EX-99.2 5 nc10004787x1_ex99-2.htm EXHIBIT 99.2

Exhibit 99.2

 

TABLE OF CONTENTS

 

INTERIM UNAUDITED FINANCIAL INFORMATION OF RAYTHEON COMPANY FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2019 AND APRIL 1, 2018 AND SIX MONTH-PERIODS ENDED JUNE 30, 2019 AND
JULY 1, 2018

 

    PAGE
INTERIM UNAUDITED FINANCIAL INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2019 AND APRIL 1, 2018
 
   
PART I FINANCIAL INFORMATION    
Item 1. Consolidated Financial Statements   2
  Consolidated Balance Sheets (unaudited)   2
  Consolidated Statements of Operations (unaudited)   3
  Consolidated Statements of Comprehensive Income (loss) (unaudited)   4
  Consolidated Statements of Equity (unaudited)   5
  Consolidated Statements of Cash Flows (unaudited)   6
  Notes to Consolidated Financial Statements (unaudited)   7
     
INTERIM UNAUDITED FINANCIAL INFORMATION FOR THE SIX MONTH-PERIODS ENDED JUNE 30, 2019 AND JULY 1, 2018    
     
PART I FINANCIAL INFORMATION    
     
Item 1. Consolidated Financial Statements   26
  Consolidated Balance Sheets (unaudited)   26
  Consolidated Statements of Operations (unaudited)   27
  Consolidated Statements of Comprehensive Income (unaudited)   28
  Consolidated Statements of Equity (unaudited)   29
  Consolidated Statements of Cash Flows (unaudited)   31
  Notes to Consolidated Financial Statements (unaudited)   32

 

1

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.

 

2

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.

3

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.

4

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.

5

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.

6

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). The accompanying unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements. 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 Exhibit 99.2 to this Current Report on 8-K 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.

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Note 3: Significant Accounting Policies Update

Our significant accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies” within Exhibit 99.1 to this Current Report on Form 8-K. 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.

8

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  

 

9

 

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 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.

10

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.

 

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.

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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 Instruments—We 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.

 

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
 

 

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(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 Matters—We 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  
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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.

 

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.

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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.

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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.

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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:

 

(In millions)   Pension and PRB plans, net(1)     Foreign exchange translation     Cash flow hedges(2)     Unrealized gains (losses) on investments and other, net(3)     Total  
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.

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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  

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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  

19

    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.

 

20

 

 

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.


21

    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  

 


22

    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.


23

    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.


24

 

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

 

25

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

RAYTHEON COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(In millions, except per share amounts)   Jun 30, 2019     Dec 31, 2018  
Assets                
Current assets                
Cash and cash equivalents
  $ 2,173     $ 3,608  
Receivables, net
    1,607       1,648  
Contract assets
    6,130       5,594  
Inventories
    932       758  
Prepaid expenses and other current assets
    684       529  
Total current assets
    11,526       12,137  
Property, plant and equipment, net     2,982       2,840  
Operating lease right-of-use assets     888       805  
Goodwill     14,882       14,864  
Other assets, net     1,908       2,024  
Total assets
  $ 32,186     $ 32,670  
                 
Liabilities, Redeemable Noncontrolling Interests and Equity                
Current liabilities                
Commercial paper and current portion of long-term debt
  $ 800     $ 300  
Contract liabilities
    2,944       3,309  
Accounts payable
    1,368       1,964  
Accrued employee compensation
    1,361       1,509  
Other current liabilities
    1,398       1,381  
Total current liabilities
    7,871       8,463  
Accrued retiree benefits and other long-term liabilities     6,699       6,922  
Long-term debt     4,257       4,755  
Operating lease liabilities     720       647  
Commitments and contingencies (Note 13)                
                 
Redeemable noncontrolling interests     435       411  
                 
Equity                
Raytheon Company stockholders’ equity
               
Common stock, par value, $0.01 per share, 1,450 shares authorized, 278 and 282 shares outstanding at June 30, 2019 and December 31, 2018, respectively
    3       3  
Additional paid-in capital
           
Accumulated other comprehensive loss
    (8,182 )     (8,618 )
Retained earnings
    20,383       20,087  
Total Raytheon Company stockholders’ equity
    12,204       11,472  
Noncontrolling interests in subsidiaries            
Total equity
    12,204       11,472  
Total liabilities, redeemable noncontrolling interests and equity
  $ 32,186     $ 32,670  

 

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

 

26

RAYTHEON COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

    Three Months Ended     Six Months Ended  
(In millions, except per share amounts)   Jun 30, 2019     Jul 1, 2018     Jun 30, 2019     Jul 1, 2018  
Net sales                                
Products
  $ 5,994     $ 5,507     $ 11,556     $ 10,761  
Services
    1,165       1,118       2,332       2,131  
Total net sales     7,159       6,625       13,888       12,892  
Operating expenses                                
Cost of sales—products
    4,302       3,903       8,304       7,640  
Cost of sales—services
    903       874       1,778       1,669  
General and administrative expenses
    778       748       1,517       1,442  
Total operating expenses     5,983       5,525       11,599       10,751  
Operating income     1,176       1,100       2,289       2,141  
Non-operating (income) expense, net                                
Retirement benefits non-service expense
    181       238       362       477  
Interest expense
    45       46       89       93  
Interest income
    (7 )     (8 )     (20 )     (15 )
Other (income) expense, net
    (8 )     (3 )     (28 )     2  
Total non-operating (income) expense, net     211       273       403       557  
Income from continuing operations before taxes     965       827       1,886       1,584  
Federal and foreign income taxes     152       37       298       170  
Income from continuing operations     813       790       1,588       1,414  
Income (loss) from discontinued operations, net of tax           1              
Net income     813       791       1,588       1,414  
Less: Net income (loss) attributable to noncontrolling interests in subsidiaries
    (4 )     (9 )     (10 )     (19 )
Net income attributable to Raytheon Company   $ 817     $ 800     $ 1,598     $ 1,433  
                                 
Basic earnings per share attributable to Raytheon Company common stockholders:                                
Income from continuing operations
  $ 2.92     $ 2.78     $ 5.69     $ 4.98  
Income (loss) from discontinued operations, net of tax
                       
Net income
    2.92       2.78       5.69       4.98  
Diluted earnings per share attributable to Raytheon Company common stockholders:                                
Income from continuing operations
  $ 2.92     $ 2.78     $ 5.69     $ 4.98  
Income (loss) from discontinued operations, net of tax
                       
Net income
    2.92       2.78       5.69       4.97  
Amounts attributable to Raytheon Company common stockholders:                                
Income from continuing operations
  $ 817     $ 799     $ 1,598     $ 1,433  
Income (loss) from discontinued operations, net of tax
          1              
Net income
  $ 817     $ 800     $ 1,598     $ 1,433  

 

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

 

27

RAYTHEON COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

    Three Months Ended     Six Months Ended  
(In millions)   Jun 30, 2019     Jul 1, 2018     Jun 30, 2019     Jul 1, 2018  
Net income   $ 813     $ 791     $ 1,588     $ 1,414  
Other comprehensive income (loss), before tax:                                
Pension and other postretirement benefit plans, net:
                               
Amortization of prior service cost
    2       2       3       3  
Amortization of net actuarial loss
    274       346       550       693  
Pension and other postretirement benefit plans, net
    276       348       553       696  
Foreign exchange translation
    (6 )     (43 )     2       (19 )
Cash flow hedges
    8             (2 )     (10 )
Unrealized gains (losses) on investments and other, net
                       
Other comprehensive income (loss), before tax     278       305       553       667  
Income tax benefit (expense) related to items of other comprehensive income (loss)     (61 )     (73 )     (117 )     (144 )
Other comprehensive income (loss), net of tax     217       232       436       523  
Reclassification of stranded tax effects                       (1,451 )
Total comprehensive income (loss)     1,030       1,023       2,024       486  
Less: Comprehensive income (loss) attributable to noncontrolling interests in subsidiaries
    (4 )     (9 )     (10 )     (19 )
Comprehensive income attributable to Raytheon Company   $ 1,034     $ 1,032     $ 2,034     $ 505  

 

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

 

28

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 March 31, 2019   $ 3     $     $ (8,399 )   $ 20,104     $ 11,708     $     $ 11,708  
Net income (loss)                             817       817             817  
Other comprehensive income (loss), net of tax                     217               217               217  
Adjustment of redeemable noncontrolling interests to redemption value                             (7 )     (7 )             (7 )
Dividends declared                           (264 )     (264 )             (264 )
Common stock plans activity             33                       33               33  
Share repurchases             (33 )             (267 )     (300 )             (300 )
Balance at June 30, 2019   $ 3     $     $ (8,182 )   $ 20,383     $ 12,204     $     $ 12,204  
                                                         
Balance at December 31, 2018   $ 3     $     $ (8,618 )   $ 20,087     $ 11,472     $     $ 11,472  
Net income (loss)                             1,598       1,598             1,598  
Other comprehensive income (loss), net of tax                     436               436               436  
Adjustment of redeemable noncontrolling interests to redemption value                             (2 )     (2 )             (2 )
Dividends declared             1               (529 )     (528 )             (528 )
Common stock plans activity             94                       94               94  
Share repurchases             (95 )             (771 )     (866 )             (866 )
Balance at June 30, 2019   $ 3     $     $ (8,182 )   $ 20,383     $ 12,204     $     $ 12,204  
(1) Excludes redeemable noncontrolling interests which are not considered equity. See “Note 14: Redeemable Noncontrolling Interests” for additional information.

 

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

 

29

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 April 1, 2018   $ 3     $     $ (9,095 )   $ 19,329     $ 10,237     $     $ 10,237  
Net income (loss)                             800       800             800  
Other comprehensive income (loss), net of tax                     232               232               232  
Adjustment of redeemable noncontrolling interests to redemption value                             (30 )     (30 )             (30 )
Dividends declared                           (248 )     (248 )             (248 )
Common stock plans activity             35                       35               35  
Share repurchases             (35 )             (384 )     (419 )             (419 )
Balance at July 1, 2018   $ 3     $     $ (8,863 )   $ 19,467     $ 10,607     $     $ 10,607  
                                                         
Balance at December 31, 2017   $ 3     $     $ (7,935 )   $ 17,895     $ 9,963     $     $ 9,963  
Net income (loss)                             1,433       1,433             1,433  
Other comprehensive income (loss), net of tax                     523               523               523  
Reclassification of stranded tax effects                     (1,451 )     1,451                      
Adjustment of redeemable noncontrolling interests to redemption value                             (19 )     (19 )             (19 )
Dividends declared             1               (500 )     (499 )             (499 )
Common stock plans activity             97                       97               97  
Share repurchases             (98 )             (793 )     (891 )             (891 )
Balance at July 1, 2018   $ 3     $     $ (8,863 )   $ 19,467     $ 10,607     $     $ 10,607  
(1) Excludes redeemable noncontrolling interests which are not considered equity. See “Note 14: Redeemable Noncontrolling Interests” for additional information.

 

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

 

30

RAYTHEON COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

    Six Months Ended  
(In millions)   Jun 30, 2019     Jul 1, 2018  
Cash flows from operating activities                
Net income
  $ 1,588     $ 1,414  
(Income) loss from discontinued operations, net of tax
           
Income from continuing operations
    1,588       1,414  
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
    291       274  
Stock-based compensation
    91       101  
Deferred income taxes
    3       8  
Changes in assets and liabilities
               
Receivables, net
    53       7  
Contract assets and contract liabilities
    (865 )     (442 )
Inventories
    (174 )     (133 )
Prepaid expenses and other current assets
    (17 )     62  
Income taxes receivable/payable
    (203 )     168  
Accounts payable
    (502 )     (73 )
Accrued employee compensation
    (157 )     (98 )
Other current liabilities
    17       (70 )
Accrued retiree benefits
    365       239  
Other, net
    (78 )     (18 )
Net cash provided by (used in) operating activities from continuing operations     412       1,439  
Net cash provided by (used in) operating activities from discontinued operations           1  
Net cash provided by (used in) operating activities     412       1,440  
Cash flows from investing activities                
Additions to property, plant and equipment
    (438 )     (366 )
Additions to capitalized internal-use software
    (25 )     (28 )
Maturities of short-term investments
          309  
Payments for purchases of acquired companies, net of cash received
    (8 )      
Proceeds from sale of business, net of transaction costs
          11  
Other
    2       (3 )
Net cash provided by (used in) investing activities     (469 )     (77 )
Cash flows from financing activities