Fitch Ratings Affirms Raytheon.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 23, 2002

Fitch Ratings affirms Raytheon Company's (RTN) 'BBB-' senior unsecured debt and bank facility ratings, 'BB+' trust preferred securities rating and 'F3' short-term debt rating. The Rating Outlook remains Stable based on the strong performance of RTN's defense businesses and the benefits of lower debt levels, offset by the high cash costs associated with discontinued operations and continued weak performance at Raytheon Aircraft. The ratings cover approximately $7.7 billion of debt and trust preferred securities.

The ratings reflect the recent financial performance of RTN's defense segments, the attractive defense industry environment, the successful debt reduction program, strong liquidity position, and solid backlog. The ratings also consider management's commitment to improving credit quality, as well as RTN's initiatives in asset utilization, working capital management, and Six Sigma. Concerns center on continued cash outflows for discontinued operations (Engineers & Constructors), the performance and competitive position of Raytheon Aircraft, low credit statistics for the rating category, relatively high off-balance sheet obligations (operating leases and aircraft receivables), and large debt maturities over the next four years. Fitch is also monitoring the impact recent M&A activity in the defense sector might have on the competitive positions of RTN's defense businesses when coupled with RTN's level of financial flexibility compared to other leading defense contractors. Future rating actions will depend on continued strong defense performance and clarification of the risks related to discontinued operations and Raytheon Aircraft.

At June 30, 2002, RTN's net liquidity position was $2.16 billion, consisting of $1.64 billion of cash and complete availability under RTN's $2.3 billion credit facility, offset by $1.78 billion in short-term debt and current maturities. Interest coverage for the twelve months ending June 30, 2002, was 3.2 times (x), compared to 2.7x for 2001. RTN's debt to EBITDA ratio was 4.3x for the twelve months ending June 30, 2002, compared to 4.7x for 2001. Note that Fitch conservatively includes RTN's trust preferred securities in the calculation of total debt, although Fitch recognizes certain equity-like benefits, such as interest deferral and subordination, that these securities add to RTN's capital structure. Fitch also recognizes the future benefits from $863 million of equity purchase contacts due in May 2004.

Including the $1 billion debt maturity paid on Aug. 15, RTN has reduced gross debt by $2.25 billion, or 23%, over the past 18 months using proceeds from divestitures, equity issuances, and litigation settlements. This debt reduction occurred despite high cash requirements for discontinued operations. Fitch expects RTN's gross debt, including trust preferred securities, to be $7.6-7.7 billion at year-end, resulting in a debt to EBITDA ratio in the 3.7x-3.8x range. RTN also continues to make progress reducing its off-balance sheet obligations, particularly aircraft receivables, which have declined by more than $500 million in the past eighteen months.

RTN is a leader in several of the highest priority parts of the Department of Defense budget, including precision weapons, missile defense, and ISR (intelligence, surveillance, and reconnaissance). RTN's sales to the U.S. government in the first six months of 2002, including foreign military sales, were 73% of total sales, up from 68% last year. Sales in RTN's defense segments rose 9.2% in the first half of 2002, and the strength of the defense businesses is illustrated by relatively high double-digit margins, although margins in the C3I segment dipped in the first half on program cost growth. Earlier this year, RTN won a major contract as systems integrator on the Navy's DD-X program.

Cash requirements for discontinued operations, primarily construction projects for Engineers & Constructors (E&C), continue to offset the performance of the defense businesses. RTN sold E&C in July 2000. Cash used for discontinued operations was $635 million in 2001 and $483 million through the first six months of 2002. RTN recently increased its estimate for 2002 discontinued operations costs from $600 million to $1.1 billion, or approximately $600 million in additional costs before year-end. The recent delivery of two projects, Ilijan and Red Oak, is encouraging, and RTN has now reduced its exposure from 137 projects to six. Three of the remaining projects are completed and in claims resolution, while a fourth is scheduled for customer acceptance in September. However, the two largest and most expensive projects, Mystic and Fore River, are not completed and are not scheduled for customer acceptance until December. Given the history of estimate changes at these two projects, Fitch believes there are risks of additional cash requirements, which, if material, could delay improvement in RTN's credit statistics.