Raytheon 2003 Annual Report Download - page 34

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) 3333333333333
RAYTHEON COMPANY 333
Also in July 2001, the Company was named as a nominal defen-
dant and members of its Board of Directors and several current and
former officers have been named as defendants in another pur-
ported shareholder derivative action, which contains allegations
similar to those included in the WGI Complaint and further alleges
that the individual defendants breached fiduciary duties to the
Company and failed to maintain systems necessary for prudent
management and control of the Company’s operations. In
June 2002, the defendants filed a motion to dismiss the complaint.
In September 2002, the plaintiff agreed to voluntarily dismiss this
action without prejudice so that it can be re-filed in another jurisdiction.
In May 2003, two purported class action lawsuits were filed on
behalf of participants in the Company’s savings and investment
plans who invested in the Company’s stock between August 19,
1999 and May 27, 2003. The two class action complaints are
brought pursuant to the Employee Retirement Income Security Act
(ERISA). Both lawsuits are substantially similar and have been con-
solidated into a single action. The complaints allege that the
Company and certain members of the Company’s Investment
Committee breached ERISA fiduciary and co-fiduciary duties by
allegedly failing to (1) disseminate necessary information regarding
the savings and investment plans’ investment in the Company’s
stock, (2) diversify the savings and investment plans’ assets away
from the Company’s stock, (3) monitor investment alternatives to
the Company’s stock, and (4) avoid conflicts of interest.
Although the Company believes that it and the other defendants
have meritorious defenses to each and all of the aforementioned
class action and derivative complaints and intends to contest each
lawsuit vigorously, an adverse resolution of any of the lawsuits
could have a material adverse effect on the Company’s financial
position and results of operations. The Company is not presently
able to reasonably estimate potential losses, if any, related to any of
the lawsuits.
In addition, various claims and legal proceedings generally inci-
dental to the normal course of business are pending or threatened
against the Company. While the ultimate liability from these pro-
ceedings is presently indeterminable, any additional liability is not
expected to have a material adverse effect on the Company’s finan-
cial position or 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 $119 million. Discounted at 8.5 percent,
the Company estimates the liability to be $72 million before
U.S. government recovery and had this amount accrued at
December 31, 2003. 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. Accord-
ingly, the Company has recorded $47 million at December 31,
2003 for the estimated future recovery of these costs from the U.S.
government, which is included in contracts in process. The
Company leases certain government-owned properties and is gen-
erally not liable for environmental remediation at these sites, there-
fore, no provision has been made in the financial statements for
these costs. Due to the complexity of environmental laws and regu-
lations, 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 issues guarantees and has banks and surety
companies issue, on its behalf, letters of credit and surety bonds to
meet various bid, performance, warranty, retention, and advance
payment obligations. Approximately $1,316 million, $890 million,
and $389 million of these guarantees, letters of credit, and surety
bonds, for which there were stated values, were outstanding at
December 31, 2003, respectively and $1,614 million, $1,227 mil-
lion, and $458 million were outstanding at December 31, 2002,
respectively. These instruments expire on various dates through
2007. At December 31, 2003, the amount of guarantees, letters
of credit, and surety bonds, for which there were stated values,
that remained outstanding was $90 million, $146 million, and
$283 million, respectively, related to discontinued operations and are
included in the numbers above. Additional guarantees of project per-
formance for which there is no stated value also remain outstanding.
In 1997, the Company provided a first loss guarantee of
$133 million on $1.3 billion of U.S. Export-Import Bank debt through
2015 related to the Brazilian government’s System for the Vigilance
of the Amazon (SIVAM) program.
The following is a schedule of the Company’s contractual
obligations outstanding (excluding working capital items) at
December 31, 2003:
Less than 1–3 4–5 After 5
(In millions) Total 1 Year years years years
Debt $ 6,564 $ 15 $1,208 $1,709 $3,632
Subordinated notes
payable 863 — 863 — —
Interest payments 7,031 395 740 592 5,304
Operating leases 1,477 294 507 349 327
IT outsourcing 392 68 131 128 65
Equity security unit
distributions 156 65 91 — —
Pension contributions 635 320 315 — —
Total $17,118 $1,157 $3,855 $2,778 $9,328
Interest payments include interest on debt that is redeemable at the option of
the Company.