Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SECTION 906 - RAYTHEON CO/ | rtn-09282014xexhibit321.htm |
| EX-31.2 - CERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, SECTION 302 - RAYTHEON CO/ | rtn-09282014xexhibit312.htm |
| EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SECTION 302 - RAYTHEON CO/ | rtn-09282014xexhibit311.htm |
| EX-15 - AWARENESS LETTER OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - RAYTHEON CO/ | rtn-09282014xexhibit15.htm |
| EXCEL - IDEA: XBRL DOCUMENT - RAYTHEON CO/ | Financial_Report.xls |
| EX-32.2 - CERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, SECTION 906 - RAYTHEON CO/ | rtn-09282014xexhibit322.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 28, 2014 | |
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 20, 2014 was 308,368,000.
RAYTHEON COMPANY
TABLE OF CONTENTS
Page | ||
PART I | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
2
Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of federal securities laws, including information regarding our financial outlook, future plans, objectives, business prospects, trends and anticipated financial performance including with respect to our liquidity and capital resources, capital expenditures, our cash tax payments and tax reserves, our pension expense and funding, the impact of new accounting pronouncements, our unrecognized tax benefits and the outcome of legal and administrative proceedings, claims, investigations, and commitments and contingencies. You can identify these statements by the fact that they include words such as “will,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” or variations of these words or similar expressions. These forward-looking statements are not statements of historical facts and represent only our current expectations regarding such matters. These statements inherently involve a wide range of known and unknown risks and uncertainties. Our actual actions and results could differ materially from what is expressed or implied by these statements. Specific factors that could cause such a difference include, but are not limited to, those set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 and other important factors disclosed previously and from time to time in our other filings with the Securities and Exchange Commission (SEC). Given these factors, as well as other variables that may affect our operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance nor use historical trends to anticipate results or trends in future periods. We expressly disclaim any obligation or intention to provide updates to the forward-looking statements and the estimates and assumptions associated with them.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RAYTHEON COMPANY
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts) | (Unaudited) Sep 28, 2014 | Dec 31, 2013 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 2,634 | $ | 3,296 | ||||
Short-term investments | 1,480 | 1,001 | ||||||
Contracts in process, net | 5,340 | 4,870 | ||||||
Inventories | 522 | 363 | ||||||
Prepaid expenses and other current assets | 309 | 286 | ||||||
Total current assets | 10,285 | 9,816 | ||||||
Property, plant and equipment, net | 1,860 | 1,937 | ||||||
Goodwill | 12,762 | 12,764 | ||||||
Other assets, net | 1,400 | 1,450 | ||||||
Total assets | $ | 26,307 | $ | 25,967 | ||||
Liabilities and Equity | ||||||||
Current liabilities | ||||||||
Advance payments and billings in excess of costs incurred | $ | 2,382 | $ | 2,350 | ||||
Accounts payable | 1,060 | 1,178 | ||||||
Accrued employee compensation | 1,142 | 1,068 | ||||||
Other accrued expenses | 1,371 | 1,214 | ||||||
Total current liabilities | 5,955 | 5,810 | ||||||
Accrued retiree benefits and other long-term liabilities | 3,661 | 4,226 | ||||||
Long-term debt | 4,737 | 4,734 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Equity | ||||||||
Raytheon Company stockholders’ equity | ||||||||
Common stock, par value, $0.01 per share, 1,450 shares authorized, 308 and 315 shares outstanding at September 28, 2014 and December 31, 2013, respectively. | 3 | 3 | ||||||
Additional paid-in capital | 1,403 | 1,972 | ||||||
Accumulated other comprehensive loss | (4,895 | ) | (5,113 | ) | ||||
Retained earnings | 15,273 | 14,173 | ||||||
Total Raytheon Company stockholders’ equity | 11,784 | 11,035 | ||||||
Noncontrolling interests in subsidiaries | 170 | 162 | ||||||
Total equity | 11,954 | 11,197 | ||||||
Total liabilities and equity | $ | 26,307 | $ | 25,967 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
4
RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
(In millions, except per share amounts) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Net sales | ||||||||||||||||
Products | $ | 4,561 | $ | 4,882 | $ | 13,872 | $ | 14,916 | ||||||||
Services | 913 | 960 | 2,811 | 2,920 | ||||||||||||
Total net sales | 5,474 | 5,842 | 16,683 | 17,836 | ||||||||||||
Operating expenses | ||||||||||||||||
Cost of sales—products | 3,418 | 3,718 | 10,335 | 11,447 | ||||||||||||
Cost of sales—services | 753 | 816 | 2,298 | 2,445 | ||||||||||||
General and administrative expenses | 540 | 551 | 1,740 | 1,715 | ||||||||||||
Total operating expenses | 4,711 | 5,085 | 14,373 | 15,607 | ||||||||||||
Operating income | 763 | 757 | 2,310 | 2,229 | ||||||||||||
Non-operating (income) expense, net | ||||||||||||||||
Interest expense | 53 | 53 | 158 | 159 | ||||||||||||
Interest income | (3 | ) | (3 | ) | (8 | ) | (9 | ) | ||||||||
Other (income) expense, net | 1 | (5 | ) | (5 | ) | (9 | ) | |||||||||
Total non-operating (income) expense, net | 51 | 45 | 145 | 141 | ||||||||||||
Income from continuing operations before taxes | 712 | 712 | 2,165 | 2,088 | ||||||||||||
Federal and foreign income taxes | 193 | 221 | 552 | 608 | ||||||||||||
Income from continuing operations | 519 | 491 | 1,613 | 1,480 | ||||||||||||
Income (loss) from discontinued operations, net of tax | — | 2 | 59 | — | ||||||||||||
Net income | 519 | 493 | 1,672 | 1,480 | ||||||||||||
Less: Net income attributable to noncontrolling interests in subsidiaries | 4 | 4 | 10 | 15 | ||||||||||||
Net income attributable to Raytheon Company | $ | 515 | $ | 489 | $ | 1,662 | $ | 1,465 | ||||||||
Basic earnings (loss) per share attributable to Raytheon Company common stockholders: | ||||||||||||||||
Income from continuing operations | $ | 1.66 | $ | 1.51 | $ | 5.12 | $ | 4.51 | ||||||||
Income (loss) from discontinued operations, net of tax | — | — | 0.19 | — | ||||||||||||
Net income | 1.66 | 1.52 | 5.31 | 4.51 | ||||||||||||
Diluted earnings (loss) per share attributable to Raytheon Company common stockholders: | ||||||||||||||||
Income from continuing operations | $ | 1.65 | $ | 1.51 | $ | 5.11 | $ | 4.50 | ||||||||
Income (loss) from discontinued operations, net of tax | — | — | 0.19 | — | ||||||||||||
Net income | 1.65 | 1.51 | 5.30 | 4.50 | ||||||||||||
Amounts attributable to Raytheon Company common stockholders: | ||||||||||||||||
Income from continuing operations | $ | 515 | $ | 487 | $ | 1,603 | $ | 1,465 | ||||||||
Income (loss) from discontinued operations, net of tax | — | 2 | 59 | — | ||||||||||||
Net income | $ | 515 | $ | 489 | $ | 1,662 | $ | 1,465 | ||||||||
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 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||||
Net income | $ | 519 | $ | 493 | $ | 1,672 | $ | 1,480 | |||||||
Other comprehensive income (loss), before tax: | |||||||||||||||
Foreign exchange translation | (41 | ) | 33 | (6 | ) | (18 | ) | ||||||||
Cash flow hedges and interest rate locks | (3 | ) | 8 | (2 | ) | (2 | ) | ||||||||
Unrealized gains (losses) on investments and other, net | 3 | 1 | 3 | (1 | ) | ||||||||||
Pension and other employee benefit plans, net: | |||||||||||||||
Net loss arising during period | (332 | ) | (110 | ) | (332 | ) | (110 | ) | |||||||
Amortization of prior service cost included in net periodic cost | 2 | 2 | 4 | 5 | |||||||||||
Amortization of net actuarial loss included in net income | 224 | 279 | 670 | 866 | |||||||||||
Pension and other employee benefit plans, net | (106 | ) | 171 | 342 | 761 | ||||||||||
Other comprehensive income (loss), before tax | (147 | ) | 213 | 337 | 740 | ||||||||||
Income tax benefit (expense) related to items of other comprehensive income (loss) | 38 | (63 | ) | (119 | ) | (266 | ) | ||||||||
Other comprehensive income (loss), net of tax | (109 | ) | 150 | 218 | 474 | ||||||||||
Total comprehensive income | 410 | 643 | 1,890 | 1,954 | |||||||||||
Less: Comprehensive income attributable to noncontrolling interests in subsidiaries | 4 | 4 | 10 | 15 | |||||||||||
Comprehensive income attributable to Raytheon Company | $ | 406 | $ | 639 | $ | 1,880 | $ | 1,939 | |||||||
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 28, 2014 and September 29, 2013 (in millions) | Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total Raytheon Company stockholders’ equity | Noncontrolling interests in subsidiaries | Total equity | |||||||||||||||||||||
Balance at December 31, 2013 | $ | 3 | $ | 1,972 | $ | (5,113 | ) | $ | 14,173 | $ | 11,035 | $ | 162 | $ | 11,197 | |||||||||||||
Net income | 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 | |||||||||||||
Balance at December 31, 2012 | $ | 3 | $ | 2,928 | $ | (7,788 | ) | $ | 12,883 | $ | 8,026 | $ | 164 | $ | 8,190 | |||||||||||||
Net income | 1,465 | 1,465 | 15 | 1,480 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | 474 | 474 | 474 | |||||||||||||||||||||||||
Dividends declared | (531 | ) | (531 | ) | (531 | ) | ||||||||||||||||||||||
Distributions and other activity related to noncontrolling interests | — | (9 | ) | (9 | ) | |||||||||||||||||||||||
Common stock plans activity | 129 | 129 | 129 | |||||||||||||||||||||||||
Share repurchases | (722 | ) | (722 | ) | (722 | ) | ||||||||||||||||||||||
Balance at September 29, 2013 | $ | 3 | $ | 2,335 | $ | (7,314 | ) | $ | 13,817 | $ | 8,841 | $ | 170 | $ | 9,011 | |||||||||||||
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 28, 2014 | Sep 29, 2013 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 1,672 | $ | 1,480 | ||||
(Income) loss from discontinued operations, net of tax | (59 | ) | — | |||||
Income from continuing operations | 1,613 | 1,480 | ||||||
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 | 327 | 332 | ||||||
Stock-based compensation | 118 | 96 | ||||||
Deferred income taxes | (259 | ) | (134 | ) | ||||
Tax benefit from stock-based awards | (43 | ) | (11 | ) | ||||
Changes in assets and liabilities | ||||||||
Contracts in process, net and advance payments and billings in excess of costs incurred | (441 | ) | (883 | ) | ||||
Inventories | (159 | ) | (24 | ) | ||||
Prepaid expenses and other current assets | 27 | 70 | ||||||
Accounts payable | (119 | ) | (206 | ) | ||||
Income taxes receivable/payable | 108 | 287 | ||||||
Accrued employee compensation | 73 | 138 | ||||||
Other accrued expenses | (40 | ) | (13 | ) | ||||
Other long-term liabilities | (17 | ) | (16 | ) | ||||
Pension and other postretirement benefit plans | 46 | 175 | ||||||
Other, net | 1 | (15 | ) | |||||
Net cash provided by (used in) operating activities from continuing operations | 1,235 | 1,276 | ||||||
Net cash provided by (used in) operating activities from discontinued operations | 35 | 1 | ||||||
Net cash provided by (used in) operating activities | 1,270 | 1,277 | ||||||
Cash flows from investing activities | ||||||||
Additions to property, plant and equipment | (173 | ) | (165 | ) | ||||
Proceeds from sales of property, plant and equipment | — | 1 | ||||||
Additions to capitalized internal use software | (40 | ) | (34 | ) | ||||
Purchases of short-term investments | (2,190 | ) | (939 | ) | ||||
Sales of short-term investments | 882 | 325 | ||||||
Maturities of short-term investments | 832 | 518 | ||||||
Payments for purchases of acquired companies, net of cash received | — | (14 | ) | |||||
Net cash provided by (used in) investing activities | (689 | ) | (308 | ) | ||||
Cash flows from financing activities | ||||||||
Dividends paid | (551 | ) | (520 | ) | ||||
Repurchases of common stock under share repurchase programs | (650 | ) | (675 | ) | ||||
Repurchases of common stock to satisfy tax withholding obligations | (84 | ) | (47 | ) | ||||
Proceeds from exercise of stock options | 1 | 24 | ||||||
Tax benefit from stock-based awards | 43 | 11 | ||||||
Other | (2 | ) | (8 | ) | ||||
Net cash provided by (used in) financing activities | (1,243 | ) | (1,215 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (662 | ) | (246 | ) | ||||
Cash and cash equivalents at beginning of the year | 3,296 | 3,188 | ||||||
Cash and cash equivalents at end of period | $ | 2,634 | $ | 2,942 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
8
RAYTHEON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
We prepared the accompanying unaudited consolidated financial statements of Raytheon Company and all wholly-owned and majority-owned domestic and otherwise controlled foreign subsidiaries on the same basis as our annual audited financial statements. We condensed or omitted certain information and footnote disclosures normally included in our annual audited financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Our quarterly financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. As used in this report, the terms “we,” “us,” “our,” “Raytheon” and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another meaning.
In the opinion of management, our financial statements reflect all adjustments, which are of a normal recurring nature, necessary for presentation of financial statements for interim periods in accordance with GAAP and with the instructions to Form 10-Q in Article 10 of Securities and Exchange Commission (SEC) Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates, and any such differences may be material to our financial statements. In addition, we reclassified certain prior year amounts to conform to our current year presentation.
Note 2: Changes in Estimates under Percentage of Completion Contract Accounting
We have a Company-wide standard and disciplined quarterly Estimate at Completion (EAC) process in which management reviews the progress and performance of our contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities, and the related changes in estimates of revenues and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product), and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the contract (e.g., to estimate increases in wages and prices for materials and related support cost allocations), performance by our subcontractors, the availability and timing of funding from our customer, and overhead cost rates, among other variables. These estimates also include the estimated cost of satisfying our industrial cooperation agreements, sometimes referred to as offset obligations, required under certain contracts. Based on this analysis, any quarterly adjustments to net sales, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual contracts, if we determine we will be successful in mitigating risks surrounding the technical, schedule, and cost aspects of those contracts or 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.
Net EAC adjustments had the following impact on our operating results:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In millions, except per share amounts) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||||
Operating income | $ | 155 | $ | 143 | $ | 365 | $ | 438 | |||||||
Income from continuing operations attributable to Raytheon Company | 101 | 93 | 237 | 285 | |||||||||||
Diluted earnings per share (EPS) from continuing operations attributable to Raytheon Company | $ | 0.32 | $ | 0.29 | $ | 0.76 | $ | 0.88 | |||||||
9
Note 3: Inventories
Inventories consisted of the following:
(In millions) | Sep 28, 2014 | Dec 31, 2013 | ||||||
Materials and purchased parts | $ | 75 | $ | 73 | ||||
Work in process | 434 | 279 | ||||||
Finished goods | 13 | 11 | ||||||
Total | $ | 522 | $ | 363 | ||||
We capitalize costs incurred in advance of contract award or funding in inventories if we determine that contract award or funding is probable. To the extent these are precontract costs, start-up costs have been excluded. We included capitalized precontract costs and other deferred costs of $223 million and $100 million in inventories as work in process at September 28, 2014 and December 31, 2013, respectively.
Note 4: 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. The new standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. For Raytheon, the standard will be effective in the first quarter of 2017. 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.
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for annual and interim periods thereafter. This ASU is not expected to have an impact on our financial statements or disclosures.
Other new pronouncements issued but not effective until after September 28, 2014 are not expected to have a material impact on our financial position, results of operations or liquidity.
Note 5: Acquisitions
In pursuing our business strategies, we periodically acquire and make investments in certain businesses that meet strategic and financial criteria.
During the first nine months of 2013, we acquired Visual Analytics, Incorporated, subsequently renamed Raytheon Visual Analytics, Incorporated (RVAI), for $14 million in cash, net of cash acquired, and exclusive of retention payments. RVAI further extends our capabilities to meet the data analytics, data visualization and information sharing needs of our customers, and this acquisition is part of our strategy to enhance our Intelligence, Information and Services (IIS) offerings. In connection with this acquisition, we recorded $12 million of goodwill, primarily related to expected synergies from combining operations and the value of the existing workforce, and $3 million of intangible assets, primarily related to technology and customer relationships with a weighted-average life of seven years.
A rollforward of our goodwill by segment is as follows:
(In millions) | Integrated Defense Systems | Intelligence, Information and Services | Missile Systems | Space and Airborne Systems | Total | |||||||||||||||
Balance at December 31, 2013 | $ | 1,800 | $ | 2,708 | $ | 4,150 | $ | 4,106 | $ | 12,764 | ||||||||||
Effect of foreign exchange rates and other | (2 | ) | — | — | — | (2 | ) | |||||||||||||
Balance at September 28, 2014 | $ | 1,798 | $ | 2,708 | $ | 4,150 | $ | 4,106 | $ | 12,762 | ||||||||||
10
Note 6: Discontinued Operations
In pursuing our business strategies we have divested certain non-core businesses, investments, and assets when appropriate. All residual activity relating to our previously disposed businesses appears in discontinued operations.
In the second quarter of 2014, we received notice of the resolution of a dispute and related litigation with the U.S. Government regarding pension segment closing adjustments under U.S. Government Cost Accounting Standard 413 (CAS 413) for operations we divested over ten years ago. Under CAS 413, a pension plan termination adjustment is required when a contractor divests a business, yet retains ownership of the pension plan assets and liabilities of that business. These adjustments can result in payments to the U.S. Government for pension plans that are in surplus position or payments to contractors for plans that are in a deficit position. As a result, in the first nine months of 2014 we recorded a $52 million gain, net of federal tax expense, in discontinued operations, attributable to the affected plans that were in a deficit position at the time of divestiture.
We retained certain assets and liabilities of our previously-disposed businesses. At September 28, 2014 we had $81 million of assets primarily related to a receivable for the pension matter discussed above, which was collected in the fourth quarter of 2014. At December 31, 2013 we had $56 million of assets primarily related to a receivable for an excise tax settlement associated with Flight Options and our retained interest in general aviation finance receivables previously sold by Raytheon Aircraft. At September 28, 2014 and December 31, 2013, we had $16 million of liabilities primarily related to certain environmental and product liabilities, non-income tax obligations, various contract obligations and aircraft lease obligations. We also retained certain pension assets and obligations, which we include in our pension disclosures.
Note 7: Derivatives and Other Financial Instruments
Derivatives—Our primary market exposures are to foreign exchange rates and interest rates, and we use certain derivative financial instruments to help manage these exposures. We execute these instruments with financial institutions that we judge to be credit-worthy, and the majority of our foreign currency forward contracts are denominated in currencies of major industrial countries. We do not hold or issue derivative financial instruments for trading or speculative purposes.
The fair value amounts of asset derivatives included in other assets, net and liability derivatives included in other accrued expenses on our consolidated balance sheets related to foreign currency forward contracts were as follows:
Asset Derivatives | Liability Derivatives | |||||||||||||||
(In millions) | Sep 28, 2014 | Dec 31, 2013 | Sep 28, 2014 | Dec 31, 2013 | ||||||||||||
Derivatives designated as hedging instruments | $ | 10 | $ | 20 | $ | 18 | $ | 23 | ||||||||
Derivatives not designated as hedging instruments | 3 | 3 | 3 | 3 | ||||||||||||
Total | $ | 13 | $ | 23 | $ | 21 | $ | 26 | ||||||||
The fair values of these derivatives are Level 2 in the fair value hierarchy at September 28, 2014 and December 31, 2013 because they are determined based on a market approach utilizing externally quoted forward rates for similar contracts.
We recognized the following pretax gains (losses) related to foreign currency forward contracts designated as cash flow hedges:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Effective portion | ||||||||||||||||
Gain (loss) recognized in accumulated other comprehensive loss (AOCL) | $ | (5 | ) | $ | 6 | $ | (7 | ) | $ | — | ||||||
Gain (loss) reclassified from AOCL to operating income | (3 | ) | (3 | ) | (2 | ) | 1 | |||||||||
Amount excluded from effectiveness assessment and ineffective portion | ||||||||||||||||
Gain (loss) recognized in operating income | — | — | — | — | ||||||||||||
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We recognized the following pretax gains (losses) related to foreign currency forward contracts not designated as cash flow hedges:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Gain (loss) recognized in operating income | $ | (2 | ) | $ | 1 | $ | (1 | ) | $ | (1 | ) | |||||
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 $938 million and $1,396 million at September 28, 2014 and December 31, 2013, respectively.
Our foreign currency forward contracts contain off-set or netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. At September 28, 2014 and December 31, 2013, the fair value of our counterparty default exposure was less than $1 million and spread across numerous highly rated counterparties.
There were no interest rate swaps outstanding at September 28, 2014 or December 31, 2013.
Other Financial Instruments—We invest in marketable securities in accordance with our short-term investment policy and cash management strategy. These marketable securities are classified as available-for-sale and are recorded at fair value as short-term investments in our consolidated balance sheets. These investments are deemed Level 2 assets under the fair value hierarchy at September 28, 2014 and December 31, 2013, as their fair value is determined under a market approach using valuation models that utilize observable inputs, including maturity date, issue date, settlements date, and current rates. At September 28, 2014 and December 31, 2013, we had short-term investments of $1,480 million and $1,001 million, respectively, consisting of highly rated bank certificates of deposit with a minimum long-term debt rating of A or A2 and a minimum short-term debt rating of A-1 and P-1. The amortized cost of these securities closely approximated their fair value at September 28, 2014 and December 31, 2013. There were no securities deemed to have other than temporary declines in value for the third quarter of 2014. 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. In the third quarter and first nine months of 2013, we recorded unrealized gains 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 2014 or third quarter of 2013. In the first nine months of 2014, we recorded sales of short-term investments of $882 million, which resulted in gains of less than $1 million recorded in other (income) expense, net. In the first nine months of 2013, we recorded sales of short-term investments of $325 million, which resulted in gains of less than $1 million recorded in other (income) expense, net. For purposes of computing realized gains and losses on available-for-sale securities, we determine cost on a specific identification basis.
In addition to the financial instruments discussed above, we hold other financial instruments, including cash and cash equivalents, notes receivable and debt. The carrying amounts for cash and cash equivalents and notes receivable approximated their fair values. The carrying value of long-term debt 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 28, 2014 | Dec 31, 2013 | ||||||
Carrying value of long-term debt | $ | 4,737 | $ | 4,734 | ||||
Fair value of long-term debt | 5,234 | 5,036 | ||||||
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 2014.
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Note 8: Commitments and Contingencies
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 consider such recovery probable based on government contracting regulations and our long history of receiving reimbursement for such costs, and accordingly have recorded the estimated future recovery of these costs from the U.S. Government within contracts in process, net. Our estimates regarding remediation costs to be incurred were as follows:
(In millions, except percentages) | Sep 28, 2014 | Dec 31, 2013 | ||||||
Total remediation costs—undiscounted | $ | 211 | $ | 198 | ||||
Weighted average discount rate | 5.6 | % | 5.6 | % | ||||
Total remediation costs—discounted | $ | 144 | $ | 133 | ||||
Recoverable portion | 92 | 90 | ||||||
We also lease certain government-owned properties and generally are not liable for remediation of preexisting environmental contamination at these sites. As a result, we generally do not provide for these costs in our consolidated financial statements.
Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage and the unresolved extent of our responsibility, it is difficult to determine the ultimate outcome of environmental matters. However, we do not expect any additional liability to have a material adverse effect on our financial position, results of operations or liquidity.
Financing Arrangements and Other—We issue guarantees and banks and surety companies issue, on our behalf, letters of credit and surety bonds to meet various bid, performance, warranty, retention and advance payment obligations of us or our affiliates. These instruments expire on various dates through 2023. Additional guarantees of project performance for which there is no stated value also remain outstanding. The stated values outstanding consisted of the following:
(In millions) | Sep 28, 2014 | Dec 31, 2013 | ||||||
Guarantees | $ | 342 | $ | 378 | ||||
Letters of credit | 1,845 | 1,424 | ||||||
Surety bonds | 300 | 238 | ||||||
Included in guarantees and letters of credit described above were $212 million and $240 million, respectively, at September 28, 2014, and $233 million and $268 million, respectively, at December 31, 2013, related to our joint venture in Thales-Raytheon Systems Co. Ltd. (TRS). We provide these guarantees and letters of credit to TRS and other affiliates to assist these entities in obtaining financing on more favorable terms, making bids on contracts and performing their contractual obligations. While we expect these entities to satisfy their loans, and meet their project performance and other contractual obligations, their failure to do so may result in a future obligation to us. We periodically evaluate the risk of TRS and other affiliates failing to satisfy their loans, and meet their project performance and other contractual obligations described above. At September 28, 2014, we believe the risk that TRS and other affiliates will not be able to perform or meet their obligations is minimal for the foreseeable future based on their current financial condition. All obligations were current at September 28, 2014. At September 28, 2014 and December 31, 2013, we had an estimated liability of $7 million and $8 million, respectively, related to these guarantees and letters of credit.
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. (Thales) 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. (ACSI). 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 28, 2014, 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.
In 1997, we provided a first loss guarantee of $133 million on $1.3 billion of U.S. Export-Import Bank loans (maturing in 2015) to the Brazilian Government related to IDS' System for the Vigilance of the Amazon (SIVAM) program. Loan repayments by the Brazilian Government were current at September 28, 2014.
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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 28, 2014, the aggregate amount of our offset agreements had an outstanding notional value of approximately $5 billion. These agreements are designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities, or addressing other local development priorities. Offset agreements may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects, and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for activities such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects, and making investments in local ventures. Such activities may also vary by country depending upon requirements as dictated by their governments. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customers and typically require cash outlays that represent only a fraction of the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for penalties in the event we fail to perform in accordance with offset requirements. We have historically not been required to pay any such penalties.
As a U.S. Government contractor, we are subject to many levels of audit and investigation by the U.S. Government relating to our contract performance and compliance with applicable rules and regulations. Agencies that oversee contract performance include: the Defense Contract Audit Agency, the Defense Contract Management Agency, the Inspector General of the Department of Defense and other departments and agencies, the Government Accountability Office, the Department of Justice and Congressional Committees. From time to time, these and other agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. Such investigations and audits could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, the suspension of government export licenses or the suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action against us. Our final allowable incurred costs for each year are also subject to audit and have from time to time resulted in disputes between us and the U.S. Government with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their related courts of appeals. In addition, the Department of Justice has, from time to time, convened grand juries to investigate possible irregularities by us. We also provide products and services to customers outside of the U.S. and those sales are subject to local government laws, regulations, and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. Government regulations (e.g., the Foreign Corrupt Practices Act and the International Traffic in Arms Regulations) may also be investigated or audited. Other than as specifically disclosed herein, we do not expect these audits, investigations or disputes to have a material effect on our financial position, results of operations or liquidity, either individually or in the aggregate.
On July 22, 2010, Raytheon Systems Limited (RSL) was notified by the UK Border Agency (UKBA) that it had been terminated for cause on a program. The termination notice included allegations that RSL had failed to perform on certain key milestones and other matters in addition to claiming entitlement to recovery of certain losses incurred and previous payments made to RSL. We believe that RSL performed well and delivered substantial capabilities to the UKBA under the program, which has been operating successfully and providing actionable information since live operations began in May 2009. As a result of the termination notice, we adjusted our estimated amounts of revenue and cost under the program in the second quarter of 2010. On July 29, 2010, RSL filed a dispute notice on the grounds that the termination by the UKBA was not valid. On August 18, 2010, the UKBA initiated arbitration proceedings on this issue. On March 22, 2011, the UKBA gave notice that it had presented a demand to draw on the approximately $80 million of letters of credit provided by RSL upon the signing of the contract with the UKBA in 2007. On March 23, 2011, the UKBA submitted a detailed claim in the arbitration of approximately £350 million (approximately $569 million based on foreign exchange rates as of September 28, 2014) for damages and clawback of previous payments, plus interest and arbitration costs, excluding any credit for capability delivered or draw on the letters of credit. The UKBA also asserted that additional amounts may be detailed in the claim in the future if estimates of its damages change, and for continuing post-termination losses and any re-procurement costs, which have not been quantified. At RSL's request, on March 29, 2011, the Arbitration Tribunal issued an interim order restraining the UKBA from drawing down on the letters of credit pending a hearing on the issue. Following the hearing, the Tribunal lifted the restraint on the basis that, at this early stage of the proceedings, the Tribunal had not heard the evidence needed to decide the merits of whether the contractual conditions for a drawdown had been established. The Tribunal also concluded that any decision on the UKBA's right to call on the letters of credit is inextricably intertwined with the ultimate decision on the merits in the arbitration. The Tribunal also preserved RSL's right to claim damages should RSL later establish that the drawdown was not valid. As a result, on April 6, 2011, the UKBA drew the $80 million on the letters of credit.
As a result of the Tribunal’s decision that the letters of credit are inextricably intertwined with the ultimate decision on the merits in the arbitration, we were no longer able to evaluate, independently from the overall claim, the probability of recovery
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of any amounts drawn on the letters of credit. We therefore recorded $80 million of costs related to the UKBA drawdown (UKBA LOC Adjustment), which was included in the operating expenses of our Intelligence, Information and Services (IIS) segment in the first quarter of 2011.
In June 2011, RSL submitted in the arbitration its defenses to the UKBA claim as well as substantial counterclaims in the amount of approximately £500 million (approximately $813 million based on foreign exchange rates as of September 28, 2014) against the UKBA for the collection of receivables, damages and interest. On October 3, 2011, the UKBA filed its reply to RSL's counterclaims, and increased its claim amount by approximately £32 million, to include additional civil service and post termination costs, and approximately £33 million for interest, raising the gross amount of the UKBA claim for damages and clawback of previous payments to approximately £415 million (approximately $675 million based on foreign exchange rates as of September 28, 2014). On January 6, 2012, RSL filed its response to the UKBA's reply. RSL is pursuing vigorously the collection of all receivables for the program and damages in connection with the wrongful termination and mounted a strong defense to the UKBA's alleged claims for losses and previous payments. RSL has also settled substantially all subcontractor claims, novated all key subcontracts to the UKBA and agreed with the UKBA that RSL's exit obligations to operate the previously delivered capability ended in April 2011. Effective April 15, 2011, the UKBA took over responsibility for operating the previously delivered capability. In March 2013, the UKBA updated the total net amount of its claims to approximately £302 million (approximately $491 million based on foreign exchange rates as of September 28, 2014) for damages, clawback of previous payments and interest, and inclusive of a credit for capability delivered by RSL. Arbitration hearings commenced in late 2012 and were completed in 2013. We continue to believe that the receivables and other assets remaining under the program for technology and services delivered of approximately $40 million at September 28, 2014 are probable of recovery.
On August 15, 2014, RSL received a decision from the Tribunal. The Tribunal found that the UKBA had unlawfully terminated RSL for default and had therefore repudiated the eBorders contract with RSL. Accordingly, the Tribunal denied the UKBA’s claims for damages and clawback of previous payments. In addition, the Tribunal found that the UKBA had wrongfully retained the $80 million it had drawn on RSL letters of credit in April 2011. The Tribunal awarded RSL approximately £185 million (approximately $301 million based on foreign exchange rates as of September 28, 2014) as payment for capabilities delivered, damages and other monetary relief. The Tribunal reserved ruling on costs and on the quantification of interest payable to RSL for a later date.
On September 15, 2014, the UKBA filed a challenge to the award in the London High Court. RSL is vigorously opposing such challenge. The payment of amounts awarded to RSL is now pending resolution of the challenge. Due to the inherent uncertainties of arbitration and litigation, no amounts regarding this matter were recorded in our financial results for the quarter ended September 28, 2014.
On June 29, 2012 and July 13, 2012, we received a contracting officer’s final decision (COFD) for 2004 and 2005 incurred costs at SAS. The COFDs demand a total payment of $241 million for costs, interest and penalties associated with several issues, the largest of which relates to specific research and development and capital projects undertaken by SAS between 2000 and 2005. To date, no COFDs have been provided for 2000 to 2003 periods at SAS on these issues. The Government alleges that the costs incurred on the projects should have been charged directly to U.S. Government contracts rather than through indirect rates and that these costs should not be recoverable. We strongly disagree with the Government's position. We have requested a deferment of the payment and in February and May 2013, we filed complaints in the U.S. COFC challenging the 2004 and 2005 COFDs, respectively. Due to the inherent uncertainties of litigation, we cannot estimate a range of potential loss. We believe that we appropriately charged the disputed costs based on government accounting standards and applicable precedent and properly disclosed our approach to the Government. We also believe that in many cases, the statute of limitations has run on the issues. Based upon the foregoing, we do not expect the results of the COFDs to have a material impact on our financial position, results of operations or liquidity.
In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened against, or initiated by, us. We do not expect any of these proceedings to result in any additional liability or gains that would materially affect our financial position, results of operations or liquidity. In connection with certain of our legal matters, we may be entitled to insurance recovery for qualified legal costs. We do not expect any insurance recovery to have a material impact on the financial exposure that could result from these matters.
Product Warranty—We provide for product warranties in conjunction with certain product sales for which we recognize revenue upon delivery.
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Activity related to product warranty accruals was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Beginning balance | $ | 30 | $ | 31 | $ | 30 | $ | 33 | ||||||||
Provisions for warranties | (2 | ) | 2 | 1 | 6 | |||||||||||
Warranty services provided | (2 | ) | (1 | ) | (5 | ) | (7 | ) | ||||||||
Ending balance | $ | 26 | $ | 32 | $ | 26 | $ | 32 | ||||||||
We account for warranty provision costs incurred under our long-term contracts using the cost-to-cost measure of progress as contracts costs, as the estimation of these costs is integral in determining the price of the related long-term contracts. The table above excludes these costs.
Note 9: Stockholders’ Equity
The changes in shares of our common stock outstanding were as follows:
Nine Months Ended | ||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | ||||
Beginning balance | 314.5 | 328.1 | ||||
Stock plans activity | 1.4 | 2.6 | ||||
Share repurchases | (7.6 | ) | (11.3 | ) | ||
Ending balance | 308.3 | 319.4 | ||||
In November 2013, our Board of Directors authorized the repurchase of up to $2.0 billion of our outstanding common stock. At September 28, 2014, we had approximately $1.6 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 and stock option awards issued to employees.
Our share repurchases were as follows:
Nine Months Ended | ||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | ||||||||||
$ | Shares | $ | Shares | |||||||||
Shares repurchased under our share repurchase programs | $ | 650 | 6.8 | $ | 675 | 10.5 | ||||||
Shares repurchased to satisfy tax withholding obligations | 84 | 0.8 | 47 | 0.8 | ||||||||
Total share repurchases | $ | 734 | 7.6 | $ | 722 | 11.3 | ||||||
In March 2014, our Board of Directors authorized a 10% increase to our annual dividend payout rate from $2.20 to $2.42 per share. Our Board of Directors also declared dividends of $1.815 per share during the first nine months of 2014, compared to dividends of $1.650 per share during the first nine months of 2013. Dividends are subject to quarterly approval by our Board of Directors.
Earnings Per Share (EPS)
We compute basic and diluted EPS using actual income from continuing operations attributable to Raytheon Company common stockholders, income (loss) from discontinued operations attributable to Raytheon Company common stockholders, net income attributable to Raytheon Company, and our actual weighted-average shares and participating securities outstanding rather than the numbers presented within our unaudited consolidated financial statements, which are rounded to the nearest million. As a result, it may not be possible to recalculate EPS as presented in our unaudited consolidated financial statements. Furthermore, it may not be possible to recalculate EPS attributable to Raytheon Company common stockholders by adjusting EPS from continuing operations by EPS from discontinued operations.
We include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS calculations. As a result, we have included all of our outstanding unvested restricted stock and unvested restricted stock units and Long-Term Performance Plan (LTPP) awards that meet the retirement eligible criteria in our calculation of basic and diluted EPS. We disclose EPS for common stock and
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unvested share-based payment awards, and separately disclose distributed and undistributed earnings. Distributed earnings represent common stock dividends and dividends earned on unvested share-based payment awards of retirement eligible employees. Undistributed earnings represent earnings that were available for distribution but were not distributed. Common stock and unvested share-based payment awards earn dividends equally.
EPS from continuing operations attributable to Raytheon Company common stockholders and unvested share-based payment awards was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||||||
Basic EPS attributable to Raytheon Company common stockholders: | ||||||||||||||||
Distributed earnings | $ | 0.60 | $ | 0.55 | $ | 1.80 | $ | 1.64 | ||||||||
Undistributed earnings | 1.06 | 0.96 | 3.32 | 2.87 | ||||||||||||
Total | $ | 1.66 | $ | 1.51 | $ | 5.12 | $ | 4.51 | ||||||||
Diluted EPS attributable to Raytheon Company common stockholders: | ||||||||||||||||
Distributed earnings | $ | 0.60 | $ | 0.54 | $ | 1.79 | $ | 1.64 | ||||||||
Undistributed earnings | 1.05 | 0.97 | 3.32 | 2.86 | ||||||||||||
Total | $ | 1.65 | $ | 1.51 | $ | 5.11 | $ | 4.50 | ||||||||
Basic and diluted EPS from discontinued operations attributable to Raytheon Company common stockholders and unvested share-based payment awards was a loss of less than $0.01 and earnings of less than $0.01 for the third quarters of 2014 and 2013, respectively, and earnings of $0.19 and a loss of less than $0.01 for the first nine months of 2014 and 2013, respectively.
Income attributable to participating securities was as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||||
Income from continuing operations attributable to participating securities | $ | 8 | $ | 10 | $ | 28 | $ | 29 | |||||||
Income (loss) from discontinued operations, net of tax attributable to participating securities(1) | — | — | 1 | — | |||||||||||
Net income attributable to participating securities | $ | 8 | $ | 10 | $ | 29 | $ | 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 quarter of 2014, and income of less than $1 million and a loss of less than $1 million for the third quarter and first nine months of 2013. |
The weighted-average shares outstanding for basic and diluted EPS were as follows:
Three Months Ended | Nine Months Ended | ||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||
Shares for basic EPS (including 5.3 and 6.4 participating securities for the three months ended September 28, 2014 and September 29, 2013, respectively, and 5.5 and 6.4 for the nine months ended September 28, 2014 and September 29, 2013, respectively). | 310.9 | 322.5 | 312.9 | 324.9 | |||||||
Dilutive effect of stock options and LTPP | 0.5 | 0.8 | 0.7 | 0.8 | |||||||
Shares for diluted EPS | 311.4 | 323.3 | 313.6 | 325.7 | |||||||
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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 quarters or first nine months of 2014 and 2013. Stock options to purchase the following number of shares of common stock had exercise prices that were less than the average market price (dilutive) of our common stock and were included in our calculations of diluted EPS:
Three Months Ended | Nine Months Ended | |||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||
Stock options included in calculations of EPS (dilutive) | — | 0.1 | — | 0.1 | ||||||||
Stock-based Compensation Plans
Restricted stock activity for the first nine months of 2014 was as follows:
(In millions) | Number of Shares | |
Outstanding unvested at December 31, 2013 | 5.3 | |
Granted | 1.4 | |
Vested | (1.6 | ) |
Forfeited | (0.5 | ) |
Outstanding unvested at September 28, 2014 | 4.6 | |
During the first nine months of 2014 and 2013, we issued 0.7 million and 0.4 million shares, respectively, of our common stock in connection with the vesting of our 2011–2013 and 2010–2012 LTPP awards. During the same periods, we also granted our 2014–2016 and 2013–2015 LTPP awards with an aggregate target award of 0.3 million and 0.4 million shares, respectively, for each period.
The performance goals for the 2014–2016 LTPP award are independent of each other and based on three metrics, as defined in the award agreements: return on invested capital (ROIC), weighted at 50%; total shareholder return (TSR) relative to a peer group, weighted at 25%; and cumulative free cash flow from continuing operations (CFCF), weighted at 25%. The ultimate award, which is determined at the end of the three-year cycle, can range from zero to 200% of the target award and includes dividend equivalents, which are not included in the aggregate target award numbers.
During the first nine months of 2014, we awarded 0.3 million restricted stock units (RSUs) 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 (MDCC) 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 compensation expense associated with the RSUs in the first nine months of 2014, approximately $25 million pretax, $17 million after-tax, rather than over the vesting period of the awards.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign exchange translation adjustments, gains and losses on derivative instruments qualified as cash flow hedges, unrealized gains (losses) on investments, and gains and losses associated with pension and other postretirement benefits. The computation of other comprehensive income (loss) and its components are presented in the consolidated statements of comprehensive income.
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Other comprehensive income (loss) consisted of the following activity during the first nine months of 2014 and 2013:
Foreign exchange translation | Cash flow hedges and interest rate locks | Unrealized gains (losses) on investments and other, net | Pension and other employee benefit plans, net | Total | |||||||||||||||
(In millions) | |||||||||||||||||||
Balance at December 31, 2013 | $ | 47 | $ | (8 | ) | $ | (9 | ) | $ | (5,143 | ) | $ | (5,113 | ) | |||||
Before tax amount | (6 | ) | (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 | ) | |||||
Balance at December 31, 2012 | $ | 60 | $ | (5 | ) | $ | (10 | ) | $ | (7,833 | ) | $ | (7,788 | ) | |||||
Before tax amount | (18 | ) | (2 | ) | (1 | ) | 761 | 740 | |||||||||||
Tax (expense) or benefit | — | 1 | — | (267 | ) | (266 | ) | ||||||||||||
Net of tax amount | (18 | ) | (1 | ) | (1 | ) | 494 | 474 | |||||||||||
Balance at September 29, 2013 | $ | 42 | $ | (6 | ) | $ | (11 | ) | $ | (7,339 | ) | $ | (7,314 | ) | |||||
Material amounts reclassified out of AOCL were related to amortization of net actuarial loss associated with our pension and other employee benefit plans, and were $670 million and $866 million before tax in the first nine months of 2014 and 2013, respectively. This component of AOCL is included in the calculation of net periodic benefit expense (income) (see "Note 10: Pension and Other Employee Benefits" for additional details).
The defined benefit pension and other employee benefit plans is shown net of tax benefits of $2,660 million and $2,780 million at September 28, 2014 and December 31, 2013, respectively. The cash flow hedges and interest rate locks are shown net of tax benefits of $5 million and $4 million at September 28, 2014 and December 31, 2013, respectively. The unrealized gains (losses) on investments and other are shown net of tax benefits of $2 million and $4 million at September 28, 2014 and December 31, 2013, respectively. We expect approximately $5 million of after-tax net unrealized losses on our cash flow hedges at September 28, 2014 to be reclassified into earnings at then-current values over the next twelve months as the underlying hedged transactions occur.
Note 10: Pension and Other Employee Benefits
We have pension plans covering the majority of our employees, including certain employees in foreign countries (Pension Benefits). Our primary pension obligations relate to our domestic IRS qualified pension plans. We also provide certain health care and life insurance benefits to retired employees and to eligible employees upon retirement through other postretirement benefit plans (Other Benefits).
We also sponsor nonqualified defined benefit and defined contribution plans to provide benefits in excess of qualified plan
limits. We have set aside certain assets in a separate trust, which we expect to be used to pay for trust obligations. The fair value of marketable securities held in trust, which are considered Level 1 assets under the fair value hierarchy, consisted of the following:
(In millions) | Sep 28, 2014 | Dec 31, 2013 | ||||||
Marketable securities held in trust | $ | 506 | $ | 479 | ||||
Included in marketable securities held in trust in the table above was $319 million and $304 million at September 28, 2014 and December 31, 2013, respectively, related to the nonqualified defined contribution plans. The liabilities related to the nonqualified defined contribution plans were $316 million and $300 million at September 28, 2014 and December 31, 2013, respectively.
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The components of net periodic pension expense (income) were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Service cost | $ | 103 | $ | 132 | $ | 336 | $ | 434 | ||||||||
Interest cost | 284 | 250 | 846 | 748 | ||||||||||||
Expected return on plan assets | (384 | ) | (370 | ) | (1,186 | ) | (1,122 | ) | ||||||||
Amortization of prior service cost included in net periodic pension expense | 2 | 3 | 5 | 7 | ||||||||||||
Amortization of net actuarial loss included in net income | 224 | 278 | 669 | 863 | ||||||||||||
Loss due to curtailments/settlements | — | 1 | — | 1 | ||||||||||||
Net periodic pension expense (income) | $ | 229 | $ | 294 | $ | 670 | $ | 931 | ||||||||
Net periodic pension expense (income) includes income of $2 million and expense of $1 million from foreign Pension Benefit plans in the third quarters of 2014 and 2013, respectively, and income of $7 million and expense of $3 million in the first nine months of 2014 and 2013, respectively.
The components of net periodic expense (income) related to our Other Benefits were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Service cost | $ | 2 | $ | 2 | $ | 5 | $ | 6 | ||||||||
Interest cost | 8 | 8 | 26 | 24 | ||||||||||||
Expected return on plan assets | (8 | ) | (8 | ) | (25 | ) | (24 | ) | ||||||||
Amortization of prior service cost included in net periodic postretirement expense | — | (1 | ) | (1 | ) | (2 | ) | |||||||||
Amortization of net actuarial loss included in net income | — | 1 | 1 | 3 | ||||||||||||
Net periodic postretirement expense (income) | $ | 2 | $ | 2 | $ | 6 | $ | 7 | ||||||||
Long-term pension and other postretirement benefit plan liabilities were as follows:
(In millions) | Sep 28, 2014 | Dec 31, 2013 | ||||||
Long-term pension liabilities | $ | 3,091 | $ | 3,387 | ||||
Long-term other postretirement benefit plan liabilities | 281 | 288 | ||||||
Total long-term pension and other postretirement benefit plan liabilities | $ | 3,372 | $ | 3,675 | ||||
We may make both required and discretionary contributions to our pension plans. Required contributions are primarily determined in accordance with the Pension Protection Act (PPA), which amended the Employee Retirement Income Security Act of 1974 (ERISA) rules and are affected by the actual return on plan assets and plan funded status. The funding requirements under the PPA require us to fully fund our pension plans over a rolling seven-year period as determined annually based upon the funded status at the beginning of the year. In July 2012, the Surface Transportation Extension Act, which is also referred to as the Moving Ahead for Progress in the 21st Century Act (STE Act), was passed by Congress and signed by the President. The STE Act includes a provision for temporary pension funding relief due to the low interest rate environment. The provision 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. The STE Act gradually phases out this interest rate provision beginning in 2013. In August 2014, the pension provisions of the STE Act were extended as part of the Highway and Transportation Funding Act of 2014 (HATFA). As a result, the interest rates used to determine PPA funded status will continue to be adjusted within a “corridor” and do not begin to phase out until 2018. Prior to the extension of such pension funding relief under the HATFA, we expected to make required contributions to our pension and other postretirement benefit plans of approximately $900 million in 2014. The HATFA reduced our required 2014 pension and other postretirement benefit plan contributions to approximately $700 million. As a result of lower expected contributions under HATFA in both 2014 and 2015, our 2014 expected tax payments increased by approximately $300 million. The HATFA also impacts our CAS expense in 2014, since CAS Harmonization incorporates the PPA interest rate into CAS calculations. Our 2014 CAS expense decreased by $69 million resulting in a reduction in our 2014 FAS/CAS income by the same amount since the HATFA does not change the calculation of our 2014 FAS expense. However, reductions in our pension contributions under the HATFA would increase our FAS expense in future years by the amount of expected return that would have applied to the contributions.
20
We made the following contributions to our pension and other postretirement benefit plans:
Nine Months Ended | |||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | |||||
Required pension contributions | $ | 616 | $ | 747 | |||
Other postretirement benefit contributions | 14 | 16 | |||||
We did not make any discretionary contributions to our pension plans during the first nine months of 2014 and 2013; 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 2014, we recorded an increase to the unfunded projected benefit obligation for our pension and other postretirement benefit plans of $330 million and $2 million, respectively, with a corresponding net after-tax increase of $216 million to AOCL. As a result of this update and the extension of pension funding relief under the HATFA, our 2014 FAS/CAS Adjustment (as described in "Note 12: Business Segment Reporting") changed by $59 million of decreased income, $44 million of this was recorded in the third quarter and first nine months of 2014 and $15 million will be recorded in the fourth quarter of 2014. Approximately $69 million of this decrease in the annual FAS/CAS Adjustment was due to the HATFA described above, partially offset by $10 million of increased income related to the update of our actuarial estimate.
Note 11: Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We have participated in the IRS Compliance Assurance Process (CAP) program since 2011. We continue to participate in the CAP program for the 2013 and 2014 tax years. In the first quarter of 2014 the IRS completed the examination for the 2012 tax year, which completed all examinations through the 2012 tax year. We are also under audit by multiple state and foreign tax authorities.
We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less than amounts accrued and reflected in our consolidated balance sheets. Accordingly, we may record adjustments to the amounts for federal, foreign and state tax-related liabilities in the future as we revise estimates or we settle or otherwise resolve the underlying matters. In the ordinary course of business, we may take new positions that could increase or decrease our unrecognized tax benefits in future periods.
In January of 2014, a foreign subsidiary authorized and completed a transaction which resulted in a taxable dividend of approximately $115 million. The transaction does not affect our indefinite reinvestment assertion because it generated a net tax benefit of approximately $80 million. We do not provide for taxes on undistributed earnings of non-U.S. subsidiaries when the earnings have been determined to be indefinitely invested or are expected to be remitted free of additional tax. This transaction decreased our effective tax rate for the first nine months of 2014 by approximately 3.7% and had no impact on our effective tax rate in the third quarter of 2014.
The balance of our unrecognized tax benefits, exclusive of interest, was $109 million and $118 million at September 28, 2014 and December 31, 2013, respectively, and $71 million and $129 million at September 29, 2013 and December 31, 2012, respectively, the majority of which would affect our earnings if recognized.
Note 12: Business Segment Reporting
Our reportable segments, organized based on capabilities and technologies, are: Integrated Defense Systems; Intelligence, Information and Services; Missile Systems; and Space and Airborne Systems. Segment total net sales and operating income generally include intersegment sales and profit recorded at cost plus a specified fee, which may differ from what the selling entity would be able to obtain on sales to external customers. Corporate and Eliminations includes corporate expenses and intersegment sales and profit eliminations. Corporate expenses represent unallocated costs and certain other corporate costs not considered part of management’s evaluation of reportable segment operating performance.
21
Segment financial results were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
Total Net Sales (in millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Integrated Defense Systems | $ | 1,428 | $ | 1,603 | $ | 4,458 | $ | 4,920 | ||||||||
Intelligence, Information and Services | 1,478 | 1,496 | 4,446 | 4,587 | ||||||||||||
Missile Systems | 1,477 | 1,635 | 4,590 | 4,961 | ||||||||||||
Space and Airborne Systems | 1,509 | 1,556 | 4,412 | 4,758 | ||||||||||||
Corporate and Eliminations | (418 | ) | (448 | ) | (1,223 | ) | (1,390 | ) | ||||||||
Total | $ | 5,474 | $ | 5,842 | $ | 16,683 | $ | 17,836 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Intersegment Sales (in millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Integrated Defense Systems | $ | 27 | $ | 28 | $ | 84 | $ | 80 | ||||||||
Intelligence, Information and Services | 216 | 207 | 622 | 622 | ||||||||||||
Missile Systems | 35 | 39 | 103 | 120 | ||||||||||||
Space and Airborne Systems | 140 | 174 | 414 | 568 | ||||||||||||
Total | $ | 418 | $ | 448 | $ | 1,223 | $ | 1,390 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Operating Income (in millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Integrated Defense Systems | $ | 230 | $ | 286 | $ | 675 | $ | 874 | ||||||||
Intelligence, Information and Services | 125 | 134 | 377 | 389 | ||||||||||||
Missile Systems | 190 | 202 | 588 | 629 | ||||||||||||
Space and Airborne Systems | 237 | 224 | 629 | 667 | ||||||||||||
FAS/CAS Adjustment | 42 | (46 | ) | 216 | (189 | ) | ||||||||||
Corporate and Eliminations | (61 | ) | (43 | ) | (175 | ) | (141 | ) | ||||||||
Total | $ | 763 | $ | 757 | $ | 2,310 | $ | 2,229 | ||||||||
We must calculate our pension and other postretirement benefit (PRB) costs under both Financial Accounting Standards (FAS) requirements under GAAP and U.S. Government cost accounting standards (CAS). GAAP outlines the methodology used to determine pension expense or income for financial reporting purposes, which is not indicative of the funding requirements for pension and PRB plans that we determine by other factors. CAS prescribes the allocation to and recovery of pension and PRB costs on U.S. Government contracts. The results of each segment only include pension and PRB expense as determined under CAS. The CAS requirements for pension costs and its calculation methodology differ from the FAS requirements and calculation methodology. As a result, while both FAS and CAS use long-term assumptions in their calculation methodologies, each method results in different calculated amounts of pension and PRB cost. The FAS/CAS Adjustment, which is reported as a separate line in our segment results above, represents the difference between our pension and PRB expense or income under FAS in accordance with GAAP and our pension and PRB expense under CAS.
The components of our FAS/CAS Adjustment were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
FAS/CAS Pension Adjustment | $ | 39 | $ | (47 | ) | $ | 211 | $ | (192 | ) | ||||||
FAS/CAS PRB Adjustment | 3 | 1 | 5 | 3 | ||||||||||||
FAS/CAS Adjustment | $ | 42 | $ | (46 | ) | $ | 216 | $ | (189 | ) | ||||||
22
The components of total operating income related to Corporate and Eliminations were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In millions) | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | ||||||||||||
Intersegment profit eliminations | $ | (42 | ) | $ | (39 | ) | $ | (119 | ) | $ | (125 | ) | ||||
Corporate | (19 | ) | (4 | ) | (56 | ) | (16 | ) | ||||||||
Total | $ | (61 | ) | $ | (43 | |||||||||||