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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2019
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from               to              
Commission File Number 1-13699
________________________________________________________________________________
RAYTHEON COMPANY
(Exact name of Registrant as Specified in its Charter)
________________________________________________________________________________ 
Delaware
 
95-1778500
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
870 Winter Street, Waltham, Massachusetts 02451
(Address of Principal Executive Offices) (Zip Code)
(781) 522-3000
(Registrant’s telephone number, including area code)
________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý   No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ý   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
 
Accelerated filer
 
o
Non-accelerated filer
 
o
 
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No ý
Number of shares of common stock outstanding as of April 22, 2019 was 279,871,000.


Table of Contents

RAYTHEON COMPANY
TABLE OF CONTENTS
 
 
 
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
 
9
 
 
 
 
27
 
 
 
Item 2.
28
 
 
 
Item 3.
47
 
 
 
Item 4.
48
 
 
 
PART II
 
 
 
 
Item 1.
48
 
 
 
Item 1A.
49
 
 
 
Item 2.
49
 
 
 
Item 6.
50
 
 
51

2

Table of Contents

Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of federal securities laws, including information regarding our financial outlook, future plans, objectives, business prospects, products and services, trends and anticipated financial performance, including with respect to: our revenue; our liquidity and capital resources; our capital expenditures; our bookings and backlog; our international sales, including our ability to do business in the Kingdom of Saudi Arabia (KSA) and delays in the Congressional Notification process for direct commercial sales contracts for precision guided munitions to certain Middle Eastern customers; our expected tax payments; our pension, nonqualified defined benefit and defined contribution plans funding; the impact of new accounting pronouncements and tax regulations; our unrecognized tax benefits; our recognition of revenue on certain performance obligations; our reclassifications of gains or losses on cash flow hedges; the impact and outcome of audits, legal and administrative proceedings, claims, investigations and commitments and contingencies; the impact of certain regional developments; and the impact of changes in foreign currency rates. You can identify these statements by the fact that they include words such as “will,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” or variations of these words, or similar expressions. These forward-looking statements are not statements of historical facts and represent only our current expectations regarding such matters. These statements inherently involve a wide range of known and unknown uncertainties. Our actual actions and results could differ materially from what is expressed or implied by these statements. Specific factors that could cause such a difference include, but are not limited to, those set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and other important factors disclosed previously and from time to time in our other filings with the Securities and Exchange Commission (SEC). Given these factors, as well as other variables that may affect our operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance, or use historical trends to anticipate results or trends in future periods. We expressly disclaim any obligation or intention to provide updates to the forward-looking statements and the estimates and assumptions associated with them, except as required by law.



3

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RAYTHEON COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions, except per share amounts)
 
Mar 31, 2019
 
Dec 31, 2018
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
2,093

 
$
3,608

Receivables, net
 
1,424

 
1,648

Contract assets
 
5,971

 
5,594

Inventories
 
882

 
758

Prepaid expenses and other current assets
 
586

 
529

Total current assets
 
10,956

 
12,137

Property, plant and equipment, net
 
2,899

 
2,840

Operating lease right-of-use assets
 
816

 
805

Goodwill
 
14,882

 
14,864

Other assets, net
 
2,023

 
2,024

Total assets
 
$
31,576

 
$
32,670

 
 
 
 
 
Liabilities, Redeemable Noncontrolling Interests and Equity
 
 
 
 
Current liabilities
 
 
 
 
Commercial paper and current portion of long-term debt
 
$
800

 
$
300

Contract liabilities
 
2,930

 
3,309

Accounts payable
 
1,361

 
1,964

Accrued employee compensation
 
995

 
1,509

Other current liabilities
 
1,594

 
1,381

Total current liabilities
 
7,680

 
8,463

Accrued retiree benefits and other long-term liabilities
 
6,848

 
6,922

Long-term debt
 
4,256

 
4,755

Operating lease liabilities
 
652

 
647

Commitments and contingencies (Note 12)
 


 

 
 
 
 
 
Redeemable noncontrolling interests
 
432

 
411

 
 
 
 
 
Equity
 
 
 
 
Raytheon Company stockholders’ equity
 
 
 
 
Common stock, par value, $0.01 per share, 1,450 shares authorized, 280 and 282 shares outstanding at March 31, 2019 and December 31, 2018, respectively
 
3

 
3

Additional paid-in capital
 

 

Accumulated other comprehensive loss
 
(8,399
)
 
(8,618
)
Retained earnings
 
20,104

 
20,087

Total Raytheon Company stockholders’ equity
 
11,708

 
11,472

Noncontrolling interests in subsidiaries
 

 

Total equity
 
11,708

 
11,472

Total liabilities, redeemable noncontrolling interests and equity
 
$
31,576

 
$
32,670


The accompanying notes are an integral part of the unaudited consolidated financial statements.

4

Table of Contents

RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
 
Three Months Ended
(In millions, except per share amounts)
 
Mar 31, 2019
 
Apr 1, 2018
Net sales
 
 
 
 
Products
 
$
5,562

 
$
5,254

Services
 
1,167

 
1,013

Total net sales
 
6,729

 
6,267

Operating expenses
 
 
 
 
Cost of sales—products
 
4,002

 
3,737

Cost of sales—services
 
875

 
795

General and administrative expenses
 
739

 
694

Total operating expenses
 
5,616

 
5,226

Operating income
 
1,113

 
1,041

Non-operating (income) expense, net
 
 
 
 
Retirement benefits non-service expense
 
181

 
239

Interest expense
 
44

 
47

Interest income
 
(13
)
 
(7
)
Other (income) expense, net
 
(20
)
 
5

Total non-operating (income) expense, net
 
192

 
284

Income from continuing operations before taxes
 
921

 
757

Federal and foreign income taxes
 
146

 
133

Income from continuing operations
 
775

 
624

Income (loss) from discontinued operations, net of tax
 

 
(1
)
Net income
 
775

 
623

Less: Net income (loss) attributable to noncontrolling interests in subsidiaries
 
(6
)
 
(10
)
Net income attributable to Raytheon Company
 
$
781

 
$
633

 
 
 
 
 
Basic earnings per share attributable to Raytheon Company common stockholders:
 
 
 
 
Income from continuing operations
 
$
2.77

 
$
2.20

Income (loss) from discontinued operations, net of tax
 

 

Net income
 
2.77

 
2.20

Diluted earnings per share attributable to Raytheon Company common stockholders:
 
 
 
 
Income from continuing operations
 
$
2.77

 
$
2.20

Income (loss) from discontinued operations, net of tax
 

 

Net income
 
2.77

 
2.19

Amounts attributable to Raytheon Company common stockholders:
 

 
 
Income from continuing operations
 
$
781

 
$
634

Income (loss) from discontinued operations, net of tax
 

 
(1
)
Net income
 
$
781

 
$
633

The accompanying notes are an integral part of the unaudited consolidated financial statements.

5

Table of Contents

RAYTHEON COMPANY 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 
Three Months Ended
(In millions)
Mar 31, 2019

 
Apr 1, 2018

Net income
$
775

 
$
623

Other comprehensive income (loss), before tax:
 
 
 
Pension and other postretirement benefit plans, net:
 
 
 
Amortization of prior service cost
1

 
1

Amortization of net actuarial loss
276

 
347

Pension and other postretirement benefit plans, net
277

 
348

Foreign exchange translation
8

 
24

Cash flow hedges
(10
)
 
(10
)
Unrealized gains (losses) on investments and other, net

 

Other comprehensive income (loss), before tax
275

 
362

Income tax benefit (expense) related to items of other comprehensive income (loss)
(56
)
 
(71
)
Other comprehensive income (loss), net of tax
219

 
291

Reclassification of stranded tax effects

 
(1,451
)
Total comprehensive income (loss)
994

 
(537
)
Less: Comprehensive income (loss) attributable to noncontrolling interests in subsidiaries
(6
)
 
(10
)
Comprehensive income (loss) attributable to Raytheon Company
$
1,000

 
$
(527
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.


6

Table of Contents

RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
 
(In millions)
 
Common stock

 
Additional paid-in capital

 
Accumulated other comprehensive income (loss)

 
Retained earnings

 
Total Raytheon Company stockholders’ equity

 
Noncontrolling interests in subsidiaries(1)

 
Total equity

Balance at December 31, 2018
 
$
3

 
$

 
$
(8,618
)
 
$
20,087

 
$
11,472

 
$

 
$
11,472

Net income (loss)
 
 
 
 

 
 
 
781

 
781

 

 
781

Other comprehensive income (loss), net of tax
 
 
 
 
 
219

 
 
 
219

 
 
 
219

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
5

 
5

 
 
 
5

Dividends declared
 
 
 
1

 
 
 
(265
)
 
(264
)
 
 
 
(264
)
Common stock plans activity
 
 
 
61

 
 
 
 
 
61

 
 
 
61

Share repurchases
 
 
 
(62
)
 
 
 
(504
)
 
(566
)
 
 
 
(566
)
Balance at March 31, 2019
 
$
3

 
$

 
$
(8,399
)
 
$
20,104

 
$
11,708

 
$

 
$
11,708

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
3

 
$

 
$
(7,935
)
 
$
17,895

 
$
9,963

 
$

 
$
9,963

Net income (loss)
 
 
 
 
 
 
 
633

 
633

 

 
633

Other comprehensive income (loss), net of tax
 
 
 
 
 
291

 
 
 
291

 
 
 
291

Reclassification of stranded tax effects
 
 
 
 
 
(1,451
)
 
1,451

 

 
 
 

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
11

 
11

 
 
 
11

Dividends declared
 
 
 
1

 
 
 
(252
)
 
(251
)
 
 
 
(251
)
Common stock plans activity
 
 
 
62

 
 
 
 
 
62

 
 
 
62

Share repurchases
 
 
 
(63
)
 
 
 
(409
)
 
(472
)
 
 
 
(472
)
Balance at April 1, 2018
 
$
3

 
$

 
$
(9,095
)
 
$
19,329

 
$
10,237

 
$

 
$
10,237

(1)
Excludes redeemable noncontrolling interests which are not considered equity. See “Note 13: Redeemable Noncontrolling Interests” for additional information.
The accompanying notes are an integral part of the unaudited consolidated financial statements.

7

Table of Contents

RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Cash flows from operating activities
 
 
 
 
Net income
 
$
775

 
$
623

(Income) loss from discontinued operations, net of tax
 

 
1

Income from continuing operations
 
775

 
624

Adjustments to reconcile to net cash provided by (used in) operating activities from continuing operations, net of the effect of acquisitions and divestitures
 
 
 
 
Depreciation and amortization
 
140

 
135

Stock-based compensation
 
59

 
63

Deferred income taxes
 
(44
)
 
(77
)
Changes in assets and liabilities
 
 
 
 
Receivables, net
 
236

 
(314
)
Contract assets and contract liabilities
 
(731
)
 
(174
)
Inventories
 
(124
)
 
(46
)
Prepaid expenses and other current assets
 
(59
)
 
138

Income taxes receivable/payable
 
181

 
290

Accounts payable
 
(484
)
 
(167
)
Accrued employee compensation
 
(523
)
 
(420
)
Other current liabilities
 
3

 
(60
)
Accrued retiree benefits
 
219

 
306

Other, net
 
(59
)
 
(15
)
Net cash provided by (used in) operating activities from continuing operations
 
(411
)
 
283

Net cash provided by (used in) operating activities from discontinued operations
 

 
1

Net cash provided by (used in) operating activities
 
(411
)
 
284

Cash flows from investing activities
 
 
 
 
Additions to property, plant and equipment
 
(274
)
 
(219
)
Additions to capitalized internal use software
 
(10
)
 
(12
)
Maturities of short-term investments
 

 
309

Payments for purchases of acquired companies, net of cash received
 
(8
)
 

Other
 

 
(1
)
Net cash provided by (used in) investing activities
 
(292
)
 
77

Cash flows from financing activities
 
 
 
 
Dividends paid
 
(245
)
 
(230
)
Net borrowings (payments) on commercial paper
 

 

Repurchases of common stock under share repurchase programs
 
(500
)
 
(400
)
Repurchases of common stock to satisfy tax withholding obligations
 
(66
)
 
(72
)
Other
 
(5
)
 
(5
)
Net cash provided by (used in) financing activities
 
(816
)
 
(707
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(1,519
)
 
(346
)
Cash, cash equivalents and restricted cash at beginning of the year
 
3,624

 
3,115

Cash, cash equivalents and restricted cash at end of period
 
$
2,105

 
$
2,769


The accompanying notes are an integral part of the unaudited consolidated financial statements.

8

Table of Contents

RAYTHEON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation
We prepared the accompanying unaudited consolidated financial statements of Raytheon Company and all wholly-owned, majority-owned or otherwise controlled subsidiaries on the same basis as our annual audited financial statements. We condensed or omitted certain information and footnote disclosures normally included in our annual audited financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Our quarterly financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018. As used in this report, the terms “we,” “us,” “our,” “Raytheon” and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another meaning.

In the opinion of management, our financial statements reflect all adjustments, which are of a normal recurring nature, necessary for presentation of financial statements for interim periods in accordance with U.S. GAAP and with the instructions to Form 10-Q in Article 10 of Securities and Exchange Commission (SEC) Regulation S-X. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates, and any such differences may be material to our financial statements.

Effective January 1, 2019, we adopted the requirements of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) using the modified retrospective approach as discussed below in “Note 2: Accounting Standards.” We reclassified certain balance sheet amounts to conform to our current period presentation. All amounts disclosed in this Form 10-Q reflect these changes.

Note 2: Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. Effective January 1, 2019, we adopted the requirements of the new lease standard using the modified retrospective approach, applying the new lease requirements at the beginning of the earliest period presented. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows us to carry forward the historical lease classification. We did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets. The standard resulted in the recognition of operating lease right-of-use assets of $805 million and operating lease liabilities of $841 million, of which $194 million was classified as current and is included in other current liabilities in our consolidated balance sheet as of December 31, 2018, with immaterial changes to other balance sheet accounts. The standard had no impact on our results of operations or cash flows. In addition, new disclosures are provided to enable users to assess the amount, timing and uncertainty of cash flows arising from leases.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which eliminates the disclosure requirement of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and modifies certain disclosure requirements related to Level 3 recurring and nonrecurring fair value measurements. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Effective January 1, 2019, we elected to early adopt the requirements of the new standard on a prospective basis. The standard did not have an impact on our financial position, results of operations or liquidity.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-24): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Effective January 1, 2019, we elected to early adopt the requirements of the new standard on a prospective basis. The standard did not have a material impact on our financial position, results of operations or liquidity.

Other new pronouncements adopted and issued but not effective until after March 31, 2019 did not and are not expected to have a material impact on our financial position, results of operations or liquidity.


9


Note 3: Significant Accounting Policies Update
Our significant accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies” within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to our accounting policies as a result of adopting Topic 842 are discussed below:

Leases—We determine if an arrangement is a lease or contains an embedded lease at inception. For lease agreements with both lease and nonlease components (e.g., common-area maintenance costs), we account for the nonlease components separately. Consideration is allocated to the lease and nonlease components based on the estimated standalone prices.

All of our leases are operating leases. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. The current portion of operating lease liabilities is included in other current liabilities in our consolidated balance sheets. For the majority of our leases, the discount rate used to determine the present value of the lease payments is our incremental borrowing rate as of the lease commencement date, as the implicit rate is not readily determinable. The operating lease right-of-use assets also includes any initial direct costs and any lease payments made at or before the commencement date, and is reduced for any unrestricted incentives received at or before the commencement date.

Some of our leases include options to extend or terminate the lease. We include these options in the recognition of our right-of-use assets and lease liabilities when it is reasonably certain that we will exercise the option. Very few of our leases include variable lease-related payments, such as escalation clauses based on consumer price index (CPI) rates, or residual guarantees. Variable payments that are based on an index or a rate are included in the recognition of our right-of-use assets and lease liabilities using the index or rate at lease commencement; however, changes to these lease payments due to rate or index updates are recorded as rent expense in the period incurred. Amounts probable of payment under residual guarantees are also included in the recognition of our right-of-use assets and lease liabilities.

Note 4: Changes in Estimates under Percentage of Completion Contract Accounting
We have a companywide standard and disciplined quarterly Estimate at Completion (EAC) process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by our subcontractors, the availability and timing of funding from our customer, and overhead cost rates, among other variables. These estimates also include the estimated cost of satisfying our industrial cooperation agreements, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements, required under certain contracts. These obligations may or may not be distinct depending on their nature.

Based on this analysis, any quarterly adjustments to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred exceed total estimates of revenue to be earned on a performance obligation related to complex aerospace or defense equipment or related services, or product maintenance or separately priced extended warranty, a provision for the entire loss on the performance obligation is recognized in the period the loss is identified.


10


Net EAC adjustments had the following impact on our operating results:
 
Three Months Ended
(In millions, except per share amounts)
Mar 31, 2019
 
Apr 1, 2018
Operating income
$
123

 
$
115

Income from continuing operations attributable to Raytheon Company
97

 
91

Diluted earnings per share (EPS) from continuing operations attributable to Raytheon Company
$
0.34

 
$
0.32



In addition, net revenue recognized from our performance obligations satisfied in previous periods was $158 million and $138 million in the first quarters of 2019 and 2018, respectively. This primarily relates to EAC adjustments that impacted revenue.

Note 5: Earnings Per Share (EPS)
We compute basic and diluted EPS using actual income from continuing operations attributable to Raytheon Company common stockholders, income (loss) from discontinued operations attributable to Raytheon Company common stockholders and net income attributable to Raytheon Company, and our actual weighted-average shares outstanding rather than the numbers presented within our unaudited consolidated financial statements, which are rounded to the nearest million. As a result, it may not be possible to recalculate EPS as presented in our unaudited consolidated financial statements. Furthermore, it may not be possible to recalculate EPS attributable to Raytheon Company common stockholders by adjusting EPS from continuing operations by EPS from discontinued operations.

We include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic EPS calculation as they are considered participating securities. As a result, we have included all of our outstanding unvested awards of restricted stock, as well as restricted stock units (RSUs) and Long-term Performance Plan (LTPP) awards that meet the retirement eligible criteria in our calculation of basic EPS. We disclose EPS for common stock and unvested stock-based payment awards, and separately disclose distributed and undistributed earnings. Distributed earnings represent common stock dividends and dividends earned on unvested awards of restricted stock and stock-based payment awards of retirement eligible employees. Undistributed earnings represent earnings that were available for distribution but were not distributed. Common stock and unvested stock-based payment awards earn dividends equally.

As described in “Note 13: Redeemable Noncontrolling Interests,” we record redeemable noncontrolling interest related to Vista Equity Partners’ interest in Forcepoint. We reflect the redemption value adjustments related to this redeemable noncontrolling interest in both the basic and diluted EPS calculation for the portion of redemption value that is in excess of the fair value of noncontrolling interest. There was no impact to basic or diluted EPS in the first quarters of 2019 or 2018.

EPS from continuing operations attributable to Raytheon Company common stockholders and unvested stock-based payment awards was as follows: 
 
 
Three Months Ended
 
 
Mar 31, 2019
 
Apr 1, 2018
Basic EPS attributable to Raytheon Company common stockholders:
 
 
 
 
Distributed earnings
 
$
0.94

 
$
0.87

Undistributed earnings
 
1.83

 
1.33

Total
 
$
2.77

 
$
2.20

Diluted EPS attributable to Raytheon Company common stockholders:
 
 
 
 
Distributed earnings
 
$
0.94

 
$
0.87

Undistributed earnings
 
1.83

 
1.33

Total
 
$
2.77

 
$
2.20




11


Income attributable to participating securities was as follows:
 
Three Months Ended
(In millions)
Mar 31, 2019
 
Apr 1, 2018
Income from continuing operations attributable to participating securities
$
8

 
$
7

Income (loss) from discontinued operations, net of tax attributable to participating securities

 

Net income attributable to participating securities
$
8

 
$
7


The weighted-average shares outstanding for basic and diluted EPS were as follows: 
 
Three Months Ended
(In millions)
Mar 31, 2019
 
Apr 1, 2018
Shares for basic EPS(1)
281.9

 
288.5

Effect of dilutive securities
0.3

 
0.3

Shares for diluted EPS
282.2

 
288.8

(1)
Includes 2.8 million and 3.2 million participating securities for the first quarters of 2019 and 2018, respectively.

Note 6: Inventories
Inventories consisted of the following: 
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Materials and purchased parts
 
$
74

 
$
75

Work in process
 
785

 
662

Finished goods
 
23

 
21

Total
 
$
882

 
$
758



Precontract costs are costs incurred to fulfill a contract prior to contract award. Precontract costs, including general and administrative expenses that are specifically chargeable to the customer, are deferred in inventories if we determine that the costs are probable of recovery under a specific anticipated contract. All other precontract costs, including start-up costs, are expensed as incurred. Costs that are deferred are recognized as contract costs upon the receipt of the anticipated contract. We included deferred precontract costs of $238 million and $163 million in inventories as work in process at March 31, 2019 and December 31, 2018, respectively.

Note 7: Contract Assets and Contract Liabilities
Our contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. The noncurrent portion of deferred revenue is included in accrued retiree benefits and other long-term liabilities in our consolidated balance sheets.

Net contract assets (liabilities) consisted of the following:
(In millions, except percentages)
 
Mar 31, 2019
 
Dec 31, 2018
 
$ Change
 
% Change
Contract assets
 
$
5,971

 
$
5,594

 
$
377

 
6.7
 %
Contract liabilities—current
 
(2,930
)
 
(3,309
)
 
379

 
(11.5
)%
Contract liabilities—noncurrent
 
(141
)
 
(150
)
 
9

 
(6.0
)%
Net contract assets (liabilities)
 
$
2,900

 
$
2,135

 
$
765

 
35.8
 %


The $765 million increase in our net contract assets (liabilities) from December 31, 2018 to March 31, 2019 was primarily due to a $379 million decrease in our current contract liabilities, primarily driven by revenue recognized on certain international programs with milestone payments or advances, and a $377 million increase in our contract assets, principally due to contractual billing terms on U.S. government and foreign military sales contracts and the timing of pending approvals on direct commercial sales contracts for precision guided munitions to certain Middle Eastern customers. For direct commercial sales contracts for which we are required to obtain regulatory approvals, we recognize revenue based on the likelihood of obtaining such approvals. At March 31, 2019, we had approximately $2.4 billion of total contract value, recognized approximately $1.1 billion of sales for work performed to date and received approximately $850 million in advances on contracts for precision guided munitions to certain

12


Middle Eastern customers for which U.S. government approval is pending. On a contract by contract basis, and excluding advances billed but not received, we had $600 million and $350 million of net contract assets and net contract liabilities, respectively, related to these contracts.

In the first quarters of 2019 and 2018, we recognized revenue of $894 million and $652 million related to our contract liabilities at January 1, 2019 and January 1, 2018, respectively.

Impairment losses recognized on our receivables and contract assets were de minimis in the first quarters of 2019 and 2018.

Note 8: Deferred Commissions
Our incremental direct costs of obtaining a contract, which consist of sales commissions primarily for our security software sales at Forcepoint, are deferred and amortized over the period of contract performance or a longer period, generally the estimated life of the customer relationship, if renewals are expected and the renewal commission is not commensurate with the initial commission. We classify deferred commissions as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets, and other assets, net, respectively, in our consolidated balance sheets. At March 31, 2019 and December 31, 2018, we had deferred commissions of $51 million and $55 million, respectively. Amortization expense related to deferred commissions was $4 million and $8 million in the first quarters of 2019 and 2018, respectively.

Note 9: Acquisitions, Divestitures and Goodwill
In pursuing our business strategies, we acquire and make investments in certain businesses that meet strategic and financial criteria, and divest of certain non-core businesses, investments and assets when appropriate. We did not have any divestitures in the first quarter of 2019.

In 2013, we formed the Range Generation Next LLC (RGNext) joint venture with General Dynamics Information Technology (GDIT) through our Intelligence, Information and Services (IIS) segment, in which we held a 50% equity ownership that was accounted for using the equity method. On February 8, 2019, we amended and restated the RGNext joint venture agreement and acquired an additional 10% equity ownership in the joint venture, increasing our equity ownership to 60% and giving us control of the operations of RGNext. Effective as of February 8, 2019, we consolidate the results of RGNext in our consolidated financial statements and report its results in our IIS segment. We also remeasured our equity method investment in RGNext to fair value, which resulted in a non-cash gain of $21 million that was recorded in operating income through a reduction to cost of sales at our IIS segment; recognized redeemable noncontrolling interest for GDIT’s interest in RGNext at a fair value of $32 million; and recognized $90 million of net assets, including cash acquired, at fair value. As part of our purchase price allocation, we recorded $19 million of goodwill, primarily related to the value of the existing workforce, and $34 million of intangible assets, primarily related to customer relationships with a weighted-average life of 7 years.

Pro forma financial information and revenue from the date of acquisition has not been provided as it is not material.

A rollforward of goodwill by segment was as follows: 
(In millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint(1)

 
Total

Balance at December 31, 2018
 
$
1,704

 
$
2,965

 
$
4,154

 
$
4,103

 
$
1,938

 
$
14,864

Acquisitions
 

 
19

 

 

 

 
19

Effect of foreign exchange rates and other
 
(1
)
 

 

 

 

 
(1
)
Balance at March 31, 2019
 
$
1,703

 
$
2,984

 
$
4,154

 
$
4,103

 
$
1,938

 
$
14,882

(1)
At March 31, 2019, Forcepoint’s fair value was estimated to exceed its net book value by approximately $900 million. As discussed in “Note 13: Redeemable Noncontrolling Interests,” we are required to determine Forcepoint’s fair value on a quarterly basis due to the accounting related to the redeemable noncontrolling interest.

Note 10: Derivatives and Other Financial Instruments
Derivatives—Our primary market exposures are to foreign exchange rates and interest rates, and we use certain derivative financial instruments to help manage these exposures. We execute these instruments with financial institutions that we judge to be credit-worthy. The majority of our foreign currency forward contracts are denominated in currencies of major industrial countries. We do not hold or issue derivative financial instruments for trading or speculative purposes.


13


We use foreign currency forward contracts to fix the functional currency value of specific commitments, payments and receipts denominated in foreign currencies. The aggregate notional amount of our outstanding foreign currency forward contracts was $1,843 million and $1,772 million at March 31, 2019 and December 31, 2018, respectively. The net notional exposure of these contracts was $777 million and $840 million at March 31, 2019 and December 31, 2018, respectively.

The fair value of asset derivatives included in other assets, net and liability derivatives included in other current liabilities in our consolidated balance sheets related to foreign currency forward contracts were as follows:
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Asset derivatives
 
$
14

 
$
26

Liability derivatives
 
23

 
34



The fair value of these derivatives is Level 2 in the fair value hierarchy because they are determined based on a market approach utilizing externally quoted forward rates for similar contracts.

Our foreign currency forward contracts contain offset or netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. We measure and record the impact of counterparty credit risk into our valuation and at March 31, 2019 and December 31, 2018, the fair value of our counterparty default exposure was less than $1 million and was spread across numerous highly rated counterparties.

There were no interest rate swaps outstanding at March 31, 2019 or December 31, 2018.

Other Financial InstrumentsWe hold financial instruments, including cash and cash equivalents, commercial paper and long-term debt. The carrying amounts for cash and cash equivalents and commercial paper approximated their fair values. The carrying value of long-term debt was recorded at amortized cost. The estimated fair value of long-term debt was determined based on quoted prices in inactive markets, which falls within Level 2 of the fair value hierarchy. The carrying value and estimated fair value of long-term debt were as follows:
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Carrying value of long-term debt(1)
 
$
4,756

 
$
4,755

Fair value of long-term debt(2)
 
5,202

 
5,063


(1)     Carrying value of long-term debt at March 31, 2019 includes current portion of long-term debt carrying value of $500 million.
(2)
Fair value of long-term debt at March 31, 2019 includes current portion of long-term debt fair value of $508 million.

At March 31, 2019, short-term commercial paper borrowings outstanding were $300 million, which had a weighted-average interest rate and original maturity period of 2.551% and 6 days, respectively. At December 31, 2018, short-term commercial paper borrowings outstanding were $300 million, which had a weighted-average interest rate and original maturity period of 2.954% and 16 days, respectively. The commercial paper notes outstanding have original maturities of not more than 90 days from the date of issuance.

Supplemental Cash Flow Information—Cash and cash equivalents reported within our consolidated balance sheets excludes restricted cash of $12 million and $16 million at March 31, 2019 and December 31, 2018, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.

Note 11: Leases
We enter into operating leases primarily for: real estate, including for manufacturing, engineering, research, administration, sales and warehousing facilities; information technology (IT) equipment; and other equipment. At March 31, 2019 and December 31, 2018, we did not have any finance leases. Approximately 90% of our future lease commitments, and related lease liability, relate to our real estate leases. Some of our leases also include options to extend the lease or terminate the lease. A small portion of our leases include variable escalation clauses, which are typically based on CPI rates, or other variable lease-related payments.


14


The components of lease expense were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Operating lease cost
 
$
53

 
$
58

Variable lease cost(1)
 

 

Sublease income(1)
 

 

Total lease cost
 
$
53

 
$
58

(1)
Variable lease cost was expense of less than $1 million and sublease income was income of less than $1 million, in both the first quarters of 2019 and 2018.

Gains and losses on sale and leaseback transactions were de minimis in both the first quarters of 2019 and 2018.

At March 31, 2019, our future lease payments under non-cancellable leases were as follows:
(In millions)
 

2019 (excluding the three months ended March 31, 2019)
$
167

2020
189

2021
164

2022
127

2023
90

Thereafter
238

Total future lease payments(1)
975

Imputed interest
(122
)
Total lease liabilities
$
853

(1)
Total future lease payments excluded $27 million of future lease payments related to leases that were signed but had not yet commenced as of March 31, 2019.

Our lease liabilities recognized in our consolidated balance sheet at March 31, 2019 were as follows:
(In millions)
 
 
Operating lease liabilities—current
 
$
201

Operating lease liabilities—noncurrent
 
652

Total lease liabilities
 
$
853



The weighted-average remaining lease term related to our operating leases was 8 years and 7 years as of March 31, 2019 and December 31, 2018, respectively. The weighted-average discount rate related to our operating leases was 3.1% as of March 31, 2019 and December 31, 2018.

Other information related to leases was as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
61

 
$
62

Right-of-use assets obtained in exchange for new operating lease obligations
 
56

 
38



There were no material restrictions or covenants imposed by our leases at March 31, 2019 or December 31, 2018. In addition, we do not have any related party leases and our sublease transactions are de minimis.

Note 12: Commitments and Contingencies
Environmental MattersWe are involved in various stages of investigation and cleanup related to remediation of various environmental sites. Our estimate of the liability of total environmental remediation costs includes the use of a discount rate and takes into account that a portion of these costs is eligible for future recovery through the pricing of our products and services to the U.S. government. We regularly assess the probability of recovery of these costs, which requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract activity. We consider such recovery probable based on government contracting regulations and our long history of receiving reimbursement for such costs, and accordingly

15


have recorded the estimated future recovery of these costs from the U.S. government within prepaid expenses and other current assets in our consolidated balance sheets. Our estimates regarding remediation costs to be incurred were as follows:
(In millions, except percentages)
 
Mar 31, 2019
 
Dec 31, 2018
Total remediation costs—undiscounted
 
$
197

 
$
193

Weighted-average discount rate
 
5.1
%
 
5.1
%
Total remediation costs—discounted
 
$
136

 
$
128

Recoverable portion
 
88

 
82



We also lease certain government-owned properties and generally are not liable for remediation of preexisting environmental contamination at these sites. As a result, we generally do not provide for these costs in our consolidated financial statements.

Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage, and the unresolved extent of our responsibility, it is difficult to determine the ultimate outcome of environmental matters. However, we do not expect any additional liability to have a material adverse effect on our financial position, results of operations or liquidity.

Financing Arrangements and Other—We issue guarantees, and banks and surety companies issue, on our behalf, letters of credit and surety bonds, to meet various bid, performance, warranty, retention and advance payment obligations for us or our affiliates. These instruments expire on various dates through 2028. Additional guarantees of project performance for which there is no stated value also remain outstanding. The stated values outstanding consisted of the following:
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Guarantees
 
$
211

 
$
201

Letters of credit
 
2,296

 
2,503

Surety bonds
 
80

 
166



All guarantees at March 31, 2019 and December 31, 2018 related to our joint venture in Thales-Raytheon Systems Air and Missile Defense Command and Control S.A.S. (TRS AMDC2). We provide these guarantees, as well as letters of credit, to TRS AMDC2 and other affiliates to assist these entities in obtaining financing on more favorable terms, making bids on contracts and performing their contractual obligations. While we expect these entities to satisfy their loans and meet their project performance and other contractual obligations, their failure to do so may result in a future obligation to us. We periodically evaluate the risk of these entities failing to meet their obligations described above. At March 31, 2019, we believe the risk that these entities will not be able to meet their obligations is minimal for the foreseeable future based on their current financial condition. All obligations were current at March 31, 2019. We had an estimated liability of $3 million at both March 31, 2019 and December 31, 2018 related to these guarantees.

As discussed in “Note 13: Redeemable Noncontrolling Interests,” under the joint venture agreement between Raytheon Company and Vista Equity Partners, Raytheon may be required to purchase Vista Equity Partners’ interest in Forcepoint.

We have entered into industrial cooperation agreements, sometimes in the form of either offset agreements or in-country industrial participation (ICIP) agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. At March 31, 2019, the aggregate amount of our offset agreements, both agreed to and anticipated to be agreed to, had an outstanding notional value of approximately $9.3 billion. These agreements are designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. Offset agreements may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects, and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for activities such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. Such activities may also vary by country depending upon requirements as dictated by their governments. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customers and typically require cash outlays that represent only a fraction of the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for penalties in the event we fail to perform in accordance with offset requirements. Historically, we have not been required to pay any penalties of significance.


16


As a U.S. government contractor, we are subject to many levels of audit and investigation by the U.S. government relating to our contract performance and compliance with applicable rules and regulations. Agencies that oversee contract performance include: the Defense Contract Audit Agency (DCAA); the Defense Contract Management Agency (DCMA); the Inspectors General of the U.S. Department of Defense (DoD) and other departments and agencies; the Government Accountability Office (GAO); the Department of Justice (DOJ); and Congressional Committees. Other areas of our business operations may also be subject to audit and investigation by these and/or other agencies. From time to time, agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. Such investigations and audits may be initiated due to a number of reasons, including as a result of a whistleblower complaint. Such investigations and audits could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, the suspension of government export licenses or the suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in no adverse action against us. Our final allowable incurred costs for each year are also subject to audit and have, from time to time, resulted in disputes between us and the U.S. government, with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their related courts of appeals. In addition, the DOJ has, from time to time, convened grand juries to investigate possible irregularities by us. We also provide products and services to customers outside of the U.S., and those sales are subject to local government laws, regulations and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and International Traffic in Arms Regulations (ITAR)) may also be investigated or audited. Other than as specifically disclosed herein, we do not expect these audits, investigations or disputes to have a material effect on our financial position, results of operations or liquidity, either individually or in the aggregate.

In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened against, or initiated by, us. We do not expect any of these proceedings to result in any additional liability or gains that would materially affect our financial position, results of operations or liquidity. In connection with certain of our legal matters, we may be entitled to insurance recovery for qualified legal costs or other incurred costs. We do not expect any insurance recovery to have a material impact on the financial exposure that could result from these matters.

Note 13: Redeemable Noncontrolling Interests
Forcepoint is a cybersecurity joint venture company with Vista Equity Partners. The joint venture agreement between Raytheon and Vista Equity Partners provides Vista Equity Partners with certain rights to require Forcepoint to pursue an initial public offering at any time after four years and three months following the closing date of May 29, 2015, or pursue a sale of the company at any time after five years following the closing date. In either of these events, Raytheon has the option to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint for cash at a price equal to fair value as determined under the joint venture agreement. Additionally, Vista Equity Partners has the ability to liquidate its ownership through a put option. The put option allows Vista Equity Partners to require Raytheon to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint for cash at a price equal to fair value as determined under the joint venture agreement. Lastly, Raytheon has the option to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint at a price equal to fair value as determined under the joint venture agreement. The joint venture agreement provides for the process under which the parties would determine the fair value of the interest and could result in a payment by Raytheon shortly after the exercise of Vista Equity Partners’ put option or Raytheon’s purchase option; however, the ultimate timing will depend on the actions of the parties and other factors. The estimate of fair value for purposes of presenting the redeemable noncontrolling interest in our consolidated balance sheets could differ from the parties’ determination of fair value for the interest under the joint venture agreement.

Vista Equity Partners’ adjusted equity interest in the Forcepoint joint venture was 19.5% at March 31, 2019. Vista Equity Partners’ interest in Forcepoint is presented as redeemable noncontrolling interest, outside of stockholders’ equity, in our consolidated balance sheets. The redeemable noncontrolling interest is recognized at the greater of the estimated redemption value as of the balance sheet date, which was $399 million at March 31, 2019, or the carrying value, defined as the initial value adjusted for Vista Equity Partners’ share of the cumulative impact of net income (loss), other changes in accumulated other comprehensive income (loss) and additional contributions, which was $274 million at March 31, 2019. Adjustments to the redemption value over the period from the date of acquisition to the redemption date are immediately recorded to retained earnings.

As discussed in “Note 9: Acquisitions, Divestitures and Goodwill,” in February 2019, we amended and restated the RGNext joint venture agreement and acquired an additional 10% equity ownership in the joint venture, increasing our equity ownership to 60% and giving us control of the operations, with GDIT obtaining only protective rights. As a result, we now consolidate the results of RGNext in our consolidated financial statements. The amendment to the RGNext joint venture agreement provides GDIT with the ability to liquidate its ownership and receive an amount equal to its contributed capital (the redemption value). As such, GDIT’s interest in RGNext is presented as redeemable noncontrolling interest, outside of stockholders’ equity, in our consolidated balance sheets, and is recorded at the greater of its carrying value or the redemption value.


17


A rollforward of redeemable noncontrolling interests was as follows:
(In millions)
 
Forcepoint

 
RGNext

 
Total

Balance at December 31, 2018
 
$
411

 
$

 
$
411

RGNext initial recognition
 

 
32

 
32

Net income (loss)
 
(7
)
 
1

 
(6
)
Other comprehensive income (loss), net of tax(1)
 

 

 

Adjustment of noncontrolling interests to redemption value
 
(5
)
 

 
(5
)
Balance at March 31, 2019
 
$
399

 
$
33

 
$
432

 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
512

 
$

 
$
512

Net income (loss)
 
(10
)
 

 
(10
)
Other comprehensive income (loss), net of tax
 
1

 

 
1

Adjustment of noncontrolling interests to redemption value
 
(11
)
 

 
(11
)
Balance at April 1, 2018
 
$
492

 
$

 
$
492


(1)
Other comprehensive income (loss), net of tax, related to Forcepoint was income of less than $1 million for the first quarter of 2019.

Note 14: Stockholders’ Equity
The changes in shares of our common stock outstanding were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Beginning balance
 
282.1

 
288.4

Stock plans activity
 
1.1

 
1.0

Share repurchases
 
(3.1
)
 
(2.2
)
Ending balance
 
280.1

 
287.2



From time to time, our Board of Directors authorizes the repurchase of shares of our common stock. In November 2015, our Board authorized the repurchase of up to $2.0 billion of our outstanding common stock. In November 2017, our Board also authorized the repurchase of up to an additional $2.0 billion of our outstanding common stock. At March 31, 2019, we had approximately $1.0 billion available under the 2017 repurchase program. Share repurchases will take place from time to time at management’s discretion depending on market conditions.

Share repurchases also include shares surrendered by employees to satisfy tax withholding obligations in connection with restricted stock, RSUs and LTPP awards issued to employees.

Our share repurchases were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
 
 
$
Shares

 
$
Shares

Shares repurchased under our share repurchase programs
 
$
500

2.8

 
$
400

1.9

Shares repurchased to satisfy tax withholding obligations
 
66

0.3

 
72

0.3

Total share repurchases
 
$
566

3.1

 
$
472

2.2



In March 2019, our Board of Directors authorized an 8.6% increase to our annual dividend payout rate from $3.47 to $3.77 per share. Our Board of Directors also declared dividends of $0.9425 per share during the first quarter of 2019, compared to dividends of $0.8675 per share during the first quarter of 2018. Dividends are subject to quarterly approval by our Board of Directors.

Stock-based Compensation Plans
Restricted Stock and RSUs—During the first quarter of 2019, we granted 0.9 million combined shares of restricted stock and RSUs with a weighted-average grant-date fair value of $179.93 per share, calculated under the intrinsic value method. These awards generally vest in equal installments on each of the second, third and fourth anniversary dates of the award’s grant date.


18


LTPP—During the first quarter of 2019, we granted RSUs subject to the 2019–2021 LTPP plan with an aggregate target award of 0.1 million units and a weighted-average grant-date fair value of $175.93 per share. The performance goals for the 2019–2021 LTPP award are independent of each other and based on three metrics, as defined in the LTPP award agreements: return on invested capital (ROIC), weighted at 50%; total shareholder return (TSR) relative to a peer group, weighted at 25%; and cumulative free cash flow from continuing operations (CFCF), weighted at 25%. The ultimate award, which is determined at the end of the three-year cycle, can range from zero to 200% of the target award and includes dividend equivalents, which are not included in the aggregate target award numbers. The grant-date fair value is based upon the value determined under the intrinsic value method for the CFCF and ROIC portions of the award and the Monte Carlo simulation method for the TSR portion of the award.

Forcepoint Plans—Forcepoint unit appreciation rights and profits interests vest over a specified period of time and settlement is subject to a liquidity event defined as either a change in control or an initial public offering of the joint venture. In certain limited circumstances other vesting conditions may apply. The impact attributable to these other vesting conditions was income of $2 million for the first quarter of 2019 and expense of $1 million for the first quarter of 2018. At March 31, 2019, there were 174 thousand combined units and/or profits interests authorized for award under these plans.

Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes gains and losses associated with pension and other postretirement benefit (PRB) plans, foreign exchange translation adjustments, gains and losses on derivative instruments qualified as cash flow hedges included in the assessment of effectiveness, and unrealized gains (losses) on available-for-sale investments. The computation of other comprehensive income (loss) and its components are presented in the consolidated statements of comprehensive income.
A rollforward of accumulated other comprehensive income (loss) was as follows:
 
Pension and PRB plans, net(1)

 
Foreign exchange translation

 
Cash flow hedges(2)

 
Unrealized gains (losses) on investments and other, net(3)

 
Total

 
 
 
 
 
(In millions)
 
 
 
 
Balance at December 31, 2018
$
(8,483
)
 
$
(131
)
 
$
(2
)
 
$
(2
)
 
$
(8,618
)
Before tax amount
277

 
8

 
(10
)
 

 
275

Tax (expense) or benefit
(58
)
 

 
2

 

 
(56
)
Net of tax amount
219

 
8

 
(8
)
 

 
219

Balance at March 31, 2019
$
(8,264
)
 
$
(123
)
 
$
(10
)
 
$
(2
)
 
$
(8,399
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
(7,843
)
 
$
(95
)
 
$
6

 
$
(3
)
 
$
(7,935
)
Before tax amount
348

 
24

 
(10
)
 

 
362

Tax (expense) or benefit
(73
)
 

 
2

 

 
(71
)
Net of tax amount
275

 
24

 
(8
)
 

 
291

Reclassification of stranded tax effects
(1,452
)
 

 
1

 

 
(1,451
)
Balance at April 1, 2018
$
(9,020
)
 
$
(71
)
 
$
(1
)
 
$
(3
)
 
$
(9,095
)

(1)
Pension and PRB plans, net is shown net of cumulative tax benefits of $2,197 million and $2,255 million at March 31, 2019 and December 31, 2018, respectively.
(2)
Cash flow hedges are shown net of cumulative tax benefits of $3 million and $1 million at March 31, 2019 and December 31, 2018, respectively.
(3)
Unrealized gains (losses) on investments and other, net are shown net of cumulative tax expense of $1 million at both March 31, 2019 and December 31, 2018.

In the first quarter of 2018, we reclassified the stranded tax effects related to the enactment of the Tax Cuts and Jobs Act of 2017 (2017 Act) from accumulated other comprehensive loss (AOCL) to retained earnings in accordance with ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. These stranded tax effects related to the deferred tax amounts at December 31, 2017 recorded through other comprehensive income prior to the enactment date using the prior 35% statutory tax rate that remained in other comprehensive income despite the fact that the related deferred tax assets and liabilities were remeasured to reflect the newly enacted tax rate of 21%.

Other material amounts reclassified out of AOCL related to the amortization of net actuarial loss associated with our pension plans were $273 million and $344 million before tax in the first quarters of 2019 and 2018, respectively. This component of AOCL is included in the calculation of net periodic pension expense (income). See “Note 15: Pension and Other Employee Benefits” for additional details.


19


We expect $2 million net of tax of net unrealized losses on our cash flow hedges at March 31, 2019 to be reclassified into earnings at then-current values over the next 12 months as the underlying hedged transactions occur.

Note 15: Pension and Other Employee Benefits
We have pension plans covering the majority of our employees hired prior to January 1, 2007, including certain employees in foreign countries (Pension Benefits). Our primary pension obligations relate to our domestic Internal Revenue Service (IRS) qualified pension plans. In addition, we provide certain health care and life insurance benefits to retired employees and to eligible employees upon retirement through PRB plans.

We also sponsor nonqualified defined benefit and defined contribution plans to provide benefits in excess of qualified plan limits. We have set aside certain assets in a separate trust, which we expect to be used to pay for trust obligations. The fair value of marketable securities held in trust, which are considered Level 1 assets under the fair value hierarchy, consisted of the following:
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Marketable securities held in trust
 
$
677

 
$
642



Included in marketable securities held in trust in the table above was $431 million and $420 million at March 31, 2019 and December 31, 2018, respectively, related to the nonqualified defined contribution plans. The liabilities related to the nonqualified defined contribution plans were $440 million and $431 million at March 31, 2019 and December 31, 2018, respectively.

The components of net periodic pension expense (income) were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Operating expense
 
 
 
 
Service cost
 
$
105

 
$
127

Non-operating expense
 
 
 
 
Interest cost
 
261

 
253

Expected return on plan assets
 
(359
)
 
(363
)
Amortization of prior service cost
 
1

 
1

Amortization of net actuarial loss
 
273

 
344

Total pension non-service expense
 
176

 
235

Net periodic pension expense (income)
 
$
281

 
$
362



Net periodic pension expense (income) includes income of $1 million and $2 million from foreign Pension Benefits plans in the first quarters of 2019 and 2018, respectively.

Net periodic PRB expense was $6 million and $5 million in the first quarters of 2019 and 2018, respectively.

Long-term pension and PRB liabilities consisted of the following:
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Long-term pension liabilities
 
$
6,042

 
$
6,111

Long-term PRB liabilities
 
356

 
354

Total long-term pension and PRB liabilities
 
$
6,398

 
$
6,465



We made the following contributions to our pension and PRB plans:
 
Three Months Ended
(In millions)
Mar 31, 2019
 
Apr 1, 2018
Required pension contributions
$
64

 
$
58

PRB contributions
4

 
3

Total
$
68

 
$
61




20


We periodically evaluate whether to make discretionary contributions. We did not make any discretionary contributions to our pension plans during the first quarters of 2019 or 2018.

Note 16: Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. With the exception of one matter related to the 2015 tax year, all IRS examinations related to originally filed returns are closed through the 2016 tax year. No amount related to the 2015 matter is reflected in unrecognized tax benefits as of March 31, 2019. In 2018 we amended tax returns for tax years 2014-2016 to reflect refund claims related to increased Research and Development tax credits (R&D tax credits), which will be subject to audit. We are also under audit by multiple state and foreign tax authorities.

The balance of our unrecognized tax benefits, exclusive of interest, was $96 million and $92 million at March 31, 2019 and December 31, 2018, respectively, the majority of which would affect our earnings if recognized. There were no significant changes in the balance during the first quarter of 2019.

We accrue interest and penalties related to unrecognized tax benefits in tax expense. Interest and penalties recognized during the first quarters of 2019 and 2018 and accrued as of March 31, 2019 and December 31, 2018 were de minimis.

Note 17: Business Segment Reporting
Our reportable segments, organized based on capabilities and technologies, are: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint. Segment total net sales and operating income include intersegment sales and profit generally recorded at cost-plus a specified fee, which may differ from what the selling entity would be able to obtain on sales to external customers. Eliminations include intersegment sales and profit eliminations. Corporate operating income includes expenses that represent unallocated costs and certain other corporate costs not considered part of management’s evaluation of reportable segment operating performance. Acquisition Accounting Adjustments include the adjustments to record acquired deferred revenue at fair value as part of our purchase price allocation process and the amortization of acquired intangible assets related to historical acquisitions.

Segment financial results were as follows: 
 
Three Months Ended
Total Net Sales (in millions)
Mar 31, 2019
 
Apr 1, 2018
Integrated Defense Systems
$
1,550

 
$
1,489

Intelligence, Information and Services
1,777

 
1,582

Missile Systems
2,006

 
1,848

Space and Airborne Systems
1,653

 
1,568

Forcepoint
158

 
141

Eliminations
(414
)
 
(357
)
Total business segment sales
6,730

 
6,271

Acquisition Accounting Adjustments
(1
)
 
(4
)
Total
$
6,729

 
$
6,267

 
 
Three Months Ended
Intersegment Sales (in millions)
 
Mar 31, 2019
 
Apr 1, 2018
Integrated Defense Systems
 
$
21

 
$
15

Intelligence, Information and Services
 
168

 
162

Missile Systems
 
43

 
35

Space and Airborne Systems
 
173

 
139

Forcepoint
 
9

 
6

Total
 
$
414

 
$
357



21


 
 
Three Months Ended
Operating Income (in millions)
 
Mar 31, 2019
 
Apr 1, 2018
Integrated Defense Systems
 
$
258

 
$
273

Intelligence, Information and Services
 
187

 
117

Missile Systems
 
190

 
212

Space and Airborne Systems
 
212

 
193

Forcepoint
 
(9
)
 
(7
)
Eliminations
 
(47
)
 
(40
)
Total business segment operating income
 
791

 
748

Acquisition Accounting Adjustments
 
(28
)
 
(33
)
FAS/CAS Operating Adjustment
 
366

 
354

Corporate
 
(16
)
 
(28
)
Total
 
$
1,113

 
$
1,041


 
 
Three Months Ended
Intersegment Operating Income (in millions)
 
Mar 31, 2019
 
Apr 1, 2018
Integrated Defense Systems
 
$
2

 
$
2

Intelligence, Information and Services
 
17

 
17

Missile Systems
 
4

 
3

Space and Airborne Systems
 
17

 
14

Forcepoint
 
7

 
4

Total
 
$
47

 
$
40



The FAS/CAS Operating Adjustment, which is reported as a separate line in our segment results above, represents the difference between the service cost component of our pension and PRB expense or income under Financial Accounting Standards (FAS) in accordance with U.S. GAAP and our pension and PRB expense under U.S. government Cost Accounting Standards (CAS). The results of each segment only include pension and PRB expense under CAS that we generally recover through the pricing of our products and services to the U.S. government.

The pension and PRB components of the FAS/CAS Operating Adjustment were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
FAS/CAS Pension Operating Adjustment
 
$
362

 
$
351

FAS/CAS PRB Operating Adjustment
 
4

 
3

FAS/CAS Operating Adjustment
 
$
366

 
$
354



Total assets for each of our business segments were as follows:
Total Assets (in millions)
 
Mar 31, 2019
 
Dec 31, 2018(2)

Integrated Defense Systems(1)
 
$
4,783

 
$
4,826

Intelligence, Information and Services(1)
 
4,368

 
4,238

Missile Systems(1)
 
8,490

 
8,229

Space and Airborne Systems(1)
 
6,856

 
6,740

Forcepoint(1)
 
2,455

 
2,529

Corporate
 
4,624

 
6,108

Total
 
$
31,576

 
$
32,670


(1)     Total assets includes intangible assets. Related amortization expense is included in Acquisition Accounting Adjustments.
(2)
Amounts have been recast to reflect the adoption of ASU 2016-02, Leases (Topic 842). Operating lease right-of-use assets are all recorded at Corporate.


22


We disaggregate our revenue from contracts with customers by geographic location, customer-type and contract-type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.
 
 
Three Months Ended March 31, 2019
Disaggregation of Total Net Sales 
(in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Other

 
Total

United States
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales to the U.S. government(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
$
221

 
$
224

 
$
708

 
$
548

 
$
37

 
$

 
$
1,738

Cost-type contracts
 
424

 
1,152

 
699

 
659

 
4

 

 
2,938

Direct commercial sales and other U.S. sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
1

 
33

 
9

 
26

 
44

 

 
113

Cost-type contracts
 

 
4

 

 
1

 

 

 
5

Asia/Pacific
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
40

 
73

 
124

 
30

 

 

 
267

Cost-type contracts
 
18

 
11

 
16

 
9

 

 

 
54

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
168

 
41

 
32

 
48

 
16

 

 
305

Cost-type contracts
 
17

 

 

 

 

 

 
17

Middle East and North Africa
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
269

 
3

 
115

 
74

 

 

 
461

Cost-type contracts
 
48

 
5

 
5

 
19

 

 

 
77

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
195

 
7

 
145

 
18

 
8

 

 
373

Cost-type contracts
 

 

 
19

 

 

 

 
19

All other (principally Europe)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
81

 
1

 
34

 
17

 

 

 
133

Cost-type contracts
 
10

 

 
15

 
2

 

 

 
27

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
34

 
49

 
42

 
29

 
39

 

 
193

Cost-type contracts
 
3

 
6

 

 

 

 

 
9

Total net sales
 
1,529

 
1,609

 
1,963

 
1,480

 
148

 

 
6,729

Intersegment sales
 
21

 
168

 
43

 
173

 
9

 
(414
)
 

Acquisition Accounting Adjustments
 

 

 

 

 
1

 
(1
)
 

Reconciliation to business segment sales
 
$
1,550

 
$
1,777

 
$
2,006

 
$
1,653

 
$
158

 
$
(415
)
 
$
6,729

(1)
Excludes foreign military sales through the U.S. government.

23


 
 
Three Months Ended March 31, 2019
Total Net Sales by Geographic Area (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

United States
 
$
646

 
$
1,413

 
$
1,416

 
$
1,234

 
$
85

 
$
4,794

Asia/Pacific
 
243

 
125

 
172

 
87

 
16

 
643

Middle East and North Africa
 
512

 
15

 
284

 
111

 
8

 
930

All other (principally Europe)
 
128

 
56

 
91

 
48

 
39

 
362

Total net sales
 
$
1,529

 
$
1,609

 
$
1,963

 
$
1,480

 
$
148

 
$
6,729

 
 
Three Months Ended March 31, 2019
Total Net Sales by Major Customer (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Sales to the U.S. government(1)
 
$
645

 
$
1,376

 
$
1,407

 
$
1,207

 
$
41

 
$
4,676

U.S. direct commercial sales and other U.S. sales
 
1

 
37

 
9

 
27

 
44

 
118

Foreign military sales through the U.S. government
 
466

 
93

 
309

 
151

 

 
1,019

Foreign direct commercial sales and other foreign sales(1)
 
417

 
103

 
238

 
95

 
63

 
916

Total net sales
 
$
1,529

 
$
1,609

 
$
1,963

 
$
1,480

 
$
148

 
$
6,729

(1)
Excludes foreign military sales through the U.S. government.
 
 
Three Months Ended March 31, 2019
Total Net Sales by Contract Type (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Fixed-price contracts
 
$
1,009

 
$
431

 
$
1,209

 
$
790

 
$
144

 
$
3,583

Cost-type contracts
 
520

 
1,178

 
754

 
690

 
4

 
3,146

Total net sales
 
$
1,529

 
$
1,609

 
$
1,963

 
$
1,480

 
$
148

 
$
6,729

 

24


 
 
Three Months Ended April 1, 2018
Disaggregation of Total Net Sales
 (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Other

 
Total

United States
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales to the U.S. government(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
$
226

 
$
252

 
$
584

 
$
544

 
$
21

 
$

 
$
1,627

Cost-type contracts
 
402

 
956

 
630

 
642

 
3

 

 
2,633

Direct commercial sales and other U.S. sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
2

 
28

 
11

 
26

 
49

 

 
116

Cost-type contracts
 

 
4

 

 

 

 

 
4

Asia/Pacific
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
29

 
51

 
96

 
30

 

 

 
206

Cost-type contracts
 
25

 
14

 
17

 
2

 

 

 
58

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
146

 
44

 
43

 
50

 
16

 

 
299

Cost-type contracts
 
27

 

 

 
2

 

 

 
29

Middle East and North Africa
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
195

 
3

 
81

 
54

 

 

 
333

Cost-type contracts
 
32

 
1

 
6

 
15

 

 

 
54

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
347

 
5

 
231

 
21

 
6

 

 
610

Cost-type contracts
 

 

 

 

 

 

 

All other (principally Europe)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 

 

 
25

 
9

 

 

 
34

Cost-type contracts
 
8

 

 
24

 
1

 

 

 
33

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
33

 
51

 
65

 
33

 
36

 

 
218

Cost-type contracts
 
2

 
11

 

 

 

 

 
13

Total net sales
 
1,474

 
1,420

 
1,813

 
1,429

 
131

 

 
6,267

Intersegment sales
 
15

 
162

 
35

 
139

 
6

 
(357
)
 

Acquisition Accounting Adjustments
 

 

 

 

 
4

 
(4
)
 

Reconciliation to business segment sales
 
$
1,489

 
$
1,582

 
$
1,848

 
$
1,568

 
$
141

 
$
(361
)
 
$
6,267

(1)
Excludes foreign military sales through the U.S. government.

25


 
 
Three Months Ended April 1, 2018
Total Net Sales by Geographic Area (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

United States
 
$
630

 
$
1,240

 
$
1,225

 
$
1,212

 
$
73

 
$
4,380

Asia/Pacific
 
227

 
109

 
156

 
84

 
16

 
592

Middle East and North Africa
 
574

 
9

 
318

 
90

 
6

 
997

All other (principally Europe)
 
43

 
62

 
114

 
43

 
36

 
298

Total net sales
 
$
1,474

 
$
1,420

 
$
1,813

 
$
1,429

 
$
131

 
$
6,267

 
 
Three Months Ended April 1, 2018
Total Net Sales by Major Customer (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Sales to the U.S. government(1)
 
$
628

 
$
1,208

 
$
1,214

 
$
1,186

 
$
24

 
$
4,260

U.S. direct commercial sales and other U.S. sales
 
2

 
32

 
11

 
26

 
49

 
120

Foreign military sales through the U.S. government
 
289

 
69

 
249

 
111

 

 
718

Foreign direct commercial sales and other foreign sales(1)
 
555

 
111

 
339

 
106

 
58

 
1,169

Total net sales
 
$
1,474

 
$
1,420

 
$
1,813

 
$
1,429

 
$
131

 
$
6,267

(1)
Excludes foreign military sales through the U.S. government.
 
 
Three Months Ended April 1, 2018
Total Net Sales by Contract Type (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Fixed-price contracts
 
$
978

 
$
434

 
$
1,136

 
$
767

 
$
128

 
$
3,443

Cost-type contracts
 
496

 
986

 
677

 
662

 
3

 
2,824

Total net sales
 
$
1,474

 
$
1,420

 
$
1,813

 
$
1,429

 
$
131

 
$
6,267


 
Note 18: Remaining Performance Obligations
Remaining performance obligations represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ)). As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $41,073 million. We expect to recognize revenue on approximately half and three-quarters of the remaining performance obligations over the next 12 and 24 months, respectively, with the remainder recognized thereafter.

Recent events have caused increased attention on U.S. defense sales to the Kingdom of Saudi Arabia (KSA). KSA represents less than 5% of our sales and $2.1 billion of our remaining performance obligations at March 31, 2019. Although we currently do not expect to be prevented from doing business in KSA, if government action impairs our ability to fulfill our contractual obligations or otherwise to continue to do business in KSA, it would have a material adverse effect on our financial results.

26


With respect to the unaudited consolidated financial information of Raytheon Company for the three months ended March 31, 2019 and April 1, 2018, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. Its report dated April 25, 2019, appearing below, states that the firm did not audit and does not express an opinion on that unaudited consolidated financial information. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (Securities Act) for its report on the unaudited consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Securities Act.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Raytheon Company
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of Raytheon Company and its subsidiaries (the “Company”) as of March 31, 2019, and the related consolidated statements of operations, of comprehensive income (loss), of equity and of cash flows for the three-month periods ended March 31, 2019 and April 1, 2018, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for the year then ended (not presented herein), and in our report dated February 13, 2019, which included a paragraph describing a change in the manner in which it accounts for certain stranded tax effects impacting accumulated other comprehensive income and the manner in which it presents and discloses certain net periodic pension and postretirement benefit costs in the Company’s statements of operations, we expressed an unqualified opinion on those consolidated financial statements. As discussed in Note 2 to the accompanying consolidated interim financial statements, the Company changed its method of accounting for leases. The accompanying December 31, 2018 consolidated balance sheet reflects this change.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2019

27


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
We develop technologically advanced and integrated products, services and solutions in our core markets: integrated air and missile defense; electronic warfare; command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance; space systems; effects; and cyber. We serve both domestic and international customers primarily as a prime contractor or subcontractor on a broad portfolio of defense and related programs for government customers.

We operate in five segments: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint. For a more detailed description of our segments, see “Business Segments” within Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2018.

Effective January 1, 2019, we adopted the requirements of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) using the modified retrospective approach as discussed in “Note 2: Accounting Standards” within Item 1 of this Form 10-Q. We reclassified certain balance sheet amounts to conform to our current period presentation. All amounts disclosed in this Form 10-Q reflect these changes.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 and our unaudited consolidated financial statements included in this Form 10-Q.

CONSOLIDATED RESULTS OF OPERATIONS
As described in our “Cautionary Note Regarding Forward-Looking Statements” in this Form 10-Q, our interim period results of operations and period-to-period comparisons of such results, particularly at a segment level, may not be indicative of our future operating results. Additionally, we use a fiscal calendar, which may result in differences in the number of work days in the current and comparable prior interim period and could affect period-to-period comparisons. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context.

Total Net Sales
The composition of external net sales by products and services for each segment for the first quarter of 2019 was approximately the following:
(% of segment total external net sales)
IDS

IIS

MS

SAS

Forcepoint

Products
90
%
45
%
95
%
100
%
90
%
Services
10
%
55
%
5
%
%
10
%

 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 31, 2019
 
Apr 1, 2018
 
Mar 31, 2019
 
Apr 1, 2018
Net sales
 
 
 
 
 
 
 
Products
$
5,562

 
$
5,254

 
82.7
%
 
83.8
%
Services
1,167

 
1,013

 
17.3
%
 
16.2
%
Total net sales
$
6,729

 
$
6,267

 
100.0
%
 
100.0
%

Total Net Sales - First Quarter of 2019 vs. First Quarter of 2018The increase in total net sales of $462 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher external net sales of $189 million at IIS and $150 million at MS. The increase in external net sales at IIS was primarily due to higher net sales on classified programs in both cyber and space and higher net sales from the consolidation of Range Generation Next LLC (RGNext) in the first quarter of 2019, partially offset by lower net sales on programs in support of the U.S. Army’s Warfighter Field Operations Customer Support (Warfighter FOCUS) activities, which continue to transition to a number of competitively-awarded replacement programs. In the first quarter of 2019, we amended and restated the RGNext joint venture agreement and acquired an additional 10% equity ownership in the joint venture, increasing our equity ownership to 60% and giving us control of the operations of RGNext with the partner having only protective rights. The results of RGNext are included in IIS’s segment results effective as of the February 8, 2019 consolidation date. See “Note 9: Acquisitions, Divestitures and Goodwill” within Item 1 of this Form 10-Q for additional detail. The increase in external net sales at MS was spread across numerous programs with no individual or common significant driver and included lower net sales on the Paveway™ program due to planned decreases in production and higher net sales on classified programs.


28

Table of Contents

Products and Services Net Sales - First Quarter of 2019 vs. First Quarter of 2018The increase in products net sales of $308 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher external products net sales of $147 million at MS, $65 million at SAS and $58 million at IIS. The increase in products net sales at MS was spread across numerous programs with no individual or common significant driver. The increase in products net sales at SAS was primarily driven by higher products net sales on certain classified programs. The increase in products net sales at IIS was primarily driven by higher products net sales on certain classified programs. The increase in services net sales of $154 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher external services net sales of $131 million at IIS primarily due to higher services net sales on certain classified programs and higher services net sales from the consolidation of RGNext described above in Total Net Sales, partially offset by lower services net sales on the programs in support of the U.S. Army’s Warfighter FOCUS activities described above in Total Net Sales.

Sales to Major Customers - First Quarter of 2019 vs. First Quarter of 2018
 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 31, 2019
 
Apr 1, 2018
 
Mar 31, 2019
 
Apr 1, 2018
Sales to the U.S. government(1)(2)
$
4,676

 
$
4,260

 
69
%
 
68
%
U.S. direct commercial sales and other U.S. sales
118

 
120

 
2
%
 
2
%
Foreign military sales through the U.S. government
1,019

 
718

 
15
%
 
11
%
Foreign direct commercial sales and other foreign sales(1)
916

 
1,169

 
14
%
 
19
%
Total net sales
$
6,729

 
$
6,267

 
100
%
 
100
%
(1)
Excludes foreign military sales through the U.S. government.
(2)
Includes sales to the U.S. Department of Defense (DoD) of $4,451 million, or 66% of total net sales, in the first quarter of 2019 and $4,080 million, or 65% of total net sales, in the first quarter of 2018.
 
Total Cost of Sales
Cost of sales, for both products and services, consists of labor, materials and subcontractors costs, as well as related allocated costs. For each of our contracts, we manage the nature and amount of direct costs at the contract level, and manage indirect costs through cost pools as required by government accounting regulations. The estimate of the actual amount of direct and indirect costs forms the basis for estimating our total costs at completion of the contract.
 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 31, 2019
 
Apr 1, 2018
 
Mar 31, 2019
 
Apr 1, 2018
Cost of sales
 
 
 
 
 
 
 
Products
$
4,002

 
$
3,737

 
59.5
%
 
59.6
%
Services
875

 
795

 
13.0
%
 
12.7
%
Total cost of sales
$
4,877

 
$
4,532

 
72.5
%
 
72.3
%

Total Cost of Sales - First Quarter of 2019 vs. First Quarter of 2018The increase in total cost of sales of $345 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher external cost of sales at MS and IIS. The increase in total costs of sales at MS was spread across numerous programs with no individual or common significant driver. The increase in total costs of sales at IIS was primarily due to the programs described above in Total Net Sales.

Products and Services Cost of Sales - First Quarter of 2019 vs. First Quarter of 2018The increase in products cost of sales of $265 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher external products cost of sales at MS which was spread across numerous programs with no individual or common significant driver. The increase in services cost of sales of $80 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher external services cost of sales at IIS principally driven by the programs described above in Total Net Sales.

General and Administrative Expenses
 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 31, 2019
 
Apr 1, 2018
 
Mar 31, 2019
 
Apr 1, 2018
Administrative and selling expenses
$
544

 
$
528

 
8.1
%
 
8.4
%
Research and development expenses
195

 
166

 
2.9
%
 
2.6
%
Total general and administrative expenses
$
739

 
$
694

 
11.0
%
 
11.1
%
 

29

Table of Contents

The increase in administrative and selling expenses of $16 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher selling and marketing expenses of $9 million at Forcepoint principally driven by higher costs for the sales organization due to increased staffing and training.

Included in administrative and selling expenses is the provision for state income taxes, which generally can be recovered through the pricing of products and services to the U.S. government. Net state income taxes allocated to our contracts were $10 million in the first quarters of 2019 and 2018.

The increase in research and development expenses of $29 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher independent research and development expense of $21 million at IDS related to next-generation radars.

Total Operating Expenses
 
Three Months Ended
(In millions, except percentages)
Mar 31, 2019
 
Apr 1, 2018
Total operating expenses
$
5,616

 
$
5,226

% of Total Net Sales
83.5
%
 
83.4
%

The increase in total operating expenses of $390 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the increase in total cost of sales of $345 million, the primary drivers of which are described above in Total Cost of Sales.
 
Operating Income
 
Three Months Ended
(In millions, except percentages)
Mar 31, 2019
 
Apr 1, 2018
Operating income
$
1,113

 
$
1,041

% of Total Net Sales
16.5
%
 
16.6
%

The increase in operating income of $72 million in the first quarter of 2019 compared to the first quarter of 2018 was due to the increase in total net sales of $462 million, the primary drivers of which are described above in Total Net Sales, partially offset by the increase in total operating expenses of $390 million, the primary drivers of which are described above in Total Operating Expenses.

Total Non-Operating (Income) Expense, Net
 
Three Months Ended
(In millions)
Mar 31, 2019
 
Apr 1, 2018
Non-operating (income) expense, net
 
 
 
Retirement benefits non-service expense
$
181

 
$
239

Interest expense
44

 
47

Interest income
(13
)
 
(7
)
Other (income) expense, net
(20
)
 
5

Total non-operating (income) expense, net
$
192

 
$
284


The decrease in total non-operating (income) expense, net of $92 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to a decrease in retirement benefits non-service expense of $58 million and a change in other (income) expense, net of $25 million. The decrease in retirement benefits non-service expense was principally due to a decrease in the amortization of net actuarial loss in the first quarter of 2019 compared to the first quarter of 2018 due to a decrease in the unamortized loss at December 31, 2018 compared to December 31, 2017, and the higher discount rate at December 31, 2018 compared to the discount rate at December 31, 2017, partially offset by unfavorable asset performance during 2018. The decrease in other (income) expense, net was principally driven by a $24 million change in the mark-to-market of marketable securities held in trust associated with certain of our non-qualified deferred compensation and employee benefit plans, due to net gains of $20 million in the first quarter of 2019 compared to net losses of $4 million in the first quarter of 2018.


30

Table of Contents

Federal and Foreign Income Taxes
 
Three Months Ended
(In millions, except percentages)
Mar 31, 2019
 
Apr 1, 2018
Federal and foreign income taxes
$
146

 
$
133

Effective tax rate
15.9
%
 
17.6
%

On March 4, 2019, the Treasury Department and the Internal Revenue Service (IRS) issued proposed regulations providing guidance for the determination of the amount of foreign-derived intangible income (FDII) and global intangible low-taxed income. Although these rules would affect amounts recorded or amounts expected to be recorded and could increase our income tax expense, we do not expect any material changes to our financial statements if the regulations are finalized as currently drafted.

Our effective tax rate in the first quarter of 2019 was 15.9% compared to 17.6% in the first quarter of 2018. The decrease of 1.7% was primarily due to the one-time transition tax on undistributed foreign earnings, which increased the first quarter 2018 rate by 1.7%, the foreign rate differential, which decreased the rate by 1.4% and FDII, which decreased the rate by 0.5%, partially offset by the tax benefit recognized upon settlement of stock-based awards, which increased the rate by 2.2%. The remaining decrease of 0.3% is composed of various unrelated items which individually and collectively are not significant.
 
Our effective tax rate in the first quarter of 2019 was 5.1% lower than the statutory federal rate primarily due to FDII, which decreased the rate by 3.5%, the Research and Development tax credit (R&D tax credit), which decreased the rate by 1.6% and the tax benefit recognized upon settlement of stock-based awards, which decreased the rate by 1.2%. The offsetting increase of 1.2% is composed of various unrelated items which individually and collectively are not significant.

Our effective tax rate in the first quarter of 2018 was 3.4% lower than the statutory federal rate primarily due to the tax benefit recognized upon settlement of stock-based awards, which decreased the rate by 3.4%, FDII, which decreased the rate by 3.0% and the R&D tax credit, which decreased the rate by 1.8%. Items which increased the effective tax rate were the foreign rate differential, which increased the rate by 1.9% and the one-time transition tax on undistributed foreign earnings, which increased the rate by 1.7%. The remaining increase of 1.2% is composed of various unrelated items which individually and collectively are not significant.

Income from Continuing Operations
 
Three Months Ended
(In millions)
Mar 31, 2019
 
Apr 1, 2018
Income from continuing operations
$
775

 
$
624


The increase in income from continuing operations of $151 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to a decrease of $92 million in total non-operating (income) expense, net, the primary drivers of which are described above in Total Non-Operating (Income) Expense, Net and an increase of $72 million in operating income, the primary drivers of which are described above in Operating Income.

Net Income
 
Three Months Ended
(In millions)
Mar 31, 2019
 
Apr 1, 2018
Net income
$
775

 
$
623


The increase in net income of $152 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the $151 million increase in income from continuing operations, the primary drivers of which are described above in Income from Continuing Operations.


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Table of Contents

Diluted Earnings Per Share (EPS) from Continuing Operations Attributable to Raytheon Company Common Stockholders
 
 
Three Months Ended
(In millions, except per share amounts)
 
Mar 31, 2019
 
Apr 1, 2018
Income from continuing operations attributable to Raytheon Company
 
$
781

 
$
634

Diluted weighted-average shares outstanding
 
282.2

 
288.8

 Diluted EPS from continuing operations attributable to Raytheon Company
 
$
2.77

 
$
2.20


The increase in diluted EPS from continuing operations attributable to Raytheon Company common stockholders of $0.57 in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the increase in income from continuing operations described above in Income from Continuing Operations and a decrease in weighted-average shares outstanding, which was affected by the common stock share activity shown in the table below.

Our common stock share activity was as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Beginning balance
 
282.1

 
288.4

Stock plans activity
 
1.1

 
1.0

Share repurchases
 
(3.1
)
 
(2.2
)
Ending balance
 
280.1

 
287.2


SEGMENT RESULTS
We report our results in the following segments: IDS; IIS; MS; SAS; and Forcepoint.

The following provides some context for viewing our segment performance through the eyes of management.
 
Given the nature of our business, bookings, total net sales and operating income (and the related operating margin percentage), which we disclose and discuss at the segment level, are most relevant to an understanding of management’s view of our segment performance, and often these measures have significant interrelated effects, as described below. In addition, we disclose and discuss backlog, which represents future sales that we expect to recognize over the remaining contract period, which is generally several years. We also disclose total operating expenses and the components of total operating expenses within our segment disclosures.

Bookings—We disclose the amount of bookings and notable contract awards for each segment. Bookings generally represent the dollar value of new external contracts awarded to us during the reporting period and include firm orders for which funding has not been appropriated. We believe bookings are an important measure of future performance and are an indicator of potential future changes in total net sales, because we cannot record revenues under a new contract without first having a booking in the current or a preceding period.

Bookings are impacted by the timing and amounts of awards in a given period, which are subject to numerous factors, including: (1) the desired capability by the customer and urgency of customer needs; (2) customer budgets and other fiscal constraints; (3) political and economic and other environmental factors; (4) the timing of customer negotiations; (5) the timing of governmental approvals and notifications; and (6) the timing of option exercises or increases in scope. In addition, due to these factors, quarterly bookings tend to fluctuate from period to period, particularly on a segment basis. As a result, we believe comparing bookings on a quarterly basis or for periods less than one year is less meaningful than for longer periods and that shorter term changes in bookings may not necessarily indicate a material trend.

32

Table of Contents

 
 
Three Months Ended
Bookings (in millions)
 
Mar 31, 2019
 
Apr 1, 2018
Integrated Defense Systems
 
$
1,374

 
$
2,475

Intelligence, Information and Services
 
1,634

 
1,074

Missile Systems
 
706

 
1,390

Space and Airborne Systems
 
1,530

 
1,272

Forcepoint
 
124

 
100

Total
 
$
5,368

 
$
6,311


Included in bookings were international bookings of $663 million and $2,848 million in the first quarters of 2019 and 2018, respectively, which included foreign military bookings through the U.S. government. International bookings amounted to 12% and 45% of total bookings in the first quarters of 2019 and 2018, respectively.

We record bookings for not-to-exceed contract awards (e.g., undefinitized contract awards, binding letter agreements) based on reasonable estimates of the expected contract definitization. We subsequently adjust bookings to reflect the actual amounts definitized, or prior to definitization when facts and circumstances indicate that our previously estimated amounts are no longer reasonable. The timing of awards that may cover multiple fiscal years influences the size of bookings in each year. Bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ) type contracts), and are reduced for contract cancellations and terminations of bookings recognized in the current year. We reflect contract cancellations and terminations from prior year bookings, as well as the impact of changes in foreign exchange rates, directly as an adjustment to backlog in the period in which the cancellation or termination occurs and the impact is determinable. Contract cancellations and terminations include contract underruns on cost-type programs.

Backlog—We disclose period-end backlog for each segment. Backlog, which is equivalent to our remaining performance obligations, represents the dollar value of firm orders for which work has not been performed. Backlog generally increases with bookings and generally converts into sales as we incur costs under the related contractual commitments. Therefore, we discuss changes in backlog, including any individually significant cancellations, for each of our segments, as we believe such discussion provides an understanding of the awarded but not executed portions of our contracts. Backlog excludes unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ). Backlog is affected by changes in foreign exchange rates.  
Backlog (in millions)
 
Mar 31, 2019
 
Dec 31, 2018
Integrated Defense Systems
 
$
11,380

 
$
11,557

Intelligence, Information and Services
 
6,377

 
6,233

Missile Systems
 
12,664

 
13,976

Space and Airborne Systems
 
10,157

 
10,126

Forcepoint(1)
 
495

 
528

Total
 
$
41,073

 
$
42,420

(1)
Forcepoint backlog excludes the unfavorable impact of $1 million and $2 million at March 31, 2019 and December 31, 2018, respectively, related to the Acquisition Accounting Adjustments to record acquired deferred revenue at fair value.

Total Net Sales—We generally express changes in total net sales in terms of volume. Volume generally refers to increases or decreases in revenues related to varying amounts of total operating expenses incurred on individual contracts (i.e., from performance against contractual commitments on our bookings related to engineering, production or service activity). Therefore, we discuss volume changes attributable principally to individual programs or product lines unless there is a discrete event (e.g., a major contract termination, natural disaster or major labor strike), or some other unusual item that has a material effect on changes in a segment’s volume for a reported period. Due to the nature of our contracts, the amount of costs incurred and related revenues will naturally fluctuate over the lives of our contracts. As a result, in any reporting period, the changes in volume on numerous contracts are likely to be due to normal fluctuations in our engineering, production or service activities, depending on the phase of the contracts’ lifecycle.


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Table of Contents

Total net sales by segment were as follows:
 
 
Three Months Ended
Total Net Sales (in millions)
 
Mar 31, 2019
 
Apr 1, 2018
Integrated Defense Systems
 
$
1,550

 
$
1,489

Intelligence, Information and Services
 
1,777

 
1,582

Missile Systems
 
2,006

 
1,848

Space and Airborne Systems
 
1,653

 
1,568

Forcepoint
 
158

 
141

Eliminations
 
(414
)
 
(357
)
Total business segment sales
 
6,730

 
6,271

Acquisition Accounting Adjustments
 
(1
)
 
(4
)
Total
 
$
6,729

 
$
6,267


Total Operating Expenses—We generally disclose operating expenses for each segment in terms of the following: (1) cost of sales—labor; (2) cost of sales—materials and subcontractors; and (3) other costs of sales and other operating expenses. Included in cost of sales—labor is the incurred direct labor costs associated with the performance of contracts in the current period and any applicable overhead and fringe costs. Included in cost of sales—materials and subcontractors is the incurred direct materials costs, subcontractor costs (which could include effort performed by other Raytheon segments or locations) and applicable overhead allocations in the current period. Included in other costs of sales and other operating expenses is other direct costs not captured in labor or materials and subcontractors costs, such as previously deferred precontract costs recognized in the period, applicable overhead allocations, general and administrative expenses, which include administrative and selling expenses (including bid and proposal costs) and research and development expenses, other direct costs (such as ancillary services and travel expenses) and adjustments for loss contracts.

Operating Income (and the related operating margin percentage)—We generally express changes in segment operating income in terms of volume, net changes in Estimate at Completion (EAC) adjustments or changes in contract mix and other program performance.

The impact of changes in volume on operating income excludes the impact of net EAC adjustments and the impact of changes in contract mix and other program performance and is calculated based on changes in costs on individual programs at an overall margin for the segment. As such, changes in volume do not impact operating margins.

Changes in net EAC adjustments relate to changes in operating income and margin due to revisions to total estimated revenues and costs at completion. These changes reflect improved or deteriorated operating performance or award fee rates. For a full description of our EAC process, refer to “Note 4: Changes in Estimates under Percentage of Completion Contract Accounting” within Item 1 of this Form 10-Q. Given that we have thousands of individual contracts and the types and complexity of the assumptions and estimates we must make on an on-going basis, we have both favorable and unfavorable EAC adjustments. We had the following aggregate EAC adjustments for the periods presented:
 
Three Months Ended
EAC Adjustments (in millions)
Mar 31, 2019

 
Apr 1, 2018

Gross favorable
$
242

 
$
206

Gross unfavorable
(119
)
 
(91
)
Total net EAC adjustments
$
123

 
$
115


Significant EAC adjustments in the first quarters of 2019 and 2018 are discussed in the Operating Income and Margin section of each business segment’s discussion below. The increase in net EAC adjustments of $8 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the increase in net EAC adjustments at IDS and IIS, partially offset by the decrease in net EAC adjustments at MS.

Changes in contract mix and other program performance refer to changes in operating income and margin due to a change in the relative volume of contracts with higher or lower fee rates such that the overall average margin rate for the segment changes, and other drivers of program performance including margin rate increases or decreases due to EAC adjustments in prior periods. A higher or lower expected fee rate at the initial award of a contract typically correlates to the contract’s risk profile, which is often specifically driven by the type of customer and related procurement regulations, the type of contract (e.g., fixed-price vs. cost-

34

Table of Contents

plus), the maturity of the product or service and the scope of work. Changes in contract mix and other performance also include all other items which are not related to volume or EAC adjustments (e.g., real estate transactions).

Operating income by segment was as follows:
 
 
Three Months Ended
Operating Income (in millions)
 
Mar 31, 2019
 
Apr 1, 2018
Integrated Defense Systems
 
$
258

 
$
273

Intelligence, Information and Services
 
187

 
117

Missile Systems
 
190

 
212

Space and Airborne Systems
 
212

 
193

Forcepoint
 
(9
)
 
(7
)
Eliminations
 
(47
)
 
(40
)
Total business segment operating income
 
791


748

Acquisition Accounting Adjustments
 
(28
)
 
(33
)
FAS/CAS Operating Adjustment
 
366

 
354

Corporate
 
(16
)
 
(28
)
Total
 
$
1,113

 
$
1,041

 
Integrated Defense Systems
 
 
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Total net sales
 
$
1,550

 
$
1,489

 
4.1
 %
Total operating expenses
 
 
 
 
 
 
Cost of sales—labor
 
543

 
553

 
(1.8
)%
Cost of sales—materials and subcontractors
 
503

 
466

 
7.9
 %
Other cost of sales and other operating expenses
 
246

 
197

 
24.9
 %
Total operating expenses
 
1,292

 
1,216

 
6.3
 %
Operating income
 
$
258

 
$
273

 
(5.5
)%
Operating margin
 
16.6
%
 
18.3
%
 
 
Change in Operating Income (in millions)
 
Three Months Ended Mar 31, 2019 Versus Three Months Ended Apr 1, 2018
Volume
 
 
 
$
15

 
 
Net change in EAC adjustments
 
 
 
16

 
 
Mix and other performance
 
 
 
(46
)
 
 
Total change in operating income
 
 
 
$
(15
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Bookings
 
$
1,374

 
$
2,475

 
(44.5
)%

Total Net Sales—The increase in total net sales of $61 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher net sales of $110 million on various Patriot® programs for a Middle East and North Africa (MENA) customer from the completion of a transaction to satisfy all of our existing offset obligations on the programs, higher net sales of $87 million on certain European Patriot programs awarded in 2018, higher net sales of $30 million on a naval radar program driven by awards in the first quarter of 2019, and higher net sales of $27 million on an international air and missile defense system program driven by planned increases in production, partially offset by lower net sales of $158 million on an international Patriot program awarded in the first quarter of 2018 driven primarily by an estimated $90 million of net sales recognized in the first quarter of 2018 from previously inventoried costs, and lower net sales of $36 million on certain international Patriot programs due to the scheduled completion of certain production phases of the programs.

35


Total Operating Expenses—The increase in total operating expenses of $76 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to an increase in other cost of sales and other operating expenses of $49 million and an increase in materials and subcontractors costs of $37 million. The increase in other cost of sales and other operating expenses was primarily due to higher general and administrative expenses driven by higher independent research and development costs principally related to next-generation radars. The increase in materials and subcontractors costs was driven by the completion of the offset transaction on various Patriot programs for a MENA customer described above in Total Net Sales, and higher activity on the certain European Patriot programs and on the international air and missile defense system program described above in Total Net Sales, partially offset by lower activity on the international Patriot program awarded in the first quarter of 2018 and the certain international Patriot programs described above in Total Net Sales. The remaining change was spread across numerous programs with no individual or common significant driver.

Operating Income and Margin—The decrease in operating income of $15 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to a change in mix and other performance of $46 million, partially offset by a net change in EAC adjustments of $16 million and an increase in volume of $15 million. The change in mix and other performance was principally driven by lower sales on the international Patriot program awarded in the first quarter of 2018 described above in Total Net Sales. Included in the change in mix and other performance was a $6 million gain on a real estate transaction in the first quarter of 2019. The net change in EAC adjustments was primarily due to $30 million of favorable profit adjustments in the first quarter of 2019 related to the offset transaction discussed above in Total Net Sales due to a reduction of expected costs to fulfill our offset obligations on several contracts, with the remaining change spread across numerous programs with no individual or common significant driver. The increase in volume was primarily due to the activity on the programs described above in Total Net Sales and included $14 million related to the offset transaction described above. In total, the offset transaction resulted in $44 million of operating income in the first quarter of 2019. The decrease in operating margin in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the change in mix and other performance, partially offset by the net change in EAC adjustments.

Backlog and Bookings—Backlog was $11,380 million at March 31, 2019 compared to $11,557 million at December 31, 2018. The decrease in backlog of $177 million at March 31, 2019 compared to December 31, 2018 was primarily due to sales in excess of bookings at our Integrated Air and Missile Defense (IAMD) and Mission Systems and Sensors (MSS) product lines, partially offset by bookings in excess of sales at our Seapower Capability Systems (SCS) product line. Bookings decreased by $1,101 million in the first quarter of 2019 compared to the first quarter of 2018. In the first quarter of 2019, IDS booked $418 million on the Air and Missile Defense Radar (AMDR) program for the U.S. Navy, $310 million to provide Patriot engineering services support for the U.S. Army and international customers and $103 million to provide advanced Patriot air and missile defense capability for the U.S. Army and international customers. In the first quarter of 2018, IDS booked $1.6 billion to provide advanced Patriot air and missile defense capability to an international customer, $226 million to provide Patriot engineering services support for U.S. and international customers, $150 million to provide Patriot depot support for an international customer and $139 million to provide Patriot spares for an international customer.

Intelligence, Information and Services
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Total net sales
 
$
1,777

 
$
1,582

 
12.3
 %
Total operating expenses
 
 
 
 
 
 
Cost of sales—labor
 
725

 
693

 
4.6
 %
Cost of sales—materials and subcontractors
 
698

 
578

 
20.8
 %
Other cost of sales and other operating expenses
 
167

 
194

 
(13.9
)%
Total operating expenses
 
1,590

 
1,465

 
8.5
 %
Operating income
 
$
187

 
$
117

 
59.8
 %
Operating margin
 
10.5
%
 
7.4
%
 
 

36


Change in Operating Income (in millions)
 
Three Months Ended Mar 31, 2019 Versus Three Months Ended Apr 1, 2018
Volume
 
 
 
$
14

 
 
Net change in EAC adjustments
 
 
 
12

 
 
Mix and other performance
 
 
 
44

 
 
Total change in operating income
 
 
 
$
70

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Bookings
 
$
1,634

 
$
1,074

 
52.1
%

Total Net Sales—The increase in total net sales of $195 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher net sales of $150 million on classified programs in both cyber and space and higher net sales of $38 million from the consolidation of RGNext in the first quarter of 2019, partially offset by lower net sales of $53 million on programs in support of the U.S. Army’s Warfighter FOCUS activities, which continue to transition to a number of competitively-awarded replacement programs. In the first quarter of 2019, we amended and restated the RGNext joint venture agreement and acquired an additional 10% equity ownership in the joint venture, increasing our equity ownership to 60% and giving us control of the operations of RGNext with the partner having only protective rights. The results of RGNext are included in IIS’s segment results effective as of the February 8, 2019 consolidation date. See “Note 9: Acquisitions, Divestitures and Goodwill” within Item 1 of this Form 10-Q for additional detail.

Total Operating Expenses—The increase in total operating expenses of $125 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to an increase in materials and subcontractors costs of $120 million, partially offset by a decrease in other cost of sales and other operating expenses of $27 million. The increase in materials and subcontractors costs was primarily driven by higher activity on the classified programs described above in Total Net Sales, partially offset by lower activity on the programs in support of the U.S. Army’s Warfighter FOCUS activities described above in Total Net Sales. The decrease in other cost of sales and other operating expenses was driven principally by a non-cash gain of $21 million from the remeasurement of our equity method investment in RGNext to fair value in the first quarter of 2019, which was recorded as a reduction to cost of sales. As discussed above in Total Net Sales, in the first quarter of 2019, we acquired additional equity ownership in the RGNext joint venture.

Operating Income and Margin—The increase in operating income of $70 million and the related increase in operating margin in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to a change in mix and other performance of $44 million primarily due to the non-cash gain of $21 million from the remeasurement of our equity method investment in RGNext described above in Total Operating Expenses, and a $13 million gain in the first quarter of 2019 on the sale of residual materials and supplies previously used to support the Warfighter FOCUS programs.

Backlog and Bookings—Backlog was $6,377 million at March 31, 2019 compared to $6,233 million at December 31, 2018. The increase in backlog of $144 million at March 31, 2019 compared to December 31, 2018 was primarily due to the consolidation of RGNext, as described above in Total Net Sales. Bookings increased by $560 million in the first quarter of 2019 compared to the first quarter of 2018. In the first quarter of 2019, IIS booked $148 million on domestic and foreign training programs in support of Warfighter FOCUS activities and $82 million to provide support for the North Warning System for the Canadian government. IIS also booked $744 million on a number of classified contracts. In the first quarter of 2018, IIS booked $80 million on domestic and foreign training programs in support of Warfighter FOCUS activities. IIS also booked $514 million on a number of classified contracts.


37


Missile Systems
 
 
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Total net sales
 
$
2,006

 
$
1,848

 
8.5
 %
Total operating expenses
 
 
 
 
 
 
Cost of sales—labor
 
685

 
622

 
10.1
 %
Cost of sales—materials and subcontractors
 
883

 
826

 
6.9
 %
Other cost of sales and other operating expenses
 
248

 
188

 
31.9
 %
Total operating expenses
 
1,816

 
1,636

 
11.0
 %
Operating income
 
$
190

 
$
212

 
(10.4
)%
Operating margin
 
9.5
%
 
11.5
%
 
 
Change in Operating Income (in millions)
 
Three Months Ended Mar 31, 2019 Versus Three Months Ended Apr 1, 2018
Volume
 
 
 
$
23

 
 
Net change in EAC adjustments
 
 
 
(24
)
 
 
Mix and other performance
 
 
 
(21
)
 
 
Total change in operating income
 
 
 
$
(22
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Bookings
 
$
706

 
$
1,390

 
(49.2
)%

Total Net Sales—The increase in total net sales of $158 million in the first quarter of 2019 compared to the first quarter of 2018 was spread across numerous programs with no individual or common significant driver. Included in the change in total net sales were lower net sales of $67 million on the Paveway program due to planned decreases in production and higher net sales of $52 million on classified programs.

Total Operating Expenses—The increase in total operating expenses of $180 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to an increase in labor costs of $63 million, an increase in other cost of sales and other operating expenses of $60 million and an increase in materials and subcontractors costs of $57 million. Almost half of the increase in labor costs was driven by the classified programs described above in Total Net Sales, with the remaining change spread across numerous programs with no individual or common significant driver. The increase in other cost of sales and other operating expenses was spread across numerous programs with no individual or common significant driver. The increase in materials and subcontractors costs was spread across numerous programs with no individual or common significant driver and included decreased activity on the Paveway program described above in Total Net Sales and increased activity on the classified programs described above in Total Net Sales.

Operating Income and Margin— The decrease in operating income of $22 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to a net change in EAC adjustments of $24 million and a change in mix and other performance of $21 million, partially offset by an increase in volume of $23 million. The net change in EAC adjustments was primarily driven by a $15 million unfavorable adjustment in the first quarter of 2019 on a program to upgrade an international test range due to an increase in estimated costs and schedule delays. The change in mix and other performance was principally driven by activity on international Paveway programs, which had an impact of $23 million. The increase in volume was spread across numerous programs with no individual or common significant driver. The decrease in operating margin in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the net change in EAC adjustments and the change in mix and other performance.

Backlog and Bookings—Backlog was $12,664 million at March 31, 2019 compared to $13,976 million at December 31, 2018. The decrease in backlog of $1,312 million at March 31, 2019 compared to December 31, 2018 was primarily due to sales in excess of bookings within our Air Warfare Systems (AWS) and Strategic and Naval Systems (SNS) product lines. Bookings decreased by $684 million in the first quarter of 2019 compared to the first quarter of 2018. In the first quarter of 2019, MS booked $102 million for Evolved Seasparrow Missile (ESSM®) for the U.S. Navy and an international customer and $93 million for Rolling Airframe Missile (RAM™) for the U.S. Navy and international customers. MS also booked $154 million on a number of classified contracts. In the first quarter of 2018, MS booked $552 million for Advanced Medium-Range Air-to-Air Missile (AMRAAM®) for the U.S. Air Force, U.S. Navy and international customers, $186 million for StormBreaker™ for the U.S. Air Force and $114

38


million for Commander’s Independent Thermal Viewers (CITV) for the U.S. Army and an international customer. MS also booked $130 million on a number of classified contracts.

Space and Airborne Systems
 
 
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Total net sales
 
$
1,653

 
$
1,568

 
5.4
 %
Total operating expenses
 
 
 
 
 
 
Cost of sales—labor
 
753

 
688

 
9.4
 %
Cost of sales—materials and subcontractors
 
424

 
391

 
8.4
 %
Other cost of sales and other operating expenses
 
264

 
296

 
(10.8
)%
Total operating expenses
 
1,441

 
1,375

 
4.8
 %
Operating income
 
$
212

 
$
193

 
9.8
 %
Operating margin
 
12.8
%
 
12.3
%
 
 
Change in Operating Income (in millions)
 
Three Months Ended Mar 31, 2019 Versus Three Months Ended Apr 1, 2018
Volume
 
 
 
$
7

 
 
Net change in EAC adjustments
 
 
 
4

 
 
Mix and other performance
 
 
 
8

 
 
Total change in operating income
 
 
 
$
19

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Bookings
 
$
1,530

 
$
1,272

 
20.3
%

Total Net Sales—The increase in total net sales of $85 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher net sales of $53 million on classified programs principally driven by 2018 awards.

Total Operating Expenses—The increase in total operating expenses of $66 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to an increase in labor costs of $65 million and an increase in materials and subcontractors costs of $33 million, partially offset by a decrease in other cost of sales and other operating expenses of $32 million. The increase in labor costs was primarily due to activity on the classified programs described above in Total Net Sales and on an international tactical radar systems production program due to scheduled increases in production. The increase in materials and subcontractors costs was primarily due to activity on the classified programs described above in Total Net Sales and on a surveillance and targeting systems production program for the U.S. Air Force awarded in the third quarter of 2018. The decrease in other cost of sales and other operating expenses was principally due to a $24 million change in the amount of previously deferred precontract costs recognized based on contract awards.

Operating Income and Margin—The increase in operating income of $19 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to a change in mix and other performance of $8 million and an increase in volume of $7 million, both of which were driven by activity on the classified programs described above in Total Net Sales. The increase in operating margin in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the change in mix and other performance.

Backlog and Bookings—Backlog was $10,157 million at March 31, 2019 compared to $10,126 million at December 31, 2018. Bookings increased by $258 million in the first quarter of 2019 compared to the first quarter of 2018. In the first quarter of 2019, SAS booked $288 million on the Advanced Synthetic Aperture Radar System (ASARS) program for the U.S. Air Force and $90 million for the Next Generation Overhead Persistent Infrared (Next Gen OPIR) program for the U.S. Air Force. SAS also booked $451 million on a number of classified contracts. In the first quarter of 2018, SAS booked $87 million for the next-generation Multi-Spectral Targeting System (MTS) for the U.S. Air Force and $85 million for radar components for the U.S. Navy. SAS also booked $356 million on a number of classified contracts.


39


Forcepoint
 
 
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Total net sales
 
$
158

 
$
141

 
12.1
 %
Total operating expenses
 
 
 
 
 
 
Cost of sales
 
40

 
27

 
48.1
 %
Selling and marketing
 
73

 
64

 
14.1
 %
Research and development
 
30

 
37

 
(18.9
)%
General and administrative
 
24

 
20

 
20.0
 %
Total operating expenses
 
167

 
148

 
12.8
 %
Operating income (loss)
 
$
(9
)
 
$
(7
)
 
28.6
 %
Operating margin
 
(5.7
)%
 
(5.0
)%
 
 
 
 
Three Months Ended
(In millions, except percentages)
 
Mar 31, 2019
 
Apr 1, 2018
 
% Change
Bookings
 
$
124

 
$
100

 
24.0
%

Total Net Sales—The increase in total net sales of $17 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily driven by $11 million of higher Global Government and Critical Infrastructure sales from a higher volume of product bookings and the correction of a de minimis error in the current period for royalty revenue related to original equipment manufacturing (OEM) agreements, which increased sales and operating income by $7 million, the majority of which should have been recognized in prior periods after adoption of the new revenue recognition standard (Topic 606). Total net sales excluded the unfavorable impact related to the deferred revenue acquisition accounting adjustments described below in Acquisition Accounting Adjustments.

Total Operating Expenses—We disclose our operating expenses for the segment, which excludes amortization of acquired intangible assets and certain other acquisition and acquisition related expenses, in terms of the following:
Cost of sales—labor and overhead costs associated with analytic and technical support services; infrastructure costs associated with maintaining our databases; and labor, materials and overhead costs associated with providing our product offerings;
Selling and marketing—labor costs related to personnel engaged in selling and marketing and customer support functions; costs related to public relations, advertising, promotions and travel; and related overhead costs;
Research and development—labor costs for the development and management of new and existing products; and related overhead costs; and
General and administrative—labor costs for our executive, finance and administrative personnel; third party professional service fees; and related overhead costs.

Total operating expenses in the first quarter of 2019 increased $19 million compared to the first quarter of 2018 primarily due to an increase in cost of sales of $13 million, an increase in selling and marketing expenses of $9 million and an increase in general and administrative expenses of $4 million, partially offset by a decrease in research and development expenses of $7 million. The increase in cost of sales was principally due to increased hardware sales and staffing to support fulfillment of higher services sales. The increase in selling and marketing expenses was principally due to higher costs for the sales organization due to increased staffing and training. The increase in general and administrative expenses was primarily due to increased professional services fees to increase support capabilities to align with future growth. The decrease in research and development was due to a decrease in labor costs primarily due to headcount reductions as a result of a reorganization of the research and development workforce to gain efficiencies. Total operating expenses excluded amortization of acquired intangible assets as described below in Acquisition Accounting Adjustments and certain unallocated costs which are included in Corporate.

Operating Income (Loss) and Margin—The change in operating income (loss) of $2 million and related change in operating margin in the first quarter of 2019 compared to the first quarter of 2018 was primarily driven by the increase in total operating expenses described above in Total Operating Expenses, partially offset by the increase in total net sales described above in Total Net Sales which included $7 million related to the change in accounting for OEM agreements described above in Total Net Sales.

Backlog and Bookings—Backlog was $495 million at March 31, 2019, $528 million at December 31, 2018 and $449 million at April 1, 2018. The decrease in backlog of $33 million at March 31, 2019 compared to December 31, 2018 was primarily due to the seasonality of Enterprise Security products experiencing higher bookings in the fourth quarter of each year. Bookings increased

40


by $24 million in the first quarter of 2019 compared to the first quarter of 2018 primarily due to the volume of Global Government and Critical Infrastructure awards.

Acquisition Accounting Adjustments
Acquisition Accounting Adjustments include the adjustments to record acquired deferred revenue at fair value as part of our purchase price allocation process, referred to as the deferred revenue adjustment, and the amortization of acquired intangible assets related to historical acquisitions. These adjustments are not considered part of management’s evaluation of segment results.

The components of Acquisition Accounting Adjustments were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Deferred revenue adjustment
 
$
(1
)
 
$
(4
)
Amortization of acquired intangibles
 
(27
)
 
(29
)
Total Acquisition Accounting Adjustments
 
$
(28
)
 
$
(33
)

The deferred revenue adjustment related to acquisitions in the Forcepoint segment.

Amortization of acquired intangibles related to acquisitions in the segments was as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Integrated Defense Systems
 
$

 
$

Intelligence, Information and Services
 
6

 
5

Missile Systems
 

 

Space and Airborne Systems
 
2

 
2

Forcepoint
 
19

 
22

Total
 
$
27

 
$
29


Acquisition Accounting Adjustments in the first quarter of 2019 were relatively consistent with the first quarter of 2018.

FAS/CAS Operating Adjustment
The FAS/CAS Operating Adjustment represents the difference between the service cost component of our pension and other postretirement benefit (PRB) expense or income under Financial Accounting Standards (FAS) requirements under U.S. Generally Accepted Accounting Principles (GAAP) and our pension and PRB expense under U.S. government Cost Accounting Standards (CAS). The results of each segment only include pension and PRB expense under CAS that we generally recover through the pricing of our products and services to the U.S. government.

The pension and PRB components of the FAS/CAS Operating Adjustment were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
FAS/CAS Pension Operating Adjustment
 
$
362

 
$
351

FAS/CAS PRB Operating Adjustment
 
4

 
3

FAS/CAS Operating Adjustment
 
$
366

 
$
354


The components of the FAS/CAS Operating Adjustment were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
FAS service cost (expense)
 
$
(106
)
 
$
(128
)
CAS expense
 
472

 
482

FAS/CAS Operating Adjustment
 
$
366

 
$
354



41


The change in our FAS/CAS Operating Adjustment of $12 million in the first quarter of 2019 compared to the first quarter of 2018 was driven by a $22 million decrease in our FAS service cost, partially offset by a $10 million decrease in our CAS expense. The decrease in our FAS service cost was principally driven by the higher discount rate at December 31, 2018 compared to the discount rate at December 31, 2017. The decrease in our CAS expense was primarily due to unfavorable asset performance during 2018.

Corporate
Corporate operating income consists of unallocated costs and certain other corporate costs not considered part of management’s evaluation of reportable segment operating performance.

Operating income related to Corporate was as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Corporate
 
$
(16
)
 
$
(28
)

Operating income related to Corporate in the first quarter of 2019 included miscellaneous favorable items not allocated to segments results and was relatively consistent with the first quarter of 2018.

FINANCIAL CONDITION AND LIQUIDITY

Overview
We pursue a capital deployment strategy that balances funding for growing our business, including: (1) capital expenditures, acquisitions and research and development; (2) prudently managing our balance sheet, including debt repayments and pension contributions; and (3) returning cash to our shareholders, including dividend payments and share repurchases, as outlined below. Our need for, cost of and access to funds are dependent on future operating results, as well as other external conditions. We currently expect that cash and cash equivalents, cash flow from operations and other available financing resources will be sufficient to meet anticipated operating, capital expenditure, investment, debt service and other financing requirements during the next 12 months and for the foreseeable future.

In addition, the following table highlights selected measures of our liquidity and capital resources:
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Cash and cash equivalents
 
$
2,093

 
$
3,608

Working capital(1)
 
3,276

 
3,674

Amount available under credit facilities
 
950

 
950

(1)     Amounts have been recast to reflect the adoption of ASU 2016-02, Leases (Topic 842).
 
Operating Activities
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Net cash provided by (used in) operating activities from continuing operations
 
$
(411
)
 
$
283

Net cash provided by (used in) operating activities
 
(411
)
 
284


The decrease in net cash provided by operating activities of $695 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the timing of vendor payments and higher net tax payments as discussed below in Tax Payments and Refunds.

Pension Plan Contributions—We made the following contributions to our pension and PRB plans: 
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Required pension contributions
 
$
64

 
$
58

PRB contributions
 
4

 
3

Total
 
$
68

 
$
61



42


Tax Payments and Refunds—We made (received) the following net tax payments (refunds):
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Federal
 
$

 
$
(260
)
Foreign
 
10

 
17

State
 
15

 
2


We expect full-year net federal, foreign and state tax payments to be approximately $926 million in 2019.

Interest Payments—We made interest payments on our outstanding debt of $25 million in the first quarters of 2019 and 2018.

Investing Activities
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018

Net cash provided by (used in) investing activities
 
$
(292
)
 
$
77


The change in net cash provided by (used in) investing activities of $369 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to our short-term investments activity as described below in Short-term Investments Activity.

Additions to Property, Plant and Equipment and Capitalized Internal Use Software—Additions to property, plant and equipment and capitalized internal use software were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Additions to property, plant and equipment
 
$
274

 
$
219

Additions to capitalized internal use software
 
10

 
12


The increase in additions to property, plant and equipment of $55 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily driven by program related requirements due to recent and anticipated growth and investment in productivity initiatives, including high-technology production facilities and continuing factory automation upgrades.

We expect our property, plant and equipment and capitalized internal use software expenditures to be between approximately $1,050–$1,125 million and $70–$95 million, respectively, in 2019, consistent with the anticipated needs of our business and for specific investments including capital assets and facility improvements.

Short-term Investments Activity—We may invest in marketable securities in accordance with our short-term investment policy and cash management strategy. Marketable securities are classified as available-for-sale and are recorded at fair value as short-term investments in our consolidated balance sheets. There was no activity on short-term investments in the first quarter of 2019. In the first quarter of 2018, maturities of short-term investments were $309 million.

Acquisitions and Divestitures—In pursuing our business strategies, we acquire and make investments in certain businesses that meet strategic and financial criteria. In the first quarter of 2019, we amended and restated the RGNext joint venture agreement and acquired an additional 10% equity ownership in the joint venture increasing our equity ownership to 60%. See “Note 9: Acquisitions, Divestitures and Goodwill” within Item 1 of this Form 10-Q for additional detail. There were no acquisitions in the first quarter of 2018.

Financing Activities
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
Net cash provided by (used in) financing activities
 
$
(816
)
 
$
(707
)

We generally use cash provided by operating activities and proceeds from the issuance of new debt as our primary source for the repayment of debt, payment of dividends, pension contributions and the repurchase of our common stock. The change in net cash

43


used in financing activities of $109 million in the first quarter of 2019 compared to the first quarter of 2018 was primarily due activity on our share repurchases as discussed below.

Share Repurchases—From time to time, our Board of Directors authorizes the repurchase of shares of our common stock. In November 2015, our Board authorized the repurchase of up to $2.0 billion of our outstanding common stock. In November 2017, our Board also authorized the repurchase of up to an additional $2.0 billion of our outstanding common stock. At March 31, 2019, we had approximately $1.0 billion available under the 2017 repurchase program. Share repurchases will take place from time to time at management’s discretion depending on market conditions.

Share repurchases also include shares surrendered by employees to satisfy tax withholding obligations in connection with restricted stock, restricted stock units (RSUs) and Long-term Performance Plan (LTPP) awards issued to employees.

Our share repurchases were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 31, 2019
 
Apr 1, 2018
 
 
$
Shares

 
$
Shares

Shares repurchased under our share repurchase programs
 
$
500

2.8

 
$
400

1.9

Shares repurchased to satisfy tax withholding obligations
 
66

0.3

 
72

0.3

Total share repurchases
 
$
566

3.1

 
$
472

2.2


Cash Dividends—Our Board of Directors authorized the following cash dividends:
 
 
Three Months Ended
(In millions, except per share amounts)
 
Mar 31, 2019
 
Apr 1, 2018
Cash dividends declared per share
 
$
0.9425

 
$
0.8675

Total dividends paid
 
245

 
230


In March 2019, our Board of Directors authorized an 8.6% increase to our annual dividend payout rate from $3.47 to $3.77 per share. Dividends are subject to quarterly approval by our Board of Directors.

CAPITAL RESOURCES
Long-term Debt—Total long-term debt, including the current portion of long-term debt, was $4.8 billion at both March 31, 2019 and December 31, 2018. Our outstanding debt bears contractual interest at fixed interest rates ranging from 2.5% to 7.2% and matures at various dates from 2020 through 2044.

Cash and Cash Equivalents—Cash and cash equivalents were $2.1 billion and $3.6 billion at March 31, 2019 and December 31, 2018, respectively. We may invest in: U.S. Treasuries; AAA/Aaa rated money market funds; certificates of deposit, time deposits and commercial paper of banks with a minimum long-term debt rating of A or A2 and minimum short-term debt rating of A-1 and P-1; and commercial paper of corporations with a minimum long-term debt rating of A- or A3 and minimum short-term debt rating of A-2 and P-2. Cash and cash equivalents balances held at our foreign subsidiaries were approximately $293 million and $326 million at March 31, 2019 and December 31, 2018, respectively. Our undistributed earnings of our foreign subsidiaries are not permanently reinvested. We continuously evaluate our liquidity needs and ability to meet global cash requirements as a part of our overall capital deployment strategy. Factors that affect our global capital deployment strategy include anticipated cash flows, the ability to repatriate cash in a tax efficient manner, funding requirements for operations and investment activities, acquisitions and divestitures, and capital market conditions.

Commercial Paper—The Company may issue up to $1.25 billion of unsecured commercial paper notes, as the commercial paper is backed by our credit facility. At March 31, 2019, short-term commercial paper borrowings outstanding were $300 million, which had a weighted-average interest rate and original maturity period of 2.551% and 6 days, respectively. The maximum amount of short-term commercial paper borrowings outstanding during the first quarter of 2019 was $300 million. At December 31, 2018, short-term commercial paper borrowings outstanding were $300 million, which had a weighted-average interest rate and original maturity period of 2.954% and 16 days, respectively.

Credit Facilities—In November 2015, we entered into a $1.25 billion revolving credit facility maturing in November 2020. Under the $1.25 billion credit facility, we can borrow, issue letters of credit and backstop commercial paper. Borrowings under this facility bear interest at various rate options, including LIBOR plus a margin based on our credit ratings. Based on our credit ratings at

44


March 31, 2019, borrowings would generally bear interest at LIBOR plus 80.5 basis points. The credit facility is composed of commitments from approximately 20 separate highly rated lenders, each committing no more than 10% of the facility. As of March 31, 2019 and December 31, 2018 there were no borrowings or letters of credit outstanding under this credit facility. The $300 million of commercial paper outstanding at March 31, 2019 reduced the amount available under our credit facility to $950 million.

Under the $1.25 billion credit facility we must comply with certain covenants, including a ratio of total debt to total capitalization of no more than 60%. We were in compliance with the credit facility covenants as of March 31, 2019. Our ratio of total debt to total capitalization, as those terms are defined in the credit facility, was 30.2% at March 31, 2019. We are providing this ratio as this metric is used by our lenders to monitor our leverage and is also a threshold that could limit our ability to utilize this facility.

Shelf Registrations—We have an effective shelf registration statement with the Securities and Exchange Commission (SEC), filed in March 2019, which covers the registration of debt securities, common stock, preferred stock and warrants.

COMMITMENTS AND CONTINGENCIES
Environmental MattersWe are involved in various stages of investigation and cleanup related to remediation of various environmental sites. Our estimate of the liability of total environmental remediation costs includes the use of a discount rate and takes into account that a portion of these costs is eligible for future recovery through the pricing of our products and services to the U.S. government. We regularly assess the probability of recovery of these costs, which requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract activity. We consider such recovery probable based on government contracting regulations and our long history of receiving reimbursement for such costs, and accordingly have recorded the estimated future recovery of these costs from the U.S. government within prepaid expenses and other current assets in our consolidated balance sheets. Our estimates regarding remediation costs to be incurred were as follows:  
(In millions, except percentages)
 
Mar 31, 2019
 
Dec 31, 2018
Total remediation costs—undiscounted
 
$
197

 
$
193

Weighted-average discount rate
 
5.1
%
 
5.1
%
Total remediation costs—discounted
 
$
136

 
$
128

Recoverable portion
 
88

 
82


We also lease certain government-owned properties and generally are not liable for remediation of preexisting environmental contamination at these sites. As a result, we generally do not provide for these costs in our consolidated financial statements.

Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage, and the unresolved extent of our responsibility, it is difficult to determine the ultimate outcome of environmental matters. However, we do not expect any additional liability to have a material adverse effect on our financial position, results of operations or liquidity.

Financing Arrangements and Other—We issue guarantees, and banks and surety companies issue, on our behalf, letters of credit and surety bonds, to meet various bid, performance, warranty, retention and advance payment obligations for us or our affiliates. These instruments expire on various dates through 2028. Additional guarantees of project performance for which there is no stated value also remain outstanding. The stated values outstanding consisted of the following:
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Guarantees
 
$
211

 
$
201

Letters of credit
 
2,296

 
2,503

Surety bonds
 
80

 
166


All guarantees at March 31, 2019 and December 31, 2018 related to our joint venture in Thales-Raytheon Systems Air and Missile Defense Command and Control S.A.S. (TRS AMDC2). We provide these guarantees, as well as letters of credit, to TRS AMDC2 and other affiliates to assist these entities in obtaining financing on more favorable terms, making bids on contracts and performing their contractual obligations. While we expect these entities to satisfy their loans and meet their project performance and other contractual obligations, their failure to do so may result in a future obligation to us. We periodically evaluate the risk of these entities failing to meet their obligations described above. At March 31, 2019, we believe the risk that these entities will not be able to meet their obligations is minimal for the foreseeable future based on their current financial condition. All obligations were current at March 31, 2019. We had an estimated liability of $3 million at both March 31, 2019 and December 31, 2018 related to these guarantees.


45


The joint venture agreement between Raytheon and Vista Equity Partners relating to Forcepoint provides Vista Equity Partners with certain rights to require Forcepoint to pursue an initial public offering at any time after four years and three months following the closing date of May 29, 2015, or pursue a sale of the company at any time after five years following the closing date. In either of these events, Raytheon has the option to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint for cash at a price equal to fair value as determined under the joint venture agreement. Additionally, Vista Equity Partners has the ability to liquidate its ownership through a put option. The put option allows Vista Equity Partners to require Raytheon to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint for cash at a price equal to fair value as determined under the joint venture agreement. Lastly, Raytheon has the option, to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint at a price equal to fair value as determined under the joint venture agreement. The joint venture agreement provides for the process under which the parties would determine the fair value of the interest and could result in a payment by Raytheon shortly after the exercise of Vista Equity Partners’ put option or Raytheon’s purchase option; however, the ultimate timing will depend on the actions of the parties and other factors. At March 31, 2019, the fair value of the noncontrolling interest was estimated at $399 million and is subject to change based upon market conditions and business performance. The estimate of fair value for purposes of presenting the redeemable noncontrolling interest, outside of stockholders’ equity, in our consolidated balance sheets could differ from the parties’ determination of fair value for the interest under the joint venture agreement.
We have entered into industrial cooperation agreements, sometimes in the form of either offset agreements or in-country industrial participation (ICIP) agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. At March 31, 2019, the aggregate amount of our offset agreements, both agreed to and anticipated to be agreed to, had an outstanding notional value of approximately $9.3 billion. These agreements are designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. Offset agreements may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects, and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for activities such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. Such activities may also vary by country depending upon requirements as dictated by their governments. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customers and typically require cash outlays that represent only a fraction of the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for penalties in the event we fail to perform in accordance with offset requirements. Historically, we have not been required to pay any penalties of significance.
 
As a U.S. government contractor, we are subject to many levels of audit and investigation by the U.S. government relating to our contract performance and compliance with applicable rules and regulations. Agencies that oversee contract performance include: the Defense Contract Audit Agency (DCAA); the Defense Contract Management Agency (DCMA); the Inspectors General of the U.S. Department of Defense (DoD) and other departments and agencies; the Government Accountability Office (GAO); the Department of Justice (DOJ); and Congressional Committees. Other areas of our business operations may also be subject to audit and investigation by these and/or other agencies. From time to time, agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. Such investigations and audits may be initiated due to a number of reasons, including as a result of a whistleblower complaint. Such investigations and audits could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, the suspension of government export licenses or the suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in no adverse action against us. Our final allowable incurred costs for each year are also subject to audit and have, from time to time, resulted in disputes between us and the U.S. government, with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their related courts of appeals. In addition, the DOJ has, from time to time, convened grand juries to investigate possible irregularities by us. We also provide products and services to customers outside of the U.S., and those sales are subject to local government laws, regulations and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and International Traffic in Arms Regulations (ITAR)) may also be investigated or audited. Other than as specifically disclosed herein, we do not expect these audits, investigations or disputes to have a material effect on our financial position, results of operations or liquidity, either individually or in the aggregate.

We do not expect any material impact on our financial results from regional developments regarding Qatar. Almost all of our contracts in Qatar are foreign military sales contracts through the U.S. government and represent less than 5% of our backlog at March 31, 2019.

Recent events have caused increased attention on U.S. defense sales to the Kingdom of Saudi Arabia (KSA). KSA represents less than 5% of our sales and $2.1 billion of our backlog at March 31, 2019. This includes the majority of the precision guided munitions

46


described below, integrated air and missile defense systems, as well as other products and services. Although we currently do not expect to be prevented from doing business in KSA, if government action impairs our ability to fulfill our contractual obligations or otherwise to continue to do business in KSA, it would have a material adverse effect on our financial results.

We have several direct commercial sales contracts for precision guided munitions with certain Middle Eastern customers for which U.S. government approvals from the State Department and Congress through the Congressional Notification process have been delayed and which we expect will continue to be delayed in the near future. These contracts contain clauses that permit the customer to terminate the contract, and require refund of any advances received, if those approvals are not received by a stated date or that date is not otherwise changed. While uncertainty exists over the timing of these pending approvals, and from time to time members of Congress have expressed concerns over these sales, we have taken contractual actions, such as changing or removing the government approval deadlines, or invoking the force majeure clauses for government delays. As a result, we believe further delays of these pending approvals will not have a material impact on our financial results. However, if we ultimately do not receive the approvals, it would have a material adverse effect on our financial results. For these precision guided munitions contracts with certain Middle Eastern customers, we had approximately $2.4 billion of total contract value, recognized approximately $1.1 billion of sales for work performed to date and received approximately $850 million in advances. On a contract by contract basis, and excluding advances billed but not received, we had $600 million and $350 million of net contract assets and net contract liabilities, respectively, related to these contracts.

On June 23, 2016, the U.K. held a referendum in which British citizens approved an exit from the European Union (EU), commonly referred to as “Brexit.” As a result of the referendum, there has been volatility in exchange rates versus the U.S. dollar. The British pound is the functional currency for approximately 2% of our sales. In addition, for any contracts that are not denominated in the same currency as the functional currency (for example, contracts denominated in British pounds where the functional currency is the U.S. dollar), we enter into foreign currency forward contracts to hedge our risk related to foreign currency exchange rate fluctuations. As a result, we currently do not expect the U.K.’s exit from the EU to have a material impact on our financial position, results of operations or liquidity.

In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened against, or initiated by, us. We do not expect any of these proceedings to result in any additional liability or gains that would materially affect our financial position, results of operations or liquidity. In connection with certain of our legal matters, we may be entitled to insurance recovery for qualified legal costs or other incurred costs. We do not expect any insurance recovery to have a material impact on the financial exposure that could result from these matters.

Accounting Standards
For a discussion of recent accounting pronouncements, see “Note 2: Accounting Standards” within Item 1 of this Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market exposures are to interest rates and foreign exchange rates.
 
We generally supplement our working capital requirements with a combination of variable-rate short-term and fixed-rate long-term financing. We may enter into interest rate swap agreements with commercial and investment banks to manage interest rates associated with our financing arrangements. We enter into foreign currency forward contracts with commercial banks to fix the foreign currency exchange rates on specific commitments, payments to vendors and customer receipts denominated in foreign currencies. The market-risk sensitive instruments we use for hedging are directly related to a particular asset, liability or transaction for which a firm commitment is in place. We do not hold or issue derivative financial instruments for trading or speculative purposes.

The following tables provide information as of March 31, 2019 and December 31, 2018 about our market risk exposure associated with changing interest rates. For long-term debt obligations, the table presents principal cash flows by maturity date and average interest rates related to outstanding obligations. There were no interest rate swaps outstanding at March 31, 2019 or December 31, 2018.


47

Table of Contents

Principal payments and interest rate detail for long-term debt by contractual maturity date as of March 31, 2019 and December 31, 2018, respectively, were as follows: 
March 31, 2019 (in millions, except percentages)
 
2019

 
2020

 
2021

 
2022

 
2023

 
Thereafter

 
Total

 
Fair Value

Fixed-rate debt
 
$

 
$
1,500

 
$

 
$
1,100

 
$

 
$
2,192

 
$
4,792

 
$
5,202

Average interest rate
 

 
3.550
%
 

 
2.500
%
 

 
5.097
%
 
4.017
%
 
 
December 31, 2018 (in millions, except percentages)
 
2019

 
2020

 
2021

 
2022

 
2023

 
Thereafter

 
Total

 
Fair Value

Fixed-rate debt
 
$

 
$
1,500

 
$

 
$
1,100

 
$

 
$
2,192

 
$
4,792

 
$
5,063

Average interest rate
 

 
3.550
%
 

 
2.500
%
 

 
5.097
%
 
4.017
%
 
 

In addition, the aggregate notional amount of our outstanding foreign currency forward contracts was $1,843 million and $1,772 million at March 31, 2019 and December 31, 2018, respectively. The net notional exposure of these contracts was $777 million and $840 million at March 31, 2019 and December 31, 2018, respectively.

The fair value of asset derivatives included in other assets, net and liability derivatives included in other current liabilities in our consolidated balance sheets related to foreign currency forward contracts were as follows:
(In millions)
 
Mar 31, 2019
 
Dec 31, 2018
Asset derivatives
 
$
14

 
$
26

Liability derivatives
 
23

 
34


For foreign currency forward contracts designated and qualifying for hedge accounting, we record the gain or loss on the derivative in accumulated other comprehensive loss (AOCL), net of tax, and reclassify it into earnings in the same period or periods during which the hedged revenue or cost of sales transaction affects earnings. We present the gain or loss in the same income statement line items as the earnings effect of the hedged item, which offsets the foreign exchange gains and losses on the underlying transactions being hedged. We believe our exposure due to changes in foreign currency rates is not material due to our hedging policy.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Management has conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) of the Securities Exchange Act of 1934) as of March 31, 2019.
Conclusion of EvaluationBased on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of March 31, 2019 were effective.
Inherent Limitations on Effectiveness of ControlsIn designing and evaluating our disclosure controls and procedures, management recognizes that any control, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control Over Financial Reporting—There were no changes in our internal control over financial reporting during the first quarter of 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
We primarily engage in providing products and services under contracts with the U.S. government and, to a lesser degree, under direct foreign sales contracts, some of which the U.S. government funds. As a U.S. government contractor, we are subject to many levels of audit and investigation by the U.S. government relating to our contract performance and compliance with applicable rules and regulations. Agencies that oversee contract performance include: the Defense Contract Audit Agency (DCAA); the

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Defense Contract Management Agency (DCMA); the Inspectors General of the U.S. Department of Defense (DoD) and other departments and agencies; the Government Accountability Office (GAO); the Department of Justice (DOJ); and Congressional Committees. Other areas of our business operations may also be subject to audit and investigation by these and/or other agencies. From time to time, agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. Such investigations and audits may be initiated due to a number of reasons, including as a result of a whistleblower complaint. Such investigations and audits could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, the suspension of government export licenses or the suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in no adverse action against us. Our final allowable incurred costs for each year are also subject to audit and have, from time to time, resulted in disputes between us and the U.S. government, with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their related courts of appeals. In addition, the DOJ has, from time to time, convened grand juries to investigate possible irregularities by us. We also provide products and services to customers outside of the U.S., and those sales are subject to local government laws, regulations and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and International Traffic in Arms Regulations (ITAR)) may also be investigated or audited. Other than as specifically disclosed in this Form 10-Q, we do not expect these audits, investigations or disputes to have a material effect on our financial position, results of operations or liquidity, either individually or in the aggregate.

In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened against us. We do not expect these proceedings to result in any additional liability that would materially affect our financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS
You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes from the factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission (SEC).
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities 
Period
Total Number of
Shares
Purchased (1)

 
Average
Price Paid
per Share

 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan

 
Approximate Dollar
Value (in billions)
of Shares that
May Yet Be Purchased
Under the Plan (2)

January (January 1, 2019 - January 27, 2019)
508

 
$
168.14

 

 
$
1.5

February (January 28, 2019 - February 24, 2019)
2,219,430

 
180.23

 
2,219,430

 
1.1

March (February 25, 2019 - March 31, 2019)
768,502

 
180.98

 
552,573

 
1.0

Total
2,988,440

 
$
180.42

 
2,772,003

 
 
(1)
Includes shares purchased related to activity under our stock plans. Such activity during the first quarter of 2019 includes the surrender by employees of 216,437 shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.
(2)
In November 2017, our Board authorized the repurchase of up to $2.0 billion of our outstanding common stock.
 

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Table of Contents

ITEM 6. EXHIBITS
The following list of exhibits includes exhibits submitted with this Form 10-Q as filed with the Securities and Exchange Commission and those incorporated by reference to other filings.
 
3.1
 
 
 
 
 
 
 
 
 
 
 
 
15
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
eXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.*
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.*
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.*
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.*
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*
 
*
filed electronically herewith
**
furnished electronically herewith, and not filed

50

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
RAYTHEON COMPANY
 
 
By:
/s/ Michael J. Wood
 
Michael J. Wood
 
Vice President, Controller and Chief Accounting Officer
 
Principal Accounting Officer
April 25, 2019


51
Exhibit 10.1

RAYTHEONGREYA02.JPG
 
Thomas A. Kennedy
 
Raytheon Company
 
Chairman & Chief Executive Officer
 
870 Winter Street
 
781.522.6400 business
 
Waltham, Massachusetts
 
781.522.6401 fax
 
02451 USA
 
 
tkennedy1@raytheon.com
 
 

July 23, 2015

Wesley D. Kremer
11305 N Shadow Vista Place
Oro Valley, AZ 85742


Dear Wes:
It is my sincere pleasure to offer you the position as President of the Integrated Defense Systems (IDS) business effective July 30, 2015, reporting to me. I look forward to you joining our Leadership team. Your position will be an officer and vice president of the corporation. The position resides in Tewksbury, MA.
The offer details are as follows:

Your base salary will be $600,000 annually, paid at a bi-weekly rate of $23,077.60. Your next eligibility for a base salary increase will be March, 2016.

Your Results Based Incentive (RBI) Program target for 2015 will be increased to 100% of your annualized base salary, subject to individual and company performance.

You will be eligible to participate in the Company’s Long Term Participant Plan (LTPP). As a first time participant, your award value for the 2015 program is $950,000, based on performance achieved at the end of a three-year cycle (2015-2017). Your payout, if earned, may be higher or lower than the initial award value. Participation in this plan is subject to annual review.

You remain eligible to participate in the annual restricted share award program subject to the terms of the award and the provisions of the Raytheon Stock Plan. Your 2016 restricted stock award is targeted at $975,000, subject to your individual performance and approval by the Board of Directors in 2016.

You will be required by the end of your fifth (5th) year in an elected officer capacity to own a minimum of three (3x) times base salary in the form of Raytheon equity. In addition, there is a requirement that each elected officer holds shares of Company "stock owned outright" with a value of at least 1x base salary. Company stock owned outright includes the following Company securities: outright share purchases, shares from restricted stock/unit vestings or acquired upon option exercises; and vested shares or share equivalents in any Company retirement plan (e.g., 401(k), Deferred Compensation Plan).



July 23, 2015
Wes Kremer
Page 2

If you are involuntarily separated from employment with the Company without cause, as defined in the Raytheon Severance Pay Plan, you will be entitled to a separation payment of one (1) times your annual base salary and target bonus, as well as one (1) years benefits (excluding executive perquisites) as of the date of separation in exchange for a General Release.

You will be entitled to a Change in Control Severance Agreement which would provide you with severance benefits equal to two (2) times your annual base salary and target bonus as of the date of the change in control in the event of a change in control of the company. Please note that the Change in Control Severance Agreement is structured to require both a change in corporate ownership and a loss of employment as those terms are defined in the draft agreement.

You will be eligible to participate in the Raytheon Supplemental Executive Retirement Plan. This non-qualified plan provides a pension of 35% of final average compensation after ten (10) years of Raytheon service and attainment of age 55, increasing by 3% of final average compensation for every additional year of service up to a maximum of 50% of final average compensation after fifteen (15) years of service and attainment of age 60. Amounts payable under this plan will be offset by amounts payable under any other pension plan of the Company or any prior employer and by Social Security.

You will continue to be eligible to participate in Raytheon’s Deferred Compensation Plan, subject to the terms and conditions of the program.

Your annual automobile allowance will be $18,000.00, paid at a bi-weekly rate of $692.31.

You will be eligible to receive Company paid senior executive life insurance which equals four (4) times your annual base salary bracket to a maximum of $3 million. You are also eligible to receive enhanced life insurance equal to one (1) times your annual base salary. If you choose not to elect this benefit, your enhanced life insurance will be capped at $50,000.00.

Your financial planning assistance will be $15,000.00 for your first year, and $12,000.00 annually thereafter.

Your Excess liability coverage will be increased to $5 million.

You will continue to be eligible for the Executive Health Program, which includes an annual comprehensive medical assessment. This benefit has an annual allowance of $2,000.00 for your participation in the program. You will be enrolled in the Executive Registry. It is a health care program designed for traveling executives and their families. The Registry operates as a domestic and international network of leading academic medical centers and affiliations.

You will be eligible for first class airfare for all business travel.



July 23, 2015
Wes Kremer
Page 3

This letter sets forth the entire offer and understanding between you and the Company related to your employment with Raytheon. Acceptance of this offer will be considered an acceptance to all the terms and conditions contained within the offer and the attachments.

Wes, I look forward to you leading our IDS business. Please sign below to indicate your acceptance and return to Randa Newsome. Please contact Randa at 781.522.5097 if you have additional questions.

Sincerely,


/s/ Thomas A. Kennedy
Thomas A. Kennedy
Chairman and CEO



I have read and accept this offer for President of Raytheon’s IDS business, effective July 30, 2015.


    
Accepted:
/s/Wesley Kremer
 
Wesley Kremer
 
 
Date:
July 23, 2015

Attached: (1) Change in Control Agreement

Exhibit 10.2

RAYTHEONGREYA06.JPG
 
Thomas A. Kennedy
 
Raytheon Company
 
Chairman & Chief Executive Officer
 
870 Winter Street
 
781.522.6400 tel
 
Waltham, Massachusetts
 
781.522.6401 fax
 
02451 USA
 
 
tkennedy1@raytheon.com
 
 

March 21, 2019


Wesley D. Kremer
1 Franklin Street, Unit 2403
Boston, MA 02110

Dear Wes:

It is my pleasure to offer you the position of President of Raytheon Missile Systems (RMS) effective March 30, 2019. You also will continue to be an elected officer and vice president of Raytheon Company.

This letter amends your July 23, 2015 offer letter. Those terms and conditions shall continue except for the changes listed in this offer letter. All of your other current compensation, benefits, and perquisites will remain the same.

Base Salary:
Effective March 30, 2019, your bi-weekly rate of pay will be $31,058.40 which, when annualized, is $807,518.40. You will be eligible for a base salary increase in March 2020.

Relocation Benefits:
You shall receive temporary relocation benefits coordinated by our relocation vendor, CARTUS.

Temporary Housing Expenses:
Raytheon will reimburse you up to $5,000 per month for your eligible temporary housing expenses in Tucson. You will also be reimbursed up to $1,000 per month for your eligible Tucson miscellaneous utilities and maintenance expenses. This housing reimbursement will also be coordinated by CARTUS.

Company Paid Personal Travel:
Raytheon will pay for personal travel between Arizona and Massachusetts when approved by the CEO.


Please note, this is not a contract of employment or a promise of employment for any specific period. Nothing in this letter is intended to alter the “at-will” nature of your employment. Because you are an “at-will” employee, both you and the Company may end the employment relationship at any time and for any reason, with or without cause or notice.

Wes, I look forward to you leading the RMS business unit. Please sign below to indicate your acceptance and return to Randa Newsome. Please contact Randa at 781-522-5097 if you have any questions.





Congratulations and best wishes for your success in this important role for our Company.

Sincerely,


/s/ Thomas A. Kennedy
Thomas A. Kennedy
Chairman and CEO


I have read and accept this offer for President of the Raytheon Missile Systems (RMS) business, effective March 30, 2019.

Accepted:


    
/s/Wesley D. Kremer
March 21, 2019
Wesley D. Kremer
Date



Exhibit 15

Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Commissioners:
We are aware that our report dated April 25, 2019 on our review of interim financial information of Raytheon Company, which appears in this Quarterly Report on Form 10-Q, is incorporated by reference in the Registration Statements on Form S-3 (File Nos. 333-230497; 333-211878; 333-71974; 333-58474; 333-82529 and 333-44321) and Form S-8 (File Nos. 333-168415; 333-124690; 333-64168; 333-52536; 333-56117 and 333-45629) of Raytheon Company.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2019





Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas A. Kennedy, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Raytheon Company;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: April 25, 2019
 
 
/s/ Thomas A. Kennedy
Thomas A. Kennedy
Chairman and Chief Executive Officer




Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Anthony F. O'Brien, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Raytheon Company;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: April 25, 2019
 
 
/s/ Anthony F. O'Brien
Anthony F. O'Brien
Vice President and Chief Financial Officer




Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Raytheon Company (the “Company”) on Form 10-Q for the period ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas A. Kennedy, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Thomas A. Kennedy
Thomas A. Kennedy
Chairman and Chief Executive Officer
April 25, 2019
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.





Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Raytheon Company (the “Company”) on Form 10-Q for the period ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony F. O'Brien, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Anthony F. O'Brien
Anthony F. O'Brien
Vice President and Chief Financial Officer
April 25, 2019
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.