual
impairment test in the fourth quarter of each year.
The amount of remaining goodwill by segment, as determined in accordance
with SFAS No. 142, was $7,641 million, $2,650 million, $856 million, and
$21 million for Electronic Systems; Command, Control, Communication and
Information Systems; Technical Services; and Commercial Electronics,
respectively, at June 30, 2002.
Intangible assets subject to amortization consisted primarily of drawings
and intellectual property totaling $24 million (net of $28 million of
accumulated amortization) at June 30, 2002 and $24 million (net of $34
million of accumulated amortization) at December 31, 2001. Amortization
expense is expected to approximate $2 million for each of the next five
years.
In accordance with SFAS No. 142, goodwill amortization was discontinued as
of January 1, 2002. The following adjusts reported income from continuing
operations and basic and diluted EPS from continuing operations to exclude
goodwill amortization:
Three Months Ended Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
(In millions, except per share amounts)
Reported income from continuing operations $ 223 $ 136 $ 372 $ 230
Goodwill amortization, net of tax - 76 - 146
--------- -------- ------- --------
Adjusted income from continuing operations $ 223 $ 212 $ 372 $ 376
========= ======== ======= ========
Reported basic EPS from continuing operations $ 0.56 $ 0.39 $ 0.94 $ 0.67
Goodwill amortization, net of tax - 0.22 - 0.42
--------- -------- ------- --------
Adjusted basic EPS from continuing operations $ 0.56 $ 0.61 $ 0.94 $ 1.09
========= ======== ======= ========
Reported diluted EPS from continuing operations $ 0.54 $ 0.38 $ 0.91 $ 0.66
Goodwill amortization, net of tax - 0.22 - 0.42
--------- -------- ------- --------
Adjusted diluted EPS from continuing operations $ 0.54 $ 0.60 $ 0.91 $ 1.08
========= ======== ======= ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated Results of Operations - Second Quarter 2002 Compared with Second
- -----------------------------------------------------------------------------
Quarter 2001
- ------------
Net sales were $4.1 billion in the second quarter of 2002 and 2001. Sales in the
second quarter of 2001 included $162 million related to businesses that have
since been sold. The increase in sales was primarily due to continued sales
growth in the defense businesses offset by lower volume at Raytheon Aircraft.
Sales to the U.S. Department of Defense were 62 percent of sales in the second
quarter of 2002 versus 63 percent of sales in the second quarter of 2001. Total
sales to the U.S. government, including foreign military sales, were 72 percent
of sales in the second quarter of 2002 versus 68 percent of sales in the second
quarter of 2001. Total international sales, including foreign military sales,
were 21 percent of sales in the second quarter of 2002 and 2001.
Gross margin, net sales less cost of sales, in the second quarter of 2002 was
$888 million or 21.7 percent of sales versus $814 million or 19.9 percent of
sales in the second quarter of 2001. Excluding goodwill amortization, which was
discontinued January 1, 2002 as a result of the adoption of SFAS 142, described
below, gross margin was $898 million or 21.9 percent of sales in the second
quarter of 2001. Included in gross margin was pension income of $25 million and
$74 million in the second quarter of 2002 and 2001, respectively.
Administrative and selling expenses were $313 million or 7.6 percent of sales in
the second quarter of 2002 versus $296 million or 7.2 percent of sales in the
second quarter of 2001. The increase was primarily due to the timing of
expenditures related to new proposals.
Research and development expenses were $121 million or 3.0 percent of sales in
the second quarter of 2002 versus $123 million or 3.0 percent of sales in the
second quarter of 2001.
Operating income was $454 million or 11.1 percent of sales in the second quarter
of 2002 versus $395 million or 9.6 percent of sales in the second quarter of
2001. Excluding goodwill amortization, operating income was $479 million or 11.7
percent of sales in the second quarter of 2001. Included in operating income is
pension income of $25 million and $74 million in the second quarter of 2002 and
2001, respectively. The changes in operating income by segment are discussed
below.
Interest expense from continuing operations in the second quarter of 2002 was
$131 million versus $183 million in the second quarter of 2001. The decrease was
due to lower average debt and lower weighted average cost of borrowing due to
the interest rate swaps entered into in 2001. In the second quarter of 2002 and
2001, the Company allocated $17 million and $2 million, respectively, of
interest expense to discontinued operations. Total interest expense in the
second quarter of 2002 was $148 million versus $185 million in the second
quarter of 2001.
Interest income in the second quarter of 2002 was $10 million versus $12 million
in the second quarter of 2001.
Other expense, net in the second quarter of 2002 was $13 million versus other
income, net of $18 million in the second quarter of 2001. Included in the second
quarter of 2001 was a gain of $35 million recorded in connection with the sale
of a majority interest in the Company's aviation support business (Raytheon
Aerospace).
The effective tax rate was 30.3 percent in the second quarter of 2002 reflecting
the United States statutory rate of 35 percent reduced by foreign sales
corporation tax credits and ESOP dividend deductions. The effective tax rate was
43.8 percent in the second quarter of 2001 reflecting the United States
statutory rate of 35 percent reduced by foreign sales corporation tax credits
and research and development tax credits applicable to certain government
contracts and increased by non-deductible amortization of goodwill. Excluding
the effect of goodwill amortization, the effective tax rate was 35.0 percent in
the second quarter of 2001. The lower effective tax rate in the second quarter
of 2002 was due primarily to the timing of the legislation for ESOP dividend
deductions that were not available in the second quarter of 2001 and the write
off of nondeductible goodwill related to the sale of a majority interest in
Raytheon Aerospace.
Income from continuing operations was $223 million in the second quarter of
2002, or $0.54 per diluted share on 412.9 million average shares outstanding
versus $136 million in the second quarter of 2001, or $0.38 per diluted share on
354.3 million average shares outstanding. Excluding goodwill amortization,
income from continuing operations was $212 million in the second quarter of
2001, or $0.60 per diluted share. The increase in average shares outstanding was
due primarily to the issuance of 14,375,000 and 31,578,000 shares of common
stock in May and October 2001, respectively.
The loss from discontinued operations, described below, was $359 million
after-tax, or $0.87 per diluted share in the second quarter of 2002 versus a
loss of $328 million after-tax, or $0.93 per diluted share in the second quarter
of 2001.
The net loss in the second quarter of 2002 was $136 million, or $0.33 per
diluted share versus $188 million in the second quarter of 2001, or $0.53 per
diluted share. Excluding goodwill amortization, the net loss was $112 million in
the second quarter of 2001, or $0.32 per diluted share.
Electronic Systems had sales of $2.2 billion in the second quarter of 2002
versus $2.1 billion in the second quarter of 2001. The increase in sales was
primarily due to higher volume in classified programs. Operating income was $300
million in the second quarter of 2002 versus $266 million a year ago. Excluding
goodwill amortization, operating income was $314 million in the second quarter
of 2001. Included in operating income was pension income of $11 million and $38
million in the second quarter of 2002 and 2001, respectively. The decrease in
operating income was primarily due to lower pension income offset by higher
volume.
Command, Control, Communication and Information Systems had sales of $1.0
billion in the second quarter of 2002 compared with $931 million in the second
quarter of 2001. The second quarter of 2002 included approximately $31 million
of sales which were reclassified from Electronic Systems to Command, Control,
Communication and Information Systems in connection with the formation of Thales
Raytheon Systems in 2001. In addition, there was higher volume across most
business units. Operating income was $106 million in the second quarter of 2002
versus $95 million in the second quarter of 2001. Excluding goodwill
amortization, operating income was $120 million in the second quarter of 2001.
Included in operating income was pension income of $1
million and $11 million in the second quarter of 2002 and 2001, respectively.
Operating income was negatively affected by lower pension income in the second
quarter of 2002 and positively affected by higher volume.
Technical Services had second quarter 2002 sales of $505 million compared with
$499 million in the second quarter of 2001. Operating income was $9 million in
the second quarter of 2002 compared with $42 million in the second quarter of
2001. Excluding goodwill amortization, operating income was $48 million in the
second quarter of 2001. Included in operating income was pension income of $4
million and $8 million in the second quarter of 2002 and 2001, respectively. The
decrease in operating income was due primarily to a $28 million write-off of
contract costs that the Company determined were unbillable. The decrease was
offset by a similarly sized reserve at corporate established by the Company in
the second half of 2001 to address the issue.
Commercial Electronics had sales of $105 million in the second quarter of 2002
compared with second quarter 2001 sales of $117 million. The operating loss was
$4 million in the second quarter of 2002 versus $15 million in the second
quarter of 2001. Excluding goodwill amortization, the operating loss was $13
million in the second quarter of 2001. The decrease in operating loss was due
primarily to the closure of certain unprofitable businesses and cost reduction
actions taken. There was no pension income included in the second quarter 2002
operating loss versus $1 million in the second quarter of 2001.
Raytheon Aircraft had second quarter 2002 sales of $526 million compared with
$768 million in the second quarter of 2001. The decrease was due to lower
aircraft deliveries in the second quarter of 2002 and the divestiture of a
majority interest in Raytheon Aerospace in June 2001, partially offset by a $15
million favorable contract adjustment recorded in the second quarter of 2002.
Operating income was $22 million in the second quarter of 2002 versus $27
million in the second quarter of 2001. Excluding goodwill amortization,
operating income was $30 million in the second quarter of 2001. Included in
operating income was pension income of $8 million and $14 million in the second
quarter of 2002 and 2001, respectively.
Six Months 2002 Compared With Six Months 2001
- ---------------------------------------------
Net sales in the first six months of 2002 were $8.0 billion versus $7.9 billion
for the same period in 2001. Sales in the first six months of 2001 included $307
million related to businesses that have since been sold. The increase in sales
was primarily due to continued sales growth in the defense businesses offset by
lower volume at Raytheon Aircraft. Sales to the U.S. Department of Defense were
63 percent of sales in the first six months of 2002 versus 60 percent of sales
in the first six months of 2001. Total sales to the U.S. government in the first
six months of 2002 and 2001, including foreign military sales, were 73 percent
and 68 percent of sales, respectively. Total international sales, including
foreign military sales, were 20 percent of sales in the first six months of 2002
versus 22 percent of sales in the first six months of 2001.
Gross margin, net sales less cost of sales, in the first six months of 2002 was
$1.6 billion or 20.5 percent of sales versus $1.5 billion or 19.2 percent of
sales in the first six months of 2001. Excluding goodwill amortization, gross
margin was $1.7 billion or 21.4 percent of sales in the first six months of
2001. Included in gross margin was pension income of $49 million and $148
million in the first six months of 2002 and 2001, respectively.
Administrative and selling expenses were $607 million or 7.6 percent of sales in
the first six months of 2002 versus $566 million or 7.2 percent of sales in the
first six months of 2001. The increase was due primarily to the timing of
expenditures related to new proposals. The Company expects administrative and
selling expenses to approximate 7.0 percent of sales in the full year 2002.
Research and development expenses decreased to $225 million or 2.8 percent of
sales in the first six months of 2002 from $245 million or 3.1 percent of sales
in the first six months of 2001. The decrease was primarily due to the timing of
expenditures.
Operating income was $807 million or 10.1 percent of sales in the first six
months of 2002 versus $703 million or 8.9 percent of sales in the first six
months of 2001. Excluding goodwill amortization, operating income was $872
million or 11.1 percent of sales in the first six months of 2001. Included in
operating income was pension income of $49 million and $148 million in the first
six months of 2002 and 2001, respectively. The changes in operating income by
segment are discussed below.
Interest expense from continuing operations in the first six months of 2002 was
$270 million versus $372 million in the first six months of 2001. The decrease
was due primarily to lower average debt and lower weighted average cost of
borrowing due to the interest rate swaps entered into in 2001. In the first six
months of 2002 and 2001, the Company allocated $30 million and $2 million,
respectively of interest expense to discontinued operations. The Company expects
to allocate approximately $78 million of interest to discontinued operations in
2002. Total interest expense in the first six months of 2002 was $300 million
versus $374 million in the first six months of 2001.
Interest income in the first six months of 2002 was $17 million versus $21
million in the first six months of 2001.
Other expense, net in the first six months of 2002 was $21 million versus other
income, net of $48 million in the first six months of 2001. Included in the
first six months of 2001 were pretax gains of $38 million related to the
divestiture of the Company's recreational marine business and $35 million
related to the divestiture of a majority interest in Raytheon Aerospace support
business.
The effective tax rate was 30.2 percent in the first six months of 2002
reflecting the United States statutory rate of 35 percent reduced by foreign
sales corporation tax credits and ESOP dividend deductions. The effective tax
rate was 42.5 percent in the first six months of 2001 reflecting the United
States statutory rate of 35 percent reduced by foreign sales corporation tax
credits and research and development tax credits applicable to certain
government contracts and increased by non-deductible amortization of goodwill.
Excluding the effect of goodwill amortization, the effective tax rate was 33.9
percent in the first six months of 2001. The lower effective tax rate in the
first six months of 2002 was due primarily to the timing of the legislation for
ESOP dividend deductions that were not available in the first six months of 2001
and the write off of nondeductible goodwill related to the sale of a majority
interest in Raytheon Aerospace in 2001. In the first six months of 2002, the
Company's net operating loss carryforwards that expire in 2020 and 2021
decreased by approximately $500 million as a result of the Job Creation and
Worker Assistance Act of
2002, which permitted the Company to carry back losses to 1996.
Income from continuing operations was $372 million in the first six months of
2002, or $0.91 per diluted share on 408.6 million average shares outstanding
versus $230 million in the first six months of 2001, or $0.66 per diluted share
on 349.7 million average shares outstanding. Excluding goodwill amortization,
income from continuing operations was $376 million in the first six months of
2001, or $1.08 per diluted share. The increase in average shares outstanding was
due primarily to the issuance of 14,375,000 and 31,578,900 shares of common
stock in May and October 2001, respectively.
The loss from discontinued operations, described below, was $583 million
after-tax, or $1.43 per diluted share in the first six months of 2002 versus
$546 million after-tax, or $1.56 per diluted share in the first six months of
2001.
The net loss in the first six months of 2002 was $719 million, or $1.76 per
diluted share versus $312 million in the first six months of 2001, or $0.89 per
diluted share. Excluding goodwill amortization, the net loss was $166 million in
the first six months of 2001, or $0.47 per diluted share.
Total employment related to continuing operations was 77,500 at June 30, 2002
and 81,100 at December 31, 2001.
Electronic Systems had sales of $4.3 billion in the first six months of 2002
compared with $4.0 billion in the first six months of 2001. The increase in
sales was primarily due to higher volume across all business units. Operating
income was $595 million or 13.8 percent of sales in the first six months of 2002
versus $503 million or 12.7 percent of sales a year ago. Excluding goodwill
amortization, operating income was $599 million or 15.2 percent of sales in the
first six months of 2001. Included in operating income was pension income of $21
million and $75 million in the first six months of 2002 and 2001, respectively.
The decrease in operating income was primarily due to lower pension income
offset by higher volume.
Command, Control, Communication and Information Systems had sales of $2.0
billion in the first six months of 2002 compared with $1.8 billion in the first
six months of 2001. The first six months of 2002 included approximately $71
million of sales which were reclassified from Electronic Systems to Command,
Control, Communication and Information Systems in connection with the formation
of Thales Raytheon Systems in 2001. In addition, there was higher volume across
most business units. Operating income was $208 million or 10.4 percent of sales
in the first six months of 2002 compared with $179 million or 10.0 percent of
sales in the first six months of 2001. Excluding goodwill amortization,
operating income was $230 million or 12.9 percent of sales in the first six
months of 2001. Included in operating income was pension income of $4 million
and $22 million in the first six months of 2002 and 2001, respectively. The
decrease in operating income was primarily due to cost growth on certain
programs and lower pension income offset by higher volume.
Technical Services had sales of $1.0 billion in the first six months of 2002
versus $982 million in the first six months of 2001. The increase in sales was
primarily due to higher volume from new programs. Operating income was $46
million or 4.5 percent of sales in the first six months of 2002 compared with
$77 million or 7.8 percent of sales in the first six months of 2001. Excluding
goodwill amortization, operating income was $90 million or 9.2 percent of sales
in the first six months of 2001. Included in operating income was
pension income of $6 million and $17 million in the first six months of 2002 and
2001, respectively. The decrease in operating income was due primarily to a $28
million write-off of contract costs that the Company determined were
unbillable. The decrease was offset by a similarly sized reserve at corporate
established by the Company in the second half of 2001 to address the issue.
Commercial Electronics had sales of $204 million in the first six months of 2002
compared with $238 million in the first six months of 2001. The decrease in
sales was due to further weakness in Commercial Electronics end markets and to
the divestiture of the recreational marine business in January 2001. The
operating loss of $10 million in the first six months of 2002 compares to $21
million in the first six months of 2001. Excluding goodwill amortization, the
operating loss was $17 million in the first six months of 2001. Included in the
operating losses was pension income of $1 million and $3 million in the first
six months of 2002 and 2001, respectively. The Company remains concerned about
the market outlook for Commercial Electronics.
Raytheon Aircraft had sales of $1.0 billion in the first six months of 2002
compared with $1.4 billion in the first six months of 2001. The decrease was due
to lower aircraft deliveries in the first six months of 2002 and the divestiture
of a majority interest in Raytheon Aerospace in June 2001, partially offset by a
$15 million favorable contract adjustment recorded in the second quarter of
2002. The operating loss of $19 million in the first six months of 2002 compares
to operating income of $23 million in the first six months of 2001. Excluding
goodwill amortization, operating income was $28 million in the first six months
of 2001. Included in operating income was pension income of $16 million and $29
million in the first six months of 2002 and 2001, respectively. The increase in
the operating loss was primarily due to lower volume partially offset by a $15
million favorable contract adjustment recorded in the second quarter of 2002.
The Company remains concerned about the market outlook for both new and used
aircraft and continues to monitor the production and delivery schedule for the
Premier I aircraft and the development cost of the Horizon aircraft. Demand for
general aviation aircraft remains weak and could adversely affect volume in the
remainder of 2002 and 2003.
Backlog consisted of the following at:
June 30, 2002 Dec. 31, 2001
------------- -------------
(In millions)
Electronic Systems $ 12,795 $ 13,423
Command, Control, Communication
and Information Systems 5,021 5,592
Technical Services 1,816 1,958
Commercial Electronics 435 467
Aircraft 4,672 4,165
----------- -----------
Total $ 24,739 $ 25,605
=========== ===========
U.S. government backlog
included above $ 16,669 $ 16,943
=========== ===========
Included in Aircraft backlog at June 30, 2002 was approximately $850 million
related to an order received from Flight Options, a related entity, in the first
quarter of 2002.
Bookings were as follows:
Six Months Ended
----------------
June 30, 2002 July 1, 2001
------------- ------------
(In millions)
Electronic Systems $ 3,547 $ 3,967
Command, Control, Communication and Information
Systems 1,445 1,925
Technical Services 571 402
Commercial Electronics 117 197
Aircraft 1,527 1,245
----------- ------------
Total $ 7,207 $ 7,736
=========== ============
Bookings for ES in 2002 are expected to be below the 2001 level due primarily to
two large bookings received in 2001. In addition, in the first six months of
2002, due to the protest of a large contract award, ES is slightly behind both
prior year and plan but expects to meet or exceed the full year plan.
Bookings for C3I are expected to be higher in the full year 2002 than in 2001
but are down in the first six months of 2002 versus the first six months of 2001
due to contract booking delays and lost contract awards.
Discontinued Operations
- -----------------------
In March 2002, the Company completed the sale of AIS for approximately $1,123
million, net, subject to purchase price adjustments. As part of the transaction,
the Company remained the prime contractor for the Airborne Stand-Off Radar
(ASTOR) program and retained the responsibility for performance of the Boeing
Business Jet (BBJ) program, which is nearing completion. The Company also
retained $106 million of BBJ-related assets, $18 million of receivables and
other assets, and rights to a $25 million jury award related to a 1999 claim
against Learjet. Schedule delays, cost growth, and other variables could
continue to have a negative effect on the BBJ-related assets. The timing and
amount of net realizable value of these retained assets are uncertain and
subject to a number of unpredictable market forces. The Company recorded a net
$2 million pretax gain on the sale of AIS. Due to the non-deductible goodwill
associated with AIS, the Company recorded a tax provision of $213 million,
resulting in a $211 million net loss on the sale of AIS.
In the second quarter of 2002, the Company recorded an additional loss on
disposal of AIS of $14 million, which included a $23 million write-down of a
BBJ-related aircraft owned by the Company, offset by a $13 million gain
resulting from the finalization of the 1999 claim, described above. The
write-down of the BBJ-related aircraft resulted from the Company's decision to
market this aircraft unfinished due to the current environment of declining
prices for BBJ-related aircraft. The Company was previously marketing this
aircraft as a customized executive BBJ. The settlement of the 1999 claim and the
sale of the BBJ-related aircraft are expected to result in a cash inflow of
approximately $59 million in 2002. In addition, the Company recorded a $4
million charge for cost growth on one of the two BBJ aircraft not yet delivered.
In 2000, the Company sold its Raytheon Engineers & Constructors (RE&C) business
to Washington Group International (WGI). At the time of the sale, the Company
had, either directly or through a subsidiary that it still owns, outstanding
letters of credit, performance bonds, and parent guarantees of performance and
payment (the "Support Agreements") on over 100 long-term construction contracts.
The Support Agreements were provided to owners at the time of contract award as
security to the owners for the
underlying contract obligations. Often the total security was capped at the
value of the contract price to secure full performance, including the payment of
liquidated damages available under the contract. Some of these contingent
obligations and guarantees include warranty provisions and extend for a number
of years.
In March 2001, WGI abandoned two Massachusetts construction projects, triggering
the Company's guarantees to the owners. The Company honored the guarantees and
commenced work on these projects. In the second quarter of 2002, the Company
revised its estimated cost to complete (ETC) for the two projects and recorded a
charge of $450 million. The previous ETC resulted in a total charge of $814
million in 2001, of which $633 million was recorded in the first six months of
2001. The revised ETC results from declining productivity, schedule delays,
misestimates of field engineering materials, and unbudgeted hours worked on the
two projects. Further deterioration in labor productivity or additional schedule
delays could have a material adverse effect on the Company's financial position
and results of operations. The Company expects to complete construction on the
two projects in 2002. The significant milestones related to the Mystic project
include for Mystic Block 8, customer acceptance in December 2002, and for Mystic
Block 9, back feed testing in August 2002, first fire in October 2002, and
customer acceptance in December 2002. The significant milestones related to the
Fore River project include chemical cleaning in August 2002, first fire in
October 2002, and customer acceptance in December 2002.
In May 2001, WGI filed for bankruptcy protection. In the course of the
bankruptcy proceeding, WGI rejected some ongoing construction contracts and
assumed others. For those contracts rejected, the Company's obligation to the
owners depends on the extent to which the Company has any outstanding Support
Agreements. The WGI rejected contracts included four large fixed price
international turnkey projects that were close to completion. Of the four
projects, construction has been completed on three, which are now in the claims
resolution phase. The fourth is nearing completion. In the second quarter of
2002, the Company recorded a charge of $14 million related to warranty and
startup costs associated with the fourth project. In 2001, the Company recorded
a total charge of $54 million, all of which was recorded in the first six months
of 2001, related to these projects. Additional risks and exposures on the three
completed projects are final resolution of contract closeout issues. Additional
risks and exposures on the fourth project include engineering support, equipment
performance, schedule delays, and contract closeout. The significant milestone
related to the fourth project is customer acceptance in September 2002.
Two WGI construction projects on which the Company has Support Agreements have
ongoing construction activity. The Company is paying to complete these projects
pursuant to its guarantees and the Company will receive the benefit of the
remaining contract payments from the owners. In the second quarter of 2002, the
Company recorded a charge of $21 million resulting from a contract adjustment on
one of these projects due to turbine-related delays. In 2001, the Company
recorded a total charge of $156 million, of which $49 million was recorded in
the first six months of 2001, related to these and other WGI construction
projects on which the Company has Support Agreements. Additional risks and
exposures on the two projects with ongoing construction activity include labor
productivity, equipment performance, subcontractor performance, and schedule
delays. Additional risks and exposures on the other projects with Support
Agreements include adverse claim resolution and non-performance on projects
assumed by WGI and are subject to the letters of credit, performance bonds, and
parent guarantees noted above. One of the two projects has been provisionally
accepted by the customer. The significant milestone related to the other project
is customer acceptance in August 2002.
The Company is heavily dependent upon third parties, including WGI, to perform
construction management and other tasks that require industry expertise the
Company no longer possesses. In addition, there are risks that the ultimate
costs to complete and close-out the projects will increase beyond the Company's
current estimates due to factors such as labor productivity and availability of
labor, the nature and complexity of the work to be performed, the impact of
change orders, the recoverability of claims
included in the ETC, and the outcome of defending claims asserted against the
Company. A significant change in an estimate on one or more of the projects
could have a material adverse effect on the Company's financial position and
results of operations.
In accordance with the purchase and sale agreement, the Company retained the
financial risks and rewards of certain claims, equity investments, and
receivables totaling $159 million that were sold to WGI. In addition, the
Company retained certain obligations and liabilities totaling $88 million
related to the purchase and sale agreement. As a result of WGI's bankruptcy
filing, the realization of these various assets through WGI was no longer
probable, however, the retained obligations and liabilities could be set off
against the retained assets pursuant to the terms of the purchase and sale
agreement. In the second quarter of 2001, the Company recorded a charge of $71
million to write off these assets and liabilities.
In the first six months of 2002, the Company recorded a charge of $30 million
for interest expense related to RE&C versus $2 million in the first six months
of 2001. Also in the first six months of 2002, the Company recorded charges of
$23 million for legal, management, and other costs. These costs are expected to
continue through the end of 2002. If there are delays in project completion or
contract closeout, some of these costs may continue into 2003.
Liabilities from discontinued operations included current liabilities for RE&C
of $563 million and $482 million at June 30, 2002 and December 31, 2001,
respectively.
In the second quarter of 2002 the total loss from discontinued operations was
$530 million pretax, $359 million after-tax, or $0.87 per diluted share versus
$508 million pretax, $328 million after-tax, or $0.93 per diluted share in the
second quarter of 2001.
In the first six months of 2002 the total loss from discontinued operations was
$546 million pretax, $583 million after-tax, or $1.43 per diluted share versus
$839 million pretax, $546 million after-tax, or $1.56 per diluted share in the
first six months of 2001.
Net cash used in operating activities from discontinued operations was $457
million and $26 million related to RE&C and AIS, respectively, in the first six
months of 2002 versus net cash used of $180 million and $35 million related to
RE&C and AIS, respectively, in the first six months of 2001. The Company expects
its operating cash flow to be negatively affected by approximately $1.1 billion
(excluding the benefit of tax deductions for the Company) during 2002 which
includes project completion costs, legal and management costs, and interest
related to RE&C. Further increases to project costs may increase the estimated
operating cash outflow for RE&C in 2002.
Financial Condition and Liquidity
- ---------------------------------
Net cash used in operating activities was $20 million in the first six months of
2002 versus $290 million in the first six months of 2001. Net cash provided from
operating activities from continuing operations was $463 million in the first
six months of 2002 versus net cash used of $75 million in the first six months
of 2001. The improvement was due primarily to changes in inventory levels at
Raytheon Aircraft and a $156 million tax refund received in 2002 as a result of
the change in tax law described above.
Net cash provided by investing activities in the first six months of 2002 was
$931 million due primarily to the sale of AIS described above, versus net cash
used of $15 million in the first six months of 2001. Origination of financing
receivables in the first six months of 2002 was $141 million versus $394 million
in the first six months of 2001. Sale of
financing receivables, net of repurchases included sales of $244 million and
repurchases of $237 million in the first six months of 2002 versus sales of $396
million and repurchases of $62 million in the first six months of 2001. Capital
expenditures were $190 million in the first six months of 2002 versus $187
million in the first six months of 2001. Capital expenditures for the full year
2002 are expected to be approximately $450 million. Expenditures for internal
use software were $52 million and $78 million in the first six months of 2002
and 2001, respectively. Expenditures for internal use software are expected to
be approximately $95 million in 2002 as the Company continues to convert
significant portions of its existing financial systems to a new integrated
financial package. In March 2002, the Company received $134 million from Hughes
Electronics representing the balance due on an October 2001 settlement regarding
the purchase price adjustment related to the Company's merger with the defense
business of Hughes Electronics (Hughes Defense). Proceeds from sales of
operating units and investments were $1,123 million and $266 million in the
first six months of 2002 and 2001, respectively.
Net cash used in financing activities was $483 million in the first six months
of 2002 versus net cash used of $37 million in the first six months of 2001.
Dividends paid to stockholders were $159 million and $136 million in the first
six months of 2002 and 2001, respectively. The quarterly dividend rate was $0.20
per share for the first two quarters of 2002 and 2001.
In the first six months of 2002 total debt decreased by $454 million versus $1.1
billion in the first six months of 2001. Payments on the outstanding lines of
credit were $140 million for the first six months of 2002. There were maturities
of the current portion of long-term debt of $200 million for the first six
months of 2002 versus $500 million for the first six months of 2001. In
addition, the Company repurchased debt with a par value of $96 million and $633
million, respectively, for the first six months of 2002 and 2001. In May 2001,
the Company issued 17,250,000 equity security units with net proceeds of $837
million and 14,375,000 shares of common stock with net proceeds of $376 million.
The Company expects to utilize existing cash and cash equivalents to fund the
repayment of $1.0 billion of debt that matures in August 2002.
The investment performance of the Company's pension plan assets during the first
half of 2002 has not met the Company's long-term return on asset (ROA)
assumption under Statement of Financial Accounting Standards No. 87, Employers'
Accounting for Pensions. As a result, it seems likely that the return on assets
for the entire measurement period ending October 31, 2002, will be below the
Company's ROA assumption of 9.5% per annum. There are a number of potential
consequences of that. First, an actual ROA below 9.5% would increase pension
expense for 2003 and thereby adversely affect earnings per share. Second, if
asset returns are significantly below 9.5% for 2002, following the unfavorable
investment performance of the pension fund in 2001, the Company would likely
reconsider its long-term ROA assumption for 2003 and beyond. That could have an
additional adverse effect on earnings per share in 2003 and beyond. Third, asset
returns below 9.5% could also increase the funding requirements of the pension
plans and adversely affect operating cash flow in 2004 and beyond. Since pension
funding requirements are generally recoverable costs under government
contracting regulations, the net cash flow impact of future increases in pension
funding is estimated to be 20-25 percent of the funding requirement and is not
considered to be material to the liquidity or financial resources of the Company
overall.
Capital Structure and Resources
- -------------------------------
Total debt was $7.8 billion at June 30, 2002 compared with $8.2 billion at
December 31, 2001. Cash and cash equivalents were $1.6 billion at June 30, 2002
and $1.2 billion at December 31, 2001. Total debt, as a percentage of total
capital, was 40.4 percent at June 30, 2002 and December 31, 2001.
In 2001, the Company entered into various interest rate swaps that correspond to
a portion of the Company's fixed rate debt in order to effectively hedge the
interest rate risk. The total notional value of the interest rate swaps, which
expire on various dates between July 2005 and August 2007, is $1.2 billion,
effectively converting approximately 15 percent of the Company's total debt to
variable rate debt.
The Company's most restrictive bank agreement covenant is an interest coverage
ratio that currently requires earnings before interest, taxes, depreciation, and
amortization (EBITDA), excluding certain charges, be at least 2.5 times net
interest expense for the prior four quarters. In July 2002, the covenant was
amended to exclude certain charges of $450 million related to discontinued
operations. The Company was in compliance with the interest coverage ratio
covenant, as amended, during the first six months of 2002.
Lines of credit with certain commercial banks exist to provide short-term
liquidity. The lines of credit bear interest based upon LIBOR and were $2.3
billion at June 30, 2002 and $2.4 billion at December 31, 2001. There were no
borrowings under these lines of credit at June 30, 2002. There was $140 million
outstanding under these lines of credit at December 31, 2001.
The outstanding balance in the Company's off balance sheet receivables facility
was $1,218 million at June 30, 2002 and $1,448 million at December 31, 2001. The
decline has primarily resulted from repurchases and restructurings of commuter
aircraft receivables consistent with the charge taken in the third quarter of
2001. The Company expects this balance to continue to decline through this
activity as well as loan sales to a point at which it may no longer be practical
to maintain this facility and may result in a decision to discontinue its use.
If that were to occur, any remaining assets financed by the Company and the
associated off balance sheet borrowing would be reflected in the consolidated
financial statements of the Company.
In 1994, the Company invested in Space Imaging and currently has a 31 percent
equity investment in Space Imaging LLC. Since 1996, the Company has guaranteed a
portion of Space Imaging's debt and currently guarantees 50 percent of a $300
million Space Imaging loan facility that matures in 2003. There were $260
million of Space Imaging borrowings outstanding under this facility at June 30,
2002.
The Company's need for, cost of, and access to funds are dependent on future
operating results, as well as conditions external to the Company. Cash and cash
equivalents, cash flow from operations, sale of financing receivables, proceeds
from divestitures, and other available financing resources are expected to be
sufficient to meet anticipated operating, capital expenditure, and debt service
requirements.
Accounting Standards
- --------------------
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146) which nulifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This accounting standard, which is effective
for exit or disposal activities that are initiated after December 31, 2002,
addresses financial accounting and reporting for costs associated with exit or
disposal activities. The adoption of SFAS No. 146 is not expected to have a
material effect on the Company's financial position or results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No.
145). This accounting standard, which is effective for fiscal years beginning
after May 15, 2002, requires, among other things, that debt extinguishments used
as a part of an entity's risk management strategy no longer meet the criteria
for classification as extraordinary items. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's financial position or
results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). This accounting standard addresses financial accounting and
reporting for goodwill and other intangible assets and requires that goodwill
amortization be discontinued and replaced with periodic tests of impairment.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001,
and is required to be applied at the beginning of the fiscal year. Impairment
losses that arise due to the initial application of this standard will be
reported as a cumulative effect of a change in accounting principle as of
January 1, 2002.
In accordance with SFAS No. 142, goodwill amortization was discontinued as of
January 1, 2002. In the first quarter of 2002, the Company recorded a goodwill
impairment of $360 million related to AIS as a cumulative effect of change in
accounting principle. Due to the non-deductibility of this goodwill, the Company
did not record a tax benefit in connection with this impairment. During the
second quarter of 2002, the Company completed its transitional review for
potential goodwill impairment in accordance with SFAS No. 142. As a result, the
Company recorded a goodwill impairment of $185 million pretax, $149 million
after-tax, which represented all of the goodwill at Raytheon Aircraft, as a
cumulative effect of change in accounting principle. The Company has also
determined that there is no impairment of goodwill related to any of its defense
businesses beyond the $360 million recorded in connection with the sale of AIS.
The total goodwill impairment charge for the six months ended June 30, 2002 was
$545 million pretax, $509 million after-tax, or $1.25 per diluted share.
Quantitative and Qualitative Disclosures About Financial Market Risks
- ---------------------------------------------------------------------
The following discussion covers quantitative and qualitative disclosures about
the Company's market risk. The Company's primary market exposures are to
interest rates and foreign exchange rates.
The Company meets its working capital requirements with a combination of
variable rate short-term and fixed rate long-term financing. The Company enters
into interest rate swap agreements with commercial and investment banks
primarily to manage interest rates associated with the Company's financing
arrangements. The Company also enters into foreign currency forward contracts
with commercial banks only to fix the dollar value of specific commitments and
payments to international vendors and the value of foreign currency denominated
receipts. The market-risk sensitive instruments used by the Company for hedging
are entered into with commercial and investment banks and are directly related
to a particular asset, liability, or transaction for which a firm commitment is
in place. The Company also sells receivables through a special purpose entity
(described in Note 3 - Other Assets) and retains a partial interest that may
include servicing rights, interest only strips, and subordinated certificates.
Financial instruments held by the Company which are subject to interest rate
risk include notes payable, long-term debt, long-term receivables, investments,
and interest rate swap agreements. The aggregate hypothetical loss in earnings
for one year of those financial instruments held by the Company at June 30, 2002
and July 1, 2001, which are subject to interest rate risk resulting from a
hypothetical increase in interest rates of 10 percent, was $2 million and $3
million, respectively, after-tax. The hypothetical loss was determined by
calculating the aggregate impact of a 10 percent increase in the interest rate
of each variable rate financial instrument held by the Company at June 30, 2002
and July 1, 2001, which was subject to interest rate risk. Fixed rate financial
instruments were not evaluated, as the risk exposure is not material.
Forward-Looking Statements
- --------------------------
Certain statements made in this report, including any statements relating to the
Company's future plans, objectives, and projected future financial performance,
contain or are based on, forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Specifically, statements that
are not historical facts, including statements accompanied by words such as
"believe," "expect," "estimate," "intend," or "plan," variations of these words
and similar expressions, are intended to identify forward-looking statements and
convey the uncertainty of future events or outcomes. The Company cautions
readers that any such forward-looking statements are based on assumptions that
the Company believes are reasonable, but are subject to a wide-range of risks,
and actual results may differ materially. Given these uncertainties, readers
should not rely on forward-looking statements. Forward-looking statements also
represent the Company's estimates and assumptions only as of the date that they
were made. The Company expressly disclaims any current intention to provide
updates to forward-looking statements, and the estimates and assumptions
associated with them, after the date of this report. Important factors that
could cause actual results to differ include, but are not limited to:
differences in anticipated and actual program results; risks inherent with large
long-term fixed price contracts, particularly the ability to contain cost
growth; the ultimate resolution of contingencies and legal matters, including
investigations; risks associated with equity investments in third party or joint
ventures; the ability to realize anticipated cost efficiencies; timely
development and certification of new aircraft; the effect of market conditions,
particularly in relation to the general aviation and commuter aircraft markets;
the impact of changes in the collateral values of financed aircraft,
particularly commuter aircraft; the ability to finance ongoing operations at
attractive rates; government customers' budgetary constraints; government import
and export policies; and other government regulations; termination of government
contracts; financial and governmental risks related to international
transactions; the ability to recruit and retain qualified employees; delays and
uncertainties regarding the timing of the
award of international programs; changes in government or customer priorities
due to program reviews or revisions to strategic objectives; difficulties in
developing and producing operationally advanced technology systems; economic,
business, and political conditions domestically and internationally; program
performance and timing of contract payments; the performance of critical
subcontractors and the ability to obtain adequate insurance; the timing and
customer acceptance of product deliveries; the impact of competitive products
and pricing; the uncertainty of the timing and amount of net realizable value of
Boeing Business Jet-related assets; and risks associated with the continuing
project obligations and retained assets and retained liabilities of RE&C,
including timely completion of two Massachusetts construction projects, among
other things. Further information regarding the factors that could cause actual
results to differ materially from projected results can be found in the
Company's filings with the Securities and Exchange Commission, including "Item
1-Business" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to or has property subject to litigation and other
proceedings referenced in "Note 11 - Commitments and Contingencies" of the Notes
to Financial Statements (Unaudited) included in this Form 10-Q and in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, or
arising in the ordinary course of business. In the opinion of management, except
as otherwise indicated in the Form 10-K, it is unlikely that the outcome of any
such litigation or other proceedings will have a material adverse effect on the
Company's financial position or results of operations.
See the "Legal Proceedings" section of the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 for detailed descriptions of previously
filed actions.
The Company is primarily engaged in providing products and services under
contracts with the U.S. government and, to a lesser degree, under direct foreign
sales contracts, some of which are funded by the U.S. government. These
contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. government investigate whether the Company's
operations are being conducted in accordance with these requirements. 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. U.S. government
investigations of the Company, whether relating to these contracts or conducted
for other reasons, could result in administrative, civil, or criminal
liabilities, including repayments, fines or penalties being imposed upon the
Company, the suspension of government export licenses, or the suspension or
debarment from future U.S. government contracting. U.S. government
investigations often take years to complete and many result in no adverse action
against the Company.
New Matters
- -----------
On June 17, 2002, the Company received service of a grand jury subpoena issued
by the United States District Court for the District of California. The subpoena
seeks documents relating to the activities of an international sales
representative engaged by the Company relating to a foreign military sales
contract in Korea in the late 1990s. The Company has in place appropriate
compliance policies and procedures, and believes its conduct has been consistent
with those policies and procedures. The Company is cooperating fully with the
Government's investigation.
Previously Reported Matters
- ---------------------------
As previously reported, in June 2001, a purported class action lawsuit entitled,
Muzinich & Co., Inc. et al v. Raytheon Company, et. al., (Civil Action No.
- -------------------------------------------------------
01-0284-S-BLW) was filed in federal court in Boise, Idaho allegedly on behalf of
all purchasers of common stock or senior notes of WGI during the period April
17, 2000 through March 1, 2001 (the class period). The putative plaintiff class
claims to have suffered harm by purchasing WGI securities because the Company
and certain of its officers allegedly violated federal securities laws by
purportedly misrepresenting the true financial condition of RE&C in order to
sell RE&C to WGI at an artificially inflated price. An amended complaint was
filed on October 1, 2001 alleging similar claims. The Company and the individual
defendants filed a motion seeking to dismiss the action in mid-November 2001. On
April 30, 2002, the Court denied the Company's and the individual defendants'
motion to dismiss the complaint. Thereafter, the defendants filed a motion with
the District Court requesting permission to seek an immediate appeal of the
District Court's decision to the United States Court of Appeals for the Ninth
Circuit, which the District Court granted on July 1, 2002. The Company's and the
individual defendants' motion asking the Ninth Circuit to accept their immediate
appeal is now pending before the Ninth Circuit Court of Appeals.
As previously reported, the Company has been named as a nominal defendant and
members of its Board of Directors and several current and former officers have
been named as defendants in another purported shareholder derivative action
entitled Richard J. Kager v. Daniel P. Burnham, et. al., (Civil Action No.
----------------------------------------------
01-11180-JLT) filed in July 2001 in the U. S. District Court in Massachusetts.
The Kager derivative complaint contains allegations similar to those included in
-----
the Muzinich complaint, and further alleges that the individual defendants
--------
breached fiduciary duties to the Company and purportedly failed to maintain
systems necessary for prudent management and control of the Company's
operations. On June 28, 2002, all of the defendants in the Kager matter filed a
-----
motion to dismiss the complaint which has not yet been heard by the Court.
The Company has been advised by the Securities and Exchange Commission ("SEC")
Staff that the investigation commenced by the SEC into the Company's former
engineering and construction business on May 2, 2001, which was previously
disclosed, has been closed without action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the annual meeting of stockholders held on April 24, 2002, the stockholders
of the Company took the following action:
1. Elected the following four directors for terms of office expiring at the
annual meeting of stockholders in 2005:
Name For Withhold
---- --- --------
Daniel P. Burnham 296,387,074 40,753,586
Barbara M. Barrett 296,529,579 40,611,082
Frederic M. Poses 296,540,146 40,600,516
John H. Tilelli, Jr. 329,477,508 7,649,507
The following directors continued in office after the meeting: Ferdinand
Colloredo-Mansfeld, Thomas E. Everhart, L. Dennis Kozlowski, Warren B.
Rudman, John M. Deutch, Henrique de Campos Meirelles, Michael C. Ruettgers,
and William R. Spivey.
2. Rejected a stockholder proposal regarding Offsets. The vote was 22,547,436
for, 253,846,900 against, 7,797,605 abstentions and 52,948,726 broker
non-votes.
3. Approved a stockholder proposal regarding Annual Election of Directors. The
vote was 174,902,705 for, 107,517,707 against, 1,760,099 abstentions and
52,960,156 broker non-votes.
4. Approved a stockholder proposal regarding the Shareholder Rights Plan. The
vote was 176,887,671 for, 105,135,779 against, 2,156,957 abstentions and
52,960,260 broker non-votes.
5. Rejected a stockholder proposal regarding Independent Directors. The vote
was 54,035,831 for, 225,270,485 against, 4,874,197 abstentions and
52,960,154 broker non-votes.
6. Rejected a stockholder proposal regarding Golden Parachutes. The vote was
53,397,048 for, 228,662,315 against, 2,121,148 abstentions and 52,960,156
broker non-votes.
7. Rejected a stockholder proposal regarding Performance-based Stock Options.
The vote was 35,412,120 for, 244,067,837 against, 4,712,921 abstentions and
52,947,789 broker non-votes.
8. Rejected a stockholder proposal regarding Severance Agreements. The vote
was 125,249,831 for, 156,635,832 against, 2,294,848 abstentions and
52,960,156 broker non-votes.
9. Rejected a stockholder proposal regarding MacBride Principles. The vote was
36,380,375 for, 241,006,743 against, 6,805,752 abstentions and 52,947,797
broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to the Fourth Amended and Restated Purchase and Sale
Agreement dated as of March 8, 2002 among Raytheon Aircraft Credit
Corporation, Raytheon Aircraft Receivables Corporation and the
Purchasers named therein.
10.2 First Amendment to the 364 Day Competitive Advance and Revolving Credit
Facility dated as of November 28, 2001, among Raytheon Company, as
Borrower, Raytheon Technical Services Company and Raytheon Aircraft
Company, as Guarantors, the lenders named therein, and J.P. Morgan
Chase Bank as Administrative Agent for the lenders.
10.3 First Amendment to the Five-Year Competitive Advance and Revolving
Credit Facility dated as of November 28, 2001, among Raytheon Company,
as Borrower, Raytheon Technical Services Company and Raytheon Aircraft
Company, as Guarantors, the lenders named therein, and J.P. Morgan
Chase Bank as Administrative Agent for the lenders.
10.4 Raytheon Savings and Investment Plan, as amended and restated effective
January 1, 2000.
12 Statement Regarding Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On June 28, 2002, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAYTHEON COMPANY (Registrant)
By: /s/ Franklyn A. Caine
-------------------------------
Franklyn A. Caine
Senior Vice President and
Chief Financial Officer
By: /s/ Edward S. Pliner
-------------------------------
Edward S. Pliner
Vice President and
Corporate Controller
(Chief Accounting Officer)
August 14, 2002
Exhibit List
Exhibit No. Description
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10.1 First Amendment to the Fourth Amended and Restated Purchase
and Sale Agreement dated as of March 8, 2002 among Raytheon
Aircraft Credit Corporation, Raytheon Aircraft Receivables
Corporation and the Purchasers named therein.
10.2 First Amendment to the 364 Day Competitive Advance and
Revolving Credit Facility dated as of November 28, 2001,
among Raytheon Company, as Borrower, Raytheon Technical
Services Company and Raytheon Aircraft Company, as
Guarantors, the lenders named therein, and J.P. Morgan Chase
Bank as Administrative Agent for the lenders.
10.3 First Amendment to the Five-Year Competitive Advance and
Revolving Credit Facility dated as of November 28, 2001,
among Raytheon Company, as Borrower, Raytheon Technical
Services Company and Raytheon Aircraft Company, as
Guarantors, the lenders named therein, and J.P. Morgan Chase
Bank as Administrative Agent for the lenders.
10.4 Raytheon Savings and Investment Plan, as amended and
restated effective January 1, 2000.
12 Statement Regarding Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Dividends.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.