Raytheon 2006 Annual Report Board of Directors WILLIAM H. SWANSON FERDINAND COLLOREDO- MICHAEL C. RUETTGERS* LINDA G. STUNTZ Chairman and MANSFELD Retired Chairman and Partner Chief Executive Offi cer Retired Chairman and Chief Executive Offi cer Stuntz, Davis & Staffi er, P.C. Raytheon Company Chief Executive Offi cer EMC Corporation Cabot Industrial Trust * Lead Director BARBARA M. BARRETT RONALD L. SKATES International Business and JOHN M. DEUTCH Retired President and Aviation Attorney Institute Professor Chief Executive Offi cer Massachusetts Institute Data General Corporation VERNON E. CLARK of Technology Retired Chief of WILLIAM R. SPIVEY Naval Operations FREDERIC M. POSES Retired President and U.S. Navy Chairman and Chief Executive Offi cer Chief Executive Offi cer Luminent, Inc. American Standard Companies, Inc. Leadership Team Raytheon leadership team: (left to right) Bryan J. Even, Thomas M. Culligan, Taylor W. Lawrence (seated), Michael D. Keebaugh, Jay B. Stephens, Rebecca R. Rhoads, David C. Wajsgras, Louise L. Francesconi, William H. Swanson, Daniel L. Smith, Keith J. Peden (seated), Colin J.R. Schottlaender, Pamela A. Wickham, Jon C. Jones, John D. Harris II, Lawrence J. Harrington (seated), Charles E. Franklin WILLIAM H. SWANSON LAWRENCE J. HARRINGTON TAYLOR W. LAWRENCE JAY B. STEPHENS Chairman and Vice President Vice President Senior Vice President Chief Executive Offi cer Internal Audit Engineering, Technology General Counsel Raytheon Company Raytheon Company and Mission Assurance and Secretary Raytheon Company Raytheon Company THOMAS M. CULLIGAN JOHN D. HARRIS II Senior Vice President Vice President KEITH J. PEDEN DAVID C. WAJSGRAS Business Development, RII Contracts and Supply Chain Senior Vice President Senior Vice President and Raytheon Company Raytheon Company Human Resources Chief Financial Offi cer Raytheon Company Raytheon Company BRYAN J. EVEN JON C. JONES President President REBECCA R. RHOADS PAMELA A. WICKHAM Technical Services Space and Airborne Systems Vice President and Vice President Chief Information Offi cer Corporate Affairs LOUISE L. FRANCESCONI MICHAEL D. KEEBAUGH Raytheon Company and Communications President President Raytheon Company Missile Systems Intelligence and COLIN J.R. SCHOTTLAENDER Information Systems President CHARLES E. FRANKLIN Network Centric Systems Vice President Company Evaluation Team DANIEL L. SMITH Raytheon Company President Integrated Defense Systems Raytheon Financial Highlights Years ended December 31 2004 2005 2006 Dollars in millions, except per share amounts Backlog $29,905 $31,528 $33,838 Net Sales 17,825 19,038 20,291 Operating Income 1,301 1,512 1,840 Net Income 417 871 1,283 Diluted EPS from Continuing Operations 0.85 1.80 2.46 Operating Cash Flow from Continuing Operations 1,689 2,313 2,469 Dividends Declared per Share 0.80 0.88 0.96 Net Debt1 4,595 3,254 1,505 Net Debt to Net Capital2 30.3% 23.3% 11.9% Return on Invested Capital3 5.2% 5.9% 7.6% BACKLOG NET SALES OPERATING INCOME ROIC3 NET DEBT1 Dollars in billions 7.6% $20.3 $4.6 $33.8 $1.8 $31.5 $19.0 5.9% $29.9 5.2% $3.3 $1.5 $17.8 $1.3 $1.5 04 05 06 04 05 06 04 05 06 04 05 06 04 05 06 1 Net debt is defined as total debt less cash and cash equivalents. 2 Net capital is defined as net debt plus equity. 3 ROIC is not a measure of financial performance under GAAP. For details about the company’s calculation of ROIC, see page 106 of this report. 1 Dear Fellow Shareholders, Performance, relationships and solutions: These are the by Fitch to BBB+ in early January 2007 and by Moody’s pillars that have supported the company’s progress — to Baa1 in early March 2007. and these are the principles, combined with our process discipline, that continue to deliver strong results. And it was a year in which the company’s stock price increased more than 30 percent. Two thousand six was a year of record bookings, backlog and operating cash fl ow from continuing operations for the Building On Our Strengths company, a year in which we achieved “organically”- driven While we are pleased with our company’s progress in sales growth of 7 percent — as well as a 37 percent increase 2006, our team’s focus continues to be on the future in diluted earnings per share from continuing operations. success of our customers and stockholders. We believe that the way to do this is to draw on our technology, It was a year in which net debt — total debt less cash systems engineering expertise and our world-class talent and cash equivalents — was reduced by $1.7 billion to a to provide outstanding solutions to our customers year-end level of $1.5 billion, the lowest level in more than — in government and industry, in countries around 12 years. the world, and especially to those who are serving on the front lines in harm’s way; their needs are a priority We also improved our return on invested capital for our company. (ROIC) from 5.9 percent in 2005 to 7.6 percent in 2006, a 29 percent increase — with more than 19,000 One of the key drivers of these solutions, and of the employees trained in ROIC to date and additional company’s growth, is innovation. At Raytheon, technology employees planned for 2007. and innovation are the company’s heritage and our foundation for the future. In the pages that follow, we It was a year in which the company took strategic steps will show you many of our capabilities, including our to focus on our core government and defense businesses, ability to integrate multiple systems to deliver a solu- announcing in December a defi nitive agreement to sell tion for our customers’ mission needs. We call this core Raytheon Aircraft Company. We thank the team at competency Mission Systems Integration. Raytheon Aircraft for building on the Hawker® and ® Beechcraft brands. It was also announced that, subject One of the more unique characteristics of our company to the closing of the transaction, the Board of Directors is our diverse portfolio of programs and capabilities, authorized an increase in the current share repurchase a portfolio that ranges from serving as national team program by an additional $750 million and the early integrator for the U.S. Navy’s Zumwalt Class Destroyer retirement of approximately $1 billion in debt, in program, to participation in thousands of programs in addition to approximately $685 million of scheduled 80 countries around the world. maturities in 2007. In some instances we are team leaders, in others we are Our long-term senior unsecured credit rating was partners with prime contractors, in others still we are upgraded by Standard & Poor’s to BBB+ in December, suppliers or providers of Mission Support solutions. 2 “Performance, relationships and solutions: These are the pillars that have supported the company’s progress—and these are the principles, combined with our process discipline, that continue to deliver strong results.” The common denominator in every contract is our successful. We have initiated the Raytheon Certifi ed innovative strength, customer focus and our depth of Systems Architect program that is training and certify- experience in the customer environment. ing a new generation of technical leaders to be capable of designing and integrating the mission solutions of Raytheon’s Fundamentals For The Future the future. We have a number of certifi ed architects To develop, integrate and apply our capabilities — supported by close to 3,000 engineers trained in the effectively, to drive innovation, to meet our customers’ principles of systems engineering and hundreds of lead needs, to achieve growth, to enhance shareholder value, systems engineers who have completed our extensive we must retain, attract and develop the best talent. Systems Engineering Technical Development program. These training initiatives continue to improve our These fundamentals start with a core foundation in capabilities, expand our ranks of systems architecture ethics, because that is essential to earning and maintain- and systems engineering experts, and provide the core ing the trust of our customers. We know that bad things skills required to grow our company. happen to good people, but when they do, our team knows it is important to raise one’s hand at the earliest We surround all of these fundamentals with a focus on stage and ask for help. As part of this awareness process, diversity — of thought, as well as of gender, age, race, we are continuing the transition I mentioned in last sexual preference and all the aspects that together make year’s letter from an ethics “training” regimen to focus each of us unique. The company’s focus on inclusive- more specifi cally on ongoing, lifelong ethics “education.” ness and the external recognition we have received We believe good companies identify issues early and then are very gratifying, but the journey continues. We will apply the proper resources for resolution. continue to pick up the pace of this important journey. To ethics, we add a culture of learning, because To continue to be world-class innovators, we also must companies that depend on innovation must draw upon continue to value different ideas and put a premium on the skills of lifelong learners. And a key element of respect, which our team defi nes as acknowledging one’s the learning process is embedded in our Raytheon Six presence, valuing one’s opinion, providing ongoing Sigma™ efforts. With each project and each employee feedback, showing appreciation and explaining why experience, we learn more about process improvement we do what we do. This is about all of Raytheon’s team and about providing value to the customer. Raytheon members being valued members of a great team.