UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 8-K

 
CURRENT REPORT

Pursuant to Section 13 OR 15(d) of
The Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): September 27, 2019
 

UNITED TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
 

         
Delaware
 
001-00812
 
06-0570975
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)

10 Farm Springs Road
Farmington, Connecticut 06032
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
(860) 728-7000
 
N/A
(Former name or former address, if changed since last report)
 

 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
 Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
Emerging growth company     ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock ($1 par value)
 
UTX
 
New York Stock Exchange
(CUSIP 913017 10 9)
       
1.125% Notes due 2021
 
UTX 21D
 
New York Stock Exchange
(CUSIP 913017 CD9)
       
1.250% Notes due 2023
 
UTX 23
 
New York Stock Exchange
(CUSIP U91301 AD0)
       
1.150% Notes due 2024
 
UTX 24A
 
New York Stock Exchange
(CUSIP 913017 CU1)
       
1.875% Notes due 2026
 
UTX 26
 
New York Stock Exchange
(CUSIP 913017 CE7)
       
2.150% Notes due 2030
 
UTX 30
 
New York Stock Exchange
(CUSIP 913017 CV9)
       
Floating Rate Notes due 2019
 
UTX 19C
 
New York Stock Exchange
(CUSIP 913017 CS6)
       
Floating Rate Notes due 2020
 
UTX 20B
 
New York Stock Exchange
(CUSIP 913017 CT4)
       
 



Item 8.01. Other Events.
 
As previously announced, on June 9, 2019, United Technologies Corporation, a Delaware corporation (“United Technologies” or “UTC”), Light Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of United Technologies (“Merger Sub”), and Raytheon Company, a Delaware corporation (“Raytheon”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides for, among other things and subject to the satisfaction or waiver of specified conditions, the merger of Merger Sub with and into Raytheon (the “Merger”), with Raytheon surviving the Merger as a wholly owned subsidiary of United Technologies.

United Technologies is filing (i) as Exhibit 99.1 to this Current Report on Form 8-K, Raytheon’s audited consolidated financial statements as of December 31, 2018 and 2017 and for each of the years ended December 31, 2018, 2017 and 2016, (ii) as Exhibit 99.2, Raytheon’s interim unaudited financial information for the three-month periods ended March 31, 2019 and April 1, 2018 and six month-periods ended June 30, 2019 and July 1, 2018, and (iii) as Exhibit 23.1, the consent of PricewaterhouseCoopers LLP, independent registered public accounting firm of Raytheon.
 
This Current Report on Form 8-K does not modify or update the consolidated financial statements of United Technologies included in the 2018 Annual Report to Shareowners, which is incorporated by reference in United Technologies’ Annual Report on Form 10-K for the year ended December 31, 2018, nor does it reflect any subsequent information or events. The information referenced in items (i)-(ii) above was previously disclosed by Raytheon in its reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including its Annual Report on Form 10-K for the year ended December 31, 2018 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019.
 
Cautionary Statement Regarding Forward-Looking Statements

This communication contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other information released to the public. These forward-looking statements are intended to provide Raytheon’s and United Technologies’ respective management’s current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “expectations,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “outlook,” “confident,” “on track” and other words of similar meaning. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash, share repurchases, tax rates, R&D spend, other measures of financial performance, potential future plans, strategies or transactions, credit ratings and net indebtedness, other anticipated benefits of the Rockwell Collins acquisition, the proposed merger or the spin-offs by UTC of Otis and Carrier into separate independent companies (the “separation transactions”), including estimated synergies and customer cost savings resulting from the proposed merger, the expected timing of completion of the proposed merger and the separation transactions, estimated costs associated with such transactions and other statements that are not historical facts. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation: (1) the effect of economic conditions in the industries and markets in which UTC and Raytheon operate in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, levels of end market demand in construction and in both the commercial and defense segments of the aerospace industry, levels of air travel, financial condition of commercial airlines, the impact of weather conditions and natural disasters, the financial condition of our customers and suppliers, and the risks associated with U.S. government sales (including changes or shifts in defense spending due to budgetary constraints, spending cuts resulting from sequestration, a government shutdown, or otherwise, and uncertain funding of programs); (2) challenges in the development, production, delivery, support, performance and realization of the anticipated benefits (including our expected returns under customer contracts) of advanced technologies and new products and services; (3) the scope, nature, impact or timing of the proposed merger and the separation transactions



and other merger, acquisition and divestiture activity, including among other things the integration of or with other businesses and realization of synergies and opportunities for growth and innovation and incurrence of related costs and expenses; (4) future levels of indebtedness, including indebtedness that may be incurred in connection with the proposed merger and the separation transactions, and capital spending and research and development spending; (5) future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure; (6) the timing and scope of future repurchases by the combined company of its common stock, which may be suspended at any time due to various factors, including market conditions and the level of other investing activities and uses of cash; (7) delays and disruption in delivery of materials and services from suppliers; (8) company and customer-directed cost reduction efforts and restructuring costs and savings and other consequences thereof (including the potential termination of U.S. government contracts and performance under undefinitized contract awards and the potential inability to recover termination costs); (9) new business and investment opportunities; (10) the ability to realize the intended benefits of organizational changes; (11) the anticipated benefits of diversification and balance of operations across product lines, regions and industries; (12) the outcome of legal proceedings, investigations and other contingencies; (13) pension plan assumptions and future contributions; (14) the impact of the negotiation of collective bargaining agreements and labor disputes; (15) the effect of changes in political conditions in the U.S. and other countries in which UTC, Raytheon and the businesses of each operate, including the effect of changes in U.S. trade policies or the U.K.’s pending withdrawal from the European Union, on general market conditions, global trade policies and currency exchange rates in the near term and beyond; (16) the effect of changes in tax (including U.S. tax reform enacted on December 22, 2017, which is commonly referred to as the Tax Cuts and Jobs Act of 2017), environmental, regulatory and other laws and regulations (including, among other things, export and import requirements such as the International Traffic in Arms Regulations and the Export Administration Regulations, anti-bribery and anti-corruption requirements, including the Foreign Corrupt Practices Act, industrial cooperation agreement obligations, and procurement and other regulations) in the U.S. and other countries in which UTC, Raytheon and the businesses of each operate; (17) negative effects of the announcement or pendency of the proposed merger or the separation transactions on the market price of UTC’s and/or Raytheon’s respective common stock and/or on their respective financial performance; (18) the ability of the parties to receive the required regulatory approvals for the proposed merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction) and approvals of UTC’s shareowners and Raytheon’s stockholders and to satisfy the other conditions to the closing of the merger on a timely basis or at all; (19) the occurrence of events that may give rise to a right of one or both of the parties to terminate the merger agreement; (20) risks relating to the value of the UTC shares to be issued in the proposed merger, significant transaction costs and/or unknown liabilities; (21) the possibility that the anticipated benefits from the proposed merger cannot be realized in full or at all or may take longer to realize than expected, including risks associated with third party contracts containing consent and/or other provisions that may be triggered by the proposed transaction; (22) risks associated with transaction-related litigation; (23) the possibility that costs or difficulties related to the integration of UTC’s and Raytheon’s operations will be greater than expected; (24) risks relating to completed merger, acquisition and divestiture activity, including UTC’s integration of Rockwell Collins, including the risk that the integration may be more difficult, time-consuming or costly than expected or may not result in the achievement of estimated synergies within the contemplated time frame or at all; (25) the ability of each of Raytheon, UTC, the companies resulting from the separation transactions and the combined company to retain and hire key personnel; (26) the expected benefits and timing of the separation transactions, and the risk that conditions to the separation transactions will not be satisfied and/or that the separation transactions will not be completed within the expected time frame, on the expected terms or at all; (27) the intended qualification of (i) the merger as a tax-free reorganization and (ii) the separation transactions as tax-free to UTC and UTC’s shareowners, in each case, for U.S. federal income tax purposes; (28) the possibility that any opinions, consents, approvals or rulings required in connection with the separation transactions will not be received or obtained within the expected time frame, on the expected terms or at all; (29) expected financing transactions undertaken in connection with the proposed merger and the separation transactions and risks associated with additional indebtedness; (30) the risk that dissynergy costs, costs of restructuring transactions and other costs incurred in connection with the separation transactions will exceed UTC’s estimates; and (31) the impact of the proposed merger and the separation transactions on the respective businesses of Raytheon and UTC and the risk that the separation transactions may be more difficult, time-consuming or costly than expected, including the impact on UTC’s resources, systems, procedures and controls, diversion of its management’s attention and the impact on relationships with customers, suppliers, employees and other business counterparties. There can be no assurance that the proposed merger, the separation transactions or any other transaction described above will in fact be consummated in the manner described or at all. For additional information on identifying factors that may cause actual results to vary materially from those stated in forward-looking statements, see the joint proxy statement/prospectus (defined below) and the reports of UTC and Raytheon on Forms 10-K, 10-Q and 8-K filed with or furnished to the Securities and Exchange Commission (the “SEC”) from time to time. Any forward-looking statement speaks only as of the date on which it is made, and UTC and Raytheon assume no obligation to update or revise such statement, whether as a result of new information, future events or otherwise, except as required by applicable law.


Additional Information and Where to Find It

In connection with the proposed merger, on September 4, 2019, UTC filed with the SEC an amendment to the registration statement on Form S-4 originally filed on July 17, 2019, which includes a joint proxy statement of UTC and Raytheon that also constitutes a prospectus of UTC (the “joint proxy statement/prospectus”). The registration statement was declared effective by the SEC on September 9, 2019, and UTC and Raytheon commenced mailing the joint proxy statement/prospectus to shareowners of UTC and stockholders of Raytheon on or about September 10, 2019. Each party will file other documents regarding the proposed merger with the SEC. In addition, in connection with the separation transactions, subsidiaries of UTC will file registration statements on Form 10 or Form S-1. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER RELEVANT DOCUMENTS FILED OR THAT WILL BE FILED WITH THE SEC WHEN THEY BECOME AVAILABLE, BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain copies of the registration statements and the joint proxy statement/prospectus free of charge from the SEC’s website or from UTC or Raytheon. The documents filed by UTC with the SEC may be obtained free of charge at UTC’s website at www.utc.com or at the SEC’s website at www.sec.gov. These documents may also be obtained free of charge from UTC by requesting them by mail at UTC Corporate Secretary, 10 Farm Springs Road, Farmington, CT, 06032, by telephone at 1-860-728-7870 or by email at corpsec@corphq.utc.com. The documents filed by Raytheon with the SEC may be obtained free of charge at Raytheon’s website at www.raytheon.com or at the SEC’s website at www.sec.gov. These documents may also be obtained free of charge from Raytheon by requesting them by mail at Raytheon Company, Investor Relations, 870 Winter Street, Waltham, MA, 02541, by telephone at 1-781-522-5123 or by email at invest@raytheon.com.

Participants in the Solicitation

UTC and Raytheon and their respective directors and executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies in respect of the proposed merger. Information about UTC’s directors and executive officers is available in UTC’s proxy statement dated March 18, 2019, for its 2019 Annual Meeting of Shareowners. Information about Raytheon’s directors and executive officers is available in Raytheon’s proxy statement dated April 16, 2019, for its 2019 Annual Meeting of Shareholders. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, are contained in the joint proxy statement/prospectus and other relevant materials to be filed with the SEC regarding the transaction when they become available. Investors should carefully read the joint proxy statement/prospectus before making any voting or investment decisions. You may obtain free copies of these documents from UTC or Raytheon as indicated above.

No Offer or Solicitation

This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.

 

Item 9.01. Financial Statements and Exhibits.
 
(d)
Exhibits

Exhibit No.
 
Description
     
 
     
 
     
 
     
 
     
104
 
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
  UNITED TECHNOLOGIES CORPORATION
(Registrant)
 
   
Date: September 27, 2019
By:
/s/ AKHIL JOHRI
   
Akhil Johri
   
Executive Vice President &Chief Financial Officer



Exhibit 15.1
 
September 27, 2019

Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549

Commissioners:

We are aware that our reports dated April 25, 2019 and July 25, 2019 on our reviews of interim financial information of Raytheon Company (the “Company”), which appear in this Current Report on Form 8-K,  are incorporated by reference in the Registration Statements on Form S-8 (Nos. 333-228649, 333-225839, 333-207193, 333-197704, 333-183123, 333-177517, 333-175781, 333-150643, 333-125293, 333-110020, 333-100724, 333-100723, 333-100718 and 033-51385) of United Technologies Corporation.

Very truly yours,

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Boston, Massachusetts
September 27, 2019


 

Exhibit 23.1
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos.  333-228649, 333-225839, 333-207193, 333-197704, 333-183123, 333-177517, 333-175781, 333-150643, 333-125293, 333-110020, 333-100724, 333-100723, 333-100718 and 033-51385) of United Technologies Corporation of our report dated February 13, 2019 relating to the financial statements and the effectiveness of internal control over financial reporting of Raytheon Company, which appears in this Current Report on Form 8-K.
 
/s/ PricewaterhouseCoopers LLP
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 27, 2019



Exhibit 99.1
Management’s Report on Internal Control over Financial Reporting
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Topic
Page
Report of Independent Registered Public Accounting Firm

3
Consolidated Balance Sheets

5
Consolidated Statements of Operations

6
Consolidated Statements of Comprehensive Income

7
Consolidated Statements of Equity

8
Consolidated Statements of Cash Flows

9
Note 1: Summary of Significant Accounting Policies

10
Note 2: Earnings Per Share (EPS)

21
Note 3: Acquisitions and Goodwill

21
Note 4: Thales-Raytheon Systems Co. Ltd. (TRS) Joint Venture

22
Note 5: Receivables, Net

23
Note 6: Contract Assets and Contract Liabilities

23
Note 7: Property, Plant and Equipment, Net

24
Note 8: Other Assets, Net

24
Note 9: Commercial Paper and Long-term Debt

24
Note 10: Commitments and Contingencies

26
Note 11: Forcepoint Joint Venture

28
Note 12: Stockholders’ Equity

29
Note 13: Stock-based Compensation Plans

30
Note 14: Pension and Other Employee Benefits
  33
Note 15: Income Taxes
  44
Note 16: Business Segment Reporting
  47
Note 17: Quarterly Operating Results (Unaudited)
  56
 

1

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING


Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018, based on criteria in Internal Control – Integrated Framework, issued by the COSO in 2013. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included below.

/s/ Thomas A. Kennedy
 
/s/ Anthony F. O’Brien
Thomas A. Kennedy
 
Anthony F. O’Brien
Chairman and Chief Executive Officer
 
Vice President and Chief Financial Officer

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Raytheon Company

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Raytheon Company and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principles

As discussed in Note 1 to the consolidated financial statements, in 2018 the Company changed the manner in which it accounts for certain stranded tax effects impacting accumulated other comprehensive income and the manner in which it presents and discloses certain net periodic pension and postretirement benefit costs in the Company’s statements of operations.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

3

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
   
/s/ PricewaterhouseCoopers LLP
 
Boston, Massachusetts
 
February 13, 2019
 

We have served as the Company’s auditor since 1961.

4

RAYTHEON COMPANY

CONSOLIDATED BALANCE SHEETS
 

(In millions, except per share amount) December 31:
 
2018
   
2017
 
Assets
           
Current assets
           
Cash and cash equivalents
 
$
3,608
   
$
3,103
 
Short-term investments
   
     
297
 
Receivables, net
   
1,648
     
1,324
 
Contract assets
   
5,594
     
5,247
 
Inventories
   
758
     
594
 
Prepaid expenses and other current assets
   
528
     
761
 
Total current assets
   
12,136
     
11,326
 
Property, plant and equipment, net
   
2,840
     
2,439
 
Goodwill
   
14,864
     
14,871
 
Other assets, net
   
2,024
     
2,224
 
Total assets
 
$
31,864
   
$
30,860
 
                 
Liabilities, Redeemable Noncontrolling Interest and Equity
               
Current liabilities
               
Commercial paper
 
$
300
   
$
300
 
Contract liabilities
   
3,309
     
2,927
 
Accounts payable
   
1,964
     
1,519
 
Accrued employee compensation
   
1,509
     
1,342
 
Other current liabilities
   
1,206
     
1,260
 
Total current liabilities
   
8,288
     
7,348
 
Accrued retiree benefits and other long-term liabilities
   
6,938
     
8,287
 
Long-term debt
   
4,755
     
4,750
 
Commitments and contingencies (Note 10)
               
                 
Redeemable noncontrolling interest (Note 11)
   
411
     
512
 
                 
Equity
               
Raytheon Company stockholders’ equity
               
Common stock, par value, $0.01 per share, 1,450 shares authorized, 282 and 288 shares outstanding at December 31, 2018 and 2017, respectively
   
3
     
3
 
Additional paid-in capital
   
     
 
Accumulated other comprehensive loss
   
(8,618
)
   
(7,935
)
Retained earnings
   
20,087
     
17,895
 
Total Raytheon Company stockholders’ equity
   
11,472
     
9,963
 
Noncontrolling interests in subsidiaries
   
     
 
Total equity
   
11,472
     
9,963
 
Total liabilities, redeemable noncontrolling interest and equity
 
$
31,864
   
$
30,860
 
 
The accompanying notes are an integral part of the consolidated financial statements.

5

RAYTHEON COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
 

(In millions, except per share amounts) Years Ended December 31:
 
2018
   
2017
   
2016
 
Net sales
                 
Products
 
$
22,633
   
$
21,416
   
$
20,309
 
Services
   
4,425
     
3,932
     
3,815
 
Total net sales
   
27,058
     
25,348
     
24,124
 
Operating expenses
                       
Cost of sales—products
   
16,108
     
15,252
     
14,462
 
Cost of sales—services
   
3,465
     
3,088
     
3,045
 
General and administrative expenses
   
2,947
     
2,777
     
2,721
 
Total operating expenses
   
22,520
     
21,117
     
20,228
 
Operating income
   
4,538
     
4,231
     
3,896
 
Non-operating (income) expense, net
                       
Retirement benefits non-service expense
   
1,230
     
913
     
601
 
Interest expense
   
184
     
205
     
232
 
Interest income
   
(31
)
   
(21
)
   
(16
)
Other (income) expense, net
   
8
     
21
     
(6
)
Total non-operating (income) expense, net
   
1,391
     
1,118
     
811
 
Income from continuing operations before taxes
   
3,147
     
3,113
     
3,085
 
Federal and foreign income taxes
   
264
     
1,114
     
873
 
Income from continuing operations
   
2,883
     
1,999
     
2,212
 
Income (loss) from discontinued operations, net of tax
   
(1
)
   
2
     
1
 
Net income
   
2,882
     
2,001
     
2,213
 
Less: Net income (loss) attributable to noncontrolling interests in subsidiaries
   
(27
)
   
(23
)
   
(31
)
Net income attributable to Raytheon Company
 
$
2,909
   
$
2,024
   
$
2,244
 
                         
Basic earnings per share attributable to Raytheon Company common stockholders:
                       
Income from continuing operations
 
$
10.16
   
$
6.95
   
$
7.55
 
Income (loss) from discontinued operations, net of tax
   
     
0.01
     
 
Net income
   
10.16
     
6.96
     
7.56
 
Diluted earnings per share attributable to Raytheon Company common stockholders:
                       
Income from continuing operations
 
$
10.15
   
$
6.94
   
$
7.55
 
Income (loss) from discontinued operations, net of tax
   
     
0.01
     
 
Net income
   
10.15
     
6.95
     
7.55
 
Amounts attributable to Raytheon Company common stockholders:
                       
Income from continuing operations
 
$
2,910
   
$
2,022
   
$
2,243
 
Income (loss) from discontinued operations, net of tax
   
(1
)
   
2
     
1
 
Net income
 
$
2,909
   
$
2,024
   
$
2,244
 
 

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

6

RAYTHEON COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 

(In millions) Years Ended December 31:
 
2018
   
2017
   
2016
 
Net income
 
$
2,882
   
$
2,001
   
$
2,213
 
Other comprehensive income (loss), before tax:
                       
Pension and other postretirement benefit plans, net:
                       
Prior service (cost) credit arising during period
   
(10
)
   
(15
)
   
(1
)
Amortization of prior service cost (credit) included in net income
   
6
     
4
     
4
 
Actuarial gain (loss) arising during period
   
(626
)
   
(1,816
)
   
(1,238
)
Amortization of net actuarial (gain) loss
   
1,362
     
1,187
     
1,002
 
Loss recognized due to settlements/curtailments
   
287
     
3
     
5
 
Effect of exchange rates
   
9
     
(14
)
   
25
 
Pension and other postretirement benefit plans, net
   
1,028
     
(651
)
   
(203
)
Foreign exchange translation
   
(36
)
   
80
     
(115
)
Cash flow hedges
   
(12
)
   
10
     
25
 
Unrealized gains (losses) on investments and other, net
   
1
     
(1
)
   
15
 
Other comprehensive income (loss), before tax
   
981
     
(562
)
   
(278
)
Income tax benefit (expense) related to items of other comprehensive income (loss)
   
(213
)
   
38
     
43
 
Other comprehensive income (loss), net of tax
   
768
     
(524
)
   
(235
)
Reclassification of stranded tax effects
   
(1,451
)
   
     
 
Total comprehensive income (loss)
   
2,199
     
1,477
     
1,978
 
Less: Comprehensive income (loss) attributable to noncontrolling interests in subsidiaries
   
(27
)
   
(23
)
   
(31
)
Comprehensive income (loss) attributable to Raytheon Company
 
$
2,226
   
$
1,500
   
$
2,009
 
 
The accompanying notes are an integral part of the consolidated financial statements.

7


RAYTHEON COMPANY

 

CONSOLIDATED STATEMENTS OF EQUITY

 

(In millions)   Common stock   Additional
paid-in
capital
    Accumulated other
comprehensive income (loss)
    Retained earnings     Total Raytheon Company stockholders’ equity     Noncontrolling interests in subsidiaries(1)     Total equity  
Balance at December 31, 2015
  $ 3   $ 398     $ (7,176 )   $ 16,956     $ 10,181     $ 202     $ 10,383  
Net income (loss)
                          2,244       2,244       (15 )     2,229  
Other comprehensive income (loss), net of tax
                  (235 )             (235 )             (235 )
Adjustment of redeemable noncontrolling interest to redemption value
                          (138 )     (138 )             (138 )
Distributions and other activity related to noncontrolling interests
                          (195 )     (195 )     (187 )     (382 )
Dividends declared
          3               (867 )     (864 )             (864 )
Common stock plans activity
          160                       160               160  
Share repurchases
          (561 )             (435 )     (996 )             (996 )
Balance at December 31, 2016
    3           (7,411 )     17,565       10,157             10,157  
Net income (loss)
                          2,024       2,024             2,024  
Other comprehensive income (loss), net of tax
                  (524 )             (524 )             (524 )
Adjustment of redeemable noncontrolling interest to redemption value
                          (41 )     (41 )             (41 )
Dividends declared
          2               (929 )     (927 )             (927 )
Common stock plans activity
          159                       159               159  
Share repurchases
          (161 )             (724 )     (885 )             (885 )
Balance at December 31, 2017
    3           (7,935 )     17,895       9,963             9,963  
Net income (loss)
                          2,909       2,909             2,909  
Other comprehensive income (loss), net of tax
                  768               768               768  
Reclassification of stranded tax effects
                  (1,451 )     1,451                      
Adjustment of redeemable noncontrolling interest to redemption value
                        73       73               73  
Dividends declared
          2               (991 )     (989 )             (989 )
Common stock plans activity
          166                       166               166  
Share repurchases
          (168 )             (1,250 )     (1,418 )             (1,418 )
Balance at December 31, 2018
  $ 3   $     $ (8,618 )   $ 20,087     $ 11,472     $     $ 11,472  
(1) Excludes redeemable noncontrolling interest which is not considered equity. See “Note 11: Forcepoint Joint Venture” for additional information.

 

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

 

8

RAYTHEON COMPANY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In millions) Years Ended December 31:   2018     2017     2016  
Cash flows from operating activities
                       
Net income
  $ 2,882     $ 2,001     $ 2,213  
(Income) loss from discontinued operations, net of tax
    1       (2 )     (1 )
Income from continuing operations
    2,883       1,999       2,212  
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
    568       550       515  
Stock-based compensation
    165       173       151  
Gain on sale of equity method investment
                (158 )
Loss on repayment of long-term debt
          39        
Deferred income taxes
    (24 )     252       133  
Changes in assets and liabilities
                       
Receivables, net
    (327 )     (157 )     18  
Contract assets and contract liabilities
    28       88       (645 )
Inventories
    (166 )     14       (10 )
Prepaid expenses and other current assets
    73       204       205  
Income taxes receivable/payable
    174       (193 )     (185 )
Accounts payable
    406       (94 )     152  
Accrued employee compensation
    165       111       77  
Other current liabilities
    (108 )     106       (41 )
Accrued retiree benefits
    (421 )     (250 )     419  
Other, net
    12       (95 )     9  
Net cash provided by (used in) operating activities from continuing operations
    3,428       2,747       2,852  
Net cash provided by (used in) operating activities from discontinued operations
          (2 )      
Net cash provided by (used in) operating activities
    3,428       2,745       2,852  
Cash flows from investing activities
                       
Additions to property, plant and equipment
    (763 )     (543 )     (561 )
Proceeds from sales of property, plant and equipment
    2       46       34  
Additions to capitalized internal use software
    (58 )     (68 )     (64 )
Purchases of short-term investments
          (696 )     (472 )
Maturities of short-term investments
    309       517       1,184  
Payments for purchases of acquired companies, net of cash received
          (93 )     (57 )
Proceeds from sale of business, net of transaction costs
    11              
Other
    (22 )     20       (11 )
Net cash provided by (used in) investing activities
    (521 )     (817 )     53  
Cash flows from financing activities
                       
Dividends paid
    (975 )     (910 )     (850 )
Net borrowings (payments) on commercial paper
          300        
Repayments of long-term debt
          (591 )      
Loss on repayment of long-term debt
          (38 )      
Repurchases of common stock under share repurchase programs
    (1,325 )     (800 )     (900 )
Repurchases of common stock to satisfy tax withholding obligations
    (93 )     (85 )     (96 )
Acquisition of noncontrolling interest in RCCS LLC
                (90 )
Contribution from noncontrolling interest in Forcepoint
          8       11  
Other
    (5 )           (5 )
Net cash provided by (used in) financing activities
    (2,398 )     (2,116 )     (1,930 )
Net increase (decrease) in cash, cash equivalents and restricted cash
    509       (188 )     975  
Cash, cash equivalents and restricted cash at beginning of year
    3,115       3,303       2,328  
Cash, cash equivalents and restricted cash at end of year
  $ 3,624     $ 3,115     $ 3,303  


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

9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Summary of Significant Accounting Policies

Consolidation and Classification—The consolidated financial statements include the accounts of Raytheon Company, and all wholly-owned, majority-owned and otherwise controlled domestic and foreign subsidiaries. All intercompany transactions have been eliminated. For classification of certain current assets and liabilities, we use the duration of the related contract or program as our operating cycle, which is generally longer than one year. In addition, we reclassified certain amounts to conform to our current period presentation. See Accounting Standards, below, for additional information on reclassifications. As used in these notes, the terms “we,” “us,” “our,” “Raytheon” and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another meaning.

Use of Estimates—Our consolidated financial statements are based on the application of U.S. Generally Accepted Accounting Principles (GAAP), which require us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our consolidated financial statements.

Revenue Recognition—The vast majority of our revenues are from long-term contracts associated with the design, development, manufacture or modification of complex aerospace or defense equipment or related services. These contracts primarily are with the U.S. government (including foreign military sales contracted through the U.S. government). Our contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (FAR) and are priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer.

Under the typical payment terms of our U.S. government fixed-price contracts, the customer pays us either performance-based payments (PBPs) or progress payments. PBPs are interim payments up to 90% of the contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments up to 80% of costs incurred as the work progresses. Because the customer retains a portion of the contract price until completion of the contract, our U.S. government fixed-price contracts generally result in revenue recognized in excess of billings which we present as contract assets on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For our U.S. government cost-type contracts, the customer generally pays us for our actual costs incurred within a short period of time. For non-U.S. government contracts, we typically receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment. We recognize a liability for these advance payments in excess of revenue recognized and present it as contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

To determine the proper revenue recognition method for contracts for complex aerospace or defense equipment or related services, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract, for example when a contract covers multiple phases of the product lifecycle (e.g., development, production, maintenance and support), in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In cases where we do, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized customer specific solution, and in these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are required to obtain certain regulatory approvals. In these cases, we recognize revenue based on the likelihood of obtaining regulatory approvals based upon all known facts and circumstances.

We generally recognize revenue over time as we perform on our performance obligations because of continuous transfer of control to the customer. For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company.

Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs including pension and any other postretirement benefit (PRB) expense under U.S. government Cost Accounting Standards (CAS).

Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion (the process described below in more detail) is complex, subject to many variables and requires significant judgment. It is common for our long-term contracts to contain award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

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

11

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

Net EAC adjustments had the following impact on our operating results:
 
(In millions, except per share amounts)
2018(1)
   
2017
   
2016
 
Operating income
$
492
   
$
442
   
$
418
 
Income from continuing operations attributable to Raytheon Company
389
   
287
   
283
 
Diluted EPS from continuing operations attributable to Raytheon Company
$
1.36
   
$
0.98
   
$
0.95
 
(1)
2018 amounts reflect a U.S. statutory tax rate of 21%, which became effective in 2018 with the adoption of the Tax Cuts and Jobs Act of 2017 (2017 Act).

In addition, net revenue recognized from our performance obligations satisfied in previous periods was $636 million, $520 million and $509 million in 2018, 2017 and 2016, respectively. This primarily relates to EAC adjustments that impacted revenue.

We also sell security software through our Forcepoint segment. For the majority of these arrangements, we recognize revenue over the term of the agreement because the software requires continuous updates to provide the intended security functionality. To a lesser extent in all of our business segments, we enter into other types of contracts including service arrangements and non-subscription software and licensing agreements. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. For software arrangements that include multiple performance obligations, including hardware, perpetual software licenses, subscriptions, term licenses and maintenance and/or services, we allocate revenue to each performance obligation based on estimates of the price that we would charge the customer for each promised product or service if it were sold on a standalone basis.

Recent events have caused increased attention on U.S. defense sales to the Kingdom of Saudi Arabia (KSA). KSA represents nearly 5% of our sales and $2.2 billion of our remaining performance obligations at December 31, 2018. Although we currently do not expect to be prevented from doing business in KSA, if government action impairs our ability to fulfill our contractual obligations or otherwise to continue to do business in KSA, it would have a material adverse effect on our financial results.

Research and Development Expenses—Research and development expenses are included in general and administrative expenses in our consolidated statements of operations and have primarily been for product development for the U.S. government. Expenditures for Company-sponsored research and development projects are expensed as incurred, and were $841 million, $700 million and $725 million in 2018, 2017 and 2016, respectively. Customer-sponsored research and development projects performed under contracts are accounted for as contract costs as the work is performed and included in receivables, net or contract assets in our consolidated balance sheets, depending on whether costs have been billed or not.

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Federal, Foreign and State Income Taxes—The Company and its domestic subsidiaries provide for federal income taxes on pretax accounting income at rates in effect under existing tax law. Foreign subsidiaries record provisions for income taxes at applicable foreign tax rates in a similar manner. Such provisions differ from the amounts currently payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. The Company provides for a U.S. tax liability on outside basis differences in our foreign subsidiaries related to amounts which have been previously taxed in the U.S. and undistributed earnings generated after December 31, 2017. This deferred tax liability generally relates to foreign currency movement and foreign withholding taxes. The Company continues to assert indefinite reinvestment on outside basis differences related to all other items, such as acquisition accounting adjustments. With the exception of Forcepoint, payments made for state income taxes are included in administrative and selling expenses as these costs can generally be recovered through the pricing of products and services to the U.S. government in the period in which the tax is payable. Accordingly, the state income tax provision (benefit) is allocated to contracts when it is paid (recovered) or otherwise agreed as allocable with the U.S. government. Payments made for state income taxes related to Forcepoint are included in federal and foreign income tax expense.

Other (Income) Expense, Net—Other (income) expense, net, consists primarily of gains and losses from our investments held in trusts used to fund certain of our non-qualified deferred compensation and employee benefit plans, gains and losses on the early repurchase of long-term debt and certain financing fees. Periodically we enter into equity method or other investments that are not related to our core operations, including investments in early stage technology companies. We record the income or loss from these investments as a component of other (income) expense, net. We record losses beyond the carrying amount of the investment only when we guarantee obligations of the investee or commit to provide the investee further financial support.

Cash and Cash Equivalents—Cash and cash equivalents consist of cash and highly liquid investments with original maturities of 90 days or less at the date of purchase. The estimated fair value of cash and cash equivalents approximates the carrying value due to their short maturities. Cash and cash equivalents excludes $16 million and $12 million of restricted cash at December 31, 2018 and December 31, 2017, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.

Short-term Investments—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 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 December 31, 2018, we had no short-term investments as all short-term investments outstanding at December 31, 2017 matured in the first quarter of 2018. At December 31, 2017, we had short-term investments of $297 million 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 or P-1. The amortized cost of these securities closely approximated their fair value. In 2017, we recorded unrealized losses on short-term investments of less than $1 million, net of tax, in accumulated other comprehensive loss (AOCL). We did not have any sales of short-term investments in 2018 or 2017. For purposes of computing realized gains and losses on available-for-sale securities, we determine cost on a specific identification basis.

Receivables, Net—Receivables, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.

Contract Assets—Contract assets include unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current.

Inventories—Inventories are stated at the lower of its cost (first-in, first-out or average cost) or net realizable value. An impairment for excess or inactive inventory is recorded based upon an analysis that considers current inventory levels, historical usage patterns, future sales expectations and salvage value.

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Inventories consisted of the following at December 31:
 
(In millions)
2018
   
2017
 
Materials and purchased parts
$
75
   
$
69
 
Work in process
662
   
504
 
Finished goods
21
   
21
 
Total
$
758
   
$
594
 
 
Precontract costs are costs incurred to fulfill a contract prior to contract award. Precontract costs, including general and administrative expenses that are specifically chargeable to the customer, are deferred in inventories if we determine that the costs are probable of recovery under a specific anticipated contract. All other precontract costs, including start-up costs, are expensed as incurred. Costs that are deferred are recognized as contract costs upon the receipt of the anticipated contract. We included deferred precontract costs of $163 million and $101 million in inventories as work in process at December 31, 2018 and December 31, 2017, respectively.

Deferred Commissions—Our incremental direct costs of obtaining a contract, which consist of sales commissions primarily for our security software sales at Forcepoint, are deferred and amortized over the period of contract performance or a longer period, generally the estimated life of the customer relationship, if renewals are expected and the renewal commission is not commensurate with the initial commission. We classify deferred commissions as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets, and other assets, net, respectively, in our consolidated balance sheets. At December 31, 2018 and December 31, 2017, we had deferred commissions of $55 million and $37 million, respectively. Amortization expense related to deferred commissions was $45 million, $28 million and $12 million in 2018, 2017 and 2016, respectively.

Property, Plant and Equipment, Net—Property, plant and equipment, net, are stated at cost less accumulated depreciation. Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements are expensed. We include gains and losses on the sales of plant and equipment that are allocable to our contracts in overhead as we generally can recover these costs through the pricing of products and services to the U.S. government. For all other sales or asset retirements, the assets and related accumulated depreciation and amortization are eliminated from the accounts, and any resulting gain or loss is reflected in operating income.

Provisions for depreciation generally are computed using a combination of accelerated and straight-line methods and are based on estimated useful lives as follows:
 
 
Years
Machinery and equipment
3–10
Buildings
20–45
 
Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated useful life of the improvement.

Impairment of Goodwill and Long-lived Assets—We evaluate our goodwill for impairment annually or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable. We perform our annual impairment test as of the first day of the fourth quarter utilizing a two-step methodology that requires us to first identify potential goodwill impairment and then measure the amount of the related goodwill impairment loss, if any. We have identified our operating segments as reporting units under the impairment test assessment criteria outlined in U.S. GAAP. In performing our annual impairment test in the fourth quarters of 2018, 2017 and 2016 we did not identify any goodwill impairment.

We determine whether long-lived assets are to be held for use or disposal. Upon indication of possible impairment of long-lived assets held for use, we evaluate the recoverability of such assets by measuring the carrying amount of the assets against the related estimated undiscounted future cash flows. When an evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value of the asset group, the asset group is adjusted to its estimated fair value. In order for long-lived assets to be considered held for disposal, we must have committed to a plan to dispose of the assets. Once deemed held for disposal, the assets are stated at the lower of the carrying amount or fair value.

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Computer Software, Net—Internal use computer software, net, included in other assets, net, which consists primarily of our enterprisewide software solutions, is stated at cost less accumulated amortization and is amortized using the straight-line method over its estimated useful life, generally 10 years. Computer software development costs related to software products developed for external use are capitalized, when significant, after establishment of technological feasibility and marketability. There have been no such costs capitalized to date as the costs incurred during the period between technological feasibility to general release have not been significant.

Contract Liabilities—Our contract liabilities consist of advance payments and billings in excess of revenue recognized and deferred revenue. We may also receive up-front payments related to software license sales primarily for Forcepoint, which in most cases we recognize ratably over the license term. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. We classify advance payments and billings in excess of revenue recognized as current, and deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of deferred revenue is included in accrued retiree benefits and other long-term liabilities in our consolidated balance sheets.

In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that balance. If additional advances are received on those contracts in subsequent periods, we assume all revenue recognized in the reporting period first applies to the beginning contract liability as opposed to a portion applying to the new advances for the period.

Redeemable Noncontrolling Interest—Redeemable noncontrolling interest is recognized at the greater of the estimated redemption value as of the balance sheet date or the initial value adjusted for the noncontrolling interest holder’s share of the cumulative impact of net income (loss), other changes in accumulated other comprehensive income (loss) and additional contributions. Adjustments to the redemption value over the period from the date of acquisition to the redemption date are immediately recorded to retained earnings. We reflect the redemption value adjustments in the earnings per share (EPS) calculation if redemption value is in excess of the fair value of noncontrolling interest which resulted in a $0.01 favorable impact to both basic and diluted EPS in 2018 and a $0.01 unfavorable impact to both basic and diluted EPS in 2016. There was no impact to basic or diluted EPS in 2017 related to the redemption value adjustments.

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

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
A rollforward of accumulated other comprehensive income (loss) was as follows:
 
 
Pension and
PRB plans,
net(1)
 
Foreign
exchange
translation
 
Cash flow
hedges(2)
 
Unrealized
gains (losses)
on investments
and other,
net(3)
 
Total
 
     
(In millions)
   
Balance at December 31, 2015
$
(7,088
)
$
(60
)
 
$
(16
)
$
(12
)
 
$
(7,176
)
Before tax amount
(203
)
(115
)
 
25
 
15
   
(278
)
Tax (expense) benefit
57
 
   
(9
)
(5
)
 
43
 
Net of tax amount
(146
)
(115
)
 
16
 
10
   
(235
)
Balance at December 31, 2016
(7,234
)
(175
)
 
 
(2
)
 
(7,411
)
Before tax amount
(651
)
80
   
10
 
(1
)
 
(562
)
Tax (expense) benefit
42
 
   
(4
)
   
38
 
Net of tax amount
(609
)
80
   
6
 
(1
)
 
(524
)
Balance at December 31, 2017
(7,843
)
(95
)
 
6
 
(3
)
 
(7,935
)
Before tax amount
1,028
 
(36
)
 
(12
)
1
   
981
 
Tax (expense) benefit
(216
)
   
3
 
   
(213
)
Net of tax amount
812
 
(36
)
 
(9
)
1
   
768
 
Reclassification of stranded tax effects
(1,452
)
   
1
 
   
(1,451
)
Balance at December 31, 2018
$
(8,483
)
$
(131
)
 
$
(2
)
$
(2
)
 
$
(8,618
)
(1)
Pension and PRB plans, net, is shown net of cumulative tax benefits of $2,255 million and $3,923 million at December 31, 2018 and December 31, 2017, respectively.
(2)
Cash flow hedges are shown net of cumulative tax benefit of $1 million and tax expense of $3 million at December 31, 2018 and December 31, 2017, respectively.
(3)
Unrealized gains (losses) on investments and other, net, are shown net of cumulative tax expense of $1 million at both December 31, 2018 and December 31, 2017.

On December 22, 2017, the President signed the 2017 Act, which reduced the U.S. corporate statutory federal tax rate to 21% for 2018. At December 31, 2017 the deferred tax amounts recorded through other comprehensive income prior to the enactment date using the prior 35% statutory tax rate remained in other comprehensive income despite the fact that the related deferred tax assets and liabilities were remeasured to reflect the newly enacted tax rate of 21%. These are referred to as stranded tax effects. Under Accounting Standards Update (ASU) 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, we elected to reclassify these stranded tax effects from AOCL to retained earnings in the first quarter of 2018. See Accounting Standards, below, for additional details. After the enactment date, any deferred tax amounts recorded to other comprehensive income are recorded at the 21% tax rate. The income tax effects remaining in AOCL will be released into earnings as the related before tax amounts are reclassified to earnings.

Other material amounts reclassified out of AOCL related to the amortization of net actuarial loss associated with our pension plans were $1,351 million, $1,177 million and $999 million before tax in 2018, 2017 and 2016, respectively. This component of AOCL is included in the calculation of net periodic pension expense (income). See “Note 14: Pension and Other Employee Benefits” for additional details.

We expect $3 million net of tax of net unrealized losses on our cash flow hedges at December 31, 2018 to be reclassified into earnings at then-current values over the next 12 months as the underlying hedged transactions occur.

Translation of Foreign Currencies—Assets and liabilities of foreign subsidiaries are translated at current exchange rates and the effects of these translation adjustments are reported as a component of AOCL in equity. Prior to the enactment of the 2017 Act, deferred taxes were not recognized for translation-related temporary differences of foreign subsidiaries as their undistributed earnings were considered to be indefinitely reinvested. After the enactment of the 2017 Act, we no longer assert indefinite reinvestment on our foreign subsidiaries outside basis differences generated after December 31, 2017. Unrealized foreign currency gains and losses associated with the subsidiary’s net assets, including unremitted earnings, represent translation gains and losses that are reported as part of other comprehensive income (loss). Therefore, the deferred tax effect of the translation gains and losses are also recorded through other comprehensive income (loss) after December 31, 2017. At December 31, 2018, we had a cumulative translation loss on the unremitted earnings, and therefore, have not recorded a deferred tax asset as it is not likely that the asset will be realized in the future. Income and expenses in foreign currencies are translated at the average exchange rate during the period.
16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Foreign exchange transaction gains and losses in 2018, 2017 and 2016 were not material.

Treasury Stock—Repurchased shares are retired immediately upon repurchase. We account for treasury stock under the cost method. Upon retirement the excess over par value is charged against additional paid-in capital until reduced to zero, with the remainder recorded as a reduction to retained earnings.

Pension and Other Postretirement Benefits (PRB) Costs—We have pension plans covering the majority of our employees hired before January 1, 2007, including certain employees in foreign countries. We calculate our pension costs as required under U.S. GAAP, and the calculations and assumptions utilized require judgment. U.S. GAAP outlines the methodology used to determine pension expense or income for financial reporting purposes. Pension and PRB expense is split between operating income and non-operating income, where only the service cost component is included in operating income and the non-service components are included in retirement benefits non-service expense. For purposes of determining retirement benefits non-service expense under U.S. GAAP, a calculated “market-related value” of our plan assets is used to develop the amount of deferred asset gains or losses to be amortized. The market-related value of assets is determined using actual asset gains or losses over a three-year period. Under U.S. GAAP, a “corridor” approach may be elected and applied in the recognition of asset and liability gains or losses which limits expense recognition to the net outstanding gains and losses in excess of the greater of 10% of the projected benefit obligation (PBO) or the calculated “market-related value” of assets. We do not use a “corridor” approach in the calculation of Financial Accounting Standards (FAS) pension expense.

We recognize the funded status of a postretirement benefit plan (defined benefit pension and other benefits) as an asset or liability in our consolidated balance sheets. Funded status represents the difference between the PBO of the plan and the market value of the plan’s assets. Previously unrecognized deferred amounts such as demographic or asset gains or losses and the impact of historical plan changes are included in AOCL. Changes in these amounts in future years will be reflected through AOCL and amortized in future pension expense generally over the estimated average remaining employee service period.

Derivative Financial Instruments—We enter into foreign currency forward contracts with commercial banks to fix the foreign currency exchange rates on specific commitments, payments and receipts denominated in foreign currencies. Our foreign currency forward contracts are transaction driven and relate directly to a particular asset, liability or transaction for which commitments are in place. We execute these instruments with financial institutions that we judge to be credit-worthy. The majority of our foreign currency forward contracts are denominated in currencies of major industrial countries. We do not hold or issue derivative financial instruments for trading or speculative purposes.

We designate most foreign currency forward contracts as cash flow hedges of forecasted purchases and sales denominated in foreign currencies. For foreign currency forward contracts designated and qualified for cash flow hedge accounting, we record the effective portion of the gain or loss on the derivative in AOCL, net of tax, and reclassify it into earnings in the same period or periods during which the hedged revenue or cost of sales transaction affects earnings. Realized gains and losses resulting from these cash flow hedges offset the foreign exchange gains and losses on the underlying transactions being hedged. We classify the cash flows from these instruments in the same category as the cash flows from the hedged items. To a lesser extent, we have gains and losses on derivatives not designated for hedge accounting or representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, which are recognized currently in net sales or cost of sales.

The aggregate notional amount of the outstanding foreign currency forward contracts was $1,772 million and $1,354 million at December 31, 2018 and December 31, 2017, respectively. The net notional exposure of these contracts was $840 million and $525 million at December 31, 2018 and December 31, 2017, respectively. The foreign currency forward contracts at December 31, 2018 have maturities at various dates through 2030 as follows: $1,145 million in 2019; $254 million in 2020; $189 million in 2021; and $184 million thereafter.

We recognize all derivative financial instruments as either assets or liabilities at fair value in our consolidated balance sheets. The fair value of asset derivatives included in other assets, net and liability derivatives included in other current liabilities in our consolidated balance sheets related to foreign currency forward contracts were $26 million and $34 million, respectively at December 31, 2018 and $28 million and $17 million, respectively at December 31, 2017. The fair value of these derivatives is Level 2 in the fair value hierarchy because they are determined based on a market approach utilizing externally quoted forward rates for similar contracts. Our foreign currency forward contracts contain offset or netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. We measure and record the impact of counterparty credit risk into our valuation and at December 31, 2018 and December 31, 2017, the fair value of our counterparty default exposure was less than $1 million and was spread across numerous highly rated counterparties.

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
We may also enter into pay-variable, receive-fixed interest rate swaps to manage interest rate risk associated with our fixed-rate financing obligations. We account for our interest rate swaps as fair value hedges of a portion of our fixed-rate financing obligations, and accordingly record gains and losses from changes in the fair value of these swaps in interest expense, along with the offsetting gains and losses on the fair value adjustment of the hedged portion of our fixed-rate financing obligations. We also record in interest expense the net amount paid or received under the swap for the period and the amortization of gain or loss from the early termination of interest rate swaps. There were no interest rate swaps outstanding at December 31, 2018 or December 31, 2017.

Fair Values—Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

Level 1:
Quoted prices in active markets for identical assets or liabilities.

Level 2:
Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or that we corroborate with observable market data for substantially the full term of the related assets or liabilities.

Level 3:
Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis consisted of marketable securities held in trust, short-term investments and foreign currency forward contracts as of December 31, 2018 and 2017. Fair value information for those assets and liabilities, including their classification in the fair value hierarchy, is included in “Note 14: Pension and Other Employee Benefits” (for marketable securities held in trust), Short-term Investments, above (for short-term investments) and Derivative Financial Instruments, below (for foreign currency forward contracts). Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. We did not have any significant nonfinancial assets or nonfinancial liabilities that would be recognized or disclosed at fair value on a recurring basis as of December 31, 2018 and 2017. We did not have any material amounts of Level 3 assets or liabilities at December 31, 2018 and 2017.

Earnings per Share (EPS)—We compute basic EPS attributable to Raytheon Company common stockholders by dividing income from continuing operations attributable to Raytheon Company common stockholders, income (loss) from discontinued operations attributable to Raytheon Company common stockholders, and net income attributable to Raytheon Company, by our weighted-average common shares outstanding, including participating securities outstanding, as described below, during the period. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, converted into common stock, or resulted in the issuance of common stock that would have shared in our earnings. We compute basic and diluted EPS using actual income from continuing operations attributable to Raytheon Company common stockholders, income (loss) from discontinued operations attributable to Raytheon Company common stockholders and net income attributable to Raytheon Company, and our actual weighted-average shares outstanding rather than the numbers presented within our 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 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.

18

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

As described in “Note 11: Forcepoint Joint Venture,” we record redeemable noncontrolling interest related to Vista Equity Partners’ interest in Forcepoint. We reflect the redemption value adjustments for redeemable noncontrolling interest in both the basic and diluted EPS calculation for the portion of redemption value that is in excess of the fair value of noncontrolling interest.

Employee Stock Plans—Stock-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the employees’ requisite service period, generally the vesting period of the award. The expense is amortized over the service period using the graded vesting method for our restricted stock and RSUs and the straight-line amortization method for our LTPP. The expense related to our Forcepoint long-term incentive plans is recognized over the requisite service period when achievement of the performance conditions is considered probable. We account for forfeitures when they occur, consistent with our government recovery accounting practice. The gross excess tax benefit received upon exercise of stock options or vesting of a stock-based award, if any, is reflected in the consolidated statements of cash flows as an operating activity.

Risks and Uncertainties—We provide a wide range of technologically advanced products, services and solutions for principally governmental customers in the U.S. and abroad, and are subject to certain business risks specific to that industry. Total sales to the U.S. government, excluding foreign military sales, were 68% of total net sales in 2018 and 67% of total net sales in 2017 and 2016. Total sales to customers outside the U.S., including foreign military sales through the U.S. government, were 30% of total net sales in 2018 and 32% of total net sales in 2017 and 2016. Sales to the U.S. government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad and other factors. Sales to international customers may be affected by changes in the priorities and budgets of international customers and geopolitical uncertainties, which may be driven by changes in threat environments, volatility in worldwide economic conditions, regional and local economic and political factors, U.S. foreign policy and other risks and uncertainties.

Remaining Performance Obligations—Remaining performance obligations represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ)). As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $42,420 million. We expect to recognize revenue on approximately half and three-quarters of the remaining performance obligations over the next 12 and 24 months, respectively, with the remainder recognized thereafter.

Accounting Standards—In February 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Act, from accumulated other comprehensive income to retained earnings. These stranded tax effects refer to the tax amounts included in accumulated other comprehensive income at the previous 35% U.S. statutory tax rate, for which the related deferred tax asset or liability was remeasured to the new 21% U.S. corporate statutory federal tax rate in the period of the 2017 Act enactment. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and can be applied either in the period of adoption or retrospectively to each period impacted by the 2017 Act. We elected to early adopt the new standard in the first quarter of 2018 and we elected to reclassify the stranded income tax effects of the 2017 Act from accumulated other comprehensive income to retained earnings in the period of adoption. This resulted in an increase to AOCL of $1,451 million and an increase in retained earnings of $1,451 million in the first quarter of 2018, almost all of which related to our pension and PRB plans, net. The standard did not have an impact on our results of operations or liquidity. Income tax effects remaining in accumulated other comprehensive income will be released into earnings as the related before tax amounts are reclassified to earnings.

19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changed certain presentation and disclosure requirements for employers that sponsor defined benefit pension and PRB plans. The new standard required the service cost component of the net benefit cost to be in the same line item as other compensation in operating income and the other components of net benefit cost to be presented outside of operating income on a retrospective basis. The new standard was effective for fiscal years beginning after December 15, 2017. We adopted the requirements of the new standard in the first quarter of 2018 on a retrospective basis for the presentation of only the service cost component in operating expenses, and the reclassification of the other components of the net benefit cost to retirement benefits non-service expense within non-operating (income) expense, net. The impact to our fiscal quarters and year-ended 2017 and year-ended 2016 financial results was as follows:
 
 
Three Months Ended
 
Twelve Months Ended
(In millions)
Dec 31, 2017
   
Oct 1, 2017
   
Jul 2, 2017
   
Apr 2, 2017
   
Dec 31, 2017
   
Dec 31, 2016
 
Cost of sales
$
(186
)
 
$
(222
)
 
$
(164
)
 
$
(164
)
 
$
(736
)
 
$
(458
)
General and administrative expenses
(44
)
 
(48
)
 
(42
)
 
(43
)
 
(177
)
 
(143
)
Total operating expenses
(230
)
 
(270
)
 
(206
)
 
(207
)
 
(913
)
 
(601
)
Operating income
230
   
270
   
206
   
207
   
913
   
601
 
Total non-operating (income) expense, net
230
   
270
   
206
   
207
   
913
   
601
 
Income from continuing operations
   
   
   
   
   
 
Net income
$
   
$
   
$
   
$
   
$
   
$
 
 
The remaining provisions of ASU 2017-07 did not have a material impact on our financial position, results of operations or liquidity.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an additional transition method under the modified retrospective approach for the adoption of Topic 842. The two permitted transition methods are now: (1) to apply the new lease requirements at the beginning of the earliest period presented, and (2) to apply the new lease requirements at the effective date. Under both transition methods there is a cumulative effect adjustment. We intend to adopt the standard on the effective date of January 1, 2019 by applying the new lease requirements at the beginning of the earliest period presented. We also intend to elect the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows us to carry forward the historical lease classification. We have evaluated the changes from this ASU to our future financial reporting and disclosures, and have designed and implemented related processes and controls to address these changes. We expect the standard will result in the recognition of right-of-use assets of $0.8 billion and lease liabilities of $0.8 billion as of December 31, 2018, with immaterial changes to other balance sheet accounts. The standard will have no impact on our results of operations or liquidity. In addition, new disclosures will be provided to enable users to assess the amount, timing and uncertainty of cash flows arising from leases.

Other new pronouncements issued but not effective until after December 31, 2018 are not expected to have a material impact on our financial position, results of operations or liquidity.

20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Note 2: Earnings Per Share (EPS)
EPS from continuing operations attributable to Raytheon Company common stockholders and unvested stock-based payment awards was as follows:
 
 
2018
   
2017
   
2016
 
Basic EPS attributable to Raytheon Company common stockholders:
         
Distributed earnings
$
3.46
   
$
3.18
   
$
2.92
 
Undistributed earnings
6.70
   
3.77
   
4.63
 
Total
$
10.16
   
$
6.95
   
$
7.55
 
Diluted EPS attributable to Raytheon Company common stockholders:
         
Distributed earnings
$
3.45
   
$
3.18
   
$
2.92
 
Undistributed earnings
6.70
   
3.76
   
4.63
 
Total
$
10.15
   
$
6.94
   
$
7.55
 
 
Income attributable to participating securities was as follows:
 
(In millions)
2018
   
2017
   
2016
 
Income from continuing operations attributable to participating securities
$
30
   
$
24
   
$
30
 
Income (loss) from discontinued operations, net of tax attributable to participating securities
   
   
 
Net income attributable to participating securities
$
30
   
$
24
   
$
30
 
 
The weighted-average shares outstanding for basic and diluted EPS were as follows: 
 
(In millions)
2018
   
2017
   
2016
 
Shares for basic EPS(1)
286.5
   
291.1
   
296.5
 
Effect of dilutive securities
0.3
   
0.3
   
0.3
 
Shares for diluted EPS
286.8
   
291.4
   
296.8
 
(1)
Includes participating securities of 2.9 million, 3.5 million and 4.0 million for 2018, 2017 and 2016, respectively.

Our Board of Directors is authorized to issue up to 200 million shares of preferred stock, $0.01 par value per share, in multiple series with terms as determined by them. There were no shares of preferred stock outstanding at December 31, 2018 or December 31, 2017.

Note 3: Acquisitions, Divestitures and Goodwill
In pursuing our business strategies, we acquire and make investments in certain businesses that meet strategic and financial criteria, and divest of certain non-core businesses, investments and assets when appropriate.

In May 2018, we completed the sale of our commercial cloud-based call center analytics solutions business for $11 million in cash, net of transaction-related costs. This business was part of our Space and Airborne Systems (SAS) segment. The Company recognized a gain of $8 million before tax, $5 million net of tax, which was recorded as a reduction to cost of sales at our SAS segment in the second quarter of 2018.

In 2017, our Forcepoint business completed the acquisitions of RedOwl Analytics Inc., a security analytics business, and the Skyfence cloud access security broker (CASB) business for total consideration of $93 million, net of cash received, and exclusive of retention payments. Vista Equity Partners contributed 19.7% of the purchase price for the Skyfence acquisition. Both acquisitions expand and enhance Forcepoint’s strategy to deliver cybersecurity systems that help customers understand people’s behaviors and intent as they interact with data and intellectual property wherever it may reside. In connection with these acquisitions, we recorded $77 million of goodwill, primarily related to expected synergies from combining operations and the value of the existing workforce, and $12 million of intangible assets, primarily related to technology and customer relationships.
21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
In 2016, our Forcepoint business acquired the Stonesoft next-generation firewall (NGFW) business, including the Sidewinder proxy firewall technology, and Vista Equity Partners contributed 19.7% of the purchase price. Stonesoft expands the cloud and hybrid capabilities of Forcepoint. In connection with this acquisition, we recorded $51 million of goodwill, primarily related to expected synergies from combining operations and the value of the existing workforce, and $23 million of intangible assets, primarily related to technology and customer relationships.

Pro forma financial information and revenue from the date of acquisition has not been provided for these acquisitions as they are not material either individually or in the aggregate.

We funded each of the above acquisitions using cash on hand. The operating results of these businesses have been included in our consolidated results as of the respective closing dates of the acquisitions. The purchase price of these businesses has been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill. The total amount of goodwill that is expected to be deductible for tax purposes related to these acquisitions was $62 million at December 31, 2018.

A rollforward of goodwill by segment was as follows: 
 
(In millions)
Integrated
Defense
Systems
   
Intelligence,
Information and
Services
   
Missile
Systems
   
Space and
Airborne
Systems
   
Forcepoint(1)
   
Total
 
Balance at December 31, 2016
$
1,702
   
$
2,966
   
$
4,154
   
$
4,106
   
$
1,860
   
$
14,788
 
Acquisitions and divestitures
   
   
   
   
77
   
77
 
Effect of foreign exchange rates and other
4
   
1
   
   
   
1
   
6
 
Balance at December 31, 2017
1,706
   
2,967
   
4,154
   
4,106
   
1,938
   
14,871
 
Acquisitions and divestitures
   
   
   
(3
)
 
   
(3
)
Effect of foreign exchange rates and other
(2
)
 
(2
)
 
   
   
   
(4
)
Balance at December 31, 2018
$
1,704
   
$
2,965
   
$
4,154
   
$
4,103
   
$
1,938
   
$
14,864
 
(1)
At December 31, 2018, Forcepoint’s fair value was estimated to exceed its net book value by approximately $1 billion. As discussed in “Note 11: Forcepoint Joint Venture,” we are required to determine Forcepoint’s fair value on a quarterly basis due to the accounting related to the redeemable noncontrolling interest.

For information on our intangible assets, see “Note 8: Other Assets, Net.”

Note 4: Thales-Raytheon Systems Co. Ltd. (TRS) Joint Venture
In 2001, we formed the TRS joint venture with Thales S.A. through our Integrated Defense Systems (IDS) segment. The TRS joint venture involved three operating companies, one of which, Raytheon Command and Control Solutions LLC (RCCS LLC), we controlled and consolidated, and the other two, Thales-Raytheon Systems Company S.A.S. (TRS SAS) and Thales-Raytheon Systems Air and Missile Defense Command and Control S.A.S. (TRS AMDC2), we accounted for using the equity method through our investment in TRS.

In 2016, Thales S.A. and Raytheon amended and restated the TRS joint venture agreement to reduce the arrangement to TRS AMDC2 only and limit its scope to NATO-only business opportunities involving air command and control systems, theatre missile defense and ballistic missile defense. As a result, we acquired Thales S.A.’s noncontrolling interest in RCCS LLC and sold our equity method investment in TRS SAS for a net cash payment to Thales S.A. of $90 million, which was classified as a financing activity in our consolidated statements of cash flows. We recorded our acquisition of RCCS LLC at fair value, which resulted in a reduction to equity of $167 million before tax, $197 million after tax, and the sale of TRS SAS at fair value, which resulted in a tax-free gain of $158 million that was recorded in operating income through a reduction in cost of sales at our IDS segment. TRS AMDC2 continues to be a joint venture between Thales S.A. and Raytheon that is accounted for using the equity method.

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Note 5: Receivables, Net
Receivables, net, consisted of the following at December 31:
 
(In millions)
2018
   
2017
 
U.S. government contracts (including foreign military sales)
$
1,121
   
$
881
 
Other customers
539
   
451
 
Allowance for doubtful accounts
(12
)
 
(8
)
Total receivables, net
$
1,648
   
$
1,324
 
 
Note 6: Contract Assets and Contract Liabilities
Net contract assets (liabilities) consisted of the following at December 31:
 
(In millions)
 
2018
 
2017
 
$ Change
 
% Change
Contract assets
 
$
5,594
   
$
5,247
   
$
347
   
6.6
%
Contract liabilities—current
 
(3,309
)
 
(2,927
)
 
(382
)
 
13.1
%
Contract liabilities—noncurrent
 
(150
)
 
(127
)
 
(23
)
 
18.1
%
Net contract assets (liabilities)
 
$
2,135
   
$
2,193
   
$
(58
)
 
(2.6
)%
 
Total net contract assets (liabilities) was relatively consistent from December 31, 2017 to December 31, 2018. Included in the change in total net contract assets (liabilities) was a $382 million increase in our current contract liabilities driven principally by billings in excess of revenue recognized on certain international programs with milestone payments, partially offset by a $347 million increase in our contract assets, principally due to the timing of pending approvals on direct commercial sales contracts for precision guided munitions to certain Middle Eastern customers. For direct commercial sales contracts for which we are required to obtain regulatory approvals, we recognize revenue based on the likelihood of obtaining such approvals. At December 31, 2018, we had approximately $2.3 billion of total contract value, recognized approximately $1 billion of sales for work performed to date and received approximately $850 million in advances on contracts for precision guided munitions to certain Middle Eastern customers for which U.S. government approval is pending. On a contract by contract basis, and excluding advances billed but not received, we had $500 million and $350 million of net contract assets and net contract liabilities, respectively, related to these contracts.

Impairment losses recognized on our receivables and contract assets were de minimis in 2018, 2017 and 2016.

Contract assets consisted of the following at December 31:
 
(In millions)
2018
   
2017
 
U.S. government contracts (including foreign military sales):
     
Unbilled
$
10,651
   
$
10,748
 
Progress payments
(6,338
)
 
(6,637
)
 
4,313
   
4,111
 
Other customers:
     
Unbilled
1,407
   
1,368
 
Progress payments
(126
)
 
(232
)
 
1,281
   
1,136
 
Total contract assets
$
5,594
   
$
5,247
 
 
The U.S. government has title to the assets related to unbilled amounts on contracts that provide progress payments. Included in contract assets at December 31, 2018 was $13 million which is expected to be collected outside of one year.
23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Contract assets include retentions arising from contractual provisions. At December 31, 2018, retentions were $103 million. We anticipate collecting $20 million of these retentions in 2019 and the balance thereafter.

In 2018, 2017 and 2016, we recognized revenue of $1,453 million, $1,434 million and $1,403 million related to our contract liabilities at January 1, 2018, January 1, 2017 and January 1, 2016, respectively.

Note 7: Property, Plant and Equipment, Net
Property, plant and equipment, net, consisted of the following at December 31:
 
(In millions)
2018
   
2017
 
Land
$
84
   
$
85
 
Buildings and improvements
2,835
   
2,567
 
Machinery and equipment
4,844
   
4,621
 
Property, plant and equipment, gross
7,763
   
7,273
 
Accumulated depreciation and amortization
(4,923
)
 
(4,834
)
Total
$
2,840
   
$
2,439
 
 
Depreciation and amortization expense of property, plant and equipment, net, was $374 million, $350 million and $316 million in 2018, 2017 and 2016, respectively.

Note 8: Other Assets, Net
Other assets, net, consisted of the following at December 31:
 
(In millions)
2018
     
2017
 
Marketable securities held in trust(1)
$
642
   
$
633
 
Computer software, net of accumulated amortization of $1,201 and $1,150 at December 31, 2018 and 2017, respectively
261
   
288
 
Other intangible assets, net of accumulated amortization of $760 and $652 at December 31, 2018 and 2017, respectively
361
   
481
 
Deferred tax asset(2)
331
   
537
 
Other noncurrent assets, net
429
   
285
 
Total
$
2,024
   
$
2,224
 
(1)
For further details, refer to “Note 14: Pension and Other Employee Benefits.”
(2)
For further details, refer to “Note 15: Income Taxes.”

Computer software amortization expense was $75 million, $71 million and $68 million in 2018, 2017 and 2016, respectively.

Other intangible assets, net, consisted primarily of completed technology, intellectual property and acquired customer relationships. These intangible assets are being amortized over their estimated useful lives which range from 1 to 15 years using either a straight-line or accelerated amortization method based on the pattern of economic benefits we expect to realize from such assets. Amortization expense for other intangible assets was $119 million, $129 million and $131 million in 2018, 2017 and 2016, respectively.

Computer software and other intangible asset amortization expense is expected to be approximately $174 million in 2019, $135 million in 2020, $99 million in 2021, $59 million in 2022 and $27 million in 2023.
 
Note 9: Commercial Paper and Long-term Debt
Commercial Paper—At December 31, 2018, short-term commercial paper borrowings outstanding were $300 million, which had a weighted-average interest rate and original maturity period of 2.954% and 16 days, respectively. At December 31, 2017, short-term commercial paper borrowings outstanding were $300 million, which had a weighted-average interest rate and original maturity period of 1.583% and 20 days, respectively. The commercial paper notes outstanding have original maturities of not more than 90 days from the date of issuance.

 
24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Long-term Debt—Long-term debt consisted of the following at December 31:

 

(In millions, except percentages)   2018     2017  
$500 notes due 2020, 4.40%   $ 499     $ 499  
$1,000 notes due 2020, 3.125%     998       996  
$1,100 notes due 2022, 2.50%     1,096       1,095  
$300 notes due 2024, 3.15%     298       297  
$382 notes due 2027, 7.20%     373       372  
$185 notes due 2028, 7.00%     185       185  
$600 notes due 2040, 4.875%     592       592  
$425 notes due 2041, 4.70%     419       419  
$300 notes due 2044, 4.20%     295       295  
Total debt issued and outstanding   $ 4,755     $ 4,750  

 

The notes are redeemable by us at any time at redemption prices based on U.S. Treasury rates. In the second quarter of 2017, we exercised our call rights to repurchase, at prices based on fixed spreads to the U.S. Treasury rates, $591 million of our long-term debt due March and December 2018 at a loss of $39 million before tax, $25 million net of tax, which is included in other (income) expense, net.

 

The carrying value of long-term debt is recorded at amortized cost. The fair value of long-term debt is determined using quoted prices in inactive markets, which falls within Level 2 of the fair value hierarchy. The estimated fair value of long-term debt was the following at December 31:

 

(In millions)   2018     2017  
Fair value of long-term debt   $ 5,063     $ 5,293  
                 

The adjustments to the principal amounts of long-term debt were as follows at December 31:

 

(In millions)   2018     2017  
Principal   $ 4,792     $ 4,792  
Unamortized issue discounts     (30 )     (34 )
Unamortized interest rate lock costs     (7 )     (8 )
Total   $ 4,755     $ 4,750  

 

The aggregate amounts of principal payments due on long-term debt for the next five years are:

 

(In millions)        
2019     $  
2020       1,500  
2021        
2022       1,100  
2023        
Thereafter       2,192  

 

In November 2015, we entered into a $1.25 billion revolving credit facility maturing in November 2020. Under the $1.25 billion credit facility, we can borrow, issue letters of credit and backstop commercial paper. Borrowings under this facility bear interest at various rate options, including LIBOR plus a margin based on our credit ratings. Based on our credit ratings at December 31, 2018, borrowings would generally bear interest at LIBOR plus 80.5 basis points. The credit facility is composed of commitments from 20 separate highly rated lenders, each committing no more than 10% of the facility. As of December 31, 2018 and December 31, 2017 there were no borrowings or letters of credit outstanding under this credit facility. The $300 million of commercial paper outstanding at December 31, 2018 reduced the amount available under our credit facility to $950 million.

25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Under the $1.25 billion credit facility we must comply with certain covenants, including a ratio of total debt to total capitalization of no more than 60%. We were in compliance with the credit facility covenants as of December 31, 2018 and December 31, 2017. Our ratio of total debt to total capitalization, as those terms are defined in the credit facility, was 30.6% at December 31, 2018. We are providing this ratio as this metric is used by our lenders to monitor our leverage and is also a threshold that could limit our ability to utilize this facility.

 

Total cash paid for interest on commercial paper and long-term debt was $194 million, $214 million and $231 million in 2018, 2017 and 2016, respectively.

 

Note 10: Commitments and Contingencies

Leases—At December 31, 2018, we had commitments under long-term leases requiring annual rentals on a net lease basis as follows:

 

(In millions)        
2019     $ 215  
2020       181  
2021       157  
2022       121  
2023       85  
Thereafter       200  

 

Rent expense was $232 million, $229 million and $239 million in 2018, 2017 and 2016, respectively. In the normal course of business, we lease equipment, office buildings and other facilities under leases that include standard escalation clauses for adjusting rent payments to reflect changes in price indices, as well as renewal options.

 

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

 

(In millions, except percentages)   2018     2017  
Total remediation costs—undiscounted   $ 193     $ 206  
Weighted-average discount rate     5.1 %     5.2 %
Total remediation costs—discounted   $ 128     $ 142  
Recoverable portion     82       92  

 

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.

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Environmental remediation costs expected to be incurred are:

 

(In millions)        
2019     $ 31  
2020       15  
2021       12  
2022       11  
2023       11  
Thereafter       113  

 

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

 

(In millions)   2018     2017  
Guarantees   $ 201     $ 216  
Letters of credit     2,503       2,416  
Surety bonds     166       166  

 

All guarantees at December 31, 2018 and December 31, 2017 related to our joint venture in TRS AMDC2. We provide these guarantees, as well as letters of credit, to TRS AMDC2 and other affiliates to assist these entities in obtaining financing on more favorable terms, making bids on contracts and performing their contractual obligations. While we expect these entities to satisfy their loans and meet their project performance and other contractual obligations, their failure to do so may result in a future obligation to us. We periodically evaluate the risk of TRS AMDC2 and other affiliates failing to meet their obligations described above. At December 31, 2018, we believe the risk that TRS AMDC2 and other affiliates will not be able to meet their obligations is minimal for the foreseeable future based on their current financial condition. All obligations were current at December 31, 2018. At December 31, 2018 and December 31, 2017, we had an estimated liability of $3 million and $2 million, respectively, related to these guarantees.

 

As discussed in “Note 11: Forcepoint Joint Venture,” under the joint venture agreement between Raytheon Company and Vista Equity Partners, Raytheon may be required to purchase Vista Equity Partners’ interest in Forcepoint.

 

We have entered into industrial cooperation agreements, sometimes in the form of either offset agreements or ICIP agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. At December 31, 2018, the aggregate amount of our offset agreements, both agreed to and anticipated to be agreed to, had an outstanding notional value of approximately $9.7 billion. These agreements are designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. Offset agreements may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects, and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for activities such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. Such activities may also vary by country depending upon requirements as dictated by their governments. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customers and typically require cash outlays that represent only a fraction of the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for penalties in the event we fail to perform in accordance with offset requirements. Historically, we have not been required to pay any penalties of significance.

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

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

 

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

 

Note 11: Forcepoint Joint Venture

Forcepoint is a cybersecurity joint venture company with Vista Equity Partners. The joint venture agreement between Raytheon and Vista Equity Partners provides Vista Equity Partners with certain rights to require Forcepoint to pursue an initial public offering at any time after four years and three months following the closing date of May 29, 2015, or pursue a sale of the company at any time after five years following the closing date. In either of these events, Raytheon has the option to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint for cash at a price equal to fair value as determined under the joint venture agreement. Additionally, Vista Equity Partners has the ability to liquidate its ownership through a put option, which became exercisable on May 29, 2017. The put option allows Vista Equity Partners to require Raytheon to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint for cash at a price equal to fair value as determined under the joint venture agreement. Lastly, Raytheon has the option, which became exercisable on May 29, 2018, to purchase all, but not less than all, of Vista Equity Partners’ interest in Forcepoint at a price equal to fair value as determined under the joint venture agreement. The joint venture agreement provides for the process under which the parties would determine the fair value of the interest and could result in a payment by Raytheon shortly after the exercise of Vista Equity Partners’ put option or Raytheon’s purchase option; however, the ultimate timing will depend on the actions of the parties and other factors. The estimate of fair value for purposes of presenting the redeemable noncontrolling interest in our consolidated balance sheets could differ from the parties’ determination of fair value for the interest under the joint venture agreement.

 

Vista Equity Partners’ adjusted equity interest in the Forcepoint joint venture was 19.5% at December 31, 2018. Vista Equity Partners’ interest in Forcepoint is presented as redeemable noncontrolling interest, outside of stockholders’ equity, in our consolidated balance sheets. The redeemable noncontrolling interest is recognized at the greater of the estimated redemption value as of the balance sheet date, which was $411 million at December 31, 2018, or the carrying value, which was $281 million at December 31, 2018.

28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

A rollforward of redeemable noncontrolling interest was as follows:

 

(In millions)   2018     2017  
Beginning balance   $ 512     $ 449  
Net income (loss)     (27 )     (23 )
Other comprehensive income (loss), net of tax(1)     (1 )      
Contribution from noncontrolling interest           8  
Adjustment of noncontrolling interest to redemption value     (73 )     78  
Ending balance   $ 411     $ 512  
(1) Other comprehensive income (loss), net of tax, was income of less than $1 million in 2017.

 

Note 12: Stockholders’ Equity

The changes in shares of our common stock outstanding were as follows:

 

(In millions)   2018     2017     2016  
Beginning balance     288.4       292.8       299.0  
Stock plans activity     0.9       1.1       1.5  
Share repurchases     (7.2 )     (5.5 )     (7.7 )
Ending balance     282.1       288.4       292.8  

 

From time to time, our Board of Directors authorizes the repurchase of shares of our common stock. In November 2015, our Board authorized the repurchase of up to $2.0 billion of our outstanding common stock. In November 2017, our Board also authorized the repurchase of up to $2.0 billion of our outstanding common stock. At December 31, 2018, we had approximately $1.5 billion available under the 2017 repurchase program. Share repurchases will take place from time to time at management’s discretion depending on market conditions.

 

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

 

Due to the volume of repurchases made under our share repurchase program, additional paid-in capital was reduced to zero in both 2018 and 2017, with the remainder of the excess purchase price over par value of $1,250 million and $724 million recorded as a reduction to retained earnings in 2018 and 2017, respectively.

 

Our share repurchases were as follows:

 

    2018     2017     2016  
(In millions)   $     Shares     $     Shares     $     Shares  
Shares repurchased under our share repurchase programs   $ 1,325       6.7     $ 800       4.9     $ 900       6.9  
Shares repurchased to satisfy tax withholding obligations     93       0.5       85       0.6       96       0.8  
Total share repurchases   $ 1,418       7.2     $ 885       5.5     $ 996       7.7  

 

In March 2018, our Board of Directors authorized an 8.8% increase to our annual dividend payout rate from $3.19 to $3.47 per share. Our Board of Directors declared dividends of $3.47, $3.19 and $2.93 per share in 2018, 2017 and 2016, respectively. Dividends are subject to quarterly approval by our Board of Directors.

 

As further discussed in “Note 4: Thales-Raytheon Systems Co. Ltd. (TRS) Joint Venture,” in 2016, we recorded our acquisition of Thales S.A.’s noncontrolling interest in RCCS LLC at fair value, which resulted in a reduction to retained earnings of $167 million before tax, $197 million after tax. The $30 million of deferred tax is due to the change in outside basis difference in RCCS LLC.

29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Note 13: Stock-based Compensation Plans

The Raytheon 2010 Stock Plan provides for stock-based awards to be issued as stock options, stock appreciation rights, restricted stock, RSUs or stock grants, including awards based on performance criteria. The plan authorizes the issuance of 7.5 million shares in addition to shares available under certain prior plans of the Company to fulfill the stock-based awards. The total maximum number of shares originally authorized for issuance under the 2010 Stock Plan and those certain prior plans is 41.8 million. The 2010 Stock Plan provides that awards to our employees, officers and consultants are generally made by the Management Development and Compensation Committee (MDCC) of our Board of Directors and are compensatory in nature, while awards to our non-employee directors are made by the Board’s Governance and Nominating Committee. Shares issued to fulfill the stock-based awards will be funded through the issuance of shares under the 2010 Stock Plan. At December 31, 2018, there were 6.0 million shares available for new awards and 3.1 million shares outstanding.

 

Stock-based compensation expense and the associated tax benefit recognized were as follows:

 

(In millions)   2018     2017     2016  
Stock-based compensation expense                        
Restricted stock expense
  $ 98     $ 94     $ 96  
RSU expense
    32       28       26  
LTPP expense
    36       38       29  
Total stock-based compensation expense   $ 166     $ 160     $ 151  
Stock-based tax benefit recognized     29       30       46  

 

At December 31, 2018, there was $179 million of compensation expense related to nonvested awards not yet recognized which is expected to be recognized over a weighted-average period of 1.5 years.

 

Restricted Stock and Restricted Stock Units

Shares of restricted stock vest over a specified period of time as determined by the MDCC, generally four years for employee awards and one year for non-employee directors. Recipients of restricted stock are entitled to full dividend and voting rights beginning on the date of grant. Non-vested shares of restricted stock are subject to forfeiture under certain circumstances and restricted as to disposition until vested. At the date of grant, each share of restricted stock is credited to common stock at par value. The fair value of restricted stock is calculated under the intrinsic value method at the date of grant and is charged to income as compensation expense generally over the vesting period with a corresponding credit to additional paid-in capital.

 

RSUs also vest over a specified period of time as determined by the MDCC, are compensatory in nature and are primarily awarded to retirement eligible employees. Retirement eligible recipients of RSUs are entitled to full dividend rights beginning on the date of grant. In addition, RSUs granted to retirement eligible employees continue to vest, but do not accelerate, on the scheduled vesting dates into retirement subject to the recipient’s compliance with certain post-employment covenants. Since recipients of RSUs with continued vesting provisions have satisfied the service requirement of the award at the date of grant, the Company recognizes all of the stock-based compensation expense associated with the RSUs awarded to retirement eligible employees in the period the award is granted. The expense is based on the fair value of the RSUs, calculated under the intrinsic value method at the date of grant.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Restricted stock and RSU activity was as follows:

 

      Shares/units  
(in thousands)
    Weighted-
average
grant date
fair value per
share
 
Outstanding at December 31, 2015       3,740     $ 87.57  
Granted
      1,128       124.08  
Vested
      (1,407 )     71.09  
Forfeited
      (167 )     98.61  
Outstanding at December 31, 2016       3,294       106.56  
Granted
      1,025       152.93  
Vested
      (1,194 )     91.77  
Forfeited
      (229 )     120.33  
Outstanding at December 31, 2017       2,896       127.98  
Granted
      774       212.96  
Vested
      (977 )     112.54  
Forfeited
      (215 )     150.67  
Outstanding at December 31, 2018       2,478     $ 158.66  

 

The total fair value of restricted stock and RSUs vested and the related tax benefit realized were as follows:

 

(In millions)   2018     2017     2016  
Fair value of restricted stock and RSUs vested   $ 206     $ 193     $ 183  
Tax benefit realized related to vested restricted stock/RSUs(1)     39       63       64  

(1) Includes $18 million, $29 million and $32 million of excess tax benefits realized in 2018, 2017 and 2016, respectively.

 

Long-term Performance Plan

In 2004, we established the LTPP, which provides for restricted stock unit awards granted from our stock plans to our senior leadership. Recipients of LTPP awards have no voting rights and receive dividend equivalent units. The vesting of LTPP awards and related dividend equivalent units is based upon the achievement of specific pre-established levels of performance at the end of a three-year performance cycle. In the event of a retirement, vesting for LTPP awards will not accelerate and instead will vest in accordance with the original vesting conditions on a pro-rated basis.

 

The performance goals for the three outstanding performance cycles at December 31, 2018 are independent of each other and based on three metrics, as defined in the LTPP award agreements: return on invested capital (ROIC), weighted at 50%; total shareholder return (TSR) relative to a peer group, weighted at 25%; and cumulative free cash flow from continuing operations (CFCF), weighted at 25%. The ultimate award, which is determined at the end of the three-year cycle, can range from zero to 200% of the target award and includes dividend equivalents, which are not included in the aggregate target award numbers.

 

Compensation expense for the LTPP awards is recognized on a straight-line basis from the grant date through the end of the performance period based upon the value determined under the intrinsic value method for the CFCF and ROIC portions of the LTPP award and the Monte Carlo simulation method for the TSR portion of the LTPP award. Compensation expense for the CFCF and ROIC portions of the awards will be adjusted based upon the expected achievement of those performance goals.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The assumptions used in the Monte Carlo model for the TSR portion of the LTPP awards granted during each year were as follows:

 

    2018     2017     2016  
Expected stock price volatility     16.87 %     18.74 %     18.60 %
Peer group stock price volatility     18.41 %     20.01 %     20.06 %
Correlations of returns     52.49 %     56.55 %     58.05 %
Risk free interest rate     2.21 %     1.53 %     1.08 %

 

LTPP award activity was as follows(1):

 

    Units  
(in thousands)
    Weighted-
average
grant date
fair value per
share
 
Outstanding at December 31, 2015     915     $ 80.83  
Granted
    167       123.31  
Increase due to expected performance
    205       89.62  
Vested
    (590 )     61.38  
Forfeited
    (32 )     105.52  
Outstanding at December 31, 2016     665       110.32  
Granted
    142       152.29  
Increase due to expected performance
    193       125.14  
Vested
    (273 )     97.59  
Forfeited
    (4 )     137.57  
Outstanding at December 31, 2017     723       127.16  
Granted
    117       205.76  
Increase due to expected performance
    71       135.27  
Vested
    (303 )     112.15  
Forfeited
    (24 )     164.58  
Outstanding at December 31, 2018     584     $ 150.15  
(1) This table excludes dividend equivalent units outstanding of 33 thousand at December 31, 2018 and 28 thousand at both December 31, 2017 and December 31, 2016, based on expected performance at each reporting date.

 

The total fair value of LTPP awards vested and the related tax benefit realized were as follows:

 

(In millions)   2018     2017     2016  
Fair value of LTPP awards vested   $ 67     $ 44     $ 77  
Tax benefit realized related to vested LTPP awards(1)     24       15       27  
(1) Includes $13 million, $7 million and $15 million of excess tax benefits realized in 2018, 2017 and 2016, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Forcepoint Plans

In 2015, Forcepoint established long-term incentive plans that provide for awards of unit appreciation rights and profits interests in the joint venture to Forcepoint management and key employees. Awards are approved by the Board of Forcepoint. These awards vest over a specified period of time and settlement is subject to a liquidity event defined as either a change in control or an initial public offering of the joint venture. In 2018, Forcepoint issued 8 thousand unit appreciation rights, 3 thousand were forfeited, and had 21 thousand outstanding at December 31, 2018. Also in 2018, Forcepoint issued 29 thousand profits interests, 15 thousand were forfeited, and had 116 thousand outstanding at December 31, 2018. At December 31, 2018, there were 174 thousand and 35 thousand combined unit appreciation rights and/or profits interests authorized and available for issuance, respectively, under these plans. The fair value of the awards is determined using the Black-Scholes valuation model and compensation expense is recognized over the requisite service period when achievement of the liquidity event is considered probable. In certain limited circumstances other vesting conditions may apply and the impact attributable to these vesting conditions was income of $1 million in 2018 and expense of $13 million and $10 million in 2017 and 2016, respectively.

 

The weighted-average assumptions used in the Black-Scholes model and the weighted-average grant date fair value for the Forcepoint awards granted were as follows:

 

    2018    2017    2016 
Unit Price   $ 1,508.01     $ 1,101.31     $ 935.28  
Expected life (in years)     3.01       2.29       4.24  
Expected unit price volatility     43.66 %     49.51 %     54.65 %
Risk free interest rate     2.69 %     1.46 %     1.12 %
Dividend yield     %     %     %
Grant date fair value   $ 486.94     $ 339.72     $ 402.64  

 

Note 14: Pension and Other Employee Benefits 

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

 

The fair value of plan assets for our domestic and foreign Pension Benefits plans was as follows:

 

(In millions)   2018     2017  
Domestic Pension Benefits plan   $ 18,488     $ 20,075  
Foreign Pension Benefits plan     833       927  

 

We maintain a defined contribution plan that includes a 401(k) plan. Covered employees hired or rehired on or after January 1, 2007 are eligible for a Company contribution based on age and service, instead of participating in our pension plans. These and other covered employees are eligible to contribute up to a specific percentage of their pay to the 401(k) plan, subject to IRS compensation and contribution limits. We match the employee contributions. The match is generally 3% or 4% of the employee’s pay and is invested in the same way as the employee contributions. Total expense for our contributions was $326 million, $303 million and $286 million in 2018, 2017 and 2016, respectively.

 

At December 31, 2018 and December 31, 2017, there was $17.0 billion and $18.4 billion invested in our defined contribution plan, respectively. At December 31, 2018 and December 31, 2017, $1.6 billion and $2.1 billion of these amounts were invested in our stock fund, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

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 at December 31:

 

(In millions)   2018     2017  
Marketable securities held in trust   $ 642     $ 633  

 

Included in marketable securities held in trust in the table above was $420 million and $410 million at December 31, 2018 and December 31, 2017, respectively, related to the nonqualified defined contribution plans. The liabilities related to the nonqualified defined contribution plans were $431 million and $422 million at December 31, 2018 and December 31, 2017, respectively.

 

We also maintain additional contractual pension benefits agreements for certain executive officers. The liability associated with such agreements was $36 million and $38 million at December 31, 2018 and December 31, 2017, respectively.

 

Contributions and Benefit Payments

We may make both required and discretionary contributions to our pension plans. Required contributions are primarily determined in accordance with the Pension Protection Act of 2006 (PPA), which amended the Employee Retirement Income Security Act of 1974 (ERISA) rules, and are affected by the actual return on plan assets (ROA) 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.

 

Due to the low interest rate environment, Congress provided for temporary pension funding relief through a provision in the Surface Transportation Extension Act of 2012 (STE Act). The provision was extended through 2020 by the Highway and Transportation Funding Act of 2014 (HATFA) and the Bipartisan Budget Act (BBA) of 2015. The provision adjusts the 24-month average high quality corporate bond rates used to determine the PPA funded status so that they are within a floor and cap, or “corridor,” based on the 25-year average of corporate bond rates. Beginning after 2020, the provision will be gradually phased out.

 

We made the following contributions to our pension and PRB plans during the years ended December 31:

 

(In millions)   2018     2017     2016  
Required pension contributions   $ 889     $ 615     $ 145  
Discretionary pension contributions     1,250       1,000       500  
PRB contributions     22       27       25  
Total   $ 2,161     $ 1,642     $ 670  

 

We periodically evaluate whether to make additional discretionary contributions. We made a $1.25 billion discretionary pension contribution in third quarter 2018 and have elected to apply approximately $1 billion to partially offset required contributions in 2019 and 2020, roughly split evenly between the two years. We expect to make required contributions of approximately $356 million and $30 million to our pension and PRB plans, respectively, in 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The table below reflects the total Pension Benefits expected to be paid from the plans or from our assets, including both our share of the benefit cost and the participants’ share of the cost, which is funded by participant contributions. PRB benefits expected to be paid reflect our portion only.

 

(In millions)     Pension
Benefits
    PRB  
2019     $ 2,008     $ 61  
2020       1,878       60  
2021       1,818       58  
2022       1,744       55  
2023       1,599       53  
Thereafter (next 5 years)       7,612       231  

 

Defined Benefit Retirement Plan Summary Financial Information 

The tables below outline the components of net periodic benefit expense (income) of our domestic and foreign Pension Benefits and PRB plans.

 

      Pension Benefits  
Components of Net Periodic Pension Expense (Income) (in millions)     2018       2017       2016  
Operating expense                        
Service cost   $ 504     $ 473     $ 482  
Non-operating expense                        
Interest cost     1,004       1,088       1,089  
Expected return on plan assets     (1,435 )     (1,377 )     (1,505 )
Amortization of prior service cost     6       5       5  
Amortization of net actuarial loss     1,351       1,177       999  
Loss recognized due to settlements     286       1       3  
Total pension non-service expense     1,212       894       591  
Net periodic pension expense (income)   $ 1,716     $ 1,367     $ 1,073  

 

Net periodic pension expense (income) includes income from foreign Pension Benefits plans of $8 million in 2018, expense of $2 million in 2017 and income of $4 million in 2016.

 

In July 2018, certain Raytheon-sponsored pension plans purchased a group annuity contract from an insurance company to transfer $923 million of our outstanding pension benefit obligations related to certain U.S. retirees and beneficiaries of our previously discontinued operations. As a result of the transaction, the insurance company is now required to pay and administer the retirement benefits owed to the approximately 13,000 U.S. retirees and beneficiaries, with no change to their monthly retirement benefit payment amounts. In connection with this transaction, in the third quarter of 2018 we recognized a non-cash pension settlement charge of $288 million before tax, $228 million net of tax, in non-operating (income) expense, net, primarily related to the accelerated recognition of actuarial losses included in AOCL for those plans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

    PRB  
Components of Net Periodic PRB Expense (Income) (in millions)   2018     2017     2016  
Operating expense                        
Service cost
  $ 5     $ 6     $ 6  
Non-operating expense                        
Interest cost
    27       30       31  
Expected return on plan assets
    (21 )     (21 )     (25 )
Amortization of prior service cost
          (1 )     (1 )
Amortization of net actuarial loss
    11       10       3  
Loss recognized due to settlements
    1       1       2  
Total PRB non-service expense
    18       19       10  
Net periodic PRB expense (income)   $ 23     $ 25     $ 16  

 

    Pension Benefits     PRB  

Funded Status – Amounts Recognized on our Balance Sheets

(in millions) December 31:

  2018     2017     2018     2017  
Noncurrent assets   $ 126     $ 112     $     $  
Current liabilities     (150 )     (164 )     (18 )     (19 )
Noncurrent liabilities     (6,111 )     (7,515 )     (354 )     (368 )
Net amount recognized on our balance sheets   $ (6,135 )   $ (7,567 )   $ (372 )   $ (387 )

 

    Pension Benefits     PRB  

Reconciliation of Amounts Recognized on our Balance Sheets

(in millions) December 31:

  2018     2017     2018     2017  
Accumulated other comprehensive loss:                                
Prior service (cost) credit   $ (27 )   $ (22 )   $     $  
Net loss     (10,590 )     (11,607 )     (121 )     (137 )
Accumulated other comprehensive loss     (10,617 )     (11,629 )     (121 )     (137 )
Accumulated contributions in excess (below) net periodic benefit or cost     4,482       4,062       (251 )     (250 )
Net amount recognized on our balance sheets   $ (6,135 )   $ (7,567 )   $ (372 )   $ (387 )

 

 
  Pension Benefits     PRB  

Sources of Change in Accumulated Other Comprehensive Loss

(in millions)

  2018     2017     2018     2017  
Prior service (cost) credit arising during period
  $ (10 )   $ (15 )   $     $  
Amortization of prior service cost (credit) included in net income
    6       5             (1 )
Net change in prior service (cost) credit not recognized in net income during the period
    (4 )     (10 )           (1 )
Actuarial gain (loss) arising during period
    (630 )     (1,796 )     4       (20 )
Amortization of net actuarial (gain) loss
    1,351       1,177       11       10  
Loss recognized due to settlements
    286       2       1       1  
Net change in actuarial gain (loss) not included in net income during the period
    1,007       (617 )     16       (9 )
Effect of exchange rates
    9       (14 )            
Total change in accumulated other comprehensive loss during period
  $ 1,012     $ (641 )   $ 16     $ (10 )

 

36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The amounts in AOCL at December 31, 2018 expected to be recognized as components of net periodic pension or PRB expense in 2019 are as follows:

 

(In millions)   Pension Benefits     PRB  
Amortization of net actuarial gain (loss)   $ (1,092 )   $ (10 )
Amortization of prior service (cost) credit     (5 )      
Total   $ (1,097 )   $ (10 )

 

The projected benefit obligation (PBO) represents the present value of Pension Benefits earned through the end of the year, with an allowance for future salary increases. The accumulated benefit obligation (ABO) is similar to the PBO, but does not provide for future salary increases. The PBO, ABO and asset values for our domestic qualified pension plans were as follows:

 

(In millions)   2018     2017  
PBO for domestic qualified pension plans   $ 23,359     $ 26,150  
ABO for domestic qualified pension plans     21,595       24,122  
Asset values for domestic qualified pension plans     18,488       20,075  

 

The PBO and fair value of plans assets for Pension Benefits plans with PBOs in excess of plan assets were $24,561 million and $18,300 million, respectively, at December 31, 2018 and $27,084 million and $19,405 million, respectively, at December 31, 2017.

 

The ABO and fair value of plan assets for Pension Benefits plans with ABOs in excess of plan assets were $22,554 million and $18,300 million, respectively, at December 31, 2018 and $24,795 million and $19,405 million, respectively, at December 31, 2017. The ABO for all Pension Benefits plans was $23,447 million and $26,276 million at December 31, 2018 and December 31, 2017, respectively.

 

The tables below provide a reconciliation of benefit obligations, plan assets and related actuarial assumptions of our domestic and foreign Pension Benefits and PRB plans.

 

    Pension Benefits     PRB  
Change in Projected Benefit Obligation (in millions)   2018     2017     2018     2017  
PBO at beginning of year   $ 28,569     $ 25,787     $ 745     $ 737  
Service cost     504       473       5       6  
Interest cost     1,004       1,088       27       30  
Plan participants’ contributions     6       8       49       35  
Amendments     10       15              
Plan settlements     (474 )     (5 )     (10 )     (9 )
Actuarial loss (gain)     (1,580 )     3,085       (39 )     41  
Foreign exchange loss (gain)     (56 )     78              
Benefits paid     (2,527 )     (1,960 )     (105 )     (95 )
PBO at end of year   $ 25,456     $ 28,569     $ 672     $ 745  

 

The PBO for our domestic and foreign Pension Benefits plans was $24,656 million and $800 million, respectively, at December 31, 2018 and $27,661 million and $908 million, respectively, at December 31, 2017.

 

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
    Pension Benefits     PRB  
Change in Plan Assets (in millions)   2018     2017     2018     2017  
Fair value of plan assets at beginning of year   $ 21,002     $ 18,605     $ 358     $ 360  
Actual return (loss) on plan assets     (775 )     2,666       (14 )     40  
Company contributions     2,139       1,615       22       27  
Plan participants’ contributions     6       8       49       35  
Plan settlements     (474 )     (4 )     (10 )     (9 )
Foreign exchange gain (loss)     (50 )     72              
Benefits paid     (2,527 )     (1,960 )     (105 )     (95 )
Fair value of plan assets at end of year   $ 19,321     $ 21,002     $ 300     $ 358  

 

Retirement Plan Assumptions

The tables below outline the actuarial assumptions of our domestic and foreign Pension Benefits and PRB plans.

 

      Pension Benefits          
Weighted-Average Net Periodic Benefit Cost Assumptions     2018       2017       2016  
Discou