Raytheon Reduces Earnings Outlook for 1999 and 2000 Announces $638 Million of Charges Against Earnings
LEXINGTON, Mass.---Raytheon today reported that it is reducing its earnings expectations for 1999 and 2000 as a result of revenue shortfalls and lower-than-expected margins at Raytheon Systems Company (RSC), and additional charges to be taken against earnings attributable to both the Electronics Segment and Raytheon Engineers & Constructors (RE&C). The new charges (detailed below) amount to $638 million pre-tax to be recorded in 1999, or $1.15 per share, plus an additional $30 million that will be recorded in 2000 as incurred. Also affecting reported earnings for 1999 is a charge of $82 million pre-tax, or $0.16 per share, that was recorded in the first quarter upon adoption of accounting standard SOP98-5. Raytheon's current estimate for 1999 earnings per share is between $1.40 - $1.50 per share including the effect of $638 million in charges, or $2.70-$2.80 per share excluding charges. This compares to the most recent consensus estimate of $3.56 per share. For the year 2000, the company estimates earnings per share will be in the range of $2.10-$2.25, compared to the most recent consensus estimate of $3.91 per share. "This is very disappointing news,'' said Daniel P. Burnham, Raytheon chairman and chief executive officer. "We are frustrated with this performance, but I can assure you we have dug deeply to understand the issues and are dealing with the problems. We've also come to the conclusion that fundamental changes are taking place in our business and in the industry, and as a result we are changing some key assumptions in our business model to arrive at a new baseline for Raytheon that is fact-based and realistic.'' Revenue for 1999 is expected to be approximately $20 billion, or about $600 million less than originally expected, primarily attributable to delays in procurement decisions and a continuing shortage of software engineers to work on revenue-producing programs. Further, Raytheon believes annual revenue growth for 1999 and 2000 will be approximately 3 percent, instead of its earlier estimate of 6-8 percent per year. Profit margins at RSC, widely expected to be about 15 percent, are declining and are now estimated to be about 12 percent next year. Despite substantial improvements in productivity, overall margins declined due to emerging competitive pricing issues, lower-than-expected margins on international business, and an unfavorable change in the domestic versus international mix. In the years 2001 and beyond, the company expects to grow revenue at a higher rate than market growth. The company expects to drive improvement in margin from the 12 percent level through Raytheon Six Sigma, working capital efficiencies, and portfolio management. Operating cash flow for the year is adversely affected by the cash component of the charges combined with the company's revised revenue and profitability outlook. Consequently, Raytheon expects to end the year with approximately $9.3 billion in net debt in 1999 and $9.0 billion in net debt at year-end 2000. "Clearly, our businesses can and should be large generators of cash, and anything less is unacceptable performance. We have taken immediate action to redirect the entire company to improve our cash management capability,'' Burnham said. Details of the charges, of which approximately half will have a cash impact over time, are as follows: * $274 million in new restructuring charges for additional employment and facility space reductions and related period expenses; * $74 million in special charges, primarily to write down to fair market value certain assets such as the company's investment in Iridium ($35 million), wireless networking inventory ($33 million), and the exit from the personal rapid transit business ($6 million); * $320 million in operating charges related primarily to contract performance issues on four contracts at each of RSC ($195 million) and RE&C ($125 million).
"While Raytheon moved quickly and decisively to consolidate and integrate several new defense electronics businesses into the company's portfolio, this put a tremendous strain on people and systems,'' Burnham explained. "In retrospect, we tried to do too much too fast, given the size of the task, our state of readiness, and the depth and maturity of the management team. The consolidation is largely behind us now and the benefits of restructuring and productivity improvements are helping to counter the effects of these setbacks. "Raytheon continues to be a strong company that can outperform in its industries,'' Burnham continued. "We believe that aerospace, defense, and electronics are growth businesses and Raytheon is well positioned to share in that growth.'' He also noted that key initiatives underway, such as Raytheon Six Sigma, leadership development, and cash management, continue at full speed and are delivering early results. "Raytheon has profound strengths. Our program performance is sound and our technology is world-class as evidenced by the recent successful EKV (Exoatmospheric Kill Vehicle) test. Although we clearly have not done so this year, we have the ability to generate substantial amounts of cash. Our productivity continues to improve and has helped offset some of the pricing pressure we are facing. We understand the dynamics that drive our earnings and believe that we have found the bottom. While our first priority for cash will be to pay down debt, we will take advantage of any appropriate opportunity to return value to our stockholders. In the end, we will work to re-establish our credibility and restore investor confidence through deeds, not words,'' Burnham concluded.
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Raytheon Reduces Earnings Outlook for 1999 and 2000 Announces $638 Million of Charges Against Earnings
