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EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SECTION 302 - RAYTHEON CO/rtn-09272015xexhibit311x10q.htm
EX-32.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SECTION 906 - RAYTHEON CO/rtn-09272015xexhibit321x10q.htm
EX-32.2 - CERTIFICATION OF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, SECTION 906 - RAYTHEON CO/rtn-09272015xexhibit322x10q.htm
EX-15 - AWARENESS LETTER OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - RAYTHEON CO/rtn-09272015xexhibit15.htm
EX-31.2 - CERTIFICATION OF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, SECTION 302 - RAYTHEON CO/rtn-09272015xexhibit312x10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 27, 2015
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from               to              
Commission File Number 1-13699
________________________________________________________________________________
RAYTHEON COMPANY
(Exact name of Registrant as Specified in its Charter)
________________________________________________________________________________ 
Delaware
 
95-1778500
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
870 Winter Street, Waltham, Massachusetts 02451
(Address of Principal Executive Offices) (Zip Code)
(781) 522-3000
(Registrant’s telephone number, including area code)
________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
 
Accelerated filer
 
o
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes ¨   No ý
Number of shares of common stock outstanding as of October 19, 2015 was 301,098,000.



RAYTHEON COMPANY
TABLE OF CONTENTS
 
 
 
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets at September 27, 2015 (Unaudited) and December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 

2


Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of federal securities laws, including information regarding our financial outlook, future plans, objectives, business prospects, trends and anticipated financial performance including with respect to our liquidity and capital resources, capital expenditures, our cash tax payments and tax reserves, our pension expense and funding, the impact of new accounting pronouncements, the impact of certain European economic conditions, our unrecognized tax benefits, our expectations regarding customer contracts, and the outcome of legal and administrative proceedings, claims, investigations, and commitments and contingencies. You can identify these statements by the fact that they include words such as “will,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” or variations of these words or similar expressions. These forward-looking statements are not statements of historical facts and represent only our current expectations regarding such matters. These statements inherently involve a wide range of known and unknown risks and uncertainties. Our actual actions and results could differ materially from what is expressed or implied by these statements. Specific factors that could cause such a difference include, but are not limited to, those set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and other important factors disclosed previously and from time to time in our other filings with the Securities and Exchange Commission (SEC). Given these factors, as well as other variables that may affect our operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance nor use historical trends to anticipate results or trends in future periods. We expressly disclaim any obligation or intention to provide updates to the forward-looking statements and the estimates and assumptions associated with them.



3


PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RAYTHEON COMPANY
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
 
(Unaudited)
Sep 27, 2015
 
Dec 31, 2014

Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
2,453

 
$
3,222

Short-term investments
 
608

 
1,497

Contracts in process, net
 
5,649

 
4,985

Inventories
 
619

 
414

Prepaid expenses and other current assets
 
199

 
174

Total current assets
 
9,528

 
10,292

Property, plant and equipment, net
 
1,934

 
1,935

Goodwill
 
14,681

 
13,061

Other assets, net
 
3,106

 
2,612

Total assets
 
$
29,249

 
$
27,900

 
 
 
 
 
Liabilities, Redeemable Noncontrolling Interest and Equity
 
 
 
 
Current liabilities
 
 
 
 
Advance payments and billings in excess of costs incurred
 
$
2,215

 
$
2,284

Accounts payable
 
1,334

 
1,250

Accrued employee compensation
 
1,190

 
1,059

Other current liabilities
 
1,589

 
1,337

Total current liabilities
 
6,328

 
5,930

Accrued retiree benefits and other long-term liabilities
 
6,895

 
6,919

Long-term debt
 
5,334

 
5,330

Commitments and contingencies (Note 9)
 


 

 
 
 
 
 
Redeemable noncontrolling interest (Note 7)
 
343

 

 
 
 
 
 
Equity
 
 
 
 
Raytheon Company stockholders’ equity
 
 
 
 
Common stock, par value, $0.01 per share, 1,450 shares authorized, 301 and 307 shares outstanding at September 27, 2015 and December 31, 2014, respectively.
 
3

 
3

Additional paid-in capital
 
617

 
1,309

Accumulated other comprehensive loss
 
(7,024
)
 
(7,458
)
Retained earnings
 
16,552

 
15,671

Total Raytheon Company stockholders’ equity
 
10,148

 
9,525

Noncontrolling interests in subsidiaries
 
201

 
196

Total equity
 
10,349

 
9,721

Total liabilities, redeemable noncontrolling interest and equity
 
$
29,249

 
$
27,900


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

4


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
 
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Net sales
 
 
 
 
 
 
 
 
Products
 
$
4,831

 
$
4,561

 
$
14,112

 
$
13,872

Services
 
952

 
913

 
2,807

 
2,811

Total net sales
 
5,783

 
5,474

 
16,919

 
16,683

Operating expenses
 
 
 
 
 
 
 
 
Cost of sales—products
 
3,635

 
3,418

 
10,458

 
10,335

Cost of sales—services
 
773

 
753

 
2,308

 
2,298

General and administrative expenses
 
678

 
540

 
1,968

 
1,740

Total operating expenses
 
5,086

 
4,711

 
14,734

 
14,373

Operating income
 
697

 
763

 
2,185

 
2,310

Non-operating (income) expense, net
 
 
 
 
 
 
 
 
Interest expense
 
58

 
53

 
175

 
158

Interest income
 
(3
)
 
(3
)
 
(9
)
 
(8
)
Other (income) expense, net
 
9

 
1

 
6

 
(5
)
Total non-operating (income) expense, net
 
64

 
51

 
172

 
145

Income from continuing operations before taxes
 
633

 
712

 
2,013

 
2,165

Federal and foreign income taxes
 
189

 
193

 
513

 
552

Income from continuing operations
 
444

 
519

 
1,500

 
1,613

Income (loss) from discontinued operations, net of tax
 
(1
)
 

 

 
59

Net income
 
443

 
519

 
1,500

 
1,672

Less: Net income (loss) attributable to noncontrolling interests in subsidiaries
 
(4
)
 
4

 
(3
)
 
10

Net income attributable to Raytheon Company
 
$
447

 
$
515

 
$
1,503

 
$
1,662

 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to Raytheon Company common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
1.47

 
$
1.66

 
$
4.91

 
$
5.12

Income (loss) from discontinued operations, net of tax
 

 

 

 
0.19

Net income
 
1.47

 
1.66

 
4.92

 
5.31

Diluted earnings per share attributable to Raytheon Company common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
1.47

 
$
1.65

 
$
4.91

 
$
5.11

Income (loss) from discontinued operations, net of tax
 

 

 

 
0.19

Net income
 
1.47

 
1.65

 
4.91

 
5.30

Amounts attributable to Raytheon Company common stockholders:
 

 
 
 
 
 
 
Income from continuing operations
 
$
448

 
$
515

 
$
1,503

 
$
1,603

Income (loss) from discontinued operations, net of tax
 
(1
)
 

 

 
59

Net income
 
$
447

 
$
515

 
$
1,503

 
$
1,662

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

5


RAYTHEON COMPANY 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
 
Nine Months Ended
(In millions)
Sep 27, 2015

 
Sep 28, 2014

 
Sep 27, 2015

 
Sep 28, 2014

Net income
$
443

 
$
519

 
$
1,500

 
$
1,672

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Foreign exchange translation
(28
)
 
(41
)
 
(30
)
 
(6
)
Cash flow hedges and interest rate locks
(4
)
 
(3
)
 
(4
)
 
(2
)
Unrealized gains (losses) on investments and other, net

 
3

 
(6
)
 
3

Pension and other postretirement benefit plans, net:
 
 
 
 
 
 
 
Net loss arising during period
(127
)
 
(332
)
 
(127
)
 
(332
)
Amortization of prior service cost included in net periodic cost
2

 
2

 
4

 
4

Amortization of net actuarial loss included in net income
281

 
224

 
847

 
670

Pension and other postretirement benefit plans, net
156

 
(106
)
 
724

 
342

Other comprehensive income (loss), before tax
124

 
(147
)
 
684

 
337

Income tax benefit (expense) related to items of other comprehensive income (loss)
(53
)
 
38

 
(250
)
 
(119
)
Other comprehensive income (loss), net of tax
71

 
(109
)
 
434

 
218

Total comprehensive income
514

 
410

 
1,934

 
1,890

Less: Comprehensive income (loss) attributable to noncontrolling interests in subsidiaries
(4
)
 
4

 
(3
)
 
10

Comprehensive income attributable to Raytheon Company
$
518

 
$
406

 
$
1,937

 
$
1,880

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


6


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
 
Nine Months Ended September 27, 2015 and September 28, 2014 (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, 2014
 
$
3

 
$
1,309

 
$
(7,458
)
 
 
$
15,671

 
$
9,525

 
$
196

 
$
9,721

Net income
 
 
 
 
 
 
 
 
1,503

 
1,503

 
8

 
1,511

Other comprehensive income (loss), net of tax
 
 
 
 
 
434

 
 
 
 
434

 
 
 
434

Adjustment of noncontrolling interest to redemption value
 
 
 
 
 
 
 
 
(11
)
 
(11
)
 
 
 
(11
)
Dividends declared
 
 
 
 
 
 
 
 
(611
)
 
(611
)
 
 
 
(611
)
Distributions and other activity related to noncontrolling interests
 
 

 
(1
)
 
 
 
 
 
 
(1
)
 
(3
)
 
(4
)
Common stock plans activity
 
 
 
157

 
 
 
 
 
 
157

 
 
 
157

Share repurchases
 

 
(848
)
 
 
 
 
 
 
(848
)
 
 
 
(848
)
Balance at September 27, 2015
 
$
3

 
$
617

 
$
(7,024
)
 
 
$
16,552

 
$
10,148

 
$
201

 
$
10,349

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
$
3

 
$
1,972

 
$
(5,113
)

 
$
14,173

 
$
11,035

 
$
162

 
$
11,197

Net income
 
 
 
 
 
 
 
 
1,662

 
1,662

 
10

 
1,672

Other comprehensive income (loss), net of tax
 
 
 
 
 
218

 
 
 
 
218

 
 
 
218

Dividends declared
 
 
 
 
 
 
 
 
(562
)
 
(562
)
 
 
 
(562
)
Distributions and other activity related to noncontrolling interests
 
 
 
 

 
 
 
 
 
 

 
(2
)
 
(2
)
Common stock plans activity
 
 
 
165

 
 
 
 
 
 
165

 
 
 
165

Share repurchases
 

 
(734
)
 
 
 
 
 
 
(734
)
 
 
 
(734
)
Balance at September 28, 2014
 
$
3

 
$
1,403

 
$
(4,895
)
 
 
$
15,273

 
$
11,784

 
$
170

 
$
11,954

(1)
Excludes redeemable noncontrolling interest which is not considered equity. See "Note 7: Raytheon|Websense Joint Venture" for additional information.
The accompanying notes are an integral part of the unaudited consolidated financial statements.


7


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Nine Months Ended
(In millions)
 
Sep 27, 2015
 
Sep 28, 2014
Cash flows from operating activities
 
 
 
 
Net income
 
$
1,500

 
$
1,672

(Income) loss from discontinued operations, net of tax
 

 
(59
)
Income from continuing operations
 
1,500

 
1,613

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
 
353

 
327

Stock-based compensation
 
114

 
118

Deferred income taxes
 
(248
)
 
(259
)
Tax benefit from stock-based awards
 
(43
)
 
(43
)
Changes in assets and liabilities
 
 
 
 
Contracts in process, net and advance payments and billings in excess of costs incurred
 
(700
)
 
(441
)
Inventories
 
(207
)
 
(159
)
Prepaid expenses and other current assets
 
7

 
27

Accounts payable
 
63

 
(119
)
Income taxes receivable/payable
 
3

 
108

Accrued employee compensation
 
109

 
73

Other current liabilities
 
47

 
(40
)
Other long-term liabilities
 
(26
)
 
(17
)
Accrued retiree benefits
 
583

 
46

Other, net
 
(22
)
 
1

Net cash provided by (used in) operating activities from continuing operations
 
1,533

 
1,235

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

 
35

Net cash provided by (used in) operating activities
 
1,533

 
1,270

Cash flows from investing activities
 
 
 
 
Additions to property, plant and equipment
 
(239
)
 
(173
)
Proceeds from sales of property, plant and equipment
 
45

 

Additions to capitalized internal use software
 
(37
)
 
(40
)
Purchases of short-term investments
 
(658
)
 
(2,190
)
Sales of short-term investments
 
209

 
882

Maturities of short-term investments
 
1,336

 
832

Payments for purchases of acquired companies, net of cash received
 
(1,892
)
 

Other
 
(6
)
 

Net cash provided by (used in) investing activities
 
(1,242
)
 
(689
)
Cash flows from financing activities
 
 
 
 
Dividends paid
 
(595
)
 
(551
)
Repurchases of common stock under share repurchase programs
 
(750
)
 
(650
)
Repurchases of common stock to satisfy tax withholding obligations
 
(98
)
 
(84
)
Proceeds from exercise of stock options
 

 
1

Tax benefit from stock-based awards
 
43

 
43

Sale of noncontrolling interest in Raytheon|Websense
 
343

 

Other
 
(3
)
 
(2
)
Net cash provided by (used in) financing activities
 
(1,060
)
 
(1,243
)
Net increase (decrease) in cash and cash equivalents
 
(769
)
 
(662
)
Cash and cash equivalents at beginning of the year
 
3,222

 
3,296

Cash and cash equivalents at end of period
 
$
2,453

 
$
2,634


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

8


RAYTHEON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation
We prepared the accompanying unaudited consolidated financial statements of Raytheon Company and all wholly-owned, majority-owned or otherwise controlled subsidiaries on the same basis as our annual audited financial statements. We condensed or omitted certain information and footnote disclosures normally included in our annual audited financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Our quarterly financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. As used in this report, the terms “we,” “us,” “our,” “Raytheon” and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another meaning.

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

As previously announced, in May 2015, we completed a series of transactions with Vista Equity Partners by which we acquired Websense, Inc. (Websense) from Vista Equity Partners and combined it with Raytheon Cyber Products (RCP), formerly part of our Intelligence, Information and Services (IIS) segment, to create Raytheon|Websense, a new cybersecurity joint venture company (with Vista Equity Partners). In connection with these transactions, we reorganized our operating and reporting structure with Raytheon|Websense as our fifth reporting segment. The amounts, discussion and presentation of our business segments, including Corporate and eliminations for intersegment activity, set forth in this Form 10-Q, reflect our new structure. None of the changes impact our previously reported consolidated balance sheets, statements of operations or statements of cash flows. See "Note 13: Business Segment Reporting" for additional information.

Note 2: Changes in Estimates under Percentage of Completion Contract Accounting
We have a Company-wide standard and disciplined quarterly Estimate at Completion (EAC) process in which management reviews the progress and performance of our contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities, and the related changes in estimates of revenues and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the contract (e.g., to estimate increases in wages and prices for materials and related support cost allocations), performance by our subcontractors, the availability and timing of funding from our customer, and overhead cost rates, among other variables. These estimates also include the estimated cost of satisfying our industrial cooperation agreements, sometimes referred to as offset obligations, required under certain contracts. Based on this analysis, any quarterly adjustments to net sales, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual contracts, if we determine we will be successful in mitigating risks surrounding the technical, schedule, and cost aspects of those contracts or in realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or in realizing related opportunities. Changes in estimates of net sales, cost of sales, and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contract's percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recognized in the period the loss is determined.

9


Net EAC adjustments had the following impact on our operating results:
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Operating income
$
84

 
$
155

 
$
245

 
$
365

Income from continuing operations attributable to Raytheon Company
54

 
101

 
159

 
237

Diluted earnings per share (EPS) from continuing operations attributable to Raytheon Company
$
0.18

 
$
0.32

 
$
0.52

 
$
0.76


Note 3: eBorders Settlement
In March 2015, Raytheon Systems Limited (RSL) reached a settlement with the UK Home Office concluding the parties' dispute regarding the UK Home Office's July 2010 termination of RSL's eBorders contract within our IIS segment. The settlement included a cash payment from the UK Home Office to RSL of £150 million (approximately $226 million based on foreign exchange rates as of the settlement date) for the resolution of all claims and counterclaims of both parties related to the matter. After certain expenses and derecognition of the outstanding receivables, IIS recorded $181 million in operating income through a reduction in cost of sales in the first quarter of 2015. The £150 million cash payment was received in the second quarter of 2015.

Note 4: Inventories
Inventories consisted of the following: 
(In millions)
 
Sep 27, 2015
 
Dec 31, 2014
Materials and purchased parts
 
$
66

 
$
70

Work in process
 
535

 
326

Finished goods
 
18

 
18

Total
 
$
619

 
$
414


We capitalize costs incurred in advance of contract award or funding in inventories if we determine that contract award or funding is probable. To the extent these are precontract costs, start-up costs have been excluded. We included capitalized precontract costs and other deferred costs of $218 million and $126 million in inventories as work in process at September 27, 2015 and December 31, 2014, respectively.

Note 5: Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606) which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Under the new standard, we expect to continue using the cost-to-cost percentage of completion method to recognize revenue for most of our long-term contracts. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have not yet selected a transition method. We are currently evaluating the potential changes from this ASU to our future financial reporting and disclosures. On July 9, 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard now would be effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.

Other new pronouncements issued but not effective until after September 27, 2015 are not expected to have a material impact on our financial position, results of operations or liquidity.

Note 6: Acquisitions
In pursuing our business strategies, we acquire and make investments in certain businesses that meet strategic and financial criteria.

In May 2015, we acquired Websense from Vista Equity Partners for approximately $1.9 billion, net of cash received, and exclusive of retention payments. Websense is a leader in advanced threat protection and data theft prevention across web,

10


email, cloud and endpoint infrastructure. In connection with this acquisition, we incurred transaction and integration-related costs of $1 million and $31 million in the third quarter and first nine months of 2015, respectively, of which $1 million and $26 million, respectively, were recorded at Corporate.

During the third quarter of 2015, based on the finalization of our valuation and internal reviews, we completed the purchase price allocation for Websense, which resulted in an adjustment to goodwill of $1 million. The final purchase price allocation, net of cash acquired, for the acquisition was as follows:
(In millions)
Purchase Price Allocation
Accounts receivable (at contractually stated amounts)
$
38

Other current assets
21

Property, plant and equipment
19

Goodwill
1,623

Intangible assets
501

Other non-current assets
17

Deferred revenue
(225
)
Current liabilities
(51
)
Long-term liabilities
(52
)
Fair value of net assets acquired
$
1,891


We have recorded $1.6 billion of goodwill, all of which will be allocated to the Raytheon|Websense segment, primarily related to expected synergies from combining operations and the value of the existing workforce, and none of which is expected to be deductible for tax purposes.

The following are the identifiable intangible assets acquired and the respective estimated periods over which such assets will be amortized:
(In millions, except years)
Gross Carrying Amount
 
Weighted Average Useful Life (in Years)
Completed technology
$
439

 
7
Customer relationships
43

 
13
Trademarks and other
19

 
10
Fair value of intangible assets acquired
$
501

 
 

The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

Pro-forma financial information has not been provided for this acquisition because it is not material.

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

 
Intelligence,
Information and Services(1)

 
Missile
Systems

 
Space and
Airborne
Systems

 
Raytheon|Websense(1)

 
Total

Balance at December 31, 2014
 
$
1,797

 
$
2,823

 
$
4,150

 
$
4,106

 
$
185

 
$
13,061

Acquisitions(2)
 

 
(2
)
 
4

 

 
1,623

 
1,625

Effect of foreign exchange rates and other
 
(3
)
 
(2
)
 

 

 

 
(5
)
Balance at September 27, 2015
 
$
1,794

 
$
2,819

 
$
4,154

 
$
4,106

 
$
1,808

 
$
14,681

(1)
In connection with the reclassification of RCP from our IIS segment, goodwill of $185 million was allocated to the Raytheon|Websense segment on a relative fair value basis.
(2)
In addition to the acquisition of Websense, we acquired Sensintel, Inc. and finalized the purchase price allocation for Raytheon Blackbird Technologies in the first nine months of 2015.


11


Note 7: Raytheon|Websense Joint Venture
As discussed above in "Note 6: Acquisitions", in May 2015, we acquired Websense and combined it with RCP, formerly part of our IIS segment, to create Raytheon|Websense. We then sold 19.7% of the equity interest in Raytheon|Websense to Vista Equity Partners for $343 million.

The joint venture agreement between Raytheon and Vista Equity Partners provides Vista Equity Partners with certain rights to require Raytheon|Websense 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 Raytheon|Websense 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 any time after two years following the closing date. In the event of a put option, Vista Equity Partners could require Raytheon to purchase all (but not less than all) of Vista Equity Partners’ interest in Raytheon|Websense for cash at a price equal to fair value as determined under the joint venture agreement. Lastly, at any time after three years following the closing date, Raytheon has the option to purchase all (but not less than all) of Vista Equity Partners’ interest in Raytheon|Websense at a price equal to fair value as determined under the joint venture agreement.

Vista Equity Partners' interest in Raytheon|Websense is presented as redeemable noncontrolling interest, outside of stockholders' equity, on the consolidated balance sheet. The redeemable noncontrolling interest is recognized at the greater of the estimated redemption value as of the balance sheet date or the initial value adjusted for Vista Equity Partners' share of the cumulative impact of net income (loss) and other changes in accumulated other comprehensive income. Adjustments to the redemption value over the period from the date of acquisition to the date the redemption feature becomes puttable are immediately recorded to retained earnings. We reflect the redemption value adjustments in the EPS calculation if redemption value is in excess of the fair value of noncontrolling interest.

A rollforward of redeemable noncontrolling interest is as follows:
 
 
Nine Months Ended
(In millions)
 
Sep 27, 2015
 
Sep 28, 2014
Beginning balance
 
$

 
$

Sale of noncontrolling interest in Raytheon|Websense
 
343

 

Net income (loss)
 
(11
)
 

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

 

Adjustment of noncontrolling interest to redemption value
 
11

 

Ending balance
 
$
343

 
$

(1)
Other comprehensive income (loss), net of tax, was a loss of less than $1 million for the nine months ended September 27, 2015.

Note 8: Derivatives and Other Financial Instruments
Derivatives—Our primary market exposures are to foreign exchange rates and interest rates, and we use certain derivative financial instruments to help manage these exposures. We execute these instruments with financial institutions that we judge to be credit-worthy, and the majority of our foreign currency forward contracts are denominated in currencies of major industrial countries. We do not hold or issue derivative financial instruments for trading or speculative purposes.

The fair value of asset derivatives included in other assets, net and liability derivatives included in other current liabilities in our consolidated balance sheets related to foreign currency contracts were $11 million and $30 million, respectively at September 27, 2015 and $7 million and $24 million, respectively at December 31, 2014. The fair values of these derivatives are Level 2 in the fair value hierarchy at September 27, 2015 and December 31, 2014 because they are determined based on a market approach utilizing externally quoted forward rates for similar contracts.

We use foreign currency forward contracts to fix the functional currency value of specific commitments, payments and receipts. The aggregate notional amount of the outstanding foreign currency forward contracts was $1,075 million and $926 million at September 27, 2015 and December 31, 2014, respectively. The net notional exposure of these contracts was approximately $10 million and $57 million at September 27, 2015 and December 31, 2014, respectively.

Our foreign currency forward contracts contain off-set or netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. At both September 27, 2015 and December 31, 2014, the fair value of our counterparty default exposure was less than $1 million and spread across numerous highly rated counterparties.


12


There were no interest rate swaps outstanding at September 27, 2015 or December 31, 2014.

Other Financial InstrumentsWe invest in marketable securities in accordance with our short-term investment policy and cash management strategy. These marketable securities are classified as available-for-sale and are recorded at fair value as short-term investments in our consolidated balance sheets. These investments are deemed Level 2 assets under the fair value hierarchy at September 27, 2015 and December 31, 2014, as their fair value is determined under a market approach using valuation models that utilize observable inputs, including maturity date, issue date, settlement date and current rates. At September 27, 2015 and December 31, 2014, we had short-term investments of $608 million and $1,497 million, respectively, consisting of highly rated bank certificates of deposit with a minimum long-term debt rating of A or A2 and a minimum short-term debt rating of A-1 and P-1. As of September 27, 2015, our short-term investments had an average maturity of approximately two months. The amortized cost of these securities closely approximated their fair value at September 27, 2015 and December 31, 2014. There were no securities deemed to have other than temporary declines in value for the third quarter of 2015. In the third quarter and first nine months of 2015, we recorded an unrealized loss on short-term investments of less than $1 million, net of tax, in accumulated other comprehensive loss (AOCL), and an unrealized gain on short-term investments of less than $1 million, net of tax, in AOCL, respectively. In the third quarter and first nine months of 2014, we recorded unrealized losses on short-term investments of less than $1 million, net of tax, in AOCL. We did not have any sales of short-term investments in the third quarter of 2015 or the third quarter of 2014. In the first nine months of 2015 and 2014, we recorded sales of short-term investments of $209 million and $882 million, respectively, which resulted in gains of less than $1 million recorded in other (income) expense, net. For purposes of computing realized gains and losses on available-for-sale securities, we determine cost on a specific identification basis.

In addition to the financial instruments discussed above, we hold other financial instruments, including cash and cash equivalents, notes receivable and debt. The carrying amounts for cash and cash equivalents and notes receivable approximated their fair values. The carrying value of long-term debt was recorded at amortized cost. The estimated fair value of long-term debt was determined based on quoted prices in inactive markets, which falls within Level 2 of the fair value hierarchy. The carrying value and estimated fair value of long-term debt were as follows:
(In millions)
 
Sep 27, 2015
 
Dec 31, 2014
Carrying value of long-term debt
 
$
5,334

 
$
5,330

Fair value of long-term debt
 
5,845

 
5,936


In addition, we did not have any transfers of assets or liabilities between levels of the fair value hierarchy during the first nine months of 2015.

Note 9: Commitments and Contingencies
Environmental MattersWe are involved in various stages of investigation and cleanup related to remediation of various environmental sites. Our estimate of the liability of total environmental remediation costs includes the use of a discount rate and takes into account that a portion of these costs is eligible for future recovery through the pricing of our products and services to the U.S. Government. We consider such recovery probable based on government contracting regulations and our long history of receiving reimbursement for such costs, and accordingly have recorded the estimated future recovery of these costs from the U.S. Government within contracts in process, net in our consolidated balance sheets. Our estimates regarding remediation costs to be incurred were as follows:
(In millions, except percentages)
 
Sep 27, 2015
 
Dec 31, 2014
Total remediation costs—undiscounted
 
$
223

 
$
202

Weighted average discount rate
 
5.3
%
 
5.5
%
Total remediation costs—discounted
 
$
150

 
$
131

Recoverable portion
 
94

 
80


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.


13


Financing Arrangements and Other—We issue guarantees and banks and surety companies issue, on our behalf, letters of credit and surety bonds to meet various bid, performance, warranty, retention and advance payment obligations of us or our affiliates. These instruments expire on various dates through 2023. Additional guarantees of project performance for which there is no stated value also remain outstanding. The stated values outstanding consisted of the following:
(In millions)
 
Sep 27, 2015
 
Dec 31, 2014
Guarantees
 
$
217

 
$
266

Letters of credit
 
2,136

 
1,938

Surety bonds
 
264

 
298


Included in guarantees and letters of credit described above were $207 million and $193 million, respectively, at September 27, 2015, and $196 million and $244 million, respectively, at December 31, 2014, related to our joint venture in Thales-Raytheon Systems Co. Ltd. (TRS). We provide these guarantees and letters of credit to TRS and other affiliates to assist these entities in obtaining financing on more favorable terms, making bids on contracts and performing their contractual obligations. While we expect these entities to satisfy their loans and meet their project performance and other contractual obligations, their failure to do so may result in a future obligation to us. We periodically evaluate the risk of TRS and other affiliates failing to meet their obligations described above. At September 27, 2015, we believe the risk that TRS 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 September 27, 2015. At September 27, 2015 and December 31, 2014, we had an estimated liability of $10 million and $9 million, respectively, related to these guarantees and letters of credit.

The TRS joint venture agreement was amended on June 10, 2014 to allow for termination of the joint venture by either party every three years based on the scheduled date for the designation of a successor Chief Executive Officer for the joint venture, which would next occur in 2016. Termination terms and related payments are subject to negotiation between Thales S.A. and Raytheon, but generally would include a net payment due for undistributed earnings of the joint venture companies since inception and a net payment based on the relative fair value of those companies excluding Air Command Systems International S.A.S. As a result, any final future termination amounts cannot be determined precisely at this time and could be different from those amounts recorded to date. However, if the joint venture were terminated as of September 27, 2015, we believe the termination payment we would be required to make based on a standard valuation approach would not be material. If a termination liability exceeds $50 million, the agreement allows the paying side to elect to make payments, inclusive of interest, in equal installments over five years to settle the liability.

We have an approximately $400 million international classified contract that did not achieve certain contractual milestones in the quarter. We are working with the customer to complete the milestones quickly and we currently do not expect to be terminated on the program. However, if we were terminated for default, it could result in a write-off currently estimated at $150$200 million.

As discussed in "Note 7: Raytheon|Websense Joint Venture", the joint venture agreement between Raytheon Company and Vista Equity Partners provides for certain contingencies that may require Raytheon to purchase Vista Equity Partners' interest in Raytheon|Websense.

We have entered into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. At September 27, 2015, the aggregate amount of our offset agreements had an outstanding notional value of approximately $5 billion. These agreements are designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. Offset agreements may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects, and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for activities such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. Such activities may also vary by country depending upon requirements as dictated by their governments. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customers and typically require cash outlays that represent only a fraction of the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for penalties in the event we fail to perform in accordance with offset requirements. We have historically not been required to pay any such penalties.


14


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

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

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

Product Warranty—We provide for product warranties in conjunction with certain product sales for which we recognize revenue upon delivery.

Activity related to product warranty accruals was as follows: 
 
 
Three Months Ended
 
Nine Months Ended
(In millions)
 
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Beginning balance
 
$
30

 
$
30

 
$
32

 
$
30

Provisions for warranties
 
(1
)
 
(2
)
 

 
1

Warranty services provided
 
(2
)
 
(2
)
 
(5
)
 
(5
)
Ending balance
 
$
27

 
$
26

 
$
27

 
$
26


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

15


Note 10: Stockholders’ Equity
The changes in shares of our common stock outstanding were as follows:
 
 
Nine Months Ended
(In millions)
 
Sep 27, 2015
 
Sep 28, 2014
Beginning balance
 
307.3

 
314.5

Stock plans activity
 
1.6

 
1.4

Share repurchases
 
(7.9
)
 
(7.6
)
Ending balance
 
301.0

 
308.3


In November 2013, our Board of Directors authorized the repurchase of up to $2.0 billion of our outstanding common stock. At September 27, 2015, we had approximately $0.8 billion available under this repurchase program. Share repurchases will take place from time to time at management’s discretion depending on market conditions.

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

Our share repurchases were as follows:
 
 
Nine Months Ended
(In millions)
 
Sep 27, 2015
 
Sep 28, 2014
 
 
$
Shares

 
$
Shares

Shares repurchased under our share repurchase programs
 
$
750

7.0

 
$
650

6.8

Shares repurchased to satisfy tax withholding obligations
 
98

0.9

 
84

0.8

Total share repurchases
 
$
848

7.9

 
$
734

7.6


In March 2015, our Board of Directors authorized an 11% increase to our annual dividend payout rate from $2.42 to $2.68 per share. Our Board of Directors also declared dividends of $2.01 per share during the first nine months of 2015, compared to dividends of $1.815 per share during the first nine months of 2014. Dividends are subject to quarterly approval by our Board of Directors.

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

We include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS calculations. As a result, we have included all of our outstanding unvested restricted stock awards, and unvested RSUs and LTPP awards that meet the retirement eligible criteria, in our calculation of basic and diluted EPS. We disclose EPS for common stock and unvested stock-based payment awards, and separately disclose distributed and undistributed earnings. Distributed earnings represent common stock dividends and dividends earned on unvested stock-based payment awards of retirement eligible employees. Undistributed earnings represent earnings that were available for distribution but were not distributed. Common stock and unvested stock-based payment awards earn dividends equally. We reflect the redemption value adjustments for redeemable noncontrolling interests in the EPS calculation if redemption value is in excess of the fair value of noncontrolling interest.


16


EPS from continuing operations attributable to Raytheon Company common stockholders and unvested stock-based payment awards was as follows: 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Basic EPS attributable to Raytheon Company common stockholders:
 
 
 
 
 
 
 
 
Distributed earnings
 
$
0.69

 
$
0.60

 
$
2.03

 
$
1.80

Undistributed earnings
 
0.78

 
1.06

 
2.88

 
3.32

Total
 
$
1.47

 
$
1.66

 
$
4.91

 
$
5.12

Diluted EPS attributable to Raytheon Company common stockholders:
 
 
 
 
 
 
 
 
Distributed earnings
 
$
0.68

 
$
0.60

 
$
2.03

 
$
1.79

Undistributed earnings
 
0.79

 
1.05

 
2.88

 
3.32

Total
 
$
1.47

 
$
1.65

 
$
4.91

 
$
5.11

Basic and diluted EPS from discontinued operations attributable to Raytheon Company common stockholders and unvested stock-based payment awards was a loss of less than $0.01 for the third quarters of 2015 and 2014, and earnings of less than $0.01 and earnings of $0.19 for the first nine months of 2015 and 2014, respectively.

Income attributable to participating securities was as follows:
 
Three Months Ended
 
Nine Months Ended
(In millions)
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Income from continuing operations attributable to participating securities
$
6

 
$
8

 
$
24

 
$
28

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

 

 

 
1

Net income attributable to participating securities
$
6

 
$
8

 
$
24

 
$
29

(1)
Income (loss) from discontinued operations, net of tax attributable to participating securities was a loss of less than $1 million for the third quarters of 2015 and 2014, and earnings of less than $1 million for the first nine months of 2015.

The weighted-average shares outstanding for basic and diluted EPS were as follows:
 
Three Months Ended
 
Nine Months Ended
(In millions)
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Shares for basic EPS(1)
303.9

 
310.9

 
305.8

 
312.9

Dilutive effect of stock options and LTPP
0.4

 
0.5

 
0.4

 
0.7

Shares for diluted EPS
304.3

 
311.4

 
306.2

 
313.6

(1)
Including 4.3 million and 5.3 million participating securities for the three months ended September 27, 2015 and September 28, 2014, respectively, and 4.9 million and 5.5 million for the nine months ended September 27, 2015 and September 28, 2014, respectively.

There were no stock options outstanding at September 27, 2015 nor included in the calculation of diluted EPS in the third quarter or first nine months of 2015, compared to less than 1 million outstanding and included in the calculation of diluted EPS in the third quarter and first nine months of 2014. There were no stock options with exercise prices greater than the average market price (anti-dilutive) that were excluded from our calculation of diluted EPS for the third quarter or first nine months of 2014.

17


Stock-based Compensation Plans
Restricted stock activity for the first nine months of 2015 was as follows:
(In millions)
Number of Shares
Outstanding unvested at December 31, 2014
4.5

Granted
1.2

Vested
(1.5
)
Forfeited
(0.3
)
Outstanding unvested at September 27, 2015
3.9

During the first nine months of 2015 and 2014, we awarded 0.2 million and 0.3 million RSUs, respectively, to retirement-eligible employees. These awards vest over a specified period of time as determined by the Management Development and Compensation Committee of our Board of Directors and are compensatory in nature. The RSUs continue to vest, but do not accelerate, on the scheduled vesting dates into retirement, subject to the employee's compliance with certain post-employment covenants. Due to the continued vesting provisions of the RSUs into retirement, the Company recognized all of the stock-based compensation expense associated with the RSUs in the first nine months of 2015 and 2014, approximately $22 million and $25 million, respectively, pretax.
During the first nine months of 2015 and 2014, we issued 0.8 million and 0.7 million shares, respectively, of our common stock in connection with the vesting of our 2012–2014 and 2011–2013 LTPP awards, respectively. During the same periods, we also granted our 2015–2017 and 2014–2016 LTPP awards with an aggregate target award of 0.2 million and 0.3 million shares, respectively, for each period.
The performance goals for the 2015–2017 LTPP award are independent of each other and based on three metrics, as defined in the award agreements: return on invested capital (ROIC), weighted at 50%; total shareholder return (TSR) relative to a peer group, weighted at 25%; and cumulative free cash flow from continuing operations (CFCF), weighted at 25%. The ultimate award, which is determined at the end of the three-year cycle, can range from zero to 200% of the target award and includes dividend equivalents, which are not included in the aggregate target award numbers.
In the third quarter of 2015, Raytheon|Websense established long-term incentive plans that provide for awards of unit appreciation rights and profits interests in the joint venture to Raytheon|Websense management and key employees. Awards are approved by the Board of Raytheon|Websense. These awards vest over a specified period of time and are subject to certain performance conditions of the joint venture. In the third quarter of 2015, Raytheon|Websense issued 12 thousand unit appreciation rights and 53 thousand profits interests with a grant date fair value of $418.86 per unit or interest. 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 performance conditions is considered probable. No compensation expense has been recognized for these plans to date.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign exchange translation adjustments, gains and losses on derivative instruments qualified as cash flow hedges, unrealized gains (losses) on investments, and gains and losses associated with pension and other postretirement benefits (PRB). The computation of other comprehensive income (loss) and its components are presented in the consolidated statements of comprehensive income.

18


Other comprehensive income (loss) consisted of the following activity during the first nine months of 2015 and 2014:
 
Foreign exchange translation

 
Cash flow hedges and interest rate locks

 
Unrealized gains (losses) on investments and other, net

 
Pension and PRB plans, net

 
Total

 
 
 
 
 
(In millions)
 
 
 
 
Balance at December 31, 2014
$
(3
)
 
$
(14
)
 
$
(9
)
 
$
(7,432
)
 
$
(7,458
)
Before tax amount
(30
)
 
(4
)
 
(6
)
 
724

 
684

Tax (expense) or benefit

 
1

 
2

 
(253
)
 
(250
)
Net of tax amount
(30
)
 
(3
)
 
(4
)
 
471

 
434

Balance at September 27, 2015
$
(33
)
 
$
(17
)
 
$
(13
)
 
$
(6,961
)
 
$
(7,024
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
47

 
$
(8
)
 
$
(9
)
 
$
(5,143
)
 
$
(5,113
)
Before tax amount
(6
)
 
(2
)
 
3

 
342

 
337

Tax (expense) or benefit

 
1

 

 
(120
)
 
(119
)
Net of tax amount
(6
)
 
(1
)
 
3

 
222

 
218

Balance at September 28, 2014
$
41

 
$
(9
)
 
$
(6
)
 
$
(4,921
)
 
$
(4,895
)
Material amounts reclassified out of AOCL were related to amortization of net actuarial loss associated with our pension and PRB plans, and were $847 million and $670 million before tax in the first nine months of 2015 and 2014, respectively. This component of AOCL is included in the calculation of net periodic benefit expense (income) (see "Note 11: Pension and Other Employee Benefits" for additional details).

The defined benefit pension and PRB plans is shown net of tax benefits of $3,752 million and $4,005 million at September 27, 2015 and December 31, 2014, respectively. The cash flow hedges and interest rate locks are shown net of tax benefits of $9 million and $8 million at September 27, 2015 and December 31, 2014, respectively. The unrealized gains (losses) on investments and other are shown net of tax benefits of $4 million and $2 million at September 27, 2015 and December 31, 2014, respectively. We expect approximately $5 million of after-tax net unrealized losses on our cash flow hedges at September 27, 2015 to be reclassified into earnings at then-current values over the next twelve months as the underlying hedged transactions occur.

Note 11: Pension and Other Employee Benefits
We have pension plans covering the majority of our employees, including certain employees in foreign countries (Pension Benefits). Our primary pension obligations relate to our domestic IRS qualified pension plans. We also provide certain health care and life insurance benefits to retired employees and to eligible employees upon retirement through PRB plans.

We also sponsor nonqualified defined benefit and defined contribution plans to provide benefits in excess of qualified plan limits. We have set aside certain assets in a separate trust, which we expect to be used to pay for trust obligations. The fair value of marketable securities held in trust, which are considered Level 1 assets under the fair value hierarchy, consisted of the following:
(In millions)
 
Sep 27, 2015
 
Dec 31, 2014
Marketable securities held in trust
 
$
508

 
$
519


Included in marketable securities held in trust in the table above was $324 million and $328 million at September 27, 2015 and December 31, 2014, respectively, related to the nonqualified defined contribution plans. The liabilities related to the nonqualified defined contribution plans were $322 million and $327 million at September 27, 2015 and December 31, 2014, respectively.


19


The components of net periodic pension expense (income) were as follows:
 
 
Three Months Ended
 
Nine Months Ended
(In millions)
 
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Service cost
 
$
142

 
$
103

 
$
403

 
$
336

Interest cost
 
263

 
284

 
786

 
846

Expected return on plan assets
 
(382
)
 
(384
)
 
(1,151
)
 
(1,186
)
Amounts reflected in net funded status
 
23

 
3

 
38

 
(4
)
Amortization of prior service cost included in net periodic pension expense
 
2

 
2

 
5

 
5

Amortization of net actuarial loss included in net income
 
281

 
224

 
846

 
669

Amounts reclassified during the year
 
283

 
226

 
851

 
674

Net periodic pension expense (income)
 
$
306

 
$
229

 
$
889

 
$
670


Net periodic pension expense (income) includes income of $1 million and $2 million from foreign Pension Benefits plans in the third quarters of 2015 and 2014, respectively, and income of $4 million and $7 million in the first nine months of 2015 and 2014, respectively.

The components of net periodic PRB expense (income) were as follows: 
 
 
Three Months Ended
 
Nine Months Ended
(In millions)
 
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Service cost
 
$
1

 
$
2

 
$
5

 
$
5

Interest cost
 
8

 
8

 
23

 
26

Expected return on plan assets
 
(7
)
 
(8
)
 
(21
)
 
(25
)
Amounts reflected in net funded status
 
2

 
2

 
7

 
6

Amortization of prior service cost included in net periodic PRB expense
 

 

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

 

 
1

 
1

Amounts reclassified during the year
 

 

 

 

Net periodic PRB expense (income)
 
$
2

 
$
2

 
$
7

 
$
6


Long-term pension and PRB plan liabilities were as follows:
(In millions)
 
Sep 27, 2015
 
Dec 31, 2014
Long-term pension liabilities
 
$
6,229

 
$
6,359

Long-term PRB plan liabilities
 
335

 
352

Total long-term pension and PRB plan liabilities
 
$
6,564

 
$
6,711


We made the following contributions to our pension and PRB plans:
 
Nine Months Ended
(In millions)
Sep 27, 2015
 
Sep 28, 2014
Required pension contributions
$
298

 
$
616

PRB contributions
15

 
14


We did not make any discretionary contributions to our pension plans during the first nine months of 2015 and 2014; however, we periodically evaluate whether to make discretionary contributions.

On a periodic basis, generally planned annually in the third quarter, we update our actuarial estimate of the unfunded projected benefit obligation with final census and investment valuation data for the end of the prior year. As a result of this update, in the third quarter of 2015, we recorded an increase to the unfunded projected benefit obligation for our pension and a decrease to the unfunded projected benefit obligation for our PRB plans of $135 million and $8 million, respectively, with a corresponding net after-tax increase of $83 million to AOCL.

20


Note 12: Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We have participated in the IRS Compliance Assurance Process (CAP) program since 2011. In June 2015, we received notification from the IRS that they completed their review of the 2013 tax year with no changes. All IRS examinations of our tax years prior to 2013 are closed. We continue to participate in the CAP program for the 2014 and 2015 tax years. We are also under audit by multiple state and foreign tax authorities.

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

The balance of our unrecognized tax benefits, exclusive of interest, was $16 million and $104 million at September 27, 2015 and December 31, 2014, respectively, and $109 million and $118 million at September 28, 2014 and December 31, 2013, respectively, the majority of which would affect our earnings if recognized. The decrease in the balance of our unrecognized tax benefits of $88 million in the first nine months of 2015 was primarily due to the resolution of federal income tax matters related to the completion of the 2013 IRS audit review in the second quarter of 2015. The decrease of $88 million is included in income from continuing operations.
 
Note 13: Business Segment Reporting
Our reportable segments, organized based on capabilities and technologies, are: Integrated Defense Systems; Intelligence, Information and Services; Missile Systems; Space and Airborne Systems; and Raytheon|Websense. Segment total net sales and operating income generally include intersegment sales and profit recorded at cost plus a specified fee, which may differ from what the selling entity would be able to obtain on sales to external customers. Eliminations includes 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.

As previously announced, in May 2015, we acquired Websense from Vista Equity Partners and combined it with RCP, formerly part of our IIS segment, to create Raytheon|Websense, a new cybersecurity joint venture company (with Vista Equity Partners). In connection with these transactions, we reorganized our operating and reporting structure with Raytheon|Websense as our fifth reporting segment. The amounts, discussion and presentation of our business segments, including Corporate and eliminations for intersegment activity, set forth in this Form 10-Q, reflect our new structure. The Raytheon|Websense results reflect RCP results for all periods and Websense results after the acquisition date of May 29, 2015.

Segment financial results were as follows:
 
Three Months Ended
 
Nine Months Ended
Total Net Sales (in millions)
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Integrated Defense Systems
$
1,533

 
$
1,428

 
$
4,664

 
$
4,458

Intelligence, Information and Services
1,438

 
1,450

 
4,306

 
4,372

Missile Systems
1,645

 
1,477

 
4,677

 
4,590

Space and Airborne Systems
1,446

 
1,509

 
4,220

 
4,412

Raytheon|Websense(1)
114

 
30

 
195

 
81

Eliminations
(366
)
 
(420
)
 
(1,106
)
 
(1,230
)
Total business segment sales
5,810

 
5,474

 
16,956

 
16,683

Raytheon|Websense Acquisition Accounting Adjustments(2)
(27
)
 

 
(37
)
 

Total
$
5,783

 
$
5,474

 
$
16,919

 
$
16,683

(1) Excludes the unfavorable impact of the acquisition accounting adjustments to record acquired deferred revenue at fair value related to Raytheon|Websense, including historical RCP acquisitions. These amounts are included in Raytheon|Websense Acquisition Accounting Adjustments.
(2) Adjustments were less than $(1) million for the third quarter and first nine months of 2014.

21


 
 
Three Months Ended
 
Nine Months Ended
Intersegment Sales (in millions)
 
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Integrated Defense Systems
 
$
16

 
$
27

 
$
55

 
$
84

Intelligence, Information and Services
 
195

 
216

 
573

 
621

Missile Systems
 
37

 
35

 
103

 
103

Space and Airborne Systems
 
115

 
140

 
365

 
414

Raytheon|Websense
 
3

 
2

 
10

 
8

Total
 
$
366

 
$
420

 
$
1,106

 
$
1,230


 
 
Three Months Ended
 
Nine Months Ended
Operating Income (in millions)
 
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Integrated Defense Systems
 
$
212

 
$
230

 
$
622

 
$
675

Intelligence, Information and Services
 
108

 
118

 
500

 
364

Missile Systems
 
219

 
190

 
609

 
588

Space and Airborne Systems
 
204

 
237

 
563

 
629

Raytheon|Websense(1)
 
20

 
5

 
19

 
12

Eliminations
 
(49
)
 
(43
)
 
(125
)
 
(125
)
Total business segment operating income
 
714

 
737

 
2,188

 
2,143

Raytheon|Websense Acquisition Accounting Adjustments
 
(51
)
 
(1
)
 
(71
)
 
(4
)
FAS/CAS Adjustment
 
43

 
42

 
141

 
216

Corporate
 
(9
)
 
(15
)
 
(73
)
 
(45
)
Total
 
$
697

 
$
763

 
$
2,185

 
$
2,310

(1)
Excludes the unfavorable impact of the acquisition accounting adjustments to record acquired deferred revenue at fair value of $(27) million and less than $(1) million for the third quarters of 2015 and 2014, respectively, and $(37) million and less than $(1) million for the first nine months of 2015 and 2014, respectively, and amortization of acquired intangible assets of $(24) million and $(1) million for the third quarters of 2015 and 2014, respectively, and $(34) million and $(4) million for the first nine months of 2015 and 2014, respectively, related to Raytheon|Websense, including historical RCP acquisitions. These amounts are included in Raytheon|Websense Acquisition Accounting Adjustments.

 
 
Three Months Ended
 
Nine Months Ended
Intersegment Operating Income (in millions)
 
Sep 27, 2015
 
Sep 28, 2014
 
Sep 27, 2015
 
Sep 28, 2014
Integrated Defense Systems
 
$
1

 
$
2

 
$
4

 
$
6

Intelligence, Information and Services
 
33