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 |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
/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 |
/s/ PricewaterhouseCoopers LLP | |
Boston, Massachusetts | |
February 13, 2019 |
(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 |
(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 |
(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 |
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.
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.
(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 millions) | 2018 | 2017 | |||||
Materials and purchased parts | $ | 75 | $ | 69 | |||
Work in process | 662 | 504 | |||||
Finished goods | 21 | 21 | |||||
Total | $ | 758 | $ | 594 |
Years | |
Machinery and equipment | 3–10 |
Buildings | 20–45 |
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. |
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. |
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 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
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 |
(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 |
(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. |
(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. |
(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 |
(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 | )% |
(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 |
(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 |
(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.” |
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.
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.
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.
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.
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.
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.
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.
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. |
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.
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.
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.
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 | ) |
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.
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 | |||||||||
Discount rate | 3.68 | % | 4.31 | % | 4.45 | % | ||||||
Expected long-term rate of return on plan assets | 7.38 | % | 7.39 | % | 7.91 | % | ||||||
Rate of compensation increase | ||||||||||||
Range | 2%–7 | % | 2%–7 | % | 2%–7 | % | ||||||
Average | 4.43 | % | 4.43 | % | 4.42 | % |
PRB | ||||||||||||
Weighted-Average Net Periodic Benefit Cost Assumptions | 2018 | 2017 | 2016 | |||||||||
Discount rate | 3.72 | % | 4.28 | % | 4.42 | % | ||||||
Expected long-term rate of return on plan assets | 6.25 | % | 6.25 | % | 6.99 | % | ||||||
Rate of compensation increase | ||||||||||||
Range | 2%–7 | % | 2%–7 | % | 2%–7 | % | ||||||
Average | 4.50 | % | 4.50 | % | 4.50 | % | ||||||
Health care trend rate* | 4.00 | % | 4.00 | % | 4.00 | % |
* Currently at the ultimate trend rate.
Pension Benefits | PRB | |||||||||||||||
Weighted-Average Year-End Benefit Obligation Assumptions | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Discount rate | 4.28 | % | 3.68 | % | 4.31 | % | 3.72 | % | ||||||||
Rate of compensation increase | ||||||||||||||||
Range | 2%–7 | % | 2%–7 | % | 2%–7 | % | 2%–7 | % | ||||||||
Average | 4.40 | % | 4.40 | % | 4.50 | % | 4.50 | % | ||||||||
Health care trend rate* | 4.00 | % | 4.00 | % |
* Currently at the ultimate trend rate.
Our long-term return on plan assets (ROA) and discount rate assumptions are the key variables in determining the net periodic benefit cost and the pension benefit obligation of our pension plans under U.S. GAAP. Our long-term ROA assumption only impacts the retirement benefits non-service expense. The discount rate assumption impacts the service cost component of FAS expense and retirement benefits non-service expense, while also impacting the pension benefit obligation.
The discount rate represents the interest rate that should be used to determine the present value of future cash flows currently expected to be required to settle our pension and PRB obligations. The discount rate assumption is determined by using a theoretical bond portfolio model consisting of bonds rated AA or better by Moody’s Investors Service for which the timing and amount of cash flows approximate the estimated benefit payments for each of our pension plans. The weighted-average year-end benefit obligation discount rate for our domestic Pension Benefits plans was 4.33% and 3.72% at December 31, 2018 and December 31, 2017, respectively. Our foreign Pension Benefits plan assumptions have been included in the Pension Benefits assumptions in the table above.
The long-term ROA represents the average rate of earnings expected over the long term on the assets invested to provide for anticipated future benefit payment obligations. The long-term ROA used to calculate net periodic pension cost is set annually at the beginning of each year. Given the long-term nature of the ROA assumption, which we believe should not be solely reactive to short-term market conditions that may not persist, we expect the long-term ROA to remain unchanged unless there are significant changes in our investment strategy, the underlying economic assumptions or other major factors.
To establish our long-term ROA assumption we employ a “building block” approach. Under this building block method, the overall expected investment return equals the weighted-average of the individual expected return for each asset class based on the target asset allocation and the long-term capital market assumptions. The expected return for each asset class is composed of inflation plus a risk-free rate of return, plus an expected risk premium for that asset class. The resulting return is then adjusted for administrative, investment management and trading expenses as well as recognition of excess returns, also known as alpha, for active management. We then annually consider whether it is appropriate to change our long-term ROA assumption by reviewing the existing assumption against a statistically determined reasonable range of outcomes. The building block approach and the reasonable range of outcomes are based upon our asset allocation assumptions and long-term capital market assumptions. Such assumptions incorporate the economic outlook for various asset classes over short- and long-term periods and also take into consideration other factors, including historical market performance, inflation and interest rates.
Actuarial Standard of Practice No. 27, Selection of Economic Assumptions for Measuring Pension Obligations (ASOP 27) requires the selection of a reasonable long-term ROA assumption that considers multiple criteria including the purposes of measurement, the actuary’s professional judgment, historical and current economic data and estimates of future experience and has no significant bias. We evaluate our long-term ROA assumption against a reasonable range of possible outcomes which we define as between the 35th to 65th percentile likelihood of achieving a long-term return over future years. We believe that validating our ROA assumption within this reasonable range ensures an unbiased result while also ensuring that the ROA assumption is not solely reactive to short-term market conditions that may not persist, and is consistent with external actuarial practices.
The reasonable range of long-term returns that was used to validate the long-term ROA assumption for the calculation of the net periodic benefit cost for 2018, 2017 and 2016 is shown below.
Percentile | 2018 | 2017 | 2016 | |||||||||
35th | 5.49 | % | 5.82 | % | 6.09 | % | ||||||
65th | 7.57 | % | 7.96 | % | 8.16 | % |
2016 ROA Assumption—The long-term domestic ROA of 8.0% fell between the 60th and 65th percentiles of the applicable reasonable range for 2016. The 50th percentile of this reasonable range was 7.12%.
2017 ROA Assumption—At year end 2016, we determined that the 8.0% long-term ROA assumption no longer fell within the range of reasonable outcomes, driven primarily by the current outlook on economic assumptions used to develop the reasonable range. As a result, we employed the building block approach described above to develop our 2017 long-term ROA assumption. The building block approach resulted in a long-term ROA assumption of 7.5% for 2017. To validate this assumption, we compared the result against the reasonable range of outcomes and confirmed that the 7.5% fell between the 55th and 60th percentile of the reasonable range for 2017 with the 50th percentile at 6.89%.
Based upon our application of the building block approach and our review of the resulting assumption against the 35th to 65th percentile reasonable range and an analysis of our historical results, we established a 2017 long-term ROA domestic assumption of 7.5% for purposes of determining the net periodic benefit cost for 2017 and determined that the assumption is reasonable and consistent with the provisions of ASOP 27.
2018 ROA Assumption—The long-term domestic ROA of 7.5% fell between the 60th and 65th percentiles of the applicable reasonable range for 2018. The 50th percentile of this reasonable range was 6.74%.
Our domestic pension plans’ actual rates of return were approximately (4)%, 15% and 6% for 2018, 2017 and 2016, respectively. The difference between the actual rate of return and our long-term ROA assumption is included in deferred gains and losses.
The long-term ROA assumptions for our foreign Pension Benefits plans are based on the asset allocations and the economic environment prevailing in the locations where the Pension Benefits plans reside. Foreign pension assets do not make up a significant portion of the total assets for all of our Pension Benefits plans.
For purposes of determining pension expense 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 FAS pension expense.
The effect of a 1% increase or decrease in the assumed health care trend rate for each future year for the aggregate of service cost and interest cost is less than $1 million and for the accumulated postretirement benefit obligation is a $4 million increase or decrease.
Plan Assets
Substantially all our domestic Pension Benefits Plan (Plan) assets, which consist of investments in cash and cash equivalents, U.S. and international equities, real assets, private equity funds, private real estate funds, fixed income and other investments such as absolute return funds, insurance contracts and derivatives, are held in a master trust, which was established for the investment of assets of our Company-sponsored retirement plans. The assets of the master trust are overseen by our Investment Committee comprised of members of senior management drawn from appropriate diversified levels of the executive management team.
The Investment Committee is responsible for setting the policy that provides the framework for management of the Plan assets. In accordance with its responsibilities and charter, the Investment Committee meets on a regular basis to review the performance of the Plan assets and compliance with the investment policy. The policy sets forth an investment structure for managing Plan assets, including setting the asset allocation ranges, which are expected to provide an appropriate level of overall diversification and total investment return over the long term while maintaining sufficient liquidity to pay the benefits of the Plan. In developing the asset allocation ranges, third-party asset allocation and liability studies are periodically performed that consider the current and expected positions of the Plan assets and funded status. Based on these studies and other appropriate information, the Investment Committee establishes asset allocation ranges taking into account acceptable risk targets and associated returns.
The investment policy asset allocation ranges for the Plan, as set by the Investment Committee, for the year ended December 31, 2018 were as follows:
Asset Category | ||||
Global equity (combined U.S. and international equity) | 30%-60% | |||
U.S. equities | 20%-35% | |||
International equities | 10%-25% | |||
Fixed income | 20%-45% | |||
Cash and cash equivalents | 0%-10% | |||
Private equity and private real estate funds | 10%-20% | |||
Real assets | 0%-4% | |||
Other (including absolute return funds) | 5%-15% |
The Investment Committee appoints the investment fiduciary, who is responsible for making investment decisions within the framework of the Investment Policy, setting the long-term target allocation within the investment policy asset allocation ranges and for supervising the internal pension investment team. The pension investment team is comprised of experienced investment professionals, who are all employees of the Company. The investment fiduciary reports back to the Investment Committee. The investment fiduciary may seek authorization from the Investment Committee to change the investing allocation ranges with a focus on managing the Plan in a prudent manner.
Taking into account the asset allocation ranges, the investment fiduciary determines the specific allocation of the Plan’s investments within various asset classes. The Plan utilizes select investment strategies which are executed through separate account or fund structures with external investment managers who demonstrate experience and expertise in the appropriate asset classes and styles. The selection of investment managers is done with careful evaluation of all aspects of performance and risk, due diligence of internal operations and controls, reputation, systems evaluation, fees and a review of investment managers’ policies and processes. Investment performance is monitored frequently against appropriate benchmarks and within a compliance framework with the assistance of third-party performance measurement and evaluation tools, analytics and metrics.
Consistent with managing the Plan in a prudent manner, multiple investment strategies are employed to diversify risk such that no single investment or manager holding represents a significant exposure to the total investment portfolio. Plan assets are invested in numerous strategies with the intent to build a diversified portfolio. Plan assets can be invested in funds that track an index and are designed to achieve broad market diversification. The Plan had $2.5 billion invested in such funds across eight indices as of December 31, 2018. Excluding funds that track an index, no individual investment strategy represented more than 5% of the Plan as of December 31, 2018. Further, within each separate account strategy, guidelines are established which set forth the list of authorized investments, the typical portfolio characteristics and diversification required by limiting the amount that can be invested by sector, country and issuer.
The Plan’s investments are stated at fair value. Investments in equity securities are valued at the last reported sales price when an active market exists. Investments in fixed income securities are generally valued using methods based upon market transactions for comparable securities and various relationships between securities which are generally recognized by institutional market participants. Investments in funds are estimated at fair market value, which primarily utilizes net asset values reported by the investment manager or fund administrator. We review additional valuation and pricing information from fund managers, including audited financial statements, to evaluate the net asset values.
The fair value of our Plan assets by asset category and by level (as described in “Note 1: Summary of Significant Accounting Policies”) at December 31, 2018 and December 31, 2017 were as follows:
December 31, 2018 (in millions) | Total | Level 1 | Level 2 | Level 3 | Not subject to leveling(8) | |||||||||||||||
U.S. equities(1) | $ | 4,701 | $ | 2,189 | $ | — | $ | — | $ | 2,512 | ||||||||||
International equities(1) | 3,141 | 2,522 | 4 | — | 615 | |||||||||||||||
Real assets(2) | 53 | — | — | — | 53 | |||||||||||||||
Fixed income | ||||||||||||||||||||
U.S. government and agency securities | 1,923 | 1,727 | 196 | — | — | |||||||||||||||
Corporate debt securities/instruments(3) | 2,907 | 329 | 2,088 | — | 490 | |||||||||||||||
Core fixed income(4) | — | — | — | — | — | |||||||||||||||
Global multi-sector fixed income(5) | 400 | 400 | — | — | — | |||||||||||||||
Securitized and structured credit(6) | 534 | — | — | — | 534 | |||||||||||||||
Cash and cash equivalents(7) | 486 | 39 | — | — | 447 | |||||||||||||||
Absolute return funds | 1,432 | — | — | — | 1,432 | |||||||||||||||
Private equity funds | 1,419 | — | — | — | 1,419 | |||||||||||||||
Private real estate funds | 1,264 | — | — | — | 1,264 | |||||||||||||||
Insurance contracts | 31 | — | — | 31 | — | |||||||||||||||
Total investments | 18,291 | 7,206 | 2,288 | 31 | 8,766 | |||||||||||||||
Net receivables and payables | 197 | — | — | — | 197 | |||||||||||||||
Total assets | $ | 18,488 | $ | 7,206 | $ | 2,288 | $ | 31 | $ | 8,963 |
December 31, 2017 (in millions) | Total | Level 1 | Level 2 | Level 3 | Not subject to leveling(8) | |||||||||||||||
U.S. equities(1) | $ | 5,217 | $ | 2,631 | $ | — | $ | — | $ | 2,586 | ||||||||||
International equities(1) | 3,784 | 2,613 | 1 | — | 1,170 | |||||||||||||||
Real assets(2) | 100 | 79 | — | — | 21 | |||||||||||||||
Fixed income | ||||||||||||||||||||
U.S. government and agency securities | 1,919 | 1,814 | 105 | — | — | |||||||||||||||
Corporate debt securities/instruments(3) | 2,850 | 278 | 2,097 | — | 475 | |||||||||||||||
Core fixed income(4) | 102 | 102 | — | — | — | |||||||||||||||
Global multi-sector fixed income(5) | 472 | 472 | — | — | — | |||||||||||||||
Securitized and structured credit(6) | 571 | — | — | — | 571 | |||||||||||||||
Cash and cash equivalents(7) | 655 | 42 | 1 | — | 612 | |||||||||||||||
Absolute return funds | 1,680 | — | — | — | 1,680 | |||||||||||||||
Private equity funds | 1,416 | — | — | — | 1,416 | |||||||||||||||
Private real estate funds | 1,203 | — | — | — | 1,203 | |||||||||||||||
Insurance contracts | 30 | — | — | 30 | — | |||||||||||||||
Total investments | 19,999 | 8,031 | 2,204 | 30 | 9,734 | |||||||||||||||
Net receivables and payables | 76 | — | — | — | 76 | |||||||||||||||
Total assets | $ | 20,075 | $ | 8,031 | $ | 2,204 | $ | 30 | $ | 9,810 |
(1) | U.S. and International equities primarily include investments across the spectrum of large, medium and small market capitalization stocks. |
(2) | Real assets primarily include investments in physical and permanent assets, including infrastructure. |
(3) | Corporate debt securities/instruments primarily include investments in investment grade and non-investment grade fixed income securities. |
(4) | Core fixed income primarily includes investments in intermediate-term, high quality domestic securities issued by various governmental or private sector entities. |
(5) | Global multi-sector fixed income primarily includes investments that invest globally among several sectors including governments, investment grade corporate bonds, high yield corporate bonds and emerging market securities. |
(6) | Securitized and structured credit primarily includes investments that pool together various cash flow producing financial assets that are structured in a way that can achieve desired targeted credit, maturity or other characteristics and are typically collateralized by residential mortgages, commercial mortgages and other assets, and other fixed income related securities. |
(7) | Cash and cash equivalents are investments in highly liquid money market funds and bank sponsored collective funds. Included in cash and cash equivalents is excess cash in investment manager accounts. This cash is available for immediate use and is used to fund daily operations and execute the investment policy. This amount is not considered to be part of the cash target allocation set forth in the investment policy. |
(8) | Receivables, payables and certain investments that are valued using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amount presented for the total domestic pension benefits plan assets. |
A reconciliation of investments with significant unobservable inputs (Level 3) has not been provided as the amounts are immaterial.
The Plan limits the use of derivatives through direct or separate account investments such that the derivatives used are liquid and able to be readily valued in the market. Derivative usage in separate account structures is limited to hedging or adjusting market exposure in a non-speculative manner. The fair market value of the Plan’s derivatives through direct or separate account investments was approximately $6 million and $3 million as of December 31, 2018 and December 31, 2017, respectively.
In addition, assets are held in trust for non-U.S. Pension Benefits plans, primarily in the U.K. and Canada, which are governed in accordance with specific jurisdictional requirements. Investments in the non-U.S. Pension Benefits plans consist primarily of fixed income and equities and had a fair market value of $833 million and $927 million at December 31, 2018 and December 31, 2017, respectively. Investments with significant unobservable inputs (Level 3) are immaterial in the non-U.S. Pension Benefits plans.
The fair market value of assets related to our PRB Benefits was $300 million and $358 million as of December 31, 2018 and December 31, 2017, respectively. These assets included $141 million and $165 million at December 31, 2018 and December 31, 2017, respectively, which were invested in the master trust described above and are therefore invested in the same assets described above. The remaining investments are held within Voluntary Employees’ Beneficiary Association (VEBA) trusts. The assets of the VEBA trusts are also overseen by the Investment Committee and managed by the same investment fiduciary that manages the master trust’s investments. These assets are generally invested in mutual funds and are valued primarily using quoted prices in active markets (Level 1). There were no Level 3 investments in the VEBA trusts at December 31, 2018 or December 31, 2017.
The table below details assets by category for our VEBA trusts. These assets consisted primarily of publicly-traded equity securities and publicly-traded fixed income securities.
% of Plan Assets at Dec 31: | ||||||||
Asset category | 2018 | 2017 | ||||||
Fixed income securities | 42 | % | 44 | % | ||||
U.S. equities | 36 | % | 40 | % | ||||
International equities | 10 | % | 10 | % | ||||
Cash and cash equivalents | 12 | % | 6 | % | ||||
Total | 100 | % | 100 | % |
Note 15: Income Taxes
The provision for federal and foreign income taxes consisted of the following:
(In millions) | 2018 | 2017 | 2016 | |||||||||
Current income tax expense (benefit) | ||||||||||||
Federal | $ | 245 | $ | 822 | $ | 713 | ||||||
Foreign | 43 | 40 | 38 | |||||||||
State | — | — | (3 | ) | ||||||||
Deferred income tax expense (benefit) | ||||||||||||
Federal | (42 | ) | 235 | 118 | ||||||||
Foreign | 15 | 18 | 6 | |||||||||
State | 3 | (1 | ) | 1 | ||||||||
Total | $ | 264 | $ | 1,114 | $ | 873 |
The expense for income taxes differed from the U.S. statutory rate due to the following:
2018 | 2017 | 2016 | ||||||||||
Statutory tax rate | 21.0 | % | 35.0 | % | 35.0 | % | ||||||
Foreign derived intangible income (FDII) | (4.2 | ) | — | — | ||||||||
Research and development tax credit (R&D tax credit) | (2.4 | ) | (1.5 | ) | (1.3 | ) | ||||||
Equity compensation | (1.0 | ) | (1.2 | ) | (1.6 | ) | ||||||
Foreign income tax rate differential | 1.3 | 0.2 | — | |||||||||
Prior year true-up | (1.1 | ) | 0.1 | — | ||||||||
Tax benefit related to discretionary pension contributions | (3.0 | ) | — | — | ||||||||
R&D tax credit claims related to the 2014-2017 tax years | (2.1 | ) | — | — | ||||||||
Irish restructuring | (2.0 | ) | — | — | ||||||||
Change in valuation allowance | 2.0 | — | — | |||||||||
Domestic manufacturing deduction benefit | — | (2.5 | ) | (2.7 | ) | |||||||
Remeasurement of deferred taxes | — | 3.2 | — | |||||||||
One-time transition tax on previously undistributed foreign earnings | — | 2.3 | — | |||||||||
TRS SAS tax-free gain | — | — | (1.8 | ) | ||||||||
Other items, net | (0.1 | ) | 0.2 | 0.7 | ||||||||
Effective tax rate | 8.4 | % | 35.8 | % | 28.3 | % |
In 2017, the Tax Cuts and Jobs Act of 2017 (2017 Act) was enacted, which reduced the U.S. corporate tax rate to 21% effective in 2018. See below for a detailed discussion of the 2017 Act.
In the fourth quarter of 2018, Forcepoint completed an Irish restructuring transaction resulting in a deferred tax asset of approximately $63 million. We have evaluated both the positive and negative evidence to support our ability to realize the deferred tax asset associated with the restructuring. We believe it is more likely than not that the benefit from this restructuring transaction will not be realized. Accordingly, we have provided a valuation allowance of $63 million on the deferred tax asset related to this transaction.
In the third quarter of 2018, the Company recognized a net tax benefit of $110 million related to the completion of the 2017 tax return and additional amended research and development tax credit (R&D tax credit) claims related to the 2014-2016 tax years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also in the third quarter of 2018, we made a discretionary contribution to our pension plans of $1.25 billion. In the second quarter of 2018, we determined we would make this contribution and as a result recorded a net tax benefit of $95 million in the second quarter of 2018. This was primarily due to the remeasurement of the related deferred tax asset balance at the 2017 tax rate of 35% versus the 2018 tax rate of 21% since the discretionary contribution was deductible on our 2017 tax return.
In 2016, the Company recorded a tax benefit of approximately $55 million as a result of the tax-free gain from the sale of our equity method investment in TRS SAS as discussed in “Note 4: Thales-Raytheon Systems Co. Ltd. (TRS) Joint Venture.”
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. In August 2018, we received a full acceptance letter from the IRS that finalized their review of the 2016 tax year with no proposed changes. With the exception of one matter related to the 2015 tax year, all IRS examinations related to originally filed returns are closed through the 2016 tax year. In December 2017, we received the IRS Revenue Agent’s Report for the 2015 tax year which proposed approximately $41 million in adjustments related to the Forcepoint transaction and a U.K. share redemption transaction. We disagree and have protested the proposed adjustments with the IRS Appeals division. In the second quarter of 2018, the IRS agreed to withdraw the issue involving the U.K. share redemption transaction, which reduced the proposed adjustment to $32 million. Except for the issue appealed for the 2015 tax year, we have no proposed adjustments for any tax year prior to 2018. No amount related to the remaining proposed IRS adjustment is reflected in unrecognized tax benefits as of December 31, 2018. The amended tax returns for tax years 2014-2016 which reflect refund claims related to the increased R&D tax credits will be subject to audit. The schedule for that audit has yet to be proposed by the IRS. We are also under audit by multiple state and foreign tax authorities.
(In millions) | 2018 | 2017 | 2016 | |||||||||
Domestic income from continuing operations before taxes | $ | 2,937 | $ | 3,027 | $ | 2,964 | ||||||
Foreign income from continuing operations before taxes | 210 | 86 | 121 |
The Company will generally be free of additional U.S. federal tax consequences due to a dividends received deduction implemented as part of the move to a territorial tax system on distributed foreign subsidiary earnings. No provision has been made for deferred taxes related to any remaining historical outside basis differences in our non-U.S. subsidiaries. Determination of the amount of unrecognized deferred tax liability on outside basis differences is not practicable because these differences primarily relate to non-earnings and profits (E&P) book tax differences, such as acquisition accounting, and could be recognized upon a sale or other transactions of a subsidiary. The Company continues to assert indefinite reinvestment on these outside basis differences generated on or before December 31, 2017.
We made (received) the following net tax payments (refunds) during the years ended December 31:
(In millions) | 2018 | 2017 | 2016 | |||||||||
Federal | $ | (69 | ) | $ | 765 | $ | 710 | |||||
Foreign | 63 | 77 | 47 | |||||||||
State | 23 | 36 | 22 |
We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less than amounts accrued and reflected in our consolidated balance sheets. Accordingly, we could record adjustments to the amounts for federal, foreign and state tax-related liabilities in the future as we revise estimates or as we settle or otherwise resolve the underlying matters. In the ordinary course of business, we may take new positions that could increase or decrease our unrecognized tax benefits in future periods.
The balance of our unrecognized tax benefits, exclusive of interest, was $92 million and $9 million at December 31, 2018 and December 31, 2017, respectively, the majority of which would affect our earnings if recognized.
We accrue interest and penalties related to unrecognized tax benefits in tax expense. Interest and penalties recognized during 2018, 2017 and 2016 and accrued as of December 31, 2018 and December 31, 2017 were immaterial.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A rollforward of our unrecognized tax benefits was as follows:
(In millions) | 2018 | 2017 | 2016 | |||||||||
Unrecognized tax benefits, beginning of year | $ | 9 | $ | 7 | $ | 7 | ||||||
Additions based on current year tax positions | 20 | 1 | 2 | |||||||||
Additions based on prior year tax positions | 68 | 4 | 1 | |||||||||
Reductions based on prior year tax positions | (5 | ) | (1 | ) | (3 | ) | ||||||
Settlements based on prior year tax positions | — | (2 | ) | — | ||||||||
Unrecognized tax benefits, end of year | $ | 92 | $ | 9 | $ | 7 |
With the exception of Forcepoint, we generally defer our state income tax expense to the extent we can recover this expense through the pricing of our products and services to the U.S. government. We include this deferred amount in prepaid expenses and other current assets until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with the U.S. government. Current state income tax expense allocated to our contracts was $18 million, $32 million and $26 million in 2018, 2017 and 2016, respectively. We include state income tax expense allocated to our contracts in administrative and selling expenses.
Deferred income taxes consisted of the following at December 31:
(In millions) | 2018 | 2017 | ||||||
Noncurrent deferred tax assets (liabilities) | ||||||||
Accrued employee compensation and benefits | $ | 209 | $ | 202 | ||||
Other accrued expenses and reserves | 77 | 86 | ||||||
Contract balances and inventories | (494 | ) | (537 | ) | ||||
Pension benefits | 1,306 | 1,505 | ||||||
Other retiree benefits | 67 | 67 | ||||||
Net operating loss and tax credit carryforwards | 83 | 99 | ||||||
Depreciation and amortization | (827 | ) | (858 | ) | ||||
Partnership outside basis difference | (29 | ) | (36 | ) | ||||
Other | 21 | 21 | ||||||
Valuation allowance | (84 | ) | (17 | ) | ||||
Deferred income taxes—noncurrent | $ | 329 | $ | 532 |
As of December 31, 2018, we had U.S. federal and state net operating loss (NOL) carryforwards related to Forcepoint of $110 million and $292 million, respectively, which expire at various dates through 2037. We believe it is more likely than not that the deferred tax asset will be realized to the extent of existing deferred tax liabilities.
We also had foreign NOL carryforwards of $95 million as of December 31, 2018, with the majority generated in the U.K. where NOLs may be carried forward indefinitely. We believe that we will have sufficient taxable income to realize these deferred tax assets.
The Tax Cuts and Jobs Act
On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 (2017 Act) which enacted a wide range of changes to the U.S. corporate income tax system. The 2017 Act reduced the U.S. corporate statutory federal tax rate to 21% effective in 2018, eliminated the domestic manufacturing deduction benefit and introduced other tax base broadening measures, changed rules for expensing and capitalizing business expenditures, established a territorial tax system for foreign earnings as well as a minimum tax on certain foreign earnings, provided for a one-time transition tax on previously undistributed foreign earnings, and introduced new rules for the treatment of certain foreign income, including foreign derived intangible income (FDII).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also on December 22, 2017, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118 (SAB 118), which provided companies with additional guidance on how to account for the 2017 Act in their financial statements, allowing companies to use a measurement period. As of December 31, 2017, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax on previously undistributed foreign earnings and recognized provisional amounts totaling $171 million in accordance with SAB 118, which was included as a component of income tax expense from continuing operations. As of December 31, 2018, we had finalized our provisional estimates for the remeasurement of our existing U.S. deferred tax balances and the one-time transition tax for which we recorded a $1 million tax benefit in 2018.
Deferred tax assets and liabilities—At the date of enactment, the Company had a net deferred tax asset for the difference between the tax basis and the book basis of the U.S. assets and liabilities. Due to the 2017 Act, the future impact associated with the reversal of the net deferred tax asset will be subject to tax at a lower corporate tax rate. Consequently in 2017, we recorded a tax expense of $100 million to reduce the Company’s deferred tax asset due to the remeasurement of the U.S. deferred tax assets and liabilities for the reduction in the corporate tax rate from 35% to 21%. At December 31, 2018, we have finalized our provisional estimate for the remeasurement of our existing deferred tax balances with no additional adjustment.
Transition tax—The one-time transition tax is based on our total post-1986 E&P for which we have previously deferred U.S. income taxes. In 2017, we recorded a provisional amount for our one-time transition tax liability, using an applicable tax rate of 15.5%, resulting in an increase in income tax expense of $71 million after accounting for foreign tax credits. In 2018, we recorded a $1 million tax benefit to finalize our provisional calculation for the one-time transition tax for foreign E&P. This refinement was a result of completing the data gathering and analysis based on the 2017 Act and guidance issued to date in 2018, including IRS Notices 2018-07, 2018-13 and 2018-26. No provision has been made for deferred taxes related to any remaining historical outside basis differences in our non-U.S. subsidiaries as we continue to assert indefinite reinvestment on outside basis differences not related to amounts that have been previously taxed in the U.S. or undistributed earnings generated after December 31, 2017.
In addition to the changes described above, the 2017 Act imposes a U.S. tax on global intangible low taxed income (GILTI) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. The Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.
Note 16: Business Segment Reporting
Our reportable segments, organized based on capabilities and technologies, are: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint.
IDS is a leader in integrated air and missile defense; large land- and sea-based radar solutions; command, control, communications, computers, cyber and intelligence solutions; naval combat and ship electronic and sensing systems; and undersea sensing and effects solutions. IDS delivers combat-proven performance against the complete spectrum of airborne and ballistic missile threats and is a world leader in the technology, development, and production of sensors and mission systems.
IIS provides a full range of technical and professional services to intelligence, defense, federal and commercial customers worldwide. IIS specializes in global Intelligence, Surveillance and Reconnaissance (ISR); navigation; DoD space and weather solutions; cybersecurity; analytics; training; logistics; mission support; advanced software-based complex systems; automation and sustainment solutions; and international and domestic Air Traffic Management (ATM) systems.
MS designs, develops, integrates and produces missile and combat systems for the armed forces of the U.S. and allied nations. Leveraging its capabilities in advanced airframes, guidance and navigation systems, high-resolution sensors, surveillance, hypersonic systems, targeting and netted systems, MS provides and supports a broad range of advanced weapon systems including missiles, smart munitions, close-in weapon systems, projectiles, kinetic kill vehicles, directed energy effectors and advanced combat sensor solutions.
SAS is a leader in the design, development and manufacture of integrated sensor and communication systems for advanced missions. These missions include intelligence, surveillance and reconnaissance; precision engagement; manned and unmanned aerial operations; and space. Leveraging state-of-the-art technologies, mission systems and domain knowledge, SAS designs, manufactures, supports and sustains civil and military electro-optical/infrared (EO/IR) sensors; airborne radars for surveillance and fire control applications; lasers; precision guidance systems; signals intelligence systems; processors; electronic warfare systems; tactical and strategic communications; and space-qualified systems.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Forcepoint develops cybersecurity products serving commercial and government organizations worldwide. Forcepoint is a joint venture of Raytheon and Vista Equity Partners created in May 2015 that brought together the capabilities of the legacy Raytheon Cyber Products (RCP) and Websense, Inc. (Websense) businesses. Forcepoint delivers a portfolio of human-centric cybersecurity capabilities that incorporate behavior based insights, including risk adaptive data loss prevention; user and entity behavior analytics (UEBA) and cloud access security broker (CASB) capabilities; insider threat solutions; next-generation firewall (NGFW) technology; cloud and on premise web and email security; and cross domain transfer products.
As previously announced, effective January 1, 2018, we adopted the requirements of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost on a retrospective basis as discussed in “Note 1: Summary of Significant Accounting Policies.” All amounts and disclosures set forth in this Exhibit 99.1 to this Current Report on 8-K reflect these changes.
Segment total net sales and operating income include intersegment sales and profit generally recorded at cost-plus a specified fee, which may differ from what the selling entity would be able to obtain on sales to external customers. Eliminations include intersegment sales and profit eliminations. Corporate operating income includes expenses that represent unallocated costs and certain other corporate costs not considered part of management’s evaluation of reportable segment operating performance. Acquisition Accounting Adjustments include the adjustments to record acquired deferred revenue at fair value as part of our purchase price allocation process and the amortization of acquired intangible assets related to historical acquisitions.
Segment financial results were as follows:
Total Net Sales (in millions) | 2018 | 2017 | 2016 | |||||||||
Integrated Defense Systems | $ | 6,180 | $ | 5,804 | $ | 5,529 | ||||||
Intelligence, Information and Services | 6,722 | 6,177 | 6,169 | |||||||||
Missile Systems | 8,298 | 7,787 | 7,096 | |||||||||
Space and Airborne Systems | 6,748 | 6,430 | 6,182 | |||||||||
Forcepoint | 634 | 608 | 586 | |||||||||
Eliminations | (1,514 | ) | (1,423 | ) | (1,361 | ) | ||||||
Total business segment sales | 27,068 | 25,383 | 24,201 | |||||||||
Acquisition Accounting Adjustments | (10 | ) | (35 | ) | (77 | ) | ||||||
Total | $ | 27,058 | $ | 25,348 | $ | 24,124 |
Intersegment Sales (in millions) | 2018 | 2017 | 2016 | |||||||||
Integrated Defense Systems | $ | 65 | $ | 64 | $ | 69 | ||||||
Intelligence, Information and Services | 666 | 666 | 657 | |||||||||
Missile Systems | 161 | 132 | 122 | |||||||||
Space and Airborne Systems | 596 | 540 | 493 | |||||||||
Forcepoint | 26 | 21 | 20 | |||||||||
Total | $ | 1,514 | $ | 1,423 | $ | 1,361 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating Income (in millions) | 2018 | 2017 | 2016 | |||||||||
Integrated Defense Systems | $ | 1,023 | $ | 935 | $ | 971 | ||||||
Intelligence, Information and Services | 538 | 455 | 467 | |||||||||
Missile Systems | 973 | 1,010 | 921 | |||||||||
Space and Airborne Systems | 884 | 862 | 808 | |||||||||
Forcepoint | 5 | 33 | 90 | |||||||||
Eliminations | (170 | ) | (148 | ) | (142 | ) | ||||||
Total business segment operating income | 3,253 | 3,147 | 3,115 | |||||||||
Acquisition Accounting Adjustments | (126 | ) | (160 | ) | (198 | ) | ||||||
FAS/CAS Operating Adjustment | 1,428 | 1,303 | 1,036 | |||||||||
Corporate | (17 | ) | (59 | ) | (57 | ) | ||||||
Total | $ | 4,538 | $ | 4,231 | $ | 3,896 |
Intersegment Operating Income (in millions) | 2018 | 2017 | 2016 | |||||||||
Integrated Defense Systems | $ | 6 | $ | 5 | $ | 4 | ||||||
Intelligence, Information and Services | 68 | 64 | 65 | |||||||||
Missile Systems | 15 | 13 | 12 | |||||||||
Space and Airborne Systems | 60 | 51 | 46 | |||||||||
Forcepoint | 21 | 15 | 15 | |||||||||
Total | $ | 170 | $ | 148 | $ | 142 |
We must calculate our pension and PRB costs under both FAS requirements under U.S. GAAP and CAS requirements. U.S. GAAP outlines the methodology used to determine pension expense or income for financial reporting purposes, which is not indicative of the funding requirements for pension and PRB plans that we determine by other factors. CAS prescribes the allocation to and recovery of pension and PRB costs on U.S. government contracts. The results of each segment only include pension and PRB expense as determined under CAS. The CAS requirements for pension costs and its calculation methodology differ from the FAS requirements and calculation methodology. As a result, while both FAS and CAS use long-term assumptions in their calculation methodologies, each method results in different calculated amounts of pension and PRB costs. Our FAS expense is split between operating income and non-operating income where only the service cost component of FAS expense is included in operating income. The FAS/CAS Operating Adjustment, which is reported as a separate line in our segment results above, represents the difference between the service cost component of our pension and PRB expense or income under FAS in accordance with U.S. GAAP and our pension and PRB expense under CAS.
The pension and PRB components of the FAS/CAS Operating Adjustment were as follows:
(In millions) | 2018 | 2017 | 2016 | |||||||||
FAS/CAS Pension Operating Adjustment | $ | 1,415 | $ | 1,291 | $ | 1,026 | ||||||
FAS/CAS PRB Operating Adjustment | 13 | 12 | 10 | |||||||||
FAS/CAS Operating Adjustment | $ | 1,428 | $ | 1,303 | $ | 1,036 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capital Expenditures (in millions) | 2018 | 2017 | 2016 | |||||||||
Integrated Defense Systems | $ | 242 | $ | 200 | $ | 135 | ||||||
Intelligence, Information and Services | 46 | 22 | 59 | |||||||||
Missile Systems | 337 | 221 | 135 | |||||||||
Space and Airborne Systems | 136 | 158 | 149 | |||||||||
Forcepoint | 13 | 14 | 19 | |||||||||
Corporate | 24 | 19 | 29 | |||||||||
Total(1) | $ | 798 | $ | 634 | $ | 526 |
(1) | Total capital expenditures may not agree to our consolidated statements of cash flows due to non-cash transactions. |
Depreciation and Amortization (in millions) | 2018 | 2017 | 2016 | |||||||||
Integrated Defense Systems | $ | 98 | $ | 98 | $ | 88 | ||||||
Intelligence, Information and Services | 51 | 50 | 65 | |||||||||
Missile Systems | 98 | 84 | 69 | |||||||||
Space and Airborne Systems | 140 | 132 | 122 | |||||||||
Forcepoint | 17 | 17 | 15 | |||||||||
Acquisition Accounting Adjustments | 116 | 125 | 121 | |||||||||
Corporate | 48 | 44 | 35 | |||||||||
Total | $ | 568 | $ | 550 | $ | 515 |
Total Assets (in millions) | 2018 | 2017 | ||||||
Integrated Defense Systems(1) | $ | 4,829 | $ | 4,679 | ||||
Intelligence, Information and Services(1) | 4,242 | 4,230 | ||||||
Missile Systems(1) | 8,229 | 7,338 | ||||||
Space and Airborne Systems(1) | 6,750 | 6,696 | ||||||
Forcepoint(1) | 2,531 | 2,543 | ||||||
Corporate | 5,283 | 5,374 | ||||||
Total | $ | 31,864 | $ | 30,860 |
(1) | Total assets includes intangible assets. Related amortization expense is included in Acquisition Accounting Adjustments. |
Property, Plant and Equipment, Net, by Geographic Area (in millions) | 2018 | 2017 | ||||||
United States | $ | 2,751 | $ | 2,362 | ||||
All other (principally Europe) | 89 | 77 | ||||||
Total | $ | 2,840 | $ | 2,439 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We disaggregate our revenue from contracts with customers by geographic location, customer-type and contract-type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.
2018 | ||||||||||||||||||||||||||||
Disaggregation of Total Net Sales (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Other | Total | |||||||||||||||||||||
United States | ||||||||||||||||||||||||||||
Sales to the U.S. government(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | $ | 818 | $ | 1,008 | $ | 2,953 | $ | 2,480 | $ | 118 | $ | — | $ | 7,377 | ||||||||||||||
Cost-type contracts | 1,706 | 4,110 | 2,675 | 2,565 | 14 | — | 11,070 | |||||||||||||||||||||
Direct commercial sales and other U.S. sales | ||||||||||||||||||||||||||||
Fixed-price contracts | 5 | 118 | 41 | 111 | 209 | — | 484 | |||||||||||||||||||||
Cost-type contracts | 1 | 18 | — | 3 | — | — | 22 | |||||||||||||||||||||
Asia/Pacific | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 189 | 243 | 450 | 152 | — | — | 1,034 | |||||||||||||||||||||
Cost-type contracts | 79 | 45 | 61 | 22 | — | — | 207 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 711 | 198 | 173 | 211 | 70 | — | 1,363 | |||||||||||||||||||||
Cost-type contracts | 117 | — | 1 | 1 | — | — | 119 | |||||||||||||||||||||
Middle East and North Africa | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 849 | 20 | 452 | 237 | — | — | 1,558 | |||||||||||||||||||||
Cost-type contracts | 170 | 5 | 23 | 69 | — | — | 267 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 1,137 | 15 | 785 | 95 | 33 | — | 2,065 | |||||||||||||||||||||
Cost-type contracts | — | — | 96 | — | — | — | 96 | |||||||||||||||||||||
All other (principally Europe) | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 151 | 2 | 124 | 56 | — | — | 333 | |||||||||||||||||||||
Cost-type contracts | 27 | — | 70 | 6 | — | — | 103 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 145 | 230 | 231 | 144 | 154 | — | 904 | |||||||||||||||||||||
Cost-type contracts | 10 | 44 | 2 | — | — | — | 56 | |||||||||||||||||||||
Total net sales | 6,115 | 6,056 | 8,137 | 6,152 | 598 | — | 27,058 | |||||||||||||||||||||
Intersegment sales | 65 | 666 | 161 | 596 | 26 | (1,514 | ) | — | ||||||||||||||||||||
Acquisition Accounting Adjustments | — | — | — | — | 10 | (10 | ) | — | ||||||||||||||||||||
Reconciliation to business segment sales | $ | 6,180 | $ | 6,722 | $ | 8,298 | $ | 6,748 | $ | 634 | $ | (1,524 | ) | $ | 27,058 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) | Excludes foreign military sales through the U.S. government. |
2018 | ||||||||||||||||||||||||
Total Net Sales by Geographic Area (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Total | ||||||||||||||||||
United States | $ | 2,530 | $ | 5,254 | $ | 5,669 | $ | 5,159 | $ | 341 | $ | 18,953 | ||||||||||||
Asia/Pacific | 1,096 | 486 | 685 | 386 | 70 | 2,723 | ||||||||||||||||||
Middle East and North Africa | 2,156 | 40 | 1,356 | 401 | 33 | 3,986 | ||||||||||||||||||
All other (principally Europe) | 333 | 276 | 427 | 206 | 154 | 1,396 | ||||||||||||||||||
Total net sales | $ | 6,115 | $ | 6,056 | $ | 8,137 | $ | 6,152 | $ | 598 | $ | 27,058 |
2018 | ||||||||||||||||||||||||
Total Net Sales by Major Customer (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Total | ||||||||||||||||||
Sales to the U.S. government(1) | $ | 2,524 | $ | 5,118 | $ | 5,628 | $ | 5,045 | $ | 132 | $ | 18,447 | ||||||||||||
U.S. direct commercial sales and other U.S. sales | 6 | 136 | 41 | 114 | 209 | 506 | ||||||||||||||||||
Foreign military sales through the U.S. government | 1,465 | 315 | 1,180 | 542 | — | 3,502 | ||||||||||||||||||
Foreign direct commercial sales and other foreign sales(1) | 2,120 | 487 | 1,288 | 451 | 257 | 4,603 | ||||||||||||||||||
Total net sales | $ | 6,115 | $ | 6,056 | $ | 8,137 | $ | 6,152 | $ | 598 | $ | 27,058 |
(1) | Excludes foreign military sales through the U.S. government. |
2018 | ||||||||||||||||||||||||
Total Net Sales by Contract Type (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Total | ||||||||||||||||||
Fixed-price contracts | $ | 4,005 | $ | 1,834 | $ | 5,209 | $ | 3,486 | $ | 584 | $ | 15,118 | ||||||||||||
Cost-type contracts | 2,110 | 4,222 | 2,928 | 2,666 | 14 | 11,940 | ||||||||||||||||||
Total net sales | $ | 6,115 | $ | 6,056 | $ | 8,137 | $ | 6,152 | $ | 598 | $ | 27,058 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2017 | ||||||||||||||||||||||||||||
Disaggregation of Total Net Sales (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Other | Total | |||||||||||||||||||||
United States | ||||||||||||||||||||||||||||
Sales to the U.S. government(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | $ | 812 | $ | 1,090 | $ | 2,914 | $ | 2,233 | $ | 111 | $ | — | $ | 7,160 | ||||||||||||||
Cost-type contracts | 1,507 | 3,576 | 1,991 | 2,614 | 12 | — | 9,700 | |||||||||||||||||||||
Direct commercial sales and other U.S. sales | ||||||||||||||||||||||||||||
Fixed-price contracts | 6 | 130 | 1 | 51 | 202 | — | 390 | |||||||||||||||||||||
Cost-type contracts | 1 | 9 | — | 2 | 1 | — | 13 | |||||||||||||||||||||
Asia/Pacific | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 167 | 181 | 410 | 113 | — | — | 871 | |||||||||||||||||||||
Cost-type contracts | 138 | 51 | 64 | 9 | — | — | 262 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 596 | 193 | 309 | 284 | 59 | — | 1,441 | |||||||||||||||||||||
Cost-type contracts | 145 | — | 1 | 1 | — | — | 147 | |||||||||||||||||||||
Middle East and North Africa | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 1,066 | 18 | 371 | 191 | — | — | 1,646 | |||||||||||||||||||||
Cost-type contracts | 154 | 1 | 22 | 30 | — | — | 207 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 979 | 18 | 1,013 | 175 | 25 | — | 2,210 | |||||||||||||||||||||
Cost-type contracts | — | — | — | — | — | — | — | |||||||||||||||||||||
All other (principally Europe) | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 7 | 3 | 157 | 51 | — | — | 218 | |||||||||||||||||||||
Cost-type contracts | 22 | 2 | 78 | 5 | — | — | 107 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 128 | 209 | 320 | 131 | 142 | — | 930 | |||||||||||||||||||||
Cost-type contracts | 12 | 30 | 4 | — | — | — | 46 | |||||||||||||||||||||
Total net sales | 5,740 | 5,511 | 7,655 | 5,890 | 552 | — | 25,348 | |||||||||||||||||||||
Intersegment sales | 64 | 666 | 132 | 540 | 21 | (1,423 | ) | — | ||||||||||||||||||||
Acquisition Accounting Adjustments | — | — | — | — | 35 | (35 | ) | — | ||||||||||||||||||||
Reconciliation to business segment sales | $ | 5,804 | $ | 6,177 | $ | 7,787 | $ | 6,430 | $ | 608 | $ | (1,458 | ) | $ | 25,348 |
(1) | Excludes foreign military sales through the U.S. government. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2017 | ||||||||||||||||||||||||
Total Net Sales by Geographic Area (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Total | ||||||||||||||||||
United States | $ | 2,326 | $ | 4,805 | $ | 4,906 | $ | 4,900 | $ | 326 | $ | 17,263 | ||||||||||||
Asia/Pacific | 1,046 | 425 | 784 | 407 | 59 | 2,721 | ||||||||||||||||||
Middle East and North Africa | 2,199 | 37 | 1,406 | 396 | 25 | 4,063 | ||||||||||||||||||
All other (principally Europe) | 169 | 244 | 559 | 187 | 142 | 1,301 | ||||||||||||||||||
Total net sales | $ | 5,740 | $ | 5,511 | $ | 7,655 | $ | 5,890 | $ | 552 | $ | 25,348 |
2017 | ||||||||||||||||||||||||
Total Net Sales by Major Customer (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Total | ||||||||||||||||||
Sales to the U.S. government(1) | $ | 2,319 | $ | 4,666 | $ | 4,905 | $ | 4,847 | $ | 123 | $ | 16,860 | ||||||||||||
U.S. direct commercial sales and other U.S. sales | 7 | 139 | 1 | 53 | 203 | 403 | ||||||||||||||||||
Foreign military sales through the U.S. government | 1,554 | 256 | 1,102 | 399 | — | 3,311 | ||||||||||||||||||
Foreign direct commercial sales and other foreign sales(1) | 1,860 | 450 | 1,647 | 591 | 226 | 4,774 | ||||||||||||||||||
Total net sales | $ | 5,740 | $ | 5,511 | $ | 7,655 | $ | 5,890 | $ | 552 | $ | 25,348 |
(1) | Excludes foreign military sales through the U.S. government. |
2017 | ||||||||||||||||||||||||
Total Net Sales by Contract Type (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Total | ||||||||||||||||||
Fixed-price contracts | $ | 3,761 | $ | 1,842 | $ | 5,495 | $ | 3,229 | $ | 539 | $ | 14,866 | ||||||||||||
Cost-type contracts | 1,979 | 3,669 | 2,160 | 2,661 | 13 | 10,482 | ||||||||||||||||||
Total net sales | $ | 5,740 | $ | 5,511 | $ | 7,655 | $ | 5,890 | $ | 552 | $ | 25,348 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2016 | ||||||||||||||||||||||||||||
Disaggregation of Total Net Sales (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Other | Total | |||||||||||||||||||||
United States | ||||||||||||||||||||||||||||
Sales to the U.S. government(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | $ | 766 | $ | 1,170 | $ | 2,647 | $ | 2,321 | $ | 86 | $ | — | $ | 6,990 | ||||||||||||||
Cost-type contracts | 1,473 | 3,357 | 1,902 | 2,345 | 16 | — | 9,093 | |||||||||||||||||||||
Direct commercial sales and other U.S. sales | ||||||||||||||||||||||||||||
Fixed-price contracts | 13 | 167 | 2 | 20 | 193 | — | 395 | |||||||||||||||||||||
Cost-type contracts | 5 | 22 | — | 3 | — | — | 30 | |||||||||||||||||||||
Asia/Pacific | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 136 | 180 | 328 | 107 | — | — | 751 | |||||||||||||||||||||
Cost-type contracts | 119 | 77 | 70 | 6 | — | — | 272 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 502 | 166 | 249 | 288 | 49 | — | 1,254 | |||||||||||||||||||||
Cost-type contracts | 175 | — | 1 | — | — | — | 176 | |||||||||||||||||||||
Middle East and North Africa | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 816 | 60 | 387 | 148 | — | — | 1,411 | |||||||||||||||||||||
Cost-type contracts | 153 | 3 | 25 | 1 | — | — | 182 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 1,086 | 72 | 829 | 272 | 18 | — | 2,277 | |||||||||||||||||||||
Cost-type contracts | 1 | — | — | — | — | — | 1 | |||||||||||||||||||||
All other (principally Europe) | ||||||||||||||||||||||||||||
Foreign military sales through the U.S. government | ||||||||||||||||||||||||||||
Fixed-price contracts | 18 | 2 | 108 | 34 | — | — | 162 | |||||||||||||||||||||
Cost-type contracts | 23 | — | 90 | 8 | — | — | 121 | |||||||||||||||||||||
Direct commercial sales and other foreign sales(1) | ||||||||||||||||||||||||||||
Fixed-price contracts | 162 | 206 | 333 | 136 | 127 | — | 964 | |||||||||||||||||||||
Cost-type contracts | 12 | 30 | 3 | — | — | — | 45 | |||||||||||||||||||||
Total net sales | 5,460 | 5,512 | 6,974 | 5,689 | 489 | — | 24,124 | |||||||||||||||||||||
Intersegment sales | 69 | 657 | 122 | 493 | 20 | (1,361 | ) | — | ||||||||||||||||||||
Acquisition Accounting Adjustments | — | — | — | — | 77 | (77 | ) | — | ||||||||||||||||||||
Reconciliation to business segment sales | $ | 5,529 | $ | 6,169 | $ | 7,096 | $ | 6,182 | $ | 586 | $ | (1,438 | ) | $ | 24,124 |
(1) | Excludes foreign military sales through the U.S. government. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2016 | ||||||||||||||||||||||||
Total Net Sales by Geographic Area (in millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Forcepoint | Total | ||||||||||||||||||
United States | $ | 2,257 | $ | 4,716 | $ | 4,551 | $ | 4,689 | $ | 295 | $ | 16,508 | ||||||||||||
Asia/Pacific | 932 | 423 | 648 | 401 | 49 | 2,453 | ||||||||||||||||||
Middle East and North Africa | 2,056 | 135 | 1,241 | 421 | 18 | 3,871 | ||||||||||||||||||
All other (principally Europe) | 215 | 238 | 534 | 178 | 127 | 1,292 | ||||||||||||||||||
Total net sales | $ | 5,460 | $ | 5,512 | $ | 6,974 | $ | 5,689 | $ | 489 | $ | 24,124 |
2016 | ||||||||||||||||||||||||
Total Net Sales by Major Customer (in millions) | Integrated Defense Systems | Intelligence, Information | Missile Systems | Space and Airborne Systems | Forcepoint | Total | ||||||||||||||||||
Sales to the U.S. government(1) | $ | 2,239 | $ | 4,527 | $ | 4,549 | $ | 4,666 | $ | 102 | $ | 16,083 | ||||||||||||
U.S. direct commercial sales and other U.S. sales | 18 | 189 | 2 | 23 | 193 | 425 | ||||||||||||||||||
Foreign military sales through the U.S. government | 1,265 | 322 | 1,008 | 304 | — | 2,899 | ||||||||||||||||||
Foreign direct commercial sales and other foreign sales(1) | 1,938 | 474 | 1,415 | 696 | 194 | 4,717 | ||||||||||||||||||
Total net sales | $ | 5,460 | $ | 5,512 | $ | 6,974 | $ | 5,689 | $ | 489 | $ | 24,124 |
(1) | Excludes foreign military sales through the U.S. government. |
2016 | ||||||||||||||||||||||||
Total Net Sales by Contract Type (in millions) | Integrated Systems | Intelligence, Information and Services | Missile Systems | Space and Systems | Forcepoint | Total | ||||||||||||||||||
Fixed-price contracts | $ | 3,499 | $ | 2,023 | $ | 4,883 | $ | 3,326 | $ | 473 | $ | 14,204 | ||||||||||||
Cost-type contracts | 1,961 | 3,489 | 2,091 | 2,363 | 16 | 9,920 | ||||||||||||||||||
Total net sales | $ | 5,460 | $ | 5,512 | $ | 6,974 | $ | 5,689 | $ | 489 | $ | 24,124 |
Note 17: Quarterly Operating Results (Unaudited)
2018 (in millions, except per share amounts and workdays) | First | Second | Third(3) | Fourth | ||||||||||||
Total net sales | $ | 6,267 | $ | 6,625 | $ | 6,806 | $ | 7,360 | ||||||||
Gross margin | 1,735 | 1,848 | 1,935 | 1,967 | ||||||||||||
Income from continuing operations | 624 | 790 | 641 | 828 | ||||||||||||
Net income attributable to Raytheon Company | 633 | 800 | 644 | 832 | ||||||||||||
EPS from continuing operations attributable to Raytheon Company common stockholders(1) | ||||||||||||||||
Basic | $ | 2.20 | $ | 2.78 | $ | 2.25 | $ | 2.93 | ||||||||
Diluted | 2.20 | 2.78 | 2.25 | 2.93 | ||||||||||||
EPS attributable to Raytheon Company common stockholders(1) | ||||||||||||||||
Basic | 2.20 | 2.78 | 2.25 | 2.93 | ||||||||||||
Diluted | 2.19 | 2.78 | 2.25 | 2.93 | ||||||||||||
Workdays(2) | 64 | 64 | 63 | 58 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2017 (in millions, except per share amounts and workdays) | First | Second | Third | Fourth(4) | ||||||||||||
Total net sales | $ | 6,000 | $ | 6,281 | $ | 6,284 | $ | 6,783 | ||||||||
Gross margin | 1,634 | 1,760 | 1,816 | 1,798 | ||||||||||||
Income from continuing operations | 497 | 547 | 568 | 387 | ||||||||||||
Net income attributable to Raytheon Company | 506 | 553 | 572 | 393 | ||||||||||||
EPS from continuing operations attributable to Raytheon Company common stockholders(1) | ||||||||||||||||
Basic | $ | 1.73 | $ | 1.90 | $ | 1.97 | $ | 1.35 | ||||||||
Diluted | 1.73 | 1.89 | 1.97 | 1.35 | ||||||||||||
EPS attributable to Raytheon Company common stockholders(1) | ||||||||||||||||
Basic | 1.74 | 1.90 | 1.97 | 1.35 | ||||||||||||
Diluted | 1.74 | 1.89 | 1.97 | 1.35 | ||||||||||||
Workdays(2) | 64 | 64 | 62 | 58 |
(1) | EPS is computed independently for each of the quarters presented; therefore, the sum of the quarterly EPS may not equal the total computed for each year. |
(2) | Number of workdays per our fiscal calendar, which excludes holidays and weekends. |
(3) | In the third quarter of 2018, we recognized a non-cash pension settlement charge of $288 million for certain Raytheon-sponsored pension plans that purchased a group annuity contract from an insurance company to transfer some of our outstanding pension benefit obligations. |
(4) | In the fourth quarter of 2017, we recorded a provisional tax-related expense of $171 million due to the enactment of the 2017 Act. |
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