Raytheon Company Business Information, Profile, and History

Company Perspectives:

From its early days as a maker of radio tubes, its adaptation of World War II radar technology to invent microwave cooking, and its development of the first guided missiles, Raytheon has successfully built upon its pioneering tradition to become a global technology leader.

Today, Raytheon is focused on its core businesses: defense and commercial electronics and business aviation and special mission aircraft. Each provides the company with the capabilities it needs to build on its strength as an innovator and to prosper in a highly competitive global economy.

History of Raytheon Company

Raytheon Company is the third largest defense contractor in the United States, trailing only the Boeing Company and Lockheed Martin Corporation. Among the company's key defense products are missile defense systems, including the Patriot and Hawk ground-based missile systems; offensive missiles, including the Tomahawk, TOW, and Stinger; and radar, infrared, and other electronic systems for surveillance, reconnaissance, targeting, navigation, and other purposes. Raytheon has pioneered in the conversion of defense technologies into commercial products handled by Raytheon Commercial Electronics, such as marine electronic equipment, broadband wireless communications products, and infrared night vision systems for automobiles. Raytheon Aircraft Company is the number one maker of business and special mission aircraft in the world; this subsidiary, however, had been placed up for sale in 2000. The sale of the company's aircraft unit would complete a divestiture program launched in the late 1990s that transformed Raytheon from an industrial conglomerate to a company focused solely on defense and commercial electronics.

Beginnings in Radio Tubes

Raytheon was founded in 1922 when a civil engineer named Laurence Marshall was introduced to an inventor and Harvard physicist named Charles G. Smith by Dr. Vannevar Bush. Marshall proposed a business partnership with Smith and Bush after hearing that Smith had developed a new method for noiseless home refrigeration using compressed gases and no moving parts. Marshall raised $25,000 in venture capital from investors and a former World War I comrade and incorporated the partnership in Cambridge, Massachusetts (near Bush's employer, the Massachusetts Institute of Technology), as American Appliance Company.

Marshall and Smith never developed their refrigeration technologies for the market, but instead shifted their attention to vacuum tubes and other electronic devices. In 1924 Marshall made a three-month tour of the United States to study the pattern of growth in the electronics market. Noting rapidly growing consumer demand for radios, Marshall negotiated the purchase of patents for the S-tube, a gas-filled rectifier that converted alternating current (AC) used in households to the direct current (DC) used in radio sets (ironically, the technology had been developed by Smith and Bush some years earlier while they worked for the American Research and Development Corporation). Up to that time, radios ran on an auto storage battery called the A battery and a high-voltage B battery, which were costly, cumbersome, messy, and relatively expensive to replace.

In 1925, shortly before S-tube production began, a firm in Indiana laid claim to the American Appliance company name. The partners decided to change their corporate moniker to Raytheon Manufacturing Company. Despite the fact that raytheon is Greek for 'god of life,' the name actually was chosen for its modern sound. By 1926, Raytheon had become a major manufacturer of tube rectifiers and generated $321,000 in profit on sales of $1 million.

Virtually all the tubes produced by Raytheon were used in radio sets whose design patents were held by RCA. In 1927 RCA altered its licensing agreements with radio manufacturers to stipulate that the radios could be built only with new rectifier tubes (called Radiotrons) manufactured by RCA. Raytheon was, in effect, denied access to its markets. The company was forced to switch to the production of radio-receiving tubes, a field in which more than 100 companies were engaged in fierce competition.

Marshall's response to operating in this difficult environment was to diversify. Raytheon acquired the Acme-Delta Company, a producer of transformers, power equipment, and electronic auto parts. Profits resulting from new products were immediately put back into research and development to improve products, particularly in industrial electronics and microwave communications.

Marshall also sought the support of the National Carbon Company (a division of Union Carbide Corp.) during this difficult period. In 1929, National Carbon took a $500,000 equity position in Raytheon and held an option to buy the remaining portion of the company for an additional $19.5 million. National Carbon knew that Raytheon rectifier tubes had originally replaced its B battery business and also was convinced that its battery distribution would do well handling replacement tubes marked Eveready-Raytheon. Although the cooperative project was unsuccessful, National Carbon's investment carried Raytheon through the Great Depression. National Carbon allowed its option to acquire Raytheon to lapse in 1938.

Moving into Defense Contracting During World War II

With world war looming in 1940, U.S. President Franklin Roosevelt and British Prime Minister Winston Churchill authorized the joint development of new radar technologies by American and British institutions. Through the Radiation Laboratory at the Massachusetts Institute of Technology, Raytheon was chosen to develop the top-secret British magnetron, a microwave radar power tube. The technology would provide the range and clearer images required for successful detection and destruction of enemy planes, submarines (when they surfaced), and German warships. The new device had more than 100 times the power of previous microwave tubes and was cited as one of the Allies' top secrets. Britain, however, needed the United States' manufacturing capacity. In June 1941 Raytheon also won a contract to deliver 100 radar systems for navy ships.

Workers produced 100 magnetrons a day until plant manager Percy Spencer discovered a method, using punch presses, to raise production to more than 2,500 a day. Spencer's ingenuity won Raytheon an appropriation of $2 million from the U.S. Navy for the construction of a large new factory in Waltham, Massachusetts. By the end of the war, Raytheon magnetrons accounted for about 80 percent of the one million magnetrons produced during the war. By 1944, virtually every U.S. Navy ship was equipped with Raytheon radar. The company became internationally known for its reliable marine radar. The company also offered complete radar installations, with the help of subcontractors, and developed tubes for the VT radio fuse, a device that detonated fired shells when it sensed they were near solid objects. Over the course of the war, Raytheon's sales increased 55 times, from $3 million in 1940 to $168 million in 1945.

Raytheon was fortunate to be involved in a high-growth area of defense industry. When the war ended, companies specializing in high-technology military systems suffered less from cuts in the postwar defense budget than aircraft or heavy-vehicle manufacturers, or shipbuilders. In large part as a result of the war, Raytheon emerged as a profitable and influential, but still financially vulnerable, electronics company.

During the spring of 1945 Raytheon's management formulated plans to acquire several other electronics firms. As part of a strategy to consolidate independent component manufacturers into one company, in April the company purchased Belmont Electronics for $4.6 million. Belmont, located in Chicago, was a major consumer of Raytheon tubes and was developing a television for the commercial market. That October, Raytheon acquired Russell Electric for $1.1 million and entered merger negotiations with the Submarine Signal Company. Sub-Sig, as the company was known, was founded in Boston in 1901 as a manufacturer of maritime safety equipment, including a depth sounder called the fathometer. Sub-Sig manufactured a variety of sonar equipment during the war and, like Belmont, was a major Raytheon customer. When the two companies agreed to merge on May 31, 1946, it was decided that Sub-Sig would specialize in sonar devices and that Raytheon would continue to develop new radar systems.

Despite Raytheon's strengthened position as a result of the mergers, the company faced severe competition in both the sonar and radar markets from companies such as General Electric, RCA, Westinghouse Electric, and Sperry. Belmont, which planned to bring its television to market in late 1948, suffered a crippling strike during the summer and, as a result, lost much of its projected Christmas business. Unstable price conditions the following spring created further losses from which the subsidiary was, in large part, unable to recuperate.

Laurence Marshall, though a superb engineer, was generally regarded as a poor manager. His inability to effect positive changes within the company led him to resign as president in February 1948. The following December he resigned as CEO, but he remained chairman of the board until May 1950, when he resigned after failing to gain support for a proposed merger with International Telephone & Telegraph. Charles F. Adams, a former financial advisor who joined Raytheon in 1947, assumed Marshall's responsibilities.

The sudden resumption of military orders after the outbreak of the Korean War in June 1950 greatly benefited Raytheon, as Defense Department contracts enabled the company to develop new technologies with initially low profitability. That year, a 'Lark' missile equipped with a Raytheon-designed guidance system made history when it intercepted and destroyed a Navy drone aircraft. Raytheon's advanced research center, called Lab 16, was designed to develop the Sparrow air-to-air and Hawk surface-to-air missiles. Raytheon became a partner in Selenia, a joint venture with the Italian firms Finmeccanica and Fiat, which was established to develop new radar technologies. Raytheon's association with Selenia afforded it an opportunity to work with the Italian rocket scientist Carlo Calosi.

Raytheon's Belmont operation was re-formed in 1954, but two years later all radio and television operations were sold to the Admiral Corporation. Raytheon continued, however, to develop new appliances, such as the Radarange microwave oven. In 1956 Charles Adams hired Harold S. Geneen, a highly innovative and dynamic manager, as executive vice-president. Three years later, however, Geneen left Raytheon to become chief executive of ITT. Richard E. Krafve (who once headed the Ford Motor Company's Edsel project) enjoyed only a short tenure as Geneen's successor; he disagreed frequently with Adams and was apparently unable to gain the respect of engineers. Thomas L. Phillips, manager of the Missile Division, replaced Krafve.

In 1956 and 1957, Raytheon and Minneapolis-Honeywell jointly operated a computer company called Datamatic. Raytheon soon sold its interest to Honeywell when Datamatic failed to compete effectively against IBM. Raytheon's joint venture projects with Italian companies continued to expand, however. D. Brainerd Holmes, a former director of the American manned space flight program, joined Raytheon in 1963 to manage the company's military business, reporting to Phillips.

Diversifying in the 1960s and 1970s

Raytheon's top managers began to recognize weaknesses in the company's organizational structure perhaps as early as 1962; Raytheon, they decided, had become too dependent on government contracts. So in 1964 Adams and Phillips, who had become chairman and president, respectively, conceived a plan that aimed to diversify the company's operations. Raytheon acquired Packard-Bell's computer operations and a number of small electronics firms. In 1965 Raytheon acquired Amana Refrigeration Company. Although Raytheon had invented the microwave oven 20 years earlier, it needed Amana to commercialize the technology. (Spencer had accidentally discovered microwave cooking in 1945 when a candy bar in his pocket melted as he stood near an operating magnetron tube; the company began selling commercial refrigerator-sized Radaranges in 1947, then five years later started selling, with limited success, expensive consumer models through a licensing deal with Tappan Stove Company.) In 1967 Raytheon helped launch a domestic revolution when it introduced the first countertop microwave under the Amana name, featuring 100 volts of power and priced at just less than $500. That same year, Caloric Corporation, a major manufacturer of gas ranges and appliances, was acquired as well. By the end of the decade, Raytheon had absorbed a number of additional companies, including the E.B. Badger Co., Inc., a designer and builder of petroleum and petrochemical plants; United Engineers and Constructors, a designer and builder of power plants; textbook publisher D.C. Heath & Company; and a geological survey company called the Seismograph Service Corporation.

Raytheon's association with Selenia became strained in 1967. Raytheon's directors concluded that its Italian partners were unwilling to reform the operations of Selenia and Elsi (a jointly operated electronics firm). They voted to sell Raytheon's share of the companies to its partners and end their association with Calosi. Nevertheless, the defense department in 1967 selected Raytheon as the prime contractor for the new SAM-D surface-to-air missile. Renamed the Patriot in honor of the nation's bicentennial, the missile entered full-scale production in 1976. Initially designed as a defense against high-tech aircraft, the Patriot was upgraded about ten years later with the capability to intercept and destroy short-range ballistic missiles.

The goal of reducing Raytheon's proportion of sales to the government from 85 percent to 50 percent was achieved on schedule in 1970. But, while Raytheon's sales continued to rise, profits began to lag. Intracompany discussions determined that, with the exception of D.C. Heath, Raytheon should dispense with its marginally performing educational services units. In 1972, after several relatively small acquisitions, Raytheon purchased Iowa Manufacturing Company (later called Cedarapids, Inc.), a producer of road-building equipment.

When Charles Adams retired as chair in 1975, Tom Phillips was elected the new chairman and chief executive officer. Brainerd Holmes was promoted to president. Raytheon's financial performance during the mid-1970s was impressive: from 1973 to 1978 sales and profits grew at annual rates of 15 percent and 26 percent, respectively. Acquisitions in the latter years of the decade included Switchcraft, Inc., an electronics manufacturer, and Glenwood Range and Modern Maid gas range producers. The laundry products and kitchen appliance divisions of McGraw-Edison, which included the popular Speed Queen brand name, were added in 1979. The company's retained earnings were placed in high-yielding money market accounts until needed to finance acquisitions.

In 1977 Phillips tried to acquire Falcon Seaboard, an energy resources company involved primarily in strip mining coal, but withdrew the offer when favorable terms could not be reached. Instead, Phillips entered into negotiations to acquire Beech Aircraft, a leading manufacturer of single- and twin-engine aircraft. Raytheon acquired Beech in February 1980 for $800 million. The new affiliate recorded annual losses in each of the ensuing seven years, finally turning a profit in 1988.

At this time Raytheon's business with the government consisted mainly of radar systems, solar systems, communications equipment, and the Hawk, Sparrow, Patriot, and Sidewinder missiles, all of which totaled less than 40 percent of Raytheon's sales. Raytheon was now more widely exposed to commercial computer and consumer markets, but these markets had become unexpectedly competitive, leading Raytheon management to reconsider its trend of moving away from stable military contracts.

Raytheon's Data Systems division, created in 1971 through the merger of the company's information processing and display units, established a small market by manufacturing terminals for airline reservation systems. Raytheon failed, however, to integrate Data Systems effectively with a word processing subsidiary called Lexitron, which it acquired in 1978. As the computer products market expanded, Data Systems found itself unable to compete. After mounting losses, the division was sold to Telex in 1984. In January 1986 Raytheon acquired the Yeargin Construction Company, a builder of electrical and chemical plants, and the following October it acquired the Stearns Catalytic World Corporation, an industrial plant maintenance company.

When Brainerd Holmes retired on May 31, 1986, as he reached the traditional retirement age of 65, he was succeeded as president by R. Gene Shelley, who himself retired in July 1989 and was replaced by Dennis J. Picard. Picard succeeded Tom Phillips as chairman and chief executive of Raytheon in 1990, and Max E. Bleck rose to president.

Focusing on Defense and Commercial Electronics: 1990s and Beyond

While other major defense contractors moved to convert to civilian interests in the wake of post-Cold War defense budget cuts, Raytheon planned to buttress its position within its four main business segments: defense and commercial electronics, aircraft products, energy and environmental services, and major appliances. In 1992, Picard announced a new five-year plan. Its goals included increasing foreign military sales from 20 percent to 40 percent of total defense revenues; doubling energy and environmental services' $1.7 billion in sales; doubling Beech's $1.1 billion in sales; and increasing appliance sales by 60 percent.

The versatile Patriot missile--Raytheon's single most important product in the early 1990s--was considered pivotal to an increase in the company's overseas sales. From the end of the Gulf War until late in 1994, Raytheon received nearly $2.5 billion in orders for the missiles from overseas customers. The corporation's environmental and energy service was consolidated to form Raytheon Engineers & Constructors International Inc. (RECI), one of the world's largest engineering and construction groups, in 1993. The acquisitions of Harbert Corp., Gibbs & Hill, and key segments of EBASCO Services, Inc. that year were intended to help boost RECI's annual sales. The corporate jet unit of British Aerospace plc also was purchased that year for $387.5 million. The acquisition helped expand Beech's penetration of the business aircraft market. An extensive overhaul of the appliance segment, including downsizing, consolidation, and the 1994 acquisition of UniMac Companies, helped increase that division's sales and profits. Raytheon, meantime, exited from the publishing field with the 1995 sale of D.C. Heath to Houghton Mifflin Co. for $455 million.

The end of the Cold War and the resulting defense budget cuts ushered in a wave of mergers and consolidations in the defense industry by the mid-1990s. Raytheon was a key participant in this trend and also worked to rationalize its defense businesses. In early 1995 the company created Raytheon Electronic Systems from the merger of its Missile Systems Division and Equipment Division. Later that year Raytheon acquired Dallas-based E-Systems Inc. for more than $2.3 billion, gaining a leading developer of military intelligence communications systems. In 1996 Raytheon added two of Chrysler Corporation's defense businesses in a deal valued at about $475 million. The Chrysler units acquired were its Electrospace Systems operation, which was involved in satellite communications, secure communications, and electronic warfare systems; and its airborne-technologies operation, which modified commercial aircraft for use by the armed forces and by heads of state, often equipping the planes with high-tech signal-jamming and encoding equipment. Both of these units complemented the activities of E-Systems and, therefore, were consolidated into the newly named Raytheon E-Systems.

Raytheon's appetite was not yet sated, and in fact grew in 1997, when the company acquired the defense business of Texas Instruments Inc. for $2.9 billion in July and the defense business of Hughes Electronics Corporation, a subsidiary of General Motors Corporation, for $9.5 billion in December. The Texas Instruments deal brought to Raytheon a number of complementary operations, including laser-guided weapons systems, missiles, airborne radar, night vision systems, and electronic warfare systems. The Hughes defense unit was a leading supplier of advanced defense electronics systems and services. These latest acquisitions propelled Raytheon into the top three among defense contractors and into the top position in defense electronics. They also led to a marked increase in revenues, from $12.33 billion in 1996 to $19.53 billion in 1998. Following the completion of the Hughes transaction, Raytheon consolidated its defense businesses--Raytheon Electronic Systems, Raytheon E-Systems, and the Texas Instruments and Hughes units--into a new operation called Raytheon Systems Company. In connection with this restructuring and a smaller restructuring of Raytheon Engineers & Constructors, Raytheon took a $495 million restructuring charge in 1997 for a plan that by 1999 eliminated more than 14,000 jobs from the workforce and closed about 28 facilities in the United States. In December 1997, the company also created a new subsidiary called Raytheon Systems Limited, which was based in the United Kingdom and was formed to develop products for export from that country.

By this time it was clearly evident that Raytheon had made a marked shift in strategy, placing a greater emphasis on its defense businesses, alongside the commercial electronics applications that developed out of the defense operations. The divestment of additional noncore operations was further evidence of this trend, with the divestments also helping to hold down the company's mounting debt load, which exceeded $10 billion by the end of 1997 thanks to the defense acquisitions. In 1997 Raytheon sold its home appliance, heating, air conditioning, and commercial cooking operations to Goodman Holding Co. for $522 million. That same year, the company sold its Switchcraft and Semiconductor divisions in separate transactions totaling $183 million. Divestments continued in 1998, including the sale of the firm's commercial laundry business for $334 million. Operations now consisted of the defense units, Raytheon Commercial Electronics, Raytheon Aircraft Company, and Raytheon Engineers & Constructors. In December 1998 Daniel P. Burnham, a vice-chairman of AlliedSignal, Inc., took the helm at Raytheon as president and CEO. Picard remained chairman until August 1999, when Burnham took on that title as well.

Late in 1999 Raytheon revealed that it had uncovered pervasive management and financial problems in its defense electronics operations that forced it to cut its earnings projections for the fourth quarter and all of 2000. The company was over budget or behind schedule on more than a dozen Pentagon contracts, and other projects, both in the United States and overseas, were being delayed at the contract stage itself, including several billion-dollar deals involving Patriot missiles. With earnings down, Raytheon would be unable to pay down its $9.5 billion debt as quickly as it hoped. For the year, net income stood at $404 million, less than half the $844 million figure of the previous year. Meantime, late in 1999 the company launched a further restructuring, with additional job cuts, the closure or amalgamation of ten plants, and a charge of $668 million. To flatten the organizational structure, Raytheon Systems Company was reorganized into several smaller units: Electronic Systems; Command, Control, Communication and Information Systems; Raytheon Technical Services Company; and Aircraft Integration Systems. On the positive side for 1999, Raytheon contracted with the United Kingdom to develop a $1.3 billion high-tech radar surveillance system called Airborne Stand-Off Radar. That year also saw the sale of the Cedarapids subsidiary for $170 million.

As it worked to fix the problems in its defense operations, Raytheon was awarded a couple more large contracts in August 2000. The U.S. Army awarded a joint venture partnership of Raytheon and Lockheed Martin a $1.24 billion production contract on the Javelin Antitank Weapon System, which the partners first began producing in 1997. In addition, Lockheed Martin selected Raytheon for the design, development, and manufacture of three radar systems for the Theater High Altitude Area Defense System, a $4 billion missile defense system contracted for by the U.S. Army. Raytheon's portion of the project amounted to $1.3 billion. Meantime, Raytheon's ongoing series of divestitures were nearing their conclusion. In July 2000 Raytheon Engineers & Constructors was sold to Morrison Knudsen Corporation for more than $800 million. Later in the year it was reported that Raytheon Aircraft Company was being shopped around. The sale of the aircraft unit essentially would focus Raytheon exclusively on defense and commercial electronics. Once again, these further divestments were in part aimed at slashing the burdensome debt load, which had crept back up over the $10 billion mark by late 2000. Raytheon would need to rein in this debt load and clear up its other financial problems if it wished to return to or surpass the steadily, if unspectacularly, profitable years that preceded the major 1997 acquisitions.

Principal Subsidiaries: Raytheon Aircraft Company; Raytheon Systems Limited (U.K.).

Principal Operating Units: Electronic Systems; Command, Control, Communication and Information Systems; Raytheon Technical Services Company; Aircraft Integration Systems; Raytheon Commercial Electronics.

Principal Competitors: BAE Systems; The Boeing Company; Bombardier Inc.; Emerson Electric Co.; European Aeronautic Defence and Space Company EADS N.V.; General Electric Company; Gulfstream Aerospace Corporation; Harris Corporation; Litton Industries, Inc.; Lockheed Martin Corporation; Matra-BAE Dynamics; Northrop Grumman Corporation; Textron Inc.; United Technologies Corporation.

Chronology

• Key Dates:

• 1922: American Appliance Company is founded.
• 1925: Company changes its name to Raytheon Manufacturing Company and begins making tubes for radios.
• 1940: Raytheon is chosen to develop magnetrons, a tube used in microwave radar systems, marking the company's entrance into defense technology.
• 1941: U.S. Navy contracts with Raytheon on the delivery of 100 ship radar systems.
• 1950: Raytheon's Lark missile comes to the fore when it successfully intercepts and destroys a test drone.
• 1965: Amana Refrigeration is acquired.
• 1967: Company introduces the first countertop microwave under the Amana name.
• 1976: Production of the Patriot missile defense system begins.
• 1980: Company acquires Beech Aircraft.
• 1993: Company acquires the corporate jet unit of British Aerospace.
• 1995: E-Systems Inc. is acquired.
• 1997: Raytheon acquires the defense businesses of Texas Instruments Inc. and Hughes Electronics Corporation; its home appliances unit is divested.
• 2000: Raytheon Engineers & Constructors is sold to Morrison Knudsen Corporation.