Raytheon Reports Strong Second Quarter 2018 Results

Summary Financial Results

2nd Quarter

%

Six Months

%

($ in millions, except per share data)

2018

2017

Change

2018

2017

Change

Bookings

$

8,694

$

6,532

33.1%

$

15,005

$

12,220

22.8%

Net Sales

$

6,625

$

6,281

5.5%

$

12,892

$

12,281

5.0%

Income from Continuing Operations attributable to

    Raytheon Company

$

799

$

553

44.5%

$

1,433

$

1,056

35.7%

EPS from Continuing Operations

$

2.78

$

1.89

47.1%

$

4.98

$

3.62

37.6%

Operating Cash Flow from Continuing Operations

$

1,156

$

782

$

1,439

$

741

Workdays in Fiscal Reporting Calendar

64

64

128

128

Backlog

 Period Ending

($ in millions)

Q2 2018

Q2 2017

2017

Backlog

$

39,881

$

36,168

$

38,210

2018 Financial Outlook

Current

Prior (4/26/18)

Net Sales ($B)

26.7 - 27.2*

26.5 - 27.0

Deferred Revenue Adjustment ($M)

(10)

(10)

Amortization of Acquired Intangibles ($M)

(118)

(118)

FAS/CAS Operating Adjustment ($M)

1,416

1,416

Retirement Benefits Non-service Expense, non-operating ($M)¹

(1,246)*

(958)

Interest Expense, net ($M)

 (180) - (185)

 (180) - (185)

Diluted Shares (M)

~287*

287 - 289

Effective Tax Rate²

 ~10.5%*

 ~18.0%

EPS from Continuing Operations^{1, 3}

$9.77 - $9.97*

$9.70 - $9.90

Operating Cash Flow from Continuing Operations ($B)³

 2.6 - 3.0*

 3.6 - 4.0

*Denotes change from prior guidance

¹Some of the company's pension plans purchased a group annuity contract to transfer $923 million of outstanding pension benefit obligations related to certain U.S. retirees and beneficiaries of the company's previously discontinued operations. This transaction closed on July 17, 2018. In connection with this transaction, the company will recognize an unfavorable non-cash, non-operating pension settlement charge of $288 million pretax, $228 million after tax, in the third quarter 2018 primarily related to the accelerated recognition of actuarial losses in those plans. This will have an estimated unfavorable EPS impact of $0.79 in the third quarter and full-year 2018. The outlook above reflects this change.

²The company decreased its effective tax rate to reflect a) the discretionary pension plan contribution, which had a favorable impact to the 2018 effective tax rate of 310 bps, b) the pension plan annuity transaction, which had a favorable impact to the 2018 effective tax rate of 30 bps, and c) other tax improvements, which had a favorable impact to the 2018 effective tax rate of 410 bps. The outlook above reflects this change.

³The company will make a $1.25 billion pretax discretionary pension plan contribution by September 15, 2018. As a result, the company recorded a $95 million net tax benefit in the second quarter of 2018, which had a favorable EPS impact of $0.33. In addition, the company expects to have a net unfavorable impact to 2018 operating cash flow from continuing operations of approximately $1.0 billion, consisting of approximately $250 million of lower cash taxes in the second quarter of 2018 and $1.25 billion for the discretionary pension plan contribution in the third quarter 2018. The outlook above reflects this change.

Integrated Defense Systems

2nd Quarter

Six Months

($ in millions)

2018

2017

% Change

2018

2017

% Change

Net Sales

$

1,514

$

1,462

4%

$

3,003

$

2,860

5%

Operating Income

$

262

$

245

7%

$

535

$

457

17%

Operating Margin

17.3%

16.8%

17.8%

16.0%

Intelligence, Information and Services

2nd Quarter

Six Months

($ in millions)

2018

2017

% Change

2018

2017

% Change

Net Sales

$

1,687

$

1,555

8%

$

3,269

$

3,062

7%

Operating Income

$

128

$

115

11%

$

245

$

226

8%

Operating Margin

7.6%

7.4%

7.5%

7.4%

Missile Systems

2nd Quarter

Six Months

($ in millions)

2018

2017

% Change

2018

2017

% Change

Net Sales

$

2,051

$

1,901

8%

$

3,899

$

3,657

7%

Operating Income

$

231

$

236

(2)%

$

443

$

452

(2)%

Operating Margin

11.3%

12.4%

11.4%

12.4%

Space and Airborne Systems

2nd Quarter

Six Months

($ in millions)

2018

2017

% Change

2018

2017

% Change

Net Sales

$

1,605

$

1,608

-

$

3,173

$

3,163

-

Operating Income

$

206

$

218

(6)%

$

399

$

408

(2)%

Operating Margin

12.8%

13.6%

12.6%

12.9%

Forcepoint

2nd Quarter

Six Months

($ in millions)

2018

2017

% Change

2018

2017

% Change

Net Sales

$

148

$

138

7%

$

289

$

282

2%

Operating Income (Loss)

$

(8)

$

2

NM

$

(15)

$

18

NM

Operating Margin

(5.4)%

1.4%

(5.2)%

6.4%

NM = Not Meaningful

Attachment A

Raytheon Company

Preliminary Statement of Operations Information

Second Quarter 2018

(In millions, except per share amounts)

Three Months Ended

Six Months Ended

1-Jul-18

2-Jul-17

1-Jul-18

2-Jul-17

Net sales

$

6,625

$

6,281

$

12,892

$

12,281

Operating expenses

Cost of sales

4,777

4,521

9,309

8,887

General and administrative expenses

748

705

1,442

1,391

Total operating expenses

5,525

5,226

10,751

10,278

Operating income

1,100

1,055

2,141

2,003

Non-operating (income) expense, net

Retirement benefits non-service expense

238

206

477

413

Interest expense

46

51

93

109

Interest income

(8)

(5)

(15)

(10)

Other (income) expense, net

(3)

35

2

28

Total non-operating (income) expense, net

273

287

557

540

Income from continuing operations before taxes

827

768

1,584

1,463

Federal and foreign income taxes

37

221

170

419

Income from continuing operations

790

547

1,414

1,044

Income (loss) from discontinued operations, net of tax

1

—

—

3

Net income

791

547

1,414

1,047

Less: Net income (loss) attributable to noncontrolling interests

   in subsidiaries

(9)

(6)

(19)

(12)

Net income attributable to Raytheon Company

$

800

$

553

$

1,433

$

1,059

Basic earnings per share attributable to Raytheon Company

   common stockholders:

Income from continuing operations

$

2.78

$

1.90

$

4.98

$

3.62

Income (loss) from discontinued operations, net of tax

—

—

—

0.01

Net income

2.78

1.90

4.98

3.63

Diluted earnings per share attributable to Raytheon Company

   common stockholders:

Income from continuing operations

$

2.78

$

1.89

$

4.98

$

3.62

Income (loss) from discontinued operations, net of tax

—

—

—

0.01

Net income

2.78

1.89

4.97

3.63

Amounts attributable to Raytheon Company common

   stockholders:

Income from continuing operations

$

799

$

553

$

1,433

$

1,056

Income (loss) from discontinued operations, net of tax

1

—

—

3

Net income

$

800

$

553

$

1,433

$

1,059

Average shares outstanding

Basic

287.3

291.7

287.9

292.1

Diluted

287.6

292.0

288.2

292.4

Attachment B

Raytheon Company

Preliminary Segment Information

Second Quarter 2018

(In millions, except percentages)

Operating Income

Net Sales

Operating Income

As a Percent of Net Sales

Three Months Ended

Three Months Ended

Three Months Ended

1-Jul-18

2-Jul-17

1-Jul-18

2-Jul-17

1-Jul-18

2-Jul-17

Integrated Defense Systems

$

1,514

$

1,462

$

262

$

245

17.3%

16.8%

Intelligence, Information and Services

1,687

1,555

128

115

7.6%

7.4%

Missile Systems

2,051

1,901

231

236

11.3%

12.4%

Space and Airborne Systems

1,605

1,608

206

218

12.8%

13.6%

Forcepoint

148

138

(8)

2

(5.4)%

1.4%

Eliminations

(376)

(372)

(41)

(37)

Total business segment

6,629

6,292

778

779

11.7%

12.4%

Acquisition Accounting Adjustments

(4)

(11)

(34)

(42)

FAS/CAS Operating Adjustment

—

—

353

315

Corporate

—

—

3

3

Total

$

6,625

$

6,281

$

1,100

$

1,055

16.6%

16.8%

Operating Income

Net Sales

Operating Income

As a Percent of Net Sales

Six Months Ended

Six Months Ended

Six Months Ended

1-Jul-18

2-Jul-17

1-Jul-18

2-Jul-17

1-Jul-18

2-Jul-17

Integrated Defense Systems

$

3,003

$

2,860

$

535

$

457

17.8%

16.0%

Intelligence, Information and Services

3,269

3,062

245

226

7.5%

7.4%

Missile Systems

3,899

3,657

443

452

11.4%

12.4%

Space and Airborne Systems

3,173

3,163

399

408

12.6%

12.9%

Forcepoint

289

282

(15)

18

(5.2)%

6.4%

Eliminations

(733)

(722)

(81)

(74)

Total business segment

12,900

12,302

1,526

1,487

11.8%

12.1%

Acquisition Accounting Adjustments

(8)

(21)

(67)

(84)

FAS/CAS Operating Adjustment

—

—

707

630

Corporate

—

—

(25)

(30)

Total

$

12,892

$

12,281

$

2,141

$

2,003

16.6%

16.3%

Attachment C

Raytheon Company

Other Preliminary Information

Second Quarter 2018

(In millions)

Backlog

1-Jul-18

31-Dec-17

Integrated Defense Systems

$

10,225

$

9,186

Intelligence, Information and Services

6,197

6,503

Missile Systems

13,867

13,426

Space and Airborne Systems

9,138

8,611

Forcepoint

454

484

Total backlog

$

39,881

$

38,210

Three Months Ended

Six Months Ended

Bookings

1-Jul-18

2-Jul-17

1-Jul-18

2-Jul-17

Total bookings

$

8,694

$

6,532

$

15,005

$

12,220

Three Months Ended

Six Months Ended

General and Administrative Expenses

1-Jul-18

2-Jul-17

1-Jul-18

2-Jul-17

Administrative and selling expenses

$

540

$

514

$

1,068

$

1,037

Research and development expenses

208

191

374

354

Total general and administrative expenses

$

748

$

705

$

1,442

$

1,391

Cash, Cash Equivalents and Restricted Cash

1-Jul-18

31-Dec-17

Cash and cash equivalents

$

3,094

$

3,103

Restricted cash

8

12

Total cash, cash equivalents and restricted cash shown in Attachment E

$

3,102

$

3,115

Attachment D

Raytheon Company

Preliminary Balance Sheet Information

Second Quarter 2018

(In millions)

1-Jul-18

31-Dec-17

Assets

Current assets

Cash and cash equivalents

$

3,094

$

3,103

Short-term investments

—

297

Receivables, net

1,317

1,324

Contract assets

5,642

5,247

Inventories

725

594

Prepaid expenses and other current assets

537

761

Total current assets

11,315

11,326

Property, plant and equipment, net

2,554

2,439

Goodwill

14,865

14,871

Other assets, net

2,004

2,224

Total assets

$

30,738

$

30,860

Liabilities, Redeemable Noncontrolling Interest and Equity

Current liabilities

Commercial paper

$

300

$

300

Contract liabilities

2,886

2,927

Accounts payable

1,380

1,519

Accrued employee compensation

1,245

1,342

Other current liabilities

1,206

1,260

Total current liabilities

7,017

7,348

Accrued retiree benefits and other long-term liabilities

7,850

8,287

Long-term debt

4,752

4,750

Redeemable noncontrolling interest

512

512

Equity

Raytheon Company stockholders' equity

Common stock

3

3

Additional paid-in capital

—

—

Accumulated other comprehensive loss⁽¹⁾

(8,863)

(7,935)

Retained earnings⁽¹⁾

19,467

17,895

Total Raytheon Company stockholders' equity

10,607

9,963

Noncontrolling interests in subsidiaries

—

—

Total equity

10,607

9,963

Total liabilities, redeemable noncontrolling interest and equity

$

30,738

$

30,860

(1)

In the first quarter 2018 we adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. As a result, we reclassified $1,451 million from accumulated other comprehensive loss to retained earnings related to the reclassification of stranded income tax effects of the Tax Cuts and Jobs Act of 2017.

Attachment E

Raytheon Company

Preliminary Cash Flow Information

Second Quarter 2018

(In millions)

Six Months Ended

1-Jul-18

2-Jul-17

Cash flows from operating activities

Net income

$

1,414

$

1,047

(Income) loss from discontinued operations, net of tax

—

(3)

Income from continuing operations

1,414

1,044

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

274

263

Stock-based compensation

101

92

Loss on repayment of long-term debt

—

39

Deferred income taxes

8

(105)

Changes in assets and liabilities

Receivables, net

7

(393)

Contract assets and contract liabilities

(442)

(622)

Inventories

(133)

27

Prepaid expenses and other current assets

62

112

Income taxes receivable/payable

168

99

Accounts payable

(73)

(238)

Accrued employee compensation

(98)

(54)

Other current liabilities

(70)

(25)

Accrued retiree benefits

239

564

Other, net

(18)

(62)

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

1,439

741

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

1

—

Net cash provided by (used in) operating activities

1,440

741

Cash flows from investing activities

Additions to property, plant and equipment

(366)

(181)

Proceeds from sales of property, plant and equipment

—

31

Additions to capitalized internal use software

(28)

(33)

Purchases of short-term investments

—

(399)

Maturities of short-term investments

309

100

Payments for purchases of acquired companies, net of cash received

—

(39)

Proceeds from sale of business, net of transaction costs

11

—

Other

(3)

(1)

Net cash provided by (used in) investing activities

(77)

(522)

Cash flows from financing activities

Dividends paid

(480)

(447)

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

(800)

(500)

Repurchases of common stock to satisfy tax withholding obligations

(91)

(79)

Contribution from noncontrolling interests in Forcepoint

—

8

Other

(5)

—

Net cash provided by (used in) financing activities

(1,376)

Net increase (decrease) in cash, cash equivalents and restricted cash

(13)

(1,128)

Cash, cash equivalents and restricted cash at beginning of the year

3,115

3,303

Cash, cash equivalents and restricted cash at end of period

$

3,102

$

2,175

Attachment F

Raytheon Company

Supplemental EPS Information

Second Quarter 2018

(In millions, except per share amounts)

Three Months Ended

Six Months Ended

1-Jul-18

2-Jul-17

1-Jul-18

2-Jul-17

Per share impact of tax benefit from third quarter 2018 discretionary

   pension contribution (A)

$

0.33

$

—

$

0.33

$

—

(A)

Tax benefit from third quarter 2018 discretionary pension

    contribution

$

95

$

—

$

95

$

—

Diluted shares

287.6

—

288.2

—

Per share impact

$

0.33

$

—

$

0.33

$

—