10-Q 1 rtn-3302014x10q.htm FORM 10-Q RTN-3.30.2014-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 30, 2014
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from               to              
Commission File Number 1-13699
________________________________________________________________________________
RAYTHEON COMPANY
(Exact name of Registrant as Specified in its Charter)
________________________________________________________________________________ 
Delaware
 
95-1778500
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
870 Winter Street, Waltham, Massachusetts 02451
(Address of Principal Executive Offices) (Zip Code)
(781) 522-3000
(Registrant’s telephone number, including area code)
________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  S    No  £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  S    No  £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
S
  
Accelerated filer
 
£
Non-accelerated filer
 
£ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
£
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes  £    No  S
Number of shares of common stock outstanding as of April 21, 2014 was 312,857,000.



RAYTHEON COMPANY
TABLE OF CONTENTS
 
 
 
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 30, 2014 and March 31, 2013
 
 
 
 
Consolidated Statements of Equity (Unaudited) for the Three Months Ended March 30, 2014 and March 31, 2013
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 30, 2014 and March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 

2


Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of federal securities laws, including information regarding our financial outlook, future plans, objectives, business prospects, trends and anticipated financial performance including with respect to our liquidity and capital resources, capital expenditures, our cash tax payments and tax reserves, our pension expense and funding, the impact of new accounting pronouncements, our unrecognized tax benefits and the outcome of legal and administrative proceedings, claims, investigations, and commitments and contingencies. You can identify these statements by the fact that they include words such as “will,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” or variations of these words or similar expressions. These forward-looking statements are not statements of historical facts and represent only our current expectations regarding such matters. These statements inherently involve a wide range of known and unknown risks and uncertainties. Our actual actions and results could differ materially from what is expressed or implied by these statements. Specific factors that could cause such a difference include, but are not limited to, those set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 and other important factors disclosed previously and from time to time in our other filings with the Securities and Exchange Commission (SEC). Given these factors, as well as other variables that may affect our operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance nor use historical trends to anticipate results or trends in future periods. We expressly disclaim any obligation or intention to provide updates to the forward-looking statements and the estimates and assumptions associated with them.



3


PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RAYTHEON COMPANY
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
 
(Unaudited)
Mar 30, 2014
 
Dec 31, 2013

Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
3,036

 
$
3,296

Short-term investments
 
1,495

 
1,001

Contracts in process, net
 
5,211

 
4,870

Inventories
 
363

 
363

Prepaid expenses and other current assets
 
334

 
286

Total current assets
 
10,439

 
9,816

Property, plant and equipment, net
 
1,902

 
1,937

Goodwill
 
12,765

 
12,764

Other assets, net
 
1,435

 
1,450

Total assets
 
$
26,541

 
$
25,967

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities
 
 
 
 
Advance payments and billings in excess of costs incurred
 
$
2,612

 
$
2,350

Accounts payable
 
1,078

 
1,178

Accrued employee compensation
 
867

 
1,068

Other accrued expenses
 
1,422

 
1,214

Total current liabilities
 
5,979

 
5,810

Accrued retiree benefits and other long-term liabilities
 
4,244

 
4,226

Long-term debt
 
4,735

 
4,734

Commitments and contingencies (Note 8)
 


 

 
 
 
 
 
Equity
 
 
 
 
Raytheon Company stockholders’ equity
 
 
 
 
Common stock, par value, $0.01 per share, 1,450 shares authorized, 313 and 315
  shares outstanding at March 30, 2014 and December 31, 2013, respectively.
 
3

 
3

Additional paid-in capital
 
1,795

 
1,972

Accumulated other comprehensive loss
 
(4,962
)
 
(5,113
)
Retained earnings
 
14,582

 
14,173

Total Raytheon Company stockholders’ equity
 
11,418

 
11,035

Noncontrolling interests in subsidiaries
 
165

 
162

Total equity
 
11,583

 
11,197

Total liabilities and equity
 
$
26,541

 
$
25,967


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

4


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
 
Three Months Ended
(In millions, except per share amounts)
 
Mar 30, 2014
 
Mar 31, 2013
Net sales
 
 
 
 
Products
 
$
4,565

 
$
4,906

Services
 
943

 
973

Total net sales
 
5,508

 
5,879

Operating expenses
 
 
 
 
Cost of sales—products
 
3,391

 
3,800

Cost of sales—services
 
770

 
805

General and administrative expenses
 
559

 
568

Total operating expenses
 
4,720

 
5,173

Operating income
 
788

 
706

Non-operating (income) expense, net
 
 
 
 
Interest expense
 
51

 
53

Interest income
 
(3
)
 
(3
)
Other (income) expense, net
 

 
(7
)
Total non-operating (income) expense, net
 
48

 
43

Income from continuing operations before taxes
 
740

 
663

Federal and foreign income taxes
 
147

 
167

Income from continuing operations
 
593

 
496

Income (loss) from discontinued operations, net of tax
 
7

 
(2
)
Net income
 
600

 
494

Less: Net income attributable to noncontrolling interests in subsidiaries
 
4

 
6

Net income attributable to Raytheon Company
 
$
596

 
$
488

 
 
 
 
 
Basic earnings (loss) per share attributable to Raytheon Company common stockholders:
 
 
 
 
Income from continuing operations
 
$
1.87

 
$
1.50

Income (loss) from discontinued operations, net of tax
 
0.02

 
(0.01
)
Net income
 
1.89

 
1.49

Diluted earnings (loss) per share attributable to Raytheon Company common stockholders:
 
 
 
 
Income from continuing operations
 
$
1.87

 
$
1.49

Income (loss) from discontinued operations, net of tax
 
0.02

 
(0.01
)
Net income
 
1.89

 
1.49

Amounts attributable to Raytheon Company common stockholders:
 
 
 
 
Income from continuing operations
 
$
589

 
$
490

Income (loss) from discontinued operations, net of tax
 
7

 
(2
)
Net income
 
$
596

 
$
488

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

5


RAYTHEON COMPANY 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
(In millions)
Mar 30, 2014

 
Mar 31, 2013

Net income
$
600

 
$
494

Other comprehensive income (loss), before tax:
 
 
 
Foreign exchange translation
6

 
(45
)
Cash flow hedges and interest rate locks
(1
)
 
(4
)
Unrealized gains (losses) on investments and other, net

 
(2
)
Pension and other employee benefit plans, net:
 
 
 
Amortization of prior service cost included in net periodic cost
2

 
1

Amortization of net actuarial loss included in net income
222

 
294

Pension and other employee benefit plans, net
224

 
295

Other comprehensive income (loss), before tax
229

 
244

Income tax benefit (expense) related to items of other comprehensive income (loss)
(78
)
 
(102
)
Other comprehensive income (loss), net of tax
151

 
142

Total comprehensive income
751

 
636

  Less: Comprehensive income attributable to noncontrolling interests in subsidiaries
4

 
6

Comprehensive income attributable to Raytheon Company
$
747

 
$
630

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


6


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
 
Three Months Ended March 30, 2014 and March 31, 2013 (in millions)
 
Common
stock

 
Additional
paid-in
capital

 
Accumulated
other
comprehensive
 income (loss)

 
Retained
earnings

 
Total
Raytheon
Company
stockholders’
equity

 
Noncontrolling
interests in
subsidiaries

 
Total
equity

Balance at December 31, 2013
 
$
3

 
$
1,972

 
$
(5,113
)
 
$
14,173

 
$
11,035

 
$
162

 
$
11,197

Net income
 
 
 
 
 
 
 
596

 
596

 
4

 
600

Other comprehensive
   income (loss), net of tax
 
 
 
 
 
151

 
 
 
151

 
 
 
151

Dividends declared
 
 
 
 
 
 
 
(187
)
 
(187
)
 
 
 
(187
)
Distributions and other activity related to noncontrolling interests
 
 
 
 
 
 
 
 
 

 
(1
)
 
(1
)
Common stock plans activity
 
 
 
53

 
 
 
 
 
53

 
 
 
53

Share repurchases
 
 
 
(230
)
 
 
 
 
 
(230
)
 
 
 
(230
)
Balance at March 30, 2014
 
$
3

 
$
1,795

 
$
(4,962
)
 
$
14,582

 
$
11,418

 
$
165

 
$
11,583

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
3

 
$
2,928

 
$
(7,788
)
 
$
12,883

 
$
8,026

 
$
164

 
$
8,190

Net income
 
 
 
 
 
 
 
488

 
488

 
6

 
494

Other comprehensive income
(loss), net of tax
 
 
 
 
 
142

 
 
 
142

 
 
 
142

Dividends declared
 
 
 
 
 
 
 
(178
)
 
(178
)
 
 
 
(178
)
Common stock plans activity
 
 
 
46

 
 
 
 
 
46

 
 
 
46

Share repurchases
 
 
 
(234
)
 
 
 
 
 
(234
)
 
 
 
(234
)
Balance at March 31, 2013
 
$
3

 
$
2,740

 
$
(7,646
)
 
$
13,193

 
$
8,290

 
$
170

 
$
8,460

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


7


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014
 
Mar 31, 2013
Cash flows from operating activities
 
 
 
 
Net income
 
$
600

 
$
494

(Income) loss from discontinued operations, net of tax
 
(7
)
 
2

Income from continuing operations
 
593

 
496

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
 
107

 
108

Stock-based compensation
 
38

 
31

Deferred income taxes
 
(31
)
 
2

Tax benefit from stock-based awards
 
(11
)
 
(3
)
Changes in assets and liabilities
 
 
 
 
Contracts in process, net and advance payments and billings in excess of costs
    incurred
 
(77
)
 
(493
)
Inventories
 

 
(62
)
Prepaid expenses and other current assets
 
(51
)
 
88

Accounts payable
 
(100
)
 
(129
)
Income taxes receivable/payable
 
224

 
243

Accrued employee compensation
 
(201
)
 
(150
)
Other accrued expenses
 
5

 
23

Other long-term liabilities
 
(12
)
 
(15
)
Pension and other postretirement benefit plans
 
180

 
291

Other, net
 
(5
)
 
(8
)
Net cash provided by (used in) operating activities from continuing operations
 
659

 
422

Net cash provided by (used in) operating activities from discontinued operations
 
12

 
1

Net cash provided by (used in) operating activities
 
671

 
423

Cash flows from investing activities
 
 
 
 
Additions to property, plant and equipment
 
(39
)
 
(49
)
Proceeds from sales of property, plant and equipment
 

 
1

Additions to capitalized internal use software
 
(12
)
 
(9
)
Purchases of short-term investments
 
(1,345
)
 
(201
)
Sales of short-term investments
 
457

 

Maturities of short-term investments
 
400

 
153

Net cash provided by (used in) investing activities
 
(539
)
 
(105
)
Cash flows from financing activities
 
 
 
 
Dividends paid
 
(174
)
 
(164
)
Repurchases of common stock under stock repurchase programs
 
(200
)
 
(225
)
Repurchases of common stock to satisfy tax withholding obligations
 
(30
)
 
(9
)
Proceeds from exercise of stock options
 
1

 
14

Tax benefit from stock-based awards
 
11

 
3

Net cash provided by (used in) financing activities
 
(392
)
 
(381
)
Net increase (decrease) in cash and cash equivalents
 
(260
)
 
(63
)
Cash and cash equivalents at beginning of the year
 
3,296

 
3,188

Cash and cash equivalents at end of period
 
$
3,036

 
$
3,125


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

8


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 and majority-owned domestic and otherwise controlled foreign subsidiaries on the same basis as our annual audited financial statements. We condensed or omitted certain information and footnote disclosures normally included in our annual audited financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Our quarterly financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. 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 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 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. In addition, we reclassified certain prior year amounts to conform to our current year presentation.

Note 2: Changes in Estimates under Percentage of Completion Contract Accounting
We have a Company-wide standard and disciplined quarterly Estimate at Completion (EAC) process in which management reviews the progress and performance of our contracts. 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 contract (e.g., to estimate increases in wages and prices for materials and related support cost allocations), performance 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 referred to as offset obligations, required under certain contracts. 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 contracts, if we determine we will be successful in mitigating risks surrounding the technical, schedule, and cost aspects of those contracts 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 contract's percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recognized in the period the loss is determined.

Net EAC adjustments had the following impact on our operating results:
 
Three Months Ended
(In millions, except per share amounts)
Mar 30, 2014
 
Mar 31, 2013
Operating income
$
122

 
$
139

Income from continuing operations attributable to Raytheon Company
79

 
90

Diluted earnings per share (EPS) from continuing operations attributable to Raytheon Company
$
0.25

 
$
0.27



9


Note 3: Inventories
Inventories consisted of the following: 
(In millions)
 
Mar 30, 2014
 
Dec 31, 2013
Materials and purchased parts
 
$
75

 
$
73

Work in process
 
278

 
279

Finished goods
 
10

 
11

Total
 
$
363

 
$
363

We capitalize costs incurred in advance of contract award or funding in inventories if we determine that contract award or funding is probable. To the extent these are precontract costs, start-up costs have been excluded. We included capitalized precontract costs and other deferred costs of $90 million and $100 million in inventories as work in process at March 30, 2014 and December 31, 2013, respectively.

Note 4: Accounting Standards
New pronouncements issued but not effective until after March 30, 2014 are not expected to have a material impact on our financial position, results of operations or liquidity.

Note 5: Acquisitions
In pursuing our business strategies, we periodically acquire and make investments in certain businesses that meet strategic and financial criteria.

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

 
Intelligence,
Information and Services

 
Missile
Systems

 
Space and
Airborne
Systems

 
Total

Balance at December 31, 2013
 
$
1,800

 
$
2,708

 
$
4,150

 
$
4,106

 
$
12,764

Effect of foreign exchange rates and other
 
1

 

 

 

 
1

Balance at March 30, 2014
 
$
1,801

 
$
2,708

 
$
4,150

 
$
4,106

 
$
12,765


Note 6: Discontinued Operations
In pursuing our business strategies we have divested certain non-core businesses, investments, and assets when appropriate. All residual activity relating to our previously disposed businesses appears in discontinued operations.
We retained certain assets and liabilities of our previously-disposed businesses. At March 30, 2014 and December 31, 2013, we had $52 million and $56 million, respectively, of assets primarily related to the receivable associated with the Flight Options excise tax settlement, and our retained interest in general aviation finance receivables previously sold by Raytheon Aircraft. At March 30, 2014 and December 31, 2013, we had $17 million and $16 million, respectively, of liabilities primarily related to certain environmental and product liabilities, non-income tax obligations, various contract obligations and aircraft lease obligations. We also retained certain pension assets and obligations, which we include in our pension disclosures.

Note 7: 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, and 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.
The fair value amounts of asset derivatives included in other assets, net and liability derivatives included in other accrued expenses on our consolidated balance sheets related to foreign currency forward contracts were as follows:
 
 
Asset Derivatives
 
Liability Derivatives
(In millions)
 
Mar 30, 2014
 
Dec 31, 2013
 
Mar 30, 2014
 
Dec 31, 2013
Derivatives designated as hedging instruments
 
$
22

 
$
20

 
$
27

 
$
23

Derivatives not designated as hedging instruments
 
4

 
3

 
5

 
3

Total
 
$
26

 
$
23

 
$
32

 
$
26


10


The fair values of these derivatives are Level 2 in the fair value hierarchy at March 30, 2014 and December 31, 2013 because they are determined based on a market approach utilizing externally quoted forward rates for similar contracts.
We recognized the following pretax gains (losses) related to foreign currency forward contracts designated as cash flow hedges: 
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014
 
Mar 31, 2013
Effective portion
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive loss (AOCL)
 
$
(2
)
 
$
(1
)
Gain (loss) reclassified from AOCL to operating income
 

 
2

Amount excluded from effectiveness assessment and ineffective portion
 
 
 
 
Gain (loss) recognized in operating income
 

 


Pretax losses related to foreign currency forward contracts not designated as cash flow hedges were less than $1 million and $2 million for the first quarters of 2014 and 2013, respectively.

We use foreign currency forward contracts to fix the functional currency value of specific commitments, payments and receipts. The aggregate notional amount of the outstanding foreign currency forward contracts was $1,400 million and $1,396 million at March 30, 2014 and December 31, 2013, respectively.

Our foreign currency forward contracts contain off-set or netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. At March 30, 2014 and December 31, 2013, the fair value of our counterparty default exposure was less than $1 million and spread across numerous highly rated counterparties.

There were no interest rate swaps outstanding at March 30, 2014 or December 31, 2013.

Other Financial Instruments—We invest in marketable securities in accordance with our short-term investment policy and cash management strategy. These marketable securities are classified as available-for-sale and are recorded at fair value as short-term investments in our consolidated balance sheets. These investments are deemed Level 2 assets under the fair value hierarchy at March 30, 2014 and December 31, 2013, as their fair value is determined under a market approach using valuation models that utilize observable inputs, including maturity date, issue date, settlements date, and current rates. At March 30, 2014 and December 31, 2013, we had short-term investments of $1,495 million and $1,001 million, respectively, consisting of highly rated bank certificates of deposit with a minimum long-term debt rating of A or A2 and a minimum short-term debt rating of A-1 and P-1. The amortized cost of these securities closely approximated their fair value at March 30, 2014 and December 31, 2013. There were no securities deemed to have other than temporary declines in value for the first quarter of 2014. In the first quarter of 2014, we recorded unrealized gains on short-term investments of less than $1 million, net of tax, in AOCL. In the first three months of 2014, we recorded sales of short-term investments of $457 million, which resulted in gains of less than $1 million recorded in other (income) expense, net. For purposes of computing realized gains and losses on available-for-sale securities, we determine cost on a specific identification basis.

In addition to the financial instruments discussed above, we hold other financial instruments, including cash and cash equivalents, notes receivable and debt. The carrying amounts for cash and cash equivalents and notes receivable approximated their fair values. The carrying value of long-term debt of $4,735 million at March 30, 2014 and $4,734 million at December 31, 2013, was recorded at amortized cost. The estimated fair value of long-term debt of approximately $5,172 million and $5,036 million at March 30, 2014 and December 31, 2013, respectively, was determined based on quoted prices in inactive markets, which falls within Level 2 of the fair value hierarchy.

In addition, we did not have any transfers of assets or liabilities between levels of the fair value hierarchy during the first quarter of 2014.

Note 8: Commitments and Contingencies
Environmental MattersWe are involved in various stages of investigation and cleanup related to remediation of various environmental sites. Our estimate of the liability of total environmental remediation costs includes the use of a discount rate and takes into account that a portion of these costs is eligible for future recovery through the pricing of our products and services to the U.S. Government. We 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 contracts in process, net. Our estimates regarding remediation costs to be incurred were as follows:

11


(In millions, except percentages)
 
Mar 30, 2014
 
Dec 31, 2013
Total remediation costs—undiscounted
 
$
208

 
$
198

Weighted average discount rate
 
5.6
%
 
5.6
%
Total remediation costs—discounted
 
$
148

 
$
133

Recoverable portion
 
97

 
90

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 of us or our affiliates. These instruments expire on various dates through 2023. 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 30, 2014
 
Dec 31, 2013
Guarantees
 
$
348

 
$
378

Letters of credit
 
1,768

 
1,424

Surety bonds
 
230

 
238


Included in guarantees and letters of credit described above were $203 million and $256 million, respectively, at March 30, 2014, and $233 million and $268 million, respectively, at December 31, 2013, related to our joint venture in Thales-Raytheon Systems Co. Ltd. (TRS). We provide these guarantees and letters of credit to TRS 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 TRS and other affiliates failing to satisfy their loans, project performance and meet other contractual obligations described above. At March 30, 2014, we believe the risk that TRS and other affiliates will not be able to perform or meet their obligations is minimal for the foreseeable future based on their current financial condition. All obligations were current at March 30, 2014. At March 30, 2014 and December 31, 2013, we had an estimated liability of $7 million and $8 million, respectively, related to these guarantees and letters of credit.
In 1997, we provided a first loss guarantee of $133 million on $1.3 billion of U.S. Export-Import Bank loans (maturing in 2015) to the Brazilian Government related to IDS' System for the Vigilance of the Amazon (SIVAM) program. Loan repayments by the Brazilian Government were current at March 30, 2014.
We have entered into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. At March 30, 2014, the aggregate amount of our offset agreements had an outstanding notional value of approximately $5 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. We have historically not been required to pay any such penalties.
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, the Defense Contract Management Agency, the Inspector General of the Department of Defense and other departments and agencies, the Government Accountability Office, the Department of Justice

12


and Congressional Committees. From time to time, these and other agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. 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 Department of Justice 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 and the International Traffic in Arms Regulations) 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.
On July 22, 2010, Raytheon Systems Limited (RSL) was notified by the UK Border Agency (UKBA) that it had been terminated for cause on a program. The termination notice included allegations that RSL had failed to perform on certain key milestones and other matters in addition to claiming entitlement to recovery of certain losses incurred and previous payments made to RSL. We believe that RSL performed well and delivered substantial capabilities to the UKBA under the program, which has been operating successfully and providing actionable information since live operations began in May 2009. As a result of the termination notice, we adjusted our estimated amounts of revenue and cost under the program in the second quarter of 2010. On July 29, 2010, RSL filed a dispute notice on the grounds that the termination by the UKBA was not valid. On August 18, 2010, the UKBA initiated arbitration proceedings on this issue. On March 22, 2011, the UKBA gave notice that it had presented a demand to draw on the approximately $80 million of letters of credit provided by RSL upon the signing of the contract with the UKBA in 2007. On March 23, 2011, the UKBA submitted a detailed claim in the arbitration of approximately £350 million (approximately $582 million based on foreign exchange rates as of March 30, 2014) for damages and clawback of previous payments, plus interest and arbitration costs, excluding any credit for capability delivered or draw on the letters of credit. The UKBA also asserted that additional amounts may be detailed in the claim in the future if estimates of its damages change, and for continuing post-termination losses and any re-procurement costs, which have not been quantified. At RSL's request, on March 29, 2011, the Arbitration Tribunal issued an interim order restraining the UKBA from drawing down on the letters of credit pending a hearing on the issue. Following the hearing, the Tribunal lifted the restraint on the basis that, at this early stage of the proceedings, the Tribunal had not heard the evidence needed to decide the merits of whether the contractual conditions for a drawdown had been established. The Tribunal also concluded that any decision on the UKBA's right to call on the letters of credit is inextricably intertwined with the ultimate decision on the merits in the arbitration. The Tribunal also preserved RSL's right to claim damages should RSL later establish that the drawdown was not valid. As a result, on April 6, 2011, the UKBA drew the $80 million on the letters of credit.
As a result of the Tribunal’s decision that the letters of credit are inextricably intertwined with the ultimate decision on the merits in the arbitration, we were no longer able to evaluate, independently from the overall claim, the probability of recovery of any amounts drawn on the letters of credit. We therefore recorded $80 million of costs related to the UKBA drawdown (UKBA LOC Adjustment), which was included in the operating expenses of our Intelligence, Information and Services (IIS) segment in the first quarter of 2011.
In June 2011, RSL submitted in the arbitration its defenses to the UKBA claim as well as substantial counterclaims in the amount of approximately £500 million (approximately $831 million based on foreign exchange rates as of March 30, 2014) against the UKBA for the collection of receivables, damages and interest. On October 3, 2011, the UKBA filed its reply to RSL's counterclaims, and increased its claim amount by approximately £32 million, to include additional civil service and post termination costs, and approximately £33 million for interest, raising the gross amount of the UKBA claim for damages and clawback of previous payments to approximately £415 million (approximately $690 million based on foreign exchange rates as of March 30, 2014). On January 6, 2012, RSL filed its response to the UKBA's reply. RSL is pursuing vigorously the collection of all receivables for the program and damages in connection with the wrongful termination and is mounting a strong defense to the UKBA's alleged claims for losses and previous payments. RSL has also settled substantially all subcontractor claims, novated all key subcontracts to the UKBA and agreed with the UKBA that RSL's exit obligations to operate the previously delivered capability ended in April 2011. Effective April 15, 2011, the UKBA took over responsibility for operating the previously delivered capability. In March 2013, the UKBA updated the total net amount of its claims to approximately £302 million (approximately $502 million based on foreign exchange rates as of March 30, 2014) for damages, clawback of previous payments and interest, and inclusive of a credit for capability delivered by RSL. Arbitration hearings commenced in late 2012 and were completed in 2013. We expect a decision in the first half of 2014.

13


The receivables and other assets remaining under the program for technology and services delivered were approximately $40 million at March 30, 2014 and December 31, 2013. We believe the remaining receivables and other assets are probable of recovery in litigation or arbitration. We currently do not believe it is probable that RSL is liable for losses, previous payments (which includes the $80 million related to the drawdown on the letters of credit), clawback or other claims asserted by the UKBA either in its March 2011 arbitration filing or its October 2011 reply. Due to the inherent uncertainties in litigation and arbitration, and the complexity and technical nature of actual and potential claims and counterclaims, it is reasonably possible that the ultimate amount of any resolution of the termination could be less or greater than the amounts we have recorded. For the same reasons, at this time, we are unable to estimate a range of the possible loss or recovery, if any, beyond the claim and counterclaim amounts. If we fail to collect the receivable balances or are required to make payments against claims or other losses asserted by the UKBA in excess of the amounts we have recorded, it could have a material adverse effect on our financial position, results of operations or liquidity.

On June 29, 2012 and July 13, 2012, we received a contracting officer’s final decision (COFD) for 2004 and 2005 incurred costs at SAS. The COFDs demand a total payment of $241 million for costs, interest and penalties associated with several issues, the largest of which relates to specific research and development and capital projects undertaken by SAS between 2000 and 2005. To date, no COFDs have been provided for 2000 to 2003 periods at SAS on these issues. The Government alleges that the costs incurred on the projects should have been charged directly to U.S. Government contracts rather than through indirect rates and that these costs should not be recoverable. We strongly disagree with the Government's position. We have requested a deferment of the payment and in February and May 2013, we filed complaints in the U.S. COFC challenging the 2004 and 2005 COFDs, respectively. Due to the inherent uncertainties of litigation, we cannot estimate a range of potential loss. We believe that we appropriately charged the disputed costs based on government accounting standards and applicable precedent and properly disclosed our approach to the Government. We also believe that in many cases, the statute of limitations has run on the issues. Based upon the foregoing, we do not expect the results of the COFDs to have a material impact on our financial position, results of operations or liquidity.

In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened against, or initiated by, us. We do not expect any of these proceedings to result in any additional liability or gains that would materially affect our financial position, results of operations or liquidity. In connection with certain of our legal matters, we may be entitled to insurance recovery for qualified legal costs. We do not expect any insurance recovery to have a material impact on the financial exposure that could result from these matters.
Product Warranty—We provide for product warranties in conjunction with certain product sales for which we recognize revenue upon delivery.
Activity related to product warranty accruals was as follows: 
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014
 
Mar 31, 2013
Beginning balance
 
$
30

 
$
33

Provisions for warranties
 

 
3

Warranty services provided
 
(1
)
 
(2
)
Ending balance
 
$
29

 
$
34

We account for warranty provision costs incurred under our long-term contracts using the cost-to-cost measure of progress as contracts costs, as the estimation of these costs is integral in determining the price of the related long-term contracts. The table above excludes these costs.

Note 9: Stockholders’ Equity
The changes in shares of our common stock outstanding were as follows:
 
Three Months Ended
(In millions)
Mar 30, 2014
 
Mar 31, 2013
Beginning balance
314.5

 
328.1

Stock plans activity
0.6

 
0.7

Stock repurchases
(2.3
)
 
(4.4
)
Ending balance
312.8

 
324.4


14


In September 2011, our Board of Directors authorized the repurchase of up to $2.0 billion of our outstanding common stock. Additionally, in November 2013, our Board of Directors authorized the repurchase of up to an additional $2.0 billion of our outstanding common stock. At March 30, 2014, we had approximately $2.1 billion available under these repurchase programs. Stock repurchases will take place from time to time at management’s discretion depending on market conditions.

Stock repurchases also include shares surrendered by employees to satisfy tax withholding obligations in connection with restricted stock awards, restricted stock units and stock options issued to employees.

Our stock repurchases were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014

Mar 31, 2013
 
 
$
Shares


$
Shares

Stock repurchased under our stock repurchase programs
 
$
200

2.1


$
225

4.2

Stock repurchased to satisfy tax withholding obligations
 
30

0.2


9

0.2

Total stock repurchases
 
$
230

2.3

 
$
234

4.4


In March 2014, our Board of Directors authorized a 10% increase to our annual dividend payout rate from $2.20 to $2.42 per share. Our Board of Directors also declared dividends of $0.605 per share during the first three months of 2014, compared to dividends of $0.550 per share during the first three months of 2013. Dividends are subject to quarterly approval by our Board of Directors.
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, net income attributable to Raytheon Company, and our actual weighted-average shares and participating securities 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 and diluted EPS calculations. As a result, we have included all of our outstanding unvested restricted stock and Long-Term Performance Plan (LTPP) awards that meet the retirement eligible criteria in our calculation of basic and diluted EPS. We disclose EPS for common stock and unvested share-based payment awards, and separately disclose distributed and undistributed earnings. Distributed earnings represent common stock dividends and dividends earned on unvested share-based payment awards of retirement eligible employees. Undistributed earnings represent earnings that were available for distribution but were not distributed. Common stock and unvested share-based payment awards earn dividends equally.

EPS from continuing operations attributable to Raytheon Company common stockholders and unvested share-based payment awards was as follows: 
 
 
Three Months Ended
 
 
Mar 30, 2014
 
Mar 31, 2013
Basic EPS attributable to Raytheon Company common stockholders:
 
 
 
 
Distributed earnings
 
$
0.59

 
$
0.55

Undistributed earnings
 
1.28

 
0.95

Total
 
$
1.87

 
$
1.50

Diluted EPS attributable to Raytheon Company common stockholders:
 
 
 
 
Distributed earnings
 
$
0.59

 
$
0.54

Undistributed earnings
 
1.28

 
0.95

Total
 
$
1.87

 
$
1.49

Basic and diluted EPS from discontinued operations attributable to Raytheon Company common stockholders and unvested share-based payment awards was earnings of $0.02 and a loss of $0.01 for the first quarters of 2014 and 2013, respectively.

15



The income attributable to participating securities was as follows:
 
Three Months Ended
(In millions)
Mar 30, 2014
 
Mar 31, 2013
Income from continuing operations attributable to participating securities
$
11

 
$
9

Income (loss) from discontinued operations, net of tax attributable to participating securities(1)

 

Net income attributable to participating securities
$
11

 
$
9

(1)
Income (loss) from discontinued operations, net of tax attributable to participating securities was earnings of less than $1 million and a loss of less than $1 million for the first quarters of 2014 and 2013, respectively.
The weighted-average shares outstanding for basic and diluted EPS were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014
 
Mar 31, 2013
Shares for basic EPS (including 6.0 and 6.3 participating securities for the three months ended March 30, 2014 and March 31, 2013, respectively).
 
315.0

 
327.4

Dilutive effect of stock options and LTPP
 
0.8

 
0.8

Shares for diluted EPS
 
315.8

 
328.2

There were no stock options with exercise prices greater than the average market price (anti-dilutive) that were excluded from our calculation of diluted EPS for the first quarters of 2014 and 2013. Stock options to purchase the following number of shares of common stock had exercise prices that were less than the average market price (dilutive) of our common stock and were included in our calculations of diluted EPS:
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014
 
Mar 31, 2013
Stock options included in calculations of EPS (dilutive)
 

 
0.5

Stock-based Compensation Plans
Restricted stock activity for the first three months of 2014 was as follows:
(In millions)
Number of Shares
Outstanding unvested at December 31, 2013
5.3

Forfeited
(0.1
)
Outstanding unvested at March 30, 2014
5.2

During the first three months of 2014 and 2013, we issued 0.7 million and 0.4 million shares, respectively, of our common stock in connection with the vesting of our 2011–2013 and 2010–2012 LTPP awards. During the same periods, we also granted our 2014–2016 and 2013–2015 LTPP awards with an aggregate target award of 0.3 million and 0.4 million shares, respectively, for each period.
The performance goals for the 2014–2016 LTPP award are independent of each other and based on three metrics, as defined in the 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.

Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign exchange translation adjustments, gains and losses on derivative instruments qualified as cash flow hedges, unrealized gains (losses) on investments, and gains and losses associated with pension and other postretirement benefits. The computation of other comprehensive income (loss) and its components are presented in the consolidated statements of comprehensive income.


16


Other comprehensive income (loss) consisted of the following activity during the first three months of 2014 and 2013:
 
Foreign exchange translation

 
Cash flow hedges and interest rate locks

 
Unrealized gains (losses) on investments and other, net

 
Pension and other employee benefit plans, net

 
Total

 
 
 
 
 
(In millions)
 
 
 
 
Balance at December 31, 2013
$
47

 
$
(8
)
 
$
(9
)
 
$
(5,143
)
 
$
(5,113
)
Before tax amount
6

 
(1
)
 

 
224

 
229

Tax (expense) or benefit

 
1

 

 
(79
)
 
(78
)
Net of tax amount
6

 

 

 
145

 
151

Balance at March 30, 2014
$
53

 
$
(8
)
 
$
(9
)
 
$
(4,998
)
 
$
(4,962
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
60

 
$
(5
)
 
$
(10
)
 
$
(7,833
)
 
$
(7,788
)
Before tax amount
(45
)
 
(4
)
 
(2
)
 
295

 
244

Tax (expense) or benefit

 
2

 

 
(104
)
 
(102
)
Net of tax amount
(45
)
 
(2
)
 
(2
)
 
191

 
142

Balance at March 31, 2013
$
15

 
$
(7
)
 
$
(12
)
 
$
(7,642
)
 
$
(7,646
)

Material amounts reclassified out of AOCL were related to amortization of net actuarial loss associated with our pension and other employee benefit plans, and were $222 million and $294 million before tax in the first three months of 2014 and 2013, respectively. This component of AOCL is included in the calculation of net periodic benefit expense (income) (see "Note 10: Pension and Other Employee Benefits" for additional details).

The defined benefit pension and other employee benefit plans is shown net of tax benefits of $2,701 million and $2,780 million at March 30, 2014 and December 31, 2013, respectively. The cash flow hedges and interest rate locks are shown net of tax benefits of $5 million and $4 million at March 30, 2014 and December 31, 2013, respectively. The unrealized gains (losses) on investments and other are shown net of tax benefits of $3 million and $4 million at March 30, 2014 and December 31, 2013, respectively. We expect approximately $3 million of after-tax net unrealized losses on our cash flow hedges at March 30, 2014 to be reclassified into earnings at then-current values over the next twelve months as the underlying hedged transactions occur.

Note 10: Pension and Other Employee Benefits
We have pension plans covering the majority of our employees, including certain employees in foreign countries (Pension Benefits). Our primary pension obligations relate to our domestic IRS qualified pension plans. We also provide certain health care and life insurance benefits to retired employees and to eligible employees upon retirement through other postretirement benefit plans (Other Benefits).

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 30, 2014
 
Dec 31, 2013
Marketable securities held in trust
 
$
486

 
$
479


Included in marketable securities held in trust in the table above was $307 million and $304 million at March 30, 2014 and December 31, 2013, respectively, related to the nonqualified defined contribution plans. The liabilities related to the nonqualified defined contribution plans were $303 million and $300 million at March 30, 2014 and December 31, 2013, respectively.

17


The components of net periodic pension expense (income) were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014
 
Mar 31, 2013
Service cost
 
$
117

 
$
150

Interest cost
 
281

 
249

Expected return on plan assets
 
(401
)
 
(376
)
Amortization of prior service cost included in net periodic pension expense
 
2

 
2

Amortization of net actuarial loss included in net income
 
222

 
293

Net periodic pension expense
 
$
221

 
$
318

Net periodic pension expense (income) includes income of $2 million and expense of $1 million from foreign Pension Benefit plans in the first quarters of 2014 and 2013, respectively.
The components of net periodic expense (income) related to our Other Benefits were as follows: 
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014
 
Mar 31, 2013
Service cost
 
$
1

 
$
2

Interest cost
 
9

 
8

Expected return on plan assets
 
(8
)
 
(8
)
Amortization of prior service cost included in net periodic postretirement expense
 

 
(1
)
Amortization of net actuarial loss included in net income
 

 
1

Net periodic postretirement expense
 
$
2

 
$
2

Long-term pension and other postretirement benefit plan liabilities were as follows:
(In millions)
 
Mar 30, 2014
 
Dec 31, 2013
Long-term pension liabilities
 
$
3,339

 
$
3,387

Other postretirement benefit plan liabilities
 
286

 
288

Total long-term pension and other postretirement benefit plan liabilities
 
$
3,625

 
$
3,675


We may make both required and discretionary contributions to our pension plans. Required contributions are primarily determined in accordance with the Pension Protection Act (PPA), which amended the Employee Retirement Income Security Act of 1974 (ERISA) rules and are affected by the actual return on plan assets and plan funded status. The funding requirements under the PPA require us to fully fund our pension plans over a rolling seven-year period as determined annually based upon the funded status at the beginning of the year. In July 2012, the Surface Transportation Extension Act, which is also referred to as the Moving Ahead for Progress in the 21st Century Act (STE Act), was passed by Congress and signed by the President. The STE Act includes a provision for temporary pension funding relief due to the low interest rate environment. The provision reduced our cash funding requirements primarily in 2013 and 2012. We made the following required contributions to our pension and other postretirement benefit plans:
 
Three Months Ended
(In millions)
Mar 30, 2014
 
Mar 31, 2013
Required pension contributions
$
43

 
$
29


We did not make any discretionary contributions to our pension plans during the first quarters of 2014 and 2013; however, we periodically evaluate whether to make discretionary contributions.

Note 11: Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We have participated in the IRS Compliance Assurance Process (CAP) program since 2011. We continue to participate in the CAP program for the 2013 and 2014 tax years. In the first quarter of 2014 the IRS completed the examination for the 2012 tax year, which completed all examinations through the 2012 tax year. We are also under audit by multiple state and foreign tax authorities.


18


We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less than amounts accrued and reflected in our consolidated balance sheets. Accordingly, we may record adjustments to the amounts for federal, foreign and state tax-related liabilities in the future as we revise estimates or we settle or otherwise resolve the underlying matters. In the ordinary course of business, we may take new positions that could increase or decrease our unrecognized tax benefits in future periods.

In the first quarter of 2014, a foreign subsidiary authorized and completed a transaction which resulted in a taxable dividend of approximately $115 million. The transaction does not affect our indefinite reinvestment assertion because it generated a net tax benefit of approximately $80 million. We do not provide for deferred taxes on undistributed earnings of non-U.S. subsidiaries when the earnings have been determined to be indefinitely invested or are expected to be remitted free of additional tax. This transaction decreased our first quarter 2014 effective tax rate by approximately 10.8%.

The balance of our unrecognized tax benefits, exclusive of interest, was $110 million and $118 million at March 30, 2014 and December 31, 2013, respectively, and $119 million and $129 million at March 31, 2013 and December 31, 2012, respectively, the majority of which would affect our earnings if recognized.

Note 12: Business Segment Reporting
Our reportable segments, organized based on capabilities and technologies, are: Integrated Defense Systems; Intelligence, Information and Services; Missile Systems; and Space and Airborne Systems. Segment total net sales and operating income generally include intersegment sales and profit 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. Corporate and Eliminations includes corporate expenses and intersegment sales and profit eliminations. Corporate expenses represent unallocated costs and certain other corporate costs not considered part of management’s evaluation of reportable segment operating performance.

Segment financial results were as follows:
 
 
Three Months Ended
Total Net Sales (in millions)
 
Mar 30, 2014

Mar 31, 2013
Integrated Defense Systems
 
$
1,481

 
$
1,596

Intelligence, Information and Services
 
1,450

 
1,521

Missile Systems
 
1,574

 
1,636

Space and Airborne Systems
 
1,398

 
1,582

Corporate and Eliminations
 
(395
)
 
(456
)
Total
 
$
5,508

 
$
5,879

 
 
Three Months Ended
Intersegment Sales (in millions)
 
Mar 30, 2014

Mar 31, 2013
Integrated Defense Systems
 
$
30

 
$
24

Intelligence, Information and Services
 
200

 
191

Missile Systems
 
31

 
39

Space and Airborne Systems
 
134

 
202

Total
 
$
395

 
$
456

 
 
Three Months Ended
Operating Income (in millions)
 
Mar 30, 2014

Mar 31, 2013
Integrated Defense Systems
 
$
226

 
$
262

Intelligence, Information and Services
 
125

 
124

Missile Systems
 
208

 
214

Space and Airborne Systems
 
190

 
227

FAS/CAS Adjustment
 
87

 
(71
)
Corporate and Eliminations
 
(48
)
 
(50
)
Total
 
$
788

 
$
706


We must calculate our pension and other postretirement benefit (PRB) costs under both Financial Accounting Standards (FAS) requirements under GAAP and U.S. Government cost accounting standards (CAS). GAAP outlines the methodology used to

19


determine pension expense or income for financial reporting purposes, which is not indicative of the funding requirements for pension and PRB plans that we determine by other factors. CAS prescribes the allocation to and recovery of pension and PRB costs on U.S. Government contracts. The results of each segment only include pension and PRB expense as determined under CAS. The CAS requirements for pension costs and its calculation methodology differ from the FAS requirements and calculation methodology. As a result, while both FAS and CAS use long-term assumptions in their calculation methodologies, each method results in different calculated amounts of pension and PRB cost. The FAS/CAS Adjustment, which is reported as a separate line in our segment results above, represents the difference between our pension and PRB expense or income under FAS in accordance with GAAP and our pension and PRB expense under CAS.
The components of our FAS/CAS Adjustment were as follows: 
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014

Mar 31, 2013
FAS/CAS Pension Adjustment
 
$
86

 
$
(72
)
FAS/CAS PRB Adjustment
 
1

 
1

FAS/CAS Adjustment
 
$
87

 
$
(71
)
The components of total operating income related to Corporate and Eliminations were as follows:  
 
 
Three Months Ended
(In millions)
 
Mar 30, 2014

Mar 31, 2013
Intersegment profit eliminations
 
$
(39
)

$
(42
)
Corporate
 
(9
)

(8
)
Total
 
$
(48
)
 
$
(50
)

 
 
Three Months Ended
Intersegment Operating Income (in millions)
 
Mar 30, 2014

Mar 31, 2013
Integrated Defense Systems
 
$
2

 
$
2

Intelligence, Information and Services
 
20

 
16

Missile Systems
 
3

 
6

Space and Airborne Systems
 
14

 
18

Total
 
$
39

 
$
42


Total assets for each of our business segments were as follows:
Total Assets (in millions)
 
Mar 30, 2014
 
Dec 31, 2013
Integrated Defense Systems
 
$
4,042

 
$
3,897

Intelligence, Information and Services
 
3,848

 
3,772

Missile Systems
 
6,471

 
6,316

Space and Airborne Systems
 
6,386

 
6,399

Corporate
 
5,794

 
5,583

Total
 
$
26,541

 
$
25,967


20


With respect to the unaudited consolidated financial information of Raytheon Company for the three months ended March 30, 2014 and March 31, 2013, 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 24, 2014, 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 (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 Shareholders of Raytheon Company:
We have reviewed the accompanying consolidated balance sheet of Raytheon Company and its subsidiaries as of March 30, 2014, and the related consolidated statements of operations, of comprehensive income, and of equity for the three-month periods ended March 30, 2014 and March 31, 2013 and the consolidated statements of cash flows for the three-month periods ended March 30, 2014 and March 31, 2013. This interim financial information is the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Public Company Accounting Oversight Board (United States), 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.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2013, 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 11, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2013, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/  PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 24, 2014

21


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We develop technologically advanced, integrated products, services and solutions in four core defense markets: sensing; effects; command, control, communications and intelligence (C3I); and mission support; as well as other important markets, such as cyber and information security. We serve both domestic and international customers, as both a prime contractor and subcontractor on a broad portfolio of defense and related programs primarily for government customers.

We operate in four segments: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); and Space and Airborne Systems (SAS). For a more detailed description of our segments, see “Business Segments” within Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2013.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 and our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

CONSOLIDATED RESULTS OF OPERATIONS
As described in our Cautionary Note Regarding Forward-Looking Statements on page 3 of this Form 10-Q, our interim period results of operations and period-to-period comparisons of such results, particularly at a segment level, may not be indicative of our future operating results. Additionally, we use a fiscal calendar, which may cause the number of work days in the current and comparable prior interim period to differ and could affect period-to-period comparisons. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context.

As described in "Note 1: Basis of Presentation” within Item 1 of this Form 10-Q, we prepared the accompanying unaudited consolidated financial statements of Raytheon Company on the same basis as our annual audited consolidated financial statements.

Total Net Sales
The composition of external net sales by products and services for each segment for the first quarter of 2014 was relatively consistent with the year ended December 31, 2013, which was approximately the following:
External Net Sales by Products and Services (% of segment total external net sales)
 
IDS

IIS

MS

SAS

Products
95
%
50
%
95
%
90
%
Services
5
%
50
%
5
%
10
%

 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 30, 2014
 
Mar 31, 2013
 
Mar 30, 2014
 
Mar 31, 2013
Net sales
 
 
 
 
 
 
 
Products
$
4,565

 
$
4,906

 
82.9
%
 
83.4
%
Services
943

 
973

 
17.1
%
 
16.6
%
Total net sales
$
5,508

 
$
5,879

 
100.0
%
 
100.0
%

Total Net Sales - First Quarter of 2014 vs. First Quarter of 2013The decrease in total net sales of $371 million in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to lower external net sales of $121 million at IDS and $116 million at SAS. The decrease in external net sales at IDS was primarily due to lower net sales on an international Patriot program awarded in the second quarter of 2011 driven by the scheduled completion of certain production phases, lower net sales from the scheduled completion of certain production phases on an international Patriot program awarded in the first quarter of 2008, and lower net sales on a close combat tactical radar program due to planned decreases in production. The decrease in total net sales at IDS was partially offset by higher net sales from various other international air and missile defense programs, driven principally by new awards. The decrease in external net sales at SAS was primarily due to lower net sales on classified programs, and lower net sales on integrated communications systems programs principally driven by lower U.S Army and U.S. Air Force customer requirements on tactical communications systems.


22


Products and Services Net Sales - First Quarter of 2014 vs. First Quarter of 2013The decrease in products net sales of $341 million in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to lower external products net sales of $151 million at IDS, $103 million at SAS and $57 million at MS. The decrease in external products net sales at IDS and SAS were driven principally by the programs described above. The decrease in external products net sales at MS was primarily due to lower net sales on land warfare systems programs driven principally by planned declines in production due to the U.S. Army budget environment. The decrease in services net sales of $30 million in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to lower external services net sales at IIS of $50 million, driven principally by lower net sales on training programs supporting the U.S. Army's Warfighter FOCUS activities due to a decrease in customer-determined activity levels.

Sales to Major Customers - First Quarter of 2014 vs. First Quarter of 2013The following is a breakdown of net sales to major customers:
 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 30, 2014
 
Mar 31, 2013
 
Mar 30, 2014
 
Mar 31, 2013
Sales to the U.S. Government(1)
$
3,989

 
$
4,277

 
72
%
 
73
%
Sales to the U.S. Department of Defense(1)
3,763

 
3,994

 
68
%
 
68
%
Total international sales(2)
1,469

 
1,536

 
27
%
 
26
%
Foreign direct commercial sales(1)
805

 
783

 
15
%
 
13
%
Foreign military sales through the U.S. Government
664

 
753

 
12
%
 
13
%
(1)
Excludes foreign military sales through the U.S. Government.
(2)
Includes foreign military sales through the U.S. Government.

Total Cost of Sales
Cost of sales, for both products and services, consists of labor, materials and subcontractors costs, as well as related allocated costs. For each of our contracts, we manage the nature and amount of direct costs at the contract level, and manage indirect costs through cost pools as required by government accounting regulations. The estimate of the actual amount of direct and indirect costs forms the basis for estimating our total costs at completion of the contract.
 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 30, 2014
 
Mar 31, 2013
 
Mar 30, 2014
 
Mar 31, 2013
Cost of sales
 
 
 
 
 
 
 
Products
$
3,391

 
$
3,800

 
61.6
%
 
64.6
%
Services
770

 
805

 
14.0
%
 
13.7
%
Total cost of sales
$
4,161

 
$
4,605

 
75.5
%
 
78.3
%

Total Cost of Sales - First Quarter of 2014 vs. First Quarter of 2013The decrease in total cost of sales of $444 million in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to a $158 million change in the FAS/CAS Adjustment and lower external cost of sales of $78 million at IDS, $76 million at IIS, $67 million at SAS and $60 million at MS. The decrease in the FAS/CAS Adjustment was driven principally by a $97 million decrease in our FAS expense and by a $61 million increase in our CAS expense, which is included in the results of each segment and generally recovered through pricing of our products and services to the U.S. Government. The changes in both our FAS expense and CAS expense are described in our Segment Results beginning on page 27. The decreases in external cost of sales at IDS and SAS were driven principally by the activity on the programs described above in Total Net Sales. The decrease in external cost of sales at IIS was primarily due to lower activity on training programs supporting the U.S. Army's Warfighter FOCUS activities due to a decrease in customer-determined activity levels and on various classified programs. The decrease in external cost of sales at IIS was partially offset by increased activity on a classified cyber program for an international customer. The remaining change in external cost of sales at IIS was spread across numerous programs primarily driven by the domestic budget environment. The decrease in external cost of sales at MS was primarily due to decreased activity on land warfare systems programs driven principally by planned declines in production due to the U.S. Army budget environment.

Products and Services Cost of Sales - First Quarter of 2014 vs. First Quarter of 2013The decrease in products cost of sales of $409 million in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to $130 million of lower expense related to the FAS/CAS Adjustment described above and lower external products cost of sales of $110 million at IDS, $68 million at SAS and $64 million at MS. The decreases in external products cost of sales at IDS, MS and SAS were principally driven by the programs described above. The decrease in services cost of sales of $35 million in the first quarter of

23


2014 compared to the first quarter of 2013 was primarily due to lower external services cost of sales of $43 million at IIS, principally driven by activity on training programs supporting the U.S. Army's Warfighter FOCUS activities due to a decrease in customer-determined activity levels.

General and Administrative Expenses
 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 30, 2014
 
Mar 31, 2013
 
Mar 30, 2014
 
Mar 31, 2013
Administrative and selling expenses
$
448

 
$
461

 
8.1
%
 
7.8
%
Research and development expenses
111

 
107

 
2.0
%
 
1.8
%
Total general and administrative expenses
$
559

 
$
568

 
10.1
%
 
9.7
%

Administrative and selling expenses in the first quarter of 2014 were relatively consistent in amount and as a percentage of total net sales with the first quarter of 2013.

Included in administrative and selling expenses is the provision for state income taxes, which generally can be recovered through the pricing of products and services to the U.S. Government. Net state income taxes allocated to our contracts were $13 million and $30 million in the first quarters of 2014 and 2013, respectively.

Research and development expenses in the first quarter of 2014 were relatively consistent in amount and as a percentage of total net sales with the first quarter of 2013.

Total Operating Expenses
 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 30, 2014
 
Mar 31, 2013
 
Mar 30, 2014
 
Mar 31, 2013
Total operating expenses
$
4,720

 
$
5,173

 
85.7
%
 
88.0
%

The decrease in total operating expenses of $453 million in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to the decrease in cost of sales of $444 million, the primary drivers of which are described above in Total Cost of Sales.

Operating Income
 
Three Months Ended
 
% of Total Net Sales
(In millions, except percentages)
Mar 30, 2014
 
Mar 31, 2013
 
Mar 30, 2014
 
Mar 31, 2013
Operating income
$
788

 
$
706

 
14.3
%
 
12.0
%

The increase in operating income of $82 million in the first quarter of 2014 compared to the first quarter of 2013 was due to the decrease in total operating expenses of $453 million, the primary drivers of which are described above in Total Operating Expenses, partially offset by the decrease in total net sales of $371 million, the primary drivers of which are described above in Total Net Sales.
Total Non-Operating (Income) Expense, Net
 
Three Months Ended
(In millions)
Mar 30, 2014
 
Mar 31, 2013
Non-operating (income) expense, net
 
 
 
Interest expense
$
51

 
$
53

Interest income
(3
)
 
(3
)
Other (income) expense, net

 
(7
)
Total non-operating (income) expense, net
$
48

 
$
43


Total non-operating (income) expense, net was relatively consistent in the first quarter of 2014 compared to the first quarter of 2013.

24


Federal and Foreign Income Taxes
 
Three Months Ended
(In millions, except percentages)
Mar 30, 2014
 
Mar 31, 2013
Federal and foreign income taxes
$
147

 
$
167

Effective tax rate
19.9
%
 
25.2
%

Our effective tax rate in the first quarter of 2014 was 19.9% compared to 25.2% in the first quarter of 2013. The decrease of 5.3% was primarily due to the tax benefit on a foreign dividend, which decreased the rate by approximately 10.8%, partially offset by an increase of 4.7% due to the expiration of the U.S. research and development tax credit as of December 31, 2013. The remaining increase of 0.8% is composed of various items which individually or collectively are not significant.

Our effective tax rate in the first quarter of 2014 was 15.1% lower than the statutory federal rate primarily due to the tax benefit on a foreign dividend, which decreased the rate by approximately 10.8%, the domestic manufacturing deduction which decreased the rate by 2.7% and tax settlements which decreased the rate by 1.0%. The remaining decrease of 0.6% is composed of various items which individually or collectively are not significant.

Our effective tax rate in the first quarter of 2013 was 9.8% lower than the statutory federal tax rate primarily due to the reinstatement of the R&D tax credit which reduced our effective tax rate by 4.7%, the domestic manufacturing deduction which decreased the rate by approximately 2.4%, and the 2011 R&D refund claim described above which decreased our rate by 1.7%. The remaining decrease of 1.0% is composed of various items which individually or collectively are not significant.

Income from Continuing Operations
 
Three Months Ended
(In millions)
Mar 30, 2014
 
Mar 31, 2013
Income from continuing operations
$
593

 
$
496


The increase in income from continuing operations of $97 million in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to the $82 million increase in operating income, the primary drivers of which are described above in Operating Income.

Net Income
 
Three Months Ended
(In millions)
Mar 30, 2014
 
Mar 31, 2013
Net income
$
600

 
$
494


The increase in net income of $106 million in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to the $82 million increase in operating income, the primary drivers of which are described above in Operating Income.

Diluted Earnings per Share (EPS) from Continuing Operations Attributable to Raytheon Company Common Stockholders
 

Three Months Ended
(In millions, except per share amounts)

Mar 30, 2014

Mar 31, 2013
Income from continuing operations attributable to Raytheon Company

$
589


$
490

Diluted weighted-average shares outstanding

315.8


328.2

Diluted EPS from continuing operations attributable to Raytheon Company

$
1.87


$
1.49


The increase in diluted EPS from continuing operations attributable to Raytheon Company common stockholders of $0.38 in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to the increase in income from continuing operations described above and a decrease in weighted-average shares outstanding, which was affected by the common stock share activity shown in the table below.



25



Our common stock share activity for the first quarters of 2014 and 2013 was as follows:
 

Three Months Ended
(In millions)

Mar 30, 2014

Mar 31, 2013
Beginning balance

314.5

 
328.1

Stock plans activity

0.6

 
0.7

Stock repurchases

(2.3
)
 
(4.4
)
Ending balance

312.8

 
324.4


Diluted Earnings (Loss) per Share from Discontinued Operations Attributable to Raytheon Company Common Stockholders
Diluted earnings (loss) per share from discontinued operations attributable to Raytheon Company common stockholders was earnings of $0.02 and a loss of $0.01 for the first quarters of 2014 and 2013, respectively.

Diluted EPS Attributable to Raytheon Company Common Stockholders
 
 
Three Months Ended
(In millions, except per share amounts)
 
Mar 30, 2014
 
Mar 31, 2013
Net income attributable to Raytheon Company
 
$
596

 
$
488

Diluted weighted-average shares outstanding
 
315.8

 
328.2

Diluted EPS attributable to Raytheon Company
 
$
1.89

 
$
1.49


The increase in diluted EPS attributable to Raytheon Company common stockholders of $0.40 in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to the $0.38 increase in diluted EPS from continuing operations attributable to Raytheon Company common stockholders described above.

Adjusted EPS
Adjusted EPS was as follows:
 
 
Three Months Ended
 
 
Mar 30, 2014
 
Mar 31, 2013
Diluted EPS from continuing operations attributable to Raytheon Company common stockholders
 
$
1.87

 
$
1.49

Per share impact of FAS/CAS Adjustment
 
(0.18
)
 
0.14

Per share impact of the tax benefit of foreign dividend
 
(0.25
)
 

Per share impact of 2012 R&D tax credit
 

 
(0.08
)
Adjusted EPS
 
$
1.43

 
$
1.56


Adjusted EPS is diluted EPS from continuing operations attributable to Raytheon Company common stockholders excluding the EPS impact of the FAS/CAS Adjustment, tax effected at the federal statutory rate of 35%, and from time to time, certain other items. In addition to the FAS/CAS Adjustment, the first quarter of 2014 Adjusted EPS also excludes the EPS impact of the tax benefit related to a foreign dividend. In January 2014, a foreign subsidiary authorized and completed a transaction which resulted in a taxable dividend of approximately $115 million and generated a net tax benefit of approximately $80 million. In addition to the FAS/CAS Adjustment, the first quarter of 2013 Adjusted EPS also excludes the EPS impact of the R&D tax credit that relates to 2012. In January 2013, Congress approved legislation that included the extension of the R&D tax credit. The legislation retroactively reinstated the R&D tax credit for 2012 and extended it through December 31, 2013. As a result, we recorded the 2012 benefit in the first quarter of 2013. We are providing Adjusted EPS because management uses it for the purpose of evaluating and forecasting our financial performance and believes that it provides additional insight into our underlying business performance. We believe it allows investors to benefit from being able to assess our operating performance in the context of how our principal customer, the U.S. Government, allows us to recover pension and other postretirement benefit costs and to better compare our operating performance to others in the industry on that same basis. Adjusted EPS is not a measure of financial performance under GAAP and should be considered supplemental to and not a substitute for financial performance in accordance with GAAP. Adjusted EPS may not be defined and calculated by other companies in the same manner and the amounts presented may not recalculate directly due to rounding.

26



SEGMENT RESULTS
We report our results in the following segments: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); and Space and Airborne Systems (SAS). The following provides some context for viewing our segment performance through the eyes of management.

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

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

Bookings are impacted by the timing and amounts of awards in a given period, which are subject to numerous factors, including the desired capability by the customer and urgency of customer needs; fiscal constraints placed on customer budgets; political uncertainty; the timing of customer negotiations; the timing of governmental approvals and notifications; and the timing of option exercises or increases in scope. In addition, due to these factors, quarterly bookings tend to fluctuate from period to period, particularly on a segment basis. As a result, we believe comparing bookings on a quarterly basis or for periods less than one year is less meaningful than for longer periods and that shorter term changes in bookings may not necessarily indicate a material trend.
 
 
Three Months Ended
Bookings (in millions)
 
Mar 30, 2014
 
Mar 31, 2013
Integrated Defense Systems
 
$
1,180

 
$
926

Intelligence, Information and Services
 
1,011

 
830

Missile Systems
 
1,083

 
811

Space and Airborne Systems
 
1,019

 
1,039

Total
 
$
4,293

 
$
3,606


Included in bookings were international bookings of $1,683 million and $1,183 million in the first quarters of 2014 and 2013, respectively, which included foreign military bookings through the U.S. Government. International bookings amounted to 39% and 33% of total bookings in the first quarters of 2014 and 2013, respectively.

We record bookings for not-to-exceed contract awards (e.g. undefinitized contract awards, binding letter agreements) based on reasonable estimates of expected contract definitization, which will generally not be less than 75% of the award. We subsequently adjust bookings to reflect the actual amounts definitized, or, when prior to definitization, when facts and circumstances indicate that our previously estimated amounts are no longer reasonable. The timing of awards that may cover multiple fiscal years influences the size of bookings in each year. Bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite delivery/indefinite quantity (IDIQ) type contracts), and are reduced for contract cancellations and terminations of bookings recognized in the current year. We reflect contract cancellations and terminations from prior year bookings, as well as the impact of changes in foreign exchange rates, directly as an adjustment to backlog in the period in which the cancellation or termination occurs and the impact is determinable.

Backlog—We disclose period-ending backlog for each segment. Backlog represents the dollar value of firm orders for which work has not been performed. Backlog generally increases with bookings and generally converts into sales as we incur costs under the related contractual commitments. Therefore, we discuss changes in backlog, including any significant cancellations, for each of our segments, as we believe such discussion provides an understanding of the awarded but not executed portions of our contracts.

27


 
 
Funded Backlog
 
Total Backlog
Backlog (in millions)
 
Mar 30, 2014
 
Dec 31, 2013
 
Mar 30, 2014
 
Dec 31, 2013
Integrated Defense Systems
 
$
8,977

 
$
9,397

 
$
10,596

 
$
10,916

Intelligence, Information and Services
 
2,585

 
2,592

 
5,579

 
5,856

Missile Systems
 
6,564

 
6,859

 
8,667

 
9,162

Space and Airborne Systems
 
4,619

 
4,166

 
7,341

 
7,751

Total
 
$
22,745

 
$
23,014

 
$
32,183

 
$
33,685


Total backlog includes both funded backlog (firm orders for which funding is authorized, appropriated and contractually obligated by the customer for which work has not been performed) and unfunded backlog (firm orders for which funding has not been appropriated and/or contractually obligated by the customer for which work has not been performed). Revenue is generally not recognized on backlog until funded. Backlog excludes unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ). Both funded and unfunded backlog are affected by changes in foreign exchange rates.

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

Total net sales by segment were as follows:
 
 
Three Months Ended
Total Net Sales (in millions)
 
Mar 30, 2014
 
Mar 31, 2013
Integrated Defense Systems
 
$
1,481

 
$
1,596

Intelligence, Information and Services
 
1,450

 
1,521

Missile Systems
 
1,574

 
1,636

Space and Airborne Systems
 
1,398

 
1,582

Corporate and Eliminations