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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________________________________________

FORM 10-K

ý☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2018~~2019 or

¨☐ 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	~~Name~~Trading ~~of Each Exchange on Which Registered~~Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value	~~New York Stock Exchange~~RTN	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

_________________________________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý ☒ No ¨☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ ☐ No ý☒

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 every Interactive Data File required to be submitted 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 such files). Yes ý ☒ No ¨☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large ~~accelerated~~Accelerated ~~filer ý~~ Filer ☒ Accelerated ~~filer ¨~~ Filer ☐ Non-accelerated ~~filer ¨~~ Filer ☐ Smaller ~~reporting~~Reporting ~~company ¨~~Company ☐ Emerging Growth Company ☐

~~Emerging~~If an emerging growth company ¨, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

IfIndicate ~~an emerging growth company, indicate~~ by check mark ifwhether the ~~registrant~~Registrant ~~has~~is ~~elected~~a ~~not~~shell tocompany ~~use~~(as ~~the~~defined ~~extended~~in ~~transition~~Rule ~~period~~12b-2 ~~for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)~~ of the Exchange Act). ¨Yes ☐ No ☒

~~Indicate~~The byaggregate ~~check~~market ~~mark~~value ~~whether~~of the ~~Registrant~~voting isstock aheld ~~shell~~by ~~company~~non-affiliates ~~(as~~of ~~defined~~the inRegistrant ~~Rule~~as ~~12b-2~~ of ~~the~~June 28, ~~Exchange~~2019 ~~Act)~~was approximately $48. ~~Yes ¨ No ý~~3 billion.

The ~~aggregate~~number ~~market value~~ of ~~the~~shares ~~voting stock held by non-affiliates~~ of ~~the~~Common ~~Registrant~~Stock outstanding as of ~~June~~February 2910, ~~2018~~2020 was ~~approximately $55~~278,441,000.~~0 billion.~~

The number of shares of Common Stock outstanding as of February 11, 2019 was 282,239,000.

Documents incorporated by reference and made a part of this Form 10-K:

Portions of the Registrant’s Definitive Proxy Statement for its ~~2019~~2020 Annual Meeting of Stockholders or an amendment on Form 10-K/A are incorporated by reference in Part III of this Form 10-K.

Table of Contents

INDEX

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	2229
Item 2.	Properties	2229
Item 3.	Legal Proceedings	2330
Item 4.	Mine Safety Disclosures	2431
	Executive Officers of the Registrant	24
	Information About Our Executive Officers	31
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2633
Item 6.	Selected Financial Data	2835
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2936
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	7380
Item 8.	Financial Statements and Supplementary Data	7482
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~132~~142
Item 9A.	Controls and Procedures	~~132~~142
Item 9B.	Other Information	~~132~~142
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~132~~142
Item 11.	Executive Compensation	~~133~~143
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~133~~143
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~133~~143
Item 14.	Principal Accountant Fees and Services	~~133~~143
PART IV
Item 15.	Exhibits, ~~and~~ Financial Statement Schedules	~~134~~144
Item 16.	Form 10-K Summary	~~138~~149
SIGNATURES		~~139~~150

Table of Contents

PART I

ITEM 1. BUSINESS

General

Raytheon Company, together with its subsidiaries, is a technology and innovation leader specializing in defense and other government markets throughout the world. The terms “we,” “us,” “our,” “Raytheon” and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another meaning. We develop technologically advanced and integrated products, services and solutions in our core markets: integrated air and missile defense; electronic warfare; command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance; space systems; effects; and cyber. We serve both domestic and international customers primarily as a prime contractor or subcontractor on a broad portfolio of defense and related programs for government customers.

We were founded in 1922 and have grown internally and through a number of acquisitions. We are incorporated in the state of Delaware. Our principal executive offices are located at 870 Winter Street, Waltham, Massachusetts 02451.

Proposed Merger with United Technologies Corporation (UTC)

On June 9, 2019, we entered into an Agreement and Plan of Merger (the Merger Agreement) with UTC and Light Merger Sub Corp., a wholly-owned subsidiary of UTC (Merger Sub). Under the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Raytheon (the Merger) with Raytheon surviving the Merger as a wholly-owned subsidiary of UTC. At the effective time of the Merger (the Effective Time), each share of common stock of Raytheon issued and outstanding immediately prior to the Effective Time (except for shares held by Raytheon as treasury stock) will be converted into the right to receive 2.3348 shares of common stock of UTC (and, if applicable, cash in lieu of fractional shares), less any applicable withholding taxes. At the Effective Time, Raytheon’s stockholders will hold approximately 43%, and UTC’s stockholders will hold approximately 57%, of the outstanding shares of common stock of UTC.

The Merger Agreement also provides that, prior to the consummation of the Merger, UTC will complete the previously announced separation of its commercial businesses, Otis and Carrier, from its other businesses (the Separation), and the pro rata distributions to its stockholders of 100% of the common stock of the entity holding the Otis business and 100% of the common stock of the entity holding the Carrier business (the Distributions).

The Merger was approved by Raytheon’s stockholders at a special meeting of Raytheon’s stockholders held on October 11, 2019. The issuance of shares of UTC Common Stock in connection with the Merger was approved by UTC’s stockholders at a special meeting of UTC’s stockholders held on October 11, 2019.

For more information refer to “Note 2: Proposed Merger with United Technologies Corporation (UTC)” within Item 8 of this Form 10-K.

In this section, we describe our business, including our business segments, product lines, customers, operations and other considerations.

Business Segments

We operate in five business segments:


–	Integrated Defense Systems;


–	Intelligence, Information and Services;


–	Missile Systems;


–	Space and Airborne Systems; and


–	Forcepoint.

The following is a description of each of our business segments. As part of the description, we include a discussion of some of the segment’s notable initiatives and achievements in ~~2018~~2019, such as certain key contract awards and new product introductions.

Integrated Defense Systems (IDS)—IDS, headquartered in Tewksbury, Massachusetts, is a leader in integrated air and missile defense; large land- and sea-based radar solutions; command, control, communications, computers, cyber and intelligence solutions; naval combat and ship electronic and sensing systems; and undersea sensing and effects solutions. IDS delivers combat-proven performance against the complete spectrum of airborne and ballistic missile threats and is a world leader in the technology, development, and production of sensors and mission systems. IDS provides solutions to the U.S. Department of Defense (DoD), and more than 50 international customers which represent more than half of IDS’s business.

In 2018, IDS booked several significant awards to provide advanced Patriot® Air and Missile Defense (A&MD) systems for the U.S. Army and other international customers. IDS was awarded contracts to provide Patriot A&MD systems to Poland, Sweden and Romania as well as new contracts to provide additional Patriot A&MD systems to other international customers. In addition, IDS was one of two contractors down-selected for the U.S. Army’s Lower Tier Air and Missile Defense Sensor (LTAMDS) competition, which is currently in the Technical Maturity and Risk Reduction (TMRR) phase. IDS also received awards during the year to provide Guidance Enhanced Missiles (GEM-T) for an international customer and for the Collins class submarine program for the Royal Australian Navy. In addition, the U.S. Navy awarded IDS options to continue to produce the low-rate initial production Air and Missile Defense Radar (AMDR) units for the DDG-51 class of warships and selected IDS to provide the innovative undersea mine neutralization system known as Barracuda.

IDS has the following principal product lines:

Mission Systems and Sensors (MSS)—MSS provides integrated whole-life air and missile defense systems. MSS produces systems and solutions, including early warning radar, the Army Navy/Transportable Radar Surveillance-Model 2 (AN/TPY-2), Three-Dimensional Expeditionary Long-Range Radar (3DELRR), and other land-based surveillance and search radars, which provide threat detection, precision tracking, discrimination and classification of ballistic missile threats. In addition, MSS provides command, control, communications, computers, cyber and intelligence solutions through the development, delivery

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solutions; naval combat and ~~support~~ship ofelectronic ~~complex~~and ~~integrated,~~sensing ~~networked,~~systems; ~~actionable~~and ~~combat~~undersea ~~command~~sensing and ~~control~~effects solutions. ~~for~~IDS ~~air~~delivers ~~and~~combat-proven ~~land~~performance ~~combat~~against ~~commanders.~~the ~~MSS~~complete ~~also~~spectrum ~~provides~~of ~~tailored~~airborne ~~capabilities~~and toballistic ~~deliver~~missile ~~Air~~threats ~~Defense~~and ~~Operations~~is ~~Centers~~a ~~(ADOC)~~world ~~for~~leader ~~integrated~~in ~~command~~the ~~and~~technology, ~~control~~development, ~~fire direction~~ and ~~weapons~~production ~~systems~~of ~~and~~ sensors toand ~~our~~mission ~~global customers~~systems. ~~Key~~IDS ~~MSS~~provides ~~customers~~solutions ~~include~~to the U.S. ~~Army~~Department ~~and~~of ~~Air Force, the Missile~~ Defense ~~Agency~~ (~~MDA~~DoD), and more than 50 international customers which represent more than half of IDS’s business.

~~Integrated~~In 2019, IDS booked several significant awards to provide advanced Patriot® Air and Missile Defense (~~IAMD~~A&MD)~~—IAMD~~ ~~provides~~systems ~~combat~~and National Advanced Surface-~~proven~~to-Missile ~~air~~Systems ~~and~~(NASAMSTM). ~~missile~~IDS ~~defense~~was awarded contracts to provide Patriot A&MD and NASAMS systems to Qatar, ~~including~~contracts ~~the~~to provide additional Patriot A&MD ~~system~~systems ~~which~~to is the ~~cornerstone~~U.S. ofArmy ~~the~~and ~~air~~other international customers, and ~~missile~~a ~~defense~~contract ~~architecture~~to provide NASAMS for 16the ~~nations~~Commonwealth ~~around~~of ~~the~~Australia. ~~world,~~IDS ~~including~~was instrumental in Raytheon being selected to provide the U.S. ~~and~~Army ~~seven~~with ~~NATO~~their ~~nations.~~next ~~The~~generation ~~National~~360-degree ~~Advanced~~capable ~~Surface-to-~~radar, the Lower Tier Air and Missile ~~System~~Defense Sensor (~~NASAMS™~~LTAMDS),. ~~also~~LTAMDS ~~offered~~is bya ~~IAMD,~~new isradar athat ~~highly~~is ~~adaptable~~designed ~~mid-range~~to ~~solution~~ultimately ~~for~~replace ~~any~~the ~~operational~~current ~~air~~U.S. ~~defense~~Army’s ~~requirement~~Patriot radars. ItLTAMDS is ~~deployed~~managed as a Corporate project and as a result, the related net expenses are not included in management’s evaluation of IDS’s segment results. In addition, the U.S. ~~and~~Navy ~~nine~~awarded ~~other~~IDS ~~nations~~options ~~around~~to continue to produce the ~~world.~~low-rate ~~Key~~initial ~~IAMD~~production ~~customers~~Air ~~include~~and Missile Defense Radar (AMDR) units for the UDDG-51 class of warships.S. ~~Army~~IDS ~~and~~also received an award to provide Guidance Enhanced Missiles (GEM-T) for an international ~~customers.~~customer ~~Total~~and ~~sales~~awards ~~from~~for ~~IAMD~~the ~~were~~Army ~~approximately~~Navy/Transportable ~~10%~~Radar ofSurveillance-Model ~~our~~2 ~~consolidated~~(AN/TPY-2) ~~revenues~~radar program for ~~2018,~~the ~~2017~~Kingdom ~~and~~of ~~2016~~Saudi Arabia (KSA).

~~Seapower~~IDS ~~Capability~~has Systems (SCS)—SCS is a provider and integrator of maritime air and missile defense radar systems, naval combat management, and airborne anti-submarine and mine warfare systems, as well as sensors, maritime naval navigation systems, and torpedoes for U.S. and international navies. SCS provides the low-rate initial production AMDR units, designated as AN/SPY-6, for the U.S. Navy’s DDG 51 class of warships. SCS’s contracts with the U.S. Navy also include Enterprise Air Surveillance Radar (EASR) for aircraft carriers and amphibious warfare ships, and, in the anti-submarine warfare arena, a new variable depth sonar solution for the littoral combat ship class. In addition, as a ship integrator for the U.S. Navy, SCS provides mission systems equipment and combat and missions system integration for the following ~~ship~~principal ~~classes: DDG~~product 1000 destroyers; LPD 17 amphibious warfare ships; and CVN 78 aircraft carriers. The U.S. Navy also recently selected IDS to provide the innovative undersea mine neutralization system known as Barracuda.lines:

~~IDS~~Integrated ~~also~~Air ~~includes~~and ~~the~~Missile ~~Advanced~~Defense ~~Technology~~ (ATIAMD)—IAMD ~~product~~provides ~~line,~~combat-proven ~~which~~air ~~executes~~and ~~contract~~missile ~~research~~defense ~~and~~systems, ~~development~~including ~~programs~~the ~~primarily~~Patriot ~~with~~A&MD system which is the ~~Office~~cornerstone of ~~Naval~~the ~~Research~~air ~~(ONR),~~and ~~the~~missile ~~Strategic~~defense ~~Capabilities~~architecture ~~Office~~for ~~(SCO)~~17 ~~and~~nations around the ~~Defense~~world, ~~Advanced~~including ~~Research~~the ~~Projects~~U.S. ~~Agency~~and ~~(DARPA)~~seven inNATO ~~advanced~~nations. ~~materials~~The NASAMS, ~~semiconductors~~also ~~such~~offered asby ~~Gallium~~IAMD, ~~Nitride~~is ~~(GaN)~~a ~~and~~highly ~~next~~adaptable mid-~~generation~~range ~~systems~~solution ~~such~~for asany ~~Flexible~~operational ~~Digital~~air ~~Array~~defense ~~Radar~~requirement. ~~(FlexDAR)~~It ~~and~~is ~~Cross~~deployed ~~Domain~~in ~~Surveillance~~the U.S. and ~~Targeting~~ten ~~(CDMaST),~~other tonations ~~support~~around ~~Raytheon~~the ~~product lines~~world. ATIAMD was also ~~pursues~~instrumental ~~attractive~~in ~~adjacent~~Raytheon ~~growth~~being ~~markets~~selected ~~such~~to asprovide ~~undersea~~the ~~warfare~~U.S. ~~and~~Army ~~directed~~with ~~energy~~LTAMDS. InFor ~~addition~~segment reporting purposes, ~~IDS~~the ~~works~~costs ~~closely~~related ~~with~~to the ULTAMDS project are presented as part of Corporate and other unallocated costs as discussed above.S. ~~government~~Total ~~research~~sales ~~labs~~from ~~including~~IAMD ~~ONR,~~were ~~MIT~~approximately ~~Lincoln~~10% ~~Labs~~of our consolidated revenues for 2019, 2018 and ~~DARPA~~2017.

~~Intelligence,~~Mission ~~Information~~Systems and ~~Services~~Sensors (~~IIS~~MSS)—~~IIS~~MSS provides integrated whole-life air and missile defense systems. MSS produces systems and solutions, ~~headquartered~~including inearly ~~Dulles~~warning radar, ~~Virginia~~the AN/TPY-2, ~~provides~~the aMulti-Function ~~full~~Radio ~~range~~Frequency ofSystem ~~technical~~(MFRFS), and ~~professional~~other ~~services~~land-based tosurveillance ~~intelligence~~and search radars, ~~defense~~which provide threat detection, ~~federal~~precision ~~and~~tracking, ~~commercial~~discrimination ~~customers~~and ~~worldwide.~~classification ~~IIS~~of ~~specializes~~ballistic inmissile ~~global~~threats. ~~Intelligence~~In addition, ~~Surveillance~~MSS ~~and~~provides ~~Reconnaissance~~command, ~~(ISR);~~control, ~~navigation;~~communications, ~~DoD~~computers, ~~space~~cyber and ~~weather~~intelligence solutions; ~~cybersecurity;~~through ~~analytics;~~the ~~training;~~development, ~~logistics;~~delivery ~~mission~~and support; ~~advanced~~of ~~software-based~~ complex ~~systems;~~integrated, ~~automation~~networked, actionable combat command and ~~sustainment~~control solutions; ~~and~~for ~~international~~air and ~~domestic~~land combat commanders. MSS also provides tailored capabilities to deliver Air ~~Traffic~~Defense ~~Management~~Operations Centers (~~ATM~~ADOC) ~~systems.~~for ~~Key~~integrated ~~customers~~command ~~include~~and ~~the~~control, ~~U.S.~~fire ~~Intelligence~~direction ~~Community,~~and ~~the~~weapons ~~U.S.~~systems ~~Armed~~and ~~Forces,~~sensors ~~the~~to ~~Federal~~our ~~Aviation~~global ~~Administration~~customers. ~~(FAA),~~Key MSS customers include the ~~National~~U.S. ~~Oceanic~~Army and ~~Atmospheric~~Air ~~Administration (NOAA)~~Force, the ~~Department~~Missile ofDefense ~~Homeland~~Agency ~~Security~~ (~~DHS~~MDA), ~~NASA~~ and ~~a number of~~ international customers.

~~During~~Seapower ~~2018,~~Capability ~~IIS~~Systems ~~won~~(SCS)—SCS is a ~~number~~provider and integrator of ~~important~~maritime ~~classified~~air and ~~unclassified~~missile ~~contracts~~defense radar systems, ~~including~~naval ~~multi~~combat management, and anti-~~year~~submarine ~~contracts~~and tomine ~~provide~~warfare asystems, ~~new~~as ~~international~~well ~~government~~as ~~customer~~sensors, ~~with~~maritime ~~advanced~~naval ~~cybersecurity~~navigation ~~solutions~~systems, and ~~associated~~torpedoes ~~training~~for U.S. and international navies. SCS provides the low-rate initial production AMDR units, ~~knowledge~~designated ~~transfer~~as ~~and~~AN/SPY-6, ~~operational~~for ~~and~~the ~~sustainment~~U.S. ~~support~~Navy’s DDG 51 class of warships. ~~IIS~~SCS’s ~~was~~contracts with the U.S. Navy also ~~awarded~~include Enterprise Air Surveillance Radar (EASR) for aircraft carriers and amphibious warfare ships, and, in the anti-submarine warfare area, a ~~contract~~new variable depth sonar solution for ~~software~~the ~~support~~littoral tocombat ~~sustain~~ship class. In addition, as a ship integrator for the U.S. Navy, SCS provides mission systems equipment and ~~modernize~~combat ~~missile~~and ~~defense~~missions system integration for the following ship classes: DDG 1000 destroyers; LPD 17 amphibious warfare ships; and ~~other~~CVN ~~strategic~~78 ~~systems~~aircraft carriers. SCS also provides the innovative undersea mine neutralization system known as Barracuda for the U.S. ~~Army~~Navy.

~~IIS~~IDS ~~has~~also includes the ~~following~~Advanced ~~principal~~Technology (AT) product line, which executes contract research and development programs primarily with the Office of Naval Research (ONR), the Strategic Capabilities Office (SCO) and the Defense Advanced Research Projects Agency (DARPA) in advanced materials, semiconductors such as Gallium Nitride (GaN) and next-generation systems such as Flexible Digital Array Radar (FlexDAR) and Cross Domain Maritime Surveillance and Targeting (CDMaST), to support Raytheon product lines:. AT also pursues attractive adjacent growth markets such as undersea warfare and directed energy. In addition, IDS works closely with the U.S. government research labs including ONR, MIT Lincoln Labs and DARPA.

Cybersecurity and Special Missions (CSM)—CSM provides broad cyber domain capabilities and advanced solutions to strengthen critical systems and support mission execution. CSM designs, implements and integrates customized cyber products and services and quick-reaction solutions, as well as high-consequence special mission support for the U.S. Intelligence Community, the DoD, civil federal agencies, international governments and commercial enterprises. Raytheon leverages and incorporates CSM cyber capabilities across the Company.

Global Training Solutions (GTS)—GTS provides integrated operational training through comprehensive support for live, virtual and constructive training exercises and operations, maintenance for training and range systems, curriculum development and instruction, management oversight and administration for contractor activities, and supply support for government-owned property and material. Previously, GTS provided these services principally under the Warfighter Field Operations Customer Support (Warfighter FOCUS) contract with the U.S. Army, which continues to transition to a number of competitively awarded

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~~replacement~~Intelligence, ~~programs~~Information ~~through~~and ~~2019.~~Services ~~GTS~~(IIS)—IIS, ~~will~~headquartered ~~participate~~ in ~~some~~Dulles, Virginia, provides a full range of ~~the~~technical ~~planned~~and ~~replacement~~professional ~~programs;~~services ~~however~~to intelligence, ~~some~~defense, offederal ~~the~~and ~~work~~commercial ~~has~~customers ~~been~~worldwide. ~~awarded~~IIS tospecializes ~~other~~in ~~contractors.~~global ~~GTS~~Intelligence, ~~also~~Surveillance ~~provides~~and ~~critical~~Reconnaissance ~~training~~(ISR); navigation; DoD space and weather solutions; ~~through~~cybersecurity; ~~Raytheon~~analytics; ~~Professional~~training; ~~Services,~~logistics; ~~with~~mission ~~commercial~~support; advanced software-based complex systems; automation and sustainment solutions; and international and domestic Air Traffic Management (ATM) systems. Key customers include the U.S. Intelligence Community, ~~processes~~the DoD, ~~tools~~the Federal Aviation Administration (FAA), the National Oceanic and ~~experts~~Atmospheric ~~for~~Administration ~~domestic~~(NOAA), the Department of Homeland Security (DHS), NASA and ~~international~~a ~~commercial~~number of international customers.

~~Navigation~~During 2019, ~~Weather~~IIS ~~and~~won ~~Services~~a ~~(NWS)—NWS~~number of contracts, ~~which~~including ~~combined~~multi-year ~~the~~contracts ~~previous~~to ~~Navigation~~develop and ~~Environmental~~deploy ~~Solutions~~a ~~(NES)~~mission-critical, ~~and~~advanced ~~Transportation~~Cyber ~~and~~Security ~~Support~~Operations ~~Services~~Center (~~TSS~~CSOC) ~~product~~and ~~lines,~~related ~~primarily~~services ~~supports programs~~ for ~~NASA,~~a ~~NOAA,~~country ~~the~~in ~~DoD and~~ the ~~FAA~~Middle byEast ~~implementing secure environmental~~ and ~~navigation~~North ~~ground~~Africa ~~solutions~~(MENA) region and ~~data~~a ~~processing.~~low-rate ~~NWS~~initial ~~capabilities~~production ~~include~~award ~~ground~~to ~~systems~~outfit ~~for~~the ~~command~~U.S. ~~and~~Navy’s ~~control of space assets, domestic and international ATM, large~~nuclear-~~scale~~powered ~~data~~aircraft ~~processing~~carriers and ~~exploitation,~~amphibious ~~storage~~assault ~~architectures,~~ships ~~and~~with ~~high-performance~~Joint ~~data~~Precision ~~handling~~Approach and ~~processing~~Landing ~~systems~~Systems (JPALS). ~~Key~~In ~~programs~~addition ~~include~~to ~~the~~these ~~Joint~~wins, ~~Polar~~IIS ~~Satellite~~continued ~~System~~to ~~(JPSS),~~grow ~~which~~its ~~supports~~classified ~~multiple~~business ~~civil,~~in ~~defense~~both cyber and ~~international~~space, ~~polar-orbiting~~receiving ~~environmental~~a ~~satellites,~~number ~~the~~of ~~ATM~~significant ~~solution~~contracts. ~~Standard~~In ~~Terminal~~the ~~Automation~~first ~~Replacement~~quarter ~~System~~of ~~(STARS),~~2019 ~~the~~we ~~Joint~~acquired ~~Precision~~an ~~Approach~~additional ~~and~~10% ~~Landing~~equity ~~System~~ownership ~~(JPALS)~~in ~~and~~ the ~~Global~~Range ~~Positioning~~Generation ~~System~~ Next ~~Generation~~LLC ~~Operational Control System~~ (~~GPS-OCX~~RGNext). ~~NWS~~joint ~~also delivers product support services for other Raytheon businesses~~venture, ~~including~~increasing ~~system~~our ~~deployment,~~equity ~~installation~~ownership ~~and~~to ~~integration,~~60% ~~logistics~~ and ~~training~~giving ~~for~~us ~~military~~control ~~and~~of ~~civil~~RGNext ~~customers in over 80 countries~~operations.

~~Global~~Effective ~~Intelligence~~July ~~Solutions~~1, ~~(GIS)—GIS~~2019, ~~provides~~IIS ~~strategic~~combined ~~ISR~~ and ~~advanced~~reorganized ~~technology~~the ~~solutions~~previous ~~and~~Global ~~services~~Intelligence ~~through~~Solutions ~~large-scale~~(GIS), ~~satellite~~Mission ~~command~~Support and ~~control~~Modernization (MSM), ~~mission~~and ~~planning~~Navigation, ~~constellation~~Weather ~~management,~~and ~~data~~Services ~~processing,~~(NWS) ~~mission~~product ~~analytics,~~lines ~~and~~to ~~secure~~form ~~data~~the ~~sharing.~~C2, ~~GIS's~~Space ~~highly~~and ~~automated~~Intelligence ~~information~~(CSI) ~~solutions~~product ~~manage~~line and the ~~collection~~Navigation and ~~integration~~Modernization ofSolutions ~~information~~(NMS) ~~across~~product ~~multiple~~line ~~domains.~~to ~~GIS~~align ~~serves~~similar ~~the~~capabilities ~~DoD,~~and ~~the~~solutions. ~~Intelligence~~IIS ~~Community,~~has ~~commercial~~the ~~customers~~following ~~and~~principal ~~international~~product ~~partners.~~lines:

~~Mission~~C2, ~~Support~~Space and ~~Modernization~~Intelligence (~~MSM~~CSI)—~~MSM~~CSI ~~provides~~combines ~~multi-domain~~space ~~command~~ and ~~control,~~intelligence ~~platform modernization and cybersecurity services, and~~ mission~~-based~~ ~~software~~support ~~development~~with ~~using~~an ~~commercial~~expanding ~~best~~portfolio ~~practices~~of ~~for~~command ~~the~~and ~~U.S.~~control ~~military~~solutions, ~~civil~~such ~~agencies~~as ~~and~~large-scale ~~partner~~data ~~nations.~~processing ~~MSM’s~~and ~~core~~exploitation, ~~services~~storage ~~are~~architectures, ~~applied in two broad areas: supporting global mission operations;~~ and ~~modernizing~~high-performance ~~legacy~~data ~~weapons~~handling and ~~platforms~~processing bysystems, ~~integrating~~offering customers the ~~latest~~ability ~~software~~to ~~solutions.~~seamlessly ~~MSM’s~~operate ~~programs~~across ~~include~~every ~~developing~~domain, ~~advanced~~sharing ~~ground~~and ~~stations~~exploiting todata ~~control~~as ~~unmanned~~quickly ~~systems, such~~ as ~~Global~~it ~~Hawk®;~~can ~~providing~~be ~~cyber-resiliency~~collected. ~~and~~CSI ~~avionics~~serves ~~solutions~~the ~~for~~U.S. aIntelligence ~~wide range of aircraft~~Community, ~~including~~ the ~~V-22~~DoD, ~~CH-53~~ and ~~HH-60;~~civil ~~upgrading~~federal ~~the U~~agencies.S. ~~Army~~In ~~and~~addition ~~Air~~to ~~Force~~numerous ~~Distributed~~classified ~~Common~~programs, ~~Ground~~CSI ~~System~~key ~~(DCGS);~~programs include integrating commercial software methods and solutions into the U.S. Air Force’s Air and Space Operations Center (AOC); ~~deploying~~ and ~~integrating critical border security solutions for partner nations; and operating~~ the ~~North~~Joint ~~American~~Polar ~~Aerospace~~Satellite ~~Defense~~System ~~Command~~ (~~NORAD~~JPSS) ~~command center~~, ~~NASA's~~which ~~Neutral~~supports ~~Buoyancy~~multiple ~~Lab and~~civil, ~~through~~defense ~~its~~and ~~RGNext~~international ~~joint~~polar-orbiting ~~venture,~~environmental Usatellites.~~S. Air Force space launch facilities.~~

~~IIS~~Cybersecurity ~~also~~and ~~operates~~Special ~~the~~Missions ~~Cyber~~(CSM)—CSM provides ~~Operations,~~broad ~~Development~~cyber ~~and~~domain ~~Evaluation~~capabilities ~~(CODE)~~and ~~Center, an~~ advanced ~~cyber~~solutions ~~range~~to instrengthen ~~which~~critical ~~the~~systems ~~Company~~and ~~integrates~~support ~~our~~mission ~~capabilities~~execution. ~~and~~CSM ~~demonstrates~~designs, ~~tests~~implements and ~~assesses~~integrates ~~new~~customized cyber products and services toand ~~determine~~quick-reaction ~~how~~solutions. ~~they~~In ~~can~~addition, ~~best~~CSM ~~integrate~~provides ~~into~~high-consequence aspecial ~~customer’s Cyber~~mission ~~Security~~support ~~Operations~~for ~~Center (CSOC)~~the U.S. ~~IIS~~Intelligence ~~leverages~~Community, ~~CODE~~the ~~Center~~DoD, ~~capabilities~~civil tofederal ~~drive~~agencies, ~~both~~international ~~internal~~governments and ~~external~~commercial ~~research~~enterprises. ~~and~~Raytheon ~~development~~leverages ~~with~~and ~~Governmental~~incorporates ~~entities~~CSM ~~and~~cyber ~~commercial~~capabilities ~~cyber~~across ~~protection~~the ~~companies~~Company.

~~Missile~~Global ~~Systems~~Training Solutions (MSGTS)—~~MS,~~GTS ~~headquartered~~provides inintegrated ~~Tucson,~~operational ~~Arizona,~~training ~~designs,~~through ~~develops~~comprehensive support for live, ~~integrates~~virtual and ~~produces~~constructive ~~missile~~training exercises and ~~combat~~operations, ~~systems~~maintenance for ~~the~~training ~~armed~~and ~~forces~~range ofsystems, ~~the~~curriculum ~~U.S.~~development and ~~allied~~instruction, ~~nations.~~management ~~Leveraging~~oversight ~~its~~and ~~capabilities~~administration infor ~~advanced~~contractor ~~airframes~~activities, ~~guidance~~ and ~~navigation~~supply ~~systems,~~support ~~high~~for government-~~resolution~~owned ~~sensors,~~property ~~surveillance,~~and ~~hypersonic~~material. ~~systems~~Previously, ~~targeting~~GTS ~~and~~provided ~~netted~~these ~~systems,~~services MSprincipally ~~provides~~under ~~and~~the ~~supports~~Warfighter aField ~~broad~~Operations ~~range~~Customer ofSupport ~~advanced~~(Warfighter ~~weapon~~FOCUS) ~~systems~~contract ~~including~~with ~~missiles,~~the ~~smart~~U.S. ~~munitions~~Army, ~~close-in~~which ~~weapon~~largely ~~systems,~~transitioned ~~projectiles,~~to ~~kinetic~~a ~~kill~~number ~~vehicles,~~of ~~directed~~competitively ~~energy~~awarded ~~effectors~~replacement ~~and~~programs ~~advanced~~throughout ~~combat~~2019. ~~sensor~~GTS ~~solutions.~~will ~~Key~~participate ~~customers~~in ~~include~~some of the ~~U.S.~~planned ~~Navy,~~replacement ~~Army~~programs; however, ~~Air~~some ~~Force~~of ~~and~~the ~~Marine~~work ~~Corps,~~has ~~the~~been ~~MDA,~~awarded ~~and~~to ~~the~~other ~~armed~~contractors. ~~forces~~GTS ofalso ~~more~~provides ~~than~~critical 40commercial ~~allied~~training ~~nations.~~solutions through Raytheon Professional Services for both domestic and international customers.

InNavigation ~~2018,~~and MSModernization ~~continued~~Solutions to(NMS)—NMS ~~capture~~combines ~~key~~airspace ~~contract~~and ~~awards~~mission ~~from~~systems amodernization ~~broad~~and ~~global~~product ~~customer~~support ~~base~~efforts, ~~including~~primarily ~~awards~~supporting programs for NASA, the ~~Standard~~DoD ~~Missile-3~~and ~~(SM-3®),~~the ~~Phalanx®~~FAA ~~Close-In~~by ~~Weapon~~implementing ~~System~~secure ~~(CIWS),~~environmental ~~Advanced~~and ~~Medium-Range~~navigation ~~Air-to-Air~~ground ~~Missile~~solutions ~~(AMRAAM®),~~and ~~AIM-9X~~data ~~Sidewinder~~processing. ~~short-range~~NMS ~~air-to-air~~capabilities ~~missile~~include ground systems for command and control of space assets, asand ~~well~~domestic asand ~~key~~international ~~strategic~~ATM. ~~awards~~Key onprograms include the ~~U.S.~~ATM ~~Air~~solution ~~Force’s~~Standard ~~Long~~Terminal ~~Range~~Automation ~~Standoff~~Replacement System (~~LRSO~~STARS), ~~program~~the JPALS, the ~~U.S~~Global ~~Navy’s~~Positioning ~~over-the-horizon~~System ~~weapon~~Next ~~system~~Generation Operational Control System (~~the~~GPS-OCX). ~~Naval~~NMS ~~Strike~~also ~~Missile~~develops advanced ground stations to control unmanned systems, orsuch ~~NSM)~~as Global Hawk®, and provides cyber-resiliency and avionics solutions for a ~~number~~wide range of ~~classified~~aircraft, including the V-22, CH-53 and ~~unclassified~~HH-60. ~~awards~~Through inits ~~hypersonic,~~RGNext ~~sensor~~joint venture, ~~undersea~~NMS ~~warfare~~provides operation and ~~missile~~mission ~~defense~~support ~~technologies~~to U.S. MSAir Force space launch and U.S. Army test facilities. NMS also ~~completed~~delivers ~~successful~~product ~~flight~~support ~~tests~~services onfor ~~the~~other ~~SM-3~~Raytheon business segments, ~~Standard~~including ~~Missile-6~~system ~~(SM-6®)~~deployment, installation and ~~StormBreaker™~~integration, ~~programs~~logistics and training for military and civil customers in over 80 countries.

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~~Effective~~IIS ~~January~~also 1operates the Cyber Operations, ~~2019~~Development and Evaluation (CODE) Center, MSan ~~combined~~advanced cyber range in which the ~~previous~~Company ~~Air~~integrates ~~and~~our ~~Missile~~capabilities ~~Defense~~and ~~Systems~~demonstrates, ~~(AMDS)~~tests and ~~Naval~~assesses new cyber products and ~~Area~~services ~~Mission~~to ~~Defense~~determine ~~(NAMD)~~how ~~product~~they ~~lines~~can best integrate into a customer’s CSOC. IIS leverages CODE Center capabilities to ~~form~~drive ~~the~~both ~~Strategic~~internal and ~~Naval~~external ~~Systems~~research ~~(SNS)~~and ~~product~~development ~~line.~~with MSGovernmental ~~has~~entities ~~the~~and ~~following~~commercial ~~principal~~cyber ~~product~~protection ~~lines:~~companies.

~~Air~~Missile ~~Warfare~~ Systems (~~AWS~~MS)—~~AWS~~MS, ~~products~~headquartered ~~and~~in ~~services~~Tucson, ~~enable~~Arizona, ~~the~~designs, ~~U.S. Armed Forces and international customers to attack~~develops, ~~suppress~~integrates and ~~destroy~~produces ~~air-,~~missile ~~sea-~~ and ~~ground-based~~combat ~~targets.~~systems ~~Products~~for ~~include~~ the ~~AMRAAM,~~armed aforces ~~state-~~of- the~~-art,~~ ~~highly~~U.S. ~~dependable~~ and ~~battle-proven~~allied ~~air-to-air~~nations. ~~missile~~Leveraging ~~that~~its ~~also~~capabilities ~~has~~in aadvanced ~~surface-to-air~~airframes, ~~launch~~guidance ~~application;~~and ~~the~~navigation ~~Tomahawk cruise missile~~systems, ~~an advanced surface~~high-resolution orsensors, ~~submarine-launched~~surveillance, ~~cruise~~hypersonic ~~missile~~systems, ~~with~~targeting ~~loitering~~ and ~~network~~netted ~~communication capability; StormBreaker~~systems, anMS ~~air-to-ground~~provides ~~glide weapon designed to engage moving targets in adverse weather~~ and ~~through~~supports ~~battlefield conditions; the Joint Standoff Weapon (JSOW®),~~ a ~~family~~broad range of ~~air-to-ground~~advanced ~~weapons that employ an integrated GPS/inertial navigation system that guides the~~ weapon tosystems ~~the~~including ~~target;~~missiles, ~~the~~smart ~~Paveway™ family of laser and GPS precision guided~~ munitions;, ~~the AIM~~close-9Xin ~~Sidewinder~~weapon ~~short-range air-to-air missile; the Miniature Air Launched Decoy-Jammer (MALD®-J)~~systems, ~~a stand-in~~projectiles, ~~high~~kinetic ~~endurance~~kill ~~electronic~~vehicles, ~~warfare~~directed ~~decoy/jammer~~energy ~~used~~effectors ~~to deceive~~ and ~~degrade~~advanced ~~air~~combat ~~defenses;~~sensor ~~the~~solutions. ~~High-Speed~~Key ~~Anti-Radiation~~customers ~~Missile~~include ~~(HARM®) and~~ the ~~HARM~~U.S. ~~Targeting System; the Maverick® precision strike missile; and the Griffin®~~Navy, ~~a small lightweight missile that can be employed from aircraft~~Army, ~~unmanned~~Air ~~aerial~~Force ~~vehicles,~~and ~~ships~~Marine ~~or ground-launched against light targets. Also~~Corps, ~~AWS partners with Kongsberg Defence Systems on~~ the ~~NSM~~MDA, and the ~~Joint~~armed ~~Strike~~forces ~~Missile (JSM), which are over-the-horizon anti-surface warfare and land attack weapons systems to be used on various aircraft platforms and ship classes. Total sales from AWS were approximately 10%~~ of ~~our~~more ~~consolidated~~than ~~revenues~~50 ~~for~~allied ~~2018, 2017, and 2016~~nations.

~~Strategic~~In ~~and Naval Systems (SNS)—SNS designs~~2019, ~~develops,~~MS ~~produces,~~continued ~~and~~to ~~supports~~capture ~~air~~key ~~and~~contract ~~missile defense~~awards ~~interceptor~~from ~~systems~~a ~~along~~broad ~~with~~global ~~highly~~customer ~~effective~~base, ~~layered~~including ~~ship~~a ~~defense~~multi-year ~~systems~~award for ~~U.S. Armed Forces and more than 30 allied countries across multiple platforms to counter~~ the ~~threats~~Standard ofMissile-6 ~~today~~(SM-6®), ~~and tomorrow. SNS's primary customers are the MDA and the U.S. Navy as well as various international customers. The SNS portfolio includes the~~ Standard Missile-3 ~~family of products with capabilities including sea~~(SM-3®), ~~and~~Advanced ~~land~~Medium-~~based~~Range ~~endo~~Air-to-Air ~~and~~Missile ~~exoatmospheric~~(AMRAAM®), ~~defense~~AIM ~~against short~~9-X ~~and~~Sidewinder ~~intermediate~~short-range ~~ballistic missiles and tri~~air-~~mission defense against~~ to-air, ~~surface and ballistic~~ missile ~~threats. The product line designs~~, ~~develops, integrates, manufactures, and supports~~ the ~~Phalanx~~next ~~CIWS,~~generation ~~employed~~development ~~afloat~~of ~~and ashore,~~ the ~~Rolling Airframe Missile (RAM™) and Launcher System, the SeaRAM® system, and the~~ Evolved Seasparrow Missile (ESSM®), ~~family of missiles protecting ships against air~~Phalanx®, ~~subsurface~~Tomahawk ~~and surface~~ cruise~~/ballistic~~ missile ~~threats.~~development Inand ~~addition~~production, ~~SNS’s contracts with~~ the ~~MDA~~U.S. ~~include~~Air ~~sustainment~~Force’s ofLong ~~the~~Range ~~Exoatmospheric~~Standoff ~~Kill Vehicle~~ (~~EKV~~LRSO) ~~and~~program, ~~development of~~ the ~~Redesigned~~U.S. ~~Kill~~Navy’s ~~Vehicle (RKV) which are~~ over-the-horizon ~~primary~~weapon ~~weapons~~system ~~payloads of~~ (the ~~Ground~~Naval ~~Based~~Strike ~~Interceptor~~Missile, ~~(GBI~~or NSM) ~~for~~and ~~ballistic~~a ~~missile~~number ~~defense.~~of ~~SNS~~classified ~~continues~~and tounclassified ~~leverage~~awards ~~its~~in ~~strategic~~hypersonic, ~~international~~sensor, ~~cooperative~~undersea ~~partnerships~~warfare toand ~~evolve~~missile ~~its~~defense ~~existing products and~~ technologies. ~~with~~MS aalso ~~goal~~completed ofsuccessful ~~addressing~~flight ~~the~~tests ~~full~~on ~~spectrum of threats to both~~ the ~~U.S.~~SM-3, ~~and~~SM-6, ~~our~~Exoatmospheric ~~allies.~~Kill ~~Total~~Vehicle ~~sales~~(EKV), ~~from~~Rolling ~~SNS~~Airframe ~~were~~Missile ~~approximately 10% of our consolidated revenues for 2018~~(RAMTM), ~~2017,~~Tomahawk and ~~2016~~StormBreaker™ programs.

~~Land~~Air Warfare Systems (~~LWS~~AWS)—~~LWS~~AWS ~~provides~~products ~~precision~~and ~~missiles~~services enable the U.S. Armed Forces and ~~munitions~~international customers to attack, ~~advanced~~suppress ~~electro-optical/infrared~~and ~~(EO/IR)~~destroy ~~sensors~~air-, sea- and ~~integrated~~ground-based ~~mission~~targets. ~~solutions~~Products ininclude the ~~land~~AMRAAM, ~~domain~~a ~~for~~ state-of-the-art, ~~U.S.~~highly ~~Army~~dependable and ~~Marine~~battle-proven ~~Corps,~~air-to-air ~~and~~missile ~~the~~that ~~militaries~~also ofhas ~~more~~a ~~than~~surface-to-air 40launch ~~allied~~application; ~~nations.~~the ~~LWS~~Tomahawk ~~capabilities~~cruise ~~are~~missile, ~~designed~~an toadvanced ~~provide warfighters~~surface- ~~the~~or ~~situational~~submarine-launched ~~awareness~~cruise missile with loitering and ~~lethality~~network ~~they~~communication ~~need~~capability; StormBreaker, an air-to-ground ~~overmatch~~glide ~~and~~weapon ~~defeat~~designed ~~evolving~~to ~~complex~~engage ~~threats.~~moving ~~The~~targets ~~LWS~~in ~~portfolio~~adverse ~~includes~~weather and through battlefield conditions; the ~~Tube-launched,~~ ~~Optically-tracked,~~Joint ~~Wireless-guided~~Standoff Weapon (~~TOW~~JSOW®) ~~weapon system~~, a ~~long-range~~family ~~precision~~of ~~anti~~air-~~armor/anti~~to-~~fortification~~ground weapons that employ an integrated GPS/~~anti-amphibious-landing~~inertial ~~weapon~~navigation system~~, and Excalibur®,~~ athat guides the weapon to the target; the Paveway™ family of laser and GPS- precision guided ~~artillery~~munitions; ~~round~~the ~~providing~~AIM-9X ~~indirect~~Sidewinder ~~precision~~short-range ~~fire~~air-to-air ~~for~~missile; ~~ground~~the ~~forces.~~Miniature InAir ~~addition,~~Launched ~~LWS~~Decoy-Jammer ~~collaborates~~(MALD®-J), ~~with~~a ~~Israel’s~~high ~~Rafael~~endurance ~~Advanced~~electronic ~~Defense~~warfare ~~Systems~~decoy/jammer used to ~~provide~~deceive and degrade air defenses; the ~~SkyHunter~~High-Speed Anti-Radiation Missile (HARM®); the Maverick® precision strike missile; and the ~~SkyCeptor™ interceptor~~Griffin®, ~~designed~~a tosmall ~~help~~lightweight ~~protect~~missile ~~U.S.~~that ~~Armed~~can ~~Forces~~be ~~and~~employed ~~their~~from ~~allies~~aircraft, ~~from~~unmanned ~~incoming~~aerial ~~threats.~~vehicles, ~~The~~ships ~~3rd Generation~~or ~~Forward~~ground-launched ~~Looking~~against ~~Infrared~~light ~~(FLIR)~~targets. Also, ~~currently~~AWS inpartners ~~development,~~with ~~leverages~~Kongsberg ~~proven~~Defence ~~sensor~~Systems ~~technology~~on tothe ~~provide~~NSM and the ~~warfighter~~Joint ~~with~~Strike ~~high~~Missile (JSM), which are over-~~definition~~the-horizon ~~resolution~~anti-surface warfare and ~~magnification~~land ofattack ~~target~~weapons ~~images~~systems into ~~darkness~~be ~~and~~used inon avarious ~~range~~aircraft ofplatforms ~~adverse~~and ~~environmental~~ship ~~conditions~~classes. ~~LWS~~Total ~~also~~sales ~~produces~~from ~~unmanned~~AWS ~~aircraft~~were ~~systems~~approximately ~~including~~10% ~~the~~of ~~Coyote®~~our consolidated revenues for 2019, 2018, and 2017.

~~Advanced~~Strategic ~~Missile~~and Naval Systems (~~AMS~~SNS)—~~AMS~~SNS ~~focuses~~designs, ondevelops, ~~the~~produces, ~~development~~and supports air and ~~early~~missile defense ~~introduction~~interceptor ofsystems ~~next-generation,~~along ~~end-to-end~~with ~~system~~highly ~~solutions~~effective, ~~that~~layered ~~support~~ship ~~the~~defense ~~AWS,~~systems ~~SNS,~~for ~~LWS~~U.S. Armed Forces and ~~other~~more ~~Raytheon~~than ~~product~~30 ~~lines~~allied countries across multiple platforms to counter the threats of today and tomorrow. ~~AMS~~SNS's isprimary ~~engaged~~customers inare ~~opportunities~~the ~~involving~~MDA and the ~~transition~~U.S. ~~from~~Navy ~~weapon~~as ~~development~~well toas ~~warfighter~~various ~~fielding~~international incustomers. The SNS portfolio includes the ~~areas~~Standard Missile family of ~~next~~products ~~generation~~with ~~missile~~capabilities ~~systems~~including sea- and land-based endo- and exoatmospheric defense against short- and intermediate-range ballistic missiles and tri-mission defense against air, ~~hypersonic~~surface ~~weapons~~and ballistic missile threats. The product line designs, ~~unmanned~~develops, ~~aircraft~~integrates, ~~systems~~manufactures, ~~non~~and supports the Phalanx Close-~~kinetic~~In ~~solutions,~~Weapon ~~space~~System ~~applications~~(CIWS), ~~undersea~~employed ~~warfare~~on land and ~~collaborative~~at ~~weapon~~sea; ~~technologies. In~~and ~~addition~~the toRAM ~~MS’s~~and ~~other~~Launcher ~~key~~System, ~~customers~~the SeaRAM® system, ~~AMS~~and ~~works~~the ~~closely~~ESSM® ~~with~~family ~~U.S.~~of ~~Special~~missiles ~~Operations~~all ~~Forces~~protecting ships against air, ~~DARPA~~subsurface and surface cruise/ballistic missile threats. In addition, SNS’s contracts with the ~~SCO,~~MDA include sustainment of the ~~ONR~~EKV, which is the ~~Air~~primary ~~Force~~weapon ~~Research~~payload ~~Laboratory~~of the Ground Based Interceptor (~~AFRL~~GBI) for ballistic missile defense. SNS continues to leverage its strategic international cooperative partnerships to evolve its existing products and technologies with a goal of addressing the ~~research~~full ~~lab~~spectrum ~~community~~of threats to both the U.S. and our allies. Total sales from SNS were approximately 10% of our consolidated revenues for 2019, 2018, and 2017.

~~Space~~Land ~~and~~Warfare ~~Airborne~~ Systems (~~SAS~~LWS)—~~SAS,~~LWS ~~headquartered~~provides inprecision ~~McKinney~~missiles and munitions, ~~Texas~~advanced electro-optical/infrared (EO/IR) sensors, isand aintegrated ~~leader~~mission solutions in the ~~design,~~land ~~development~~domain for the U.S. Army and ~~manufacture~~Marine Corps, and the militaries of ~~integrated~~more ~~sensor~~than 50 allied nations. LWS capabilities are designed to provide warfighters the situational awareness and ~~communication~~lethality ~~systems~~they ~~for~~need ~~advanced~~to ~~missions~~overmatch and defeat evolving complex threats. ~~These~~The ~~missions~~LWS ~~include~~portfolio ~~intelligence~~includes the Tube-launched, Optically-tracked, Wireless-guided (TOW®) weapon system, a long-range precision anti-armor/anti-fortification/anti-amphibious-landing weapon system,

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~~surveillance~~Javelin, ~~and~~a ~~reconnaissance;~~man-portable ~~precision~~anti-tank ~~engagement;~~missile ~~manned~~in ~~and~~partnership ~~unmanned~~with ~~aerial~~Lockheed ~~operations;~~Martin, and the Excalibur® ~~space.~~precision ~~Leveraging~~artillery ~~state~~munition, which is a GPS-~~of-the-art~~guided ~~technologies,~~round ~~mission~~providing ~~systems~~indirect ~~and~~precision ~~domain~~fire ~~knowledge,~~for ~~SAS~~ground ~~designs,~~forces. ~~manufactures,~~LWS ~~supports~~also ~~and~~includes ~~sustains~~the ~~civil~~3rd Generation ~~and~~Forward ~~military~~Looking ~~electro-optical/infrared~~Infrared (~~EO/IR~~FLIR), ~~sensors;~~which ~~airborne~~leverages ~~radars~~proven ~~for~~sensor ~~surveillance~~technology ~~and~~to ~~fire~~provide ~~control~~the ~~applications;~~warfighter ~~lasers;~~with ~~precision~~high-definition ~~guidance~~resolution ~~systems;~~and ~~signals~~magnification ~~intelligence~~of ~~systems;~~target ~~processors;~~images ~~electronic~~in ~~warfare~~darkness ~~systems;~~and ~~tactical~~in ~~and~~a ~~strategic~~range ~~communications;~~of adverse environmental conditions and ~~space-qualified~~produces ~~systems.~~an ~~Key~~unmanned ~~customers~~aircraft ~~are~~system ~~the~~(UAS) ~~U.S.~~called ~~Navy~~Coyote®, ~~Air~~which ~~Force,~~is ~~and~~a ~~Army,~~multi-purpose ~~international~~solution ~~allies~~for ISR, Counter-UAS, and ~~classified~~strike ~~customers~~missions.

InAdvanced ~~2018,~~Missile ~~SAS~~Systems ~~was~~(AMS)—AMS ~~selected~~focuses toon ~~develop~~the development and ~~deliver~~early ~~the~~introduction of next-generation, ~~Electro~~end-~~Optical~~to-end ~~Distributed~~system ~~Aperture~~solutions ~~System~~that ~~(EODAS)~~are ~~for~~designed ~~Lockheed~~to ~~Martin’s~~support ~~F-35~~the ~~fighter~~MS ~~jet~~customer base including the U.S. InAir ~~addition~~Force, ~~SAS~~Navy, ~~was~~Army, ~~one~~MDA, ofDARPA, ~~two~~the ~~subcontractors~~ONR, ~~down-selected~~the byAir ~~the~~Force ~~program’s~~Research ~~prime~~Laboratory ~~contractor~~(AFRL), ~~for~~and the USCO.S. ~~Air~~AMS ~~Force’s~~develops ~~Next~~and ~~Generation~~demonstrates ~~Overhead~~systems ~~Persistent~~and ~~Infrared~~technologies ~~(Next~~aimed ~~Gen~~to ~~OPIR)~~solve ~~Geosynchronous~~customer ~~(GEO)~~problems ~~missile~~in ~~warning~~all ~~satellite~~mission ~~system~~areas ~~competition.~~and ~~SAS~~then ~~was~~transitions ~~awarded~~more amature ~~contract~~products ~~with~~or ~~the~~families ~~U.K. Ministry~~ of ~~Defence~~products to ~~provide~~one ~~support~~of ~~and~~the ~~sustainment~~other ~~services~~MS toproduct ~~the~~lines ~~U.K.~~or ~~Royal~~other ~~Air~~business ~~Force's~~segments ~~Shadow~~before ~~aircraft~~those ~~fleet,~~products ~~and~~enter athe ~~contract~~production ~~with~~phase ~~the~~of Utheir life cycle.S. ~~Air~~AMS ~~Force~~is toengaged ~~upgrade~~in ~~and~~opportunities ~~build~~involving ~~Multi-Spectral~~the ~~Targeting~~transition ~~Systems~~from ~~(MTS)~~weapon ~~for~~development ~~the~~to ~~MQ-9~~warfighter ~~Reaper~~fielding ~~attack~~in ~~unmanned~~the ~~aerial~~areas ~~vehicle.~~of ~~SAS~~next ~~was~~generation ~~also~~missile ~~awarded~~systems, ahypersonic ~~number~~and ofcounter-hypersonic ~~classified~~weapons, ~~contracts~~long inrange ~~intelligence~~strike weapons, ~~surveillance~~UAS, ~~and~~non-kinetic ~~reconnaissance~~solutions, space ~~protection~~applications, ~~electronic~~undersea warfare and ~~signals~~collaborative ~~intelligence~~weapon technologies.

Space and Airborne Systems (SAS)—SAS, headquartered in McKinney, Texas, is a leader in the design, development and manufacture of integrated sensor and communication systems for advanced missions. These missions include intelligence, surveillance and reconnaissance; precision engagement; manned and unmanned aerial operations; and space. Leveraging state-of-the-art technologies, mission systems and domain knowledge, SAS designs, manufactures, supports and sustains civil and military electro-optical/infrared (EO/IR) sensors; airborne radars for surveillance and fire control applications; lasers; precision guidance systems; signals intelligence systems; processors; electronic warfare systems; tactical and strategic communications; and space-qualified systems. Key customers are the U.S. Navy, Air Force, and Army, international allies and classified customers.

In 2019, SAS was selected to develop and deliver a new active electronically scanned array (AESA) radar for Boeing’s B-52 bomber. In addition, the U.S. Marine Corps selected SAS’s APG-79(v)4 AESA radar for its F/A-18C/D classic Hornet fleet. SAS was awarded a contract by the U.S. Air Force to develop two prototype high-energy laser (HEL) counter-UAS for a year-long overseas deployment. SAS also delivered its first Next Generation Jammer (NGJ) Mid-Band pod to the U.S. Navy for ground and aircraft integration testing, and received a follow-on award for the NGJ program for the U.S. Navy. In addition, SAS received a contract to build the Geostationary Littoral Imaging and Monitoring Radiometer sensor for NASA. This new sensor will create highly detailed views of physical and biological conditions in coastal waters. SAS was also awarded a number of classified contracts in intelligence, surveillance and reconnaissance, space protection, electronic warfare and signals intelligence.

SAS has the following principal product lines:

Intelligence, Surveillance and Reconnaissance Systems (ISRS)—ISRS designs, develops and manufactures a wide array of advanced Multispectral EO/IR sensors, ~~Active~~light-sensing ~~Electronically~~focal ~~Scanned~~plane ~~Array~~arrays, (advanced visible and infrared sensors, AESA) and mechanically scanned radars and various integrated airborne intelligence, surveillance, and reconnaissance systems solutions to provide customers with actionable information for strike, persistent surveillance and special mission platforms. These systems perform detection, identification, tracking, targeting, navigation, weather, and situational awareness tasks on a variety of airborne platforms, including maritime, littoral and overland patrol aircraft, unmanned aerial systems, and other tactical, attack and transport rotary- and fixed-wing aircraft. Key ISRS programs include the F-35 next-generation Electro-Optical Distributed Aperture System (EODAS,); Multi-Spectral Targeting Systems (MTS) on numerous unmanned and manned aircraft; the Silent Knight Terrain Following/Terrain Avoiding radar for rotary-wing platforms; and an international classified program.

Secure Sensor Solutions (S3)—S3 designs, manufactures and develops cost-effective, high-performance integrated sensor solutions for tactical and strategic platforms, which deliver trusted, actionable information for mission assurance. S3 provides integrated advanced fire control radars to customers, including the U.S. Navy, Marine Corps, and Air Force and international governments. S3 produces AESA radars for the U.S. Air Force’s F-15 and B-2 aircraft, the U.S. Navy’s F/A-18E/F and EA-18G, the U.S. Marine Corps’ F/A-18C/D and radars for several international customers. S3 develops Airborne Early Warning & Reconnaissance Systems (AEWRS) across multiple platforms, for U.S. and international customers, including the Global Hawk and U2. S3 also develops sophisticated anti-jam GPS solutions for many customers and provides a wide range of state-of-the-art product families and engineering services for the DoD’s response to dynamic threat environments.

Electronic Warfare Systems (EWS)—EWS designs and manufactures cost-effective, high-performance electronic warfare systems and equipment for strategic and tactical aircraft, helicopters, surface ships and ground forces for the U.S. Air Force, Army, Navy, Special Operations Forces, and intelligence agencies and international governments. EWS products deliver a range of non-kinetic effects ranging from radar jamming to information operations. The EWS portfolio includes the Next Generation Jammer (NGJ) program, the High-Energy Laser (HEL) Weapon Systems for Counter-UAS and Precision Strike program, infrared and visible focal plane array manufacturing operations, integrated electronic warfare suites, development of electronic warfare planning and management tools (EW PMT), the Multi-function Integrated Receiver/Exciter System (MFIRES) product family, advanced classified programs, and products which include towed decoys, radar warning receivers, radar and communications countermeasures and missile warning sensors.

Integrated Communications Systems (ICS)—ICS is a market leader in tactical airborne communications, software-defined radio technology, advanced tactical networking, cryptology and real-time sensor networking. The ARC-231 radio is deployed on U.S. and international rotary-wing platforms and fixed-wing aircraft. The Vinson/ANDVT Cryptology Modernization (VACM) family of products provides secure communications for U.S. and international customers. ICS is the only producer of Advanced Extremely High Frequency (AEHF) satellite terminals for all U.S. military branches, providing protected, highly secure satellite communications terminals for the U.S. military, including the Navy Multiband Terminal (NMT) and the Air Force Family of Advanced Beyond Line of Sight Terminal (FAB-T) and related ground terminals.

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Electronic Warfare Systems (EWS)—EWS designs and manufactures cost-effective, high-performance electronic warfare systems and equipment for strategic and tactical aircraft, helicopters, surface ships and ground forces for the U.S. Air Force, Army, Navy, Special Operations Forces, and intelligence agencies and international governments. EWS products deliver a range of non-kinetic effects ranging from radar jamming to information operations. The EWS portfolio includes the Next Generation Jammer (NGJ) program, the HEL Weapon Systems for Counter-UAS and Precision Strike program, integrated electronic warfare suites, development of electronic warfare planning and management tools (EW PMT), the Multi-function Integrated Receiver/Exciter System (MFIRES) product family, advanced classified programs, and products which include towed decoys, radar warning receivers, radar and communications countermeasures and missile warning sensors.

Integrated Communication Systems (ICS)—ICS is a market leader in tactical airborne communications, software-defined radio technology, advanced tactical and protected networking, protected tactical satellite communication (SATCOM) terminals and cryptology and real-time sensor networking. The ARC-231 radio is deployed on U.S. and international rotary-wing platforms and fixed-wing aircraft. The Vinson/ANDVT Cryptology Modernization (VACM) family of products provides secure communications for U.S. and international customers. ICS is the only producer of Advanced Extremely High Frequency (AEHF) satellite terminals for all U.S. military branches, providing protected, highly secure SATCOM terminals for the U.S. military, including the Navy Multiband Terminal (NMT) and the Air Force Family of Advanced Beyond Line of Sight Terminal (FAB-T) and related ground terminals, Global Aircrew Strategic Network Terminal (Global ASNT) and the Army Secure Mobile Anti-Jam Reliable Tactical Terminal (SMART-T).

Space Systems (SS)—SS designs and manufactures space and space-qualified sensor payloads for large national programs and develops innovative solutions for emerging commercial, intelligence, defense and civil space applications. SS provides EO/IR, radio frequency (RF), radar and laser space-based sensors to customers, including the DoD, MDA, NASA, classified and commercial customers, and international governments. SS also provides the Visible Infrared Imaging Radiometer Suite (VIIRS), an advanced imaging and radiometric sensor for NASA and NOAA weather/environmental monitoring programs.

Advanced Concepts Technology (ACT), an innovation incubator, is also part of SAS. ACT conducts both internal and contract research and development for customers, including the AFRL and DARPA. ACT produces cutting-edge products and capabilities, including next-generation all-weather millimeter wave targeting radars, advanced mission system architecture, electro-optical (EO) and RF technologies, advanced speech recognition with natural language understanding, and systems exploiting acoustic phenomenology. In addition, ~~our~~ BBN Technologies within ACT develops technology to direct and control swarms of small, autonomous air and ground vehicles for DARPA.

Forcepoint—Forcepoint, headquartered in Austin, Texas, develops cybersecurity products serving commercial and government organizations worldwide. Forcepoint iswas created in May 2015 as a joint venture of Raytheon and Vista Equity Partners ~~created in May 2015~~ that brought together the capabilities of the legacy Raytheon Cyber Products (RCP) and Websense, Inc. (Websense) businesses. On November 18, 2019, Raytheon acquired Vista Equity Partners’ interest in Forcepoint, such that Forcepoint is now wholly owned by Raytheon. Refer to “Note 11: Redeemable Noncontrolling Interests” within Item 8 of this Form 10-K for additional information. Forcepoint delivers a portfolio of human-centric cybersecurity capabilities that incorporate behavior based insights, including risk adaptive data loss prevention; user and entity behavior analytics (UEBA) and cloud access security broker (CASB) capabilities; insider threat solutions; next-generation firewall (NGFW) technology; cloud and on premise web and email security; and cross domain transfer products. Forcepoint's customers deploy its software products on standard servers, mobile endpoints or other information technology hardware, including Forcepoint optimized appliances, as a software-as-a-service (otherwise referred to as a cloud-based or cloud service) offering, or in a hybrid hardware/cloud configuration. Forcepoint’s customers include large enterprises, small- and medium-sized businesses and both domestic and international government agencies.

Forcepoint has the following principal product lines:

Global Governments and Critical Infrastructure—In addition to providing the full suite of Forcepoint products to government customers, Global Governments and Critical Infrastructure provides a suite of cross domain and insider threat technologies designed to enable defense, intelligence and civilian agencies to securely and efficiently access and transfer data, including streaming video, across multiple domains. In addition, Forcepoint provides these technologies to critical infrastructure customers. Global Governments and Critical Infrastructure products are deployed primarily in high assurance environments.

Enterprise Security—Enterprise Security, formerly called Commercial Security, consists of the User and Data Security solution area and the Cloud Access and Network Security solution area. User and Data Security provides risk adaptive data loss prevention; UEBA; and insider threat security products. Forcepoint’s data loss prevention suite of products extend data security control solutions to enterprise cloud applications, end user software applications and sensitive data and intellectual property on laptops, both on- and off-network, and include dynamic data protection, which allows automated enforcement at the individual level driven by analytics-defined risk indicators. Forcepoint’s UEBA products analyze large amounts of data to assess risk. Forcepoint’s insider threat suite of products spans analytics, insider threat, advanced threat protection and related security features. Cloud Access and Network Security solutions provide a range of appliances that consolidate multiple security capabilities and deliver real-time security functionality, including content security and firewall capabilities. The content security solutions integrate Forcepoint's web, email, filtering, and NGFW technologies into a single security architecture that may be deployed in the cloud, on premise (e.g. a proxy server or firewall) and in a hybrid environment. In addition, Forcepoint’s CASB product provides visibility, access and control as users interact with data in cloud applications. The firewall products consist of the Forcepoint NGFW and the Forcepoint Sidewinder proxy firewall products. The Forcepoint NGFW product provides software and hardware solutions that focus on high-availability, centralized management and policy deployment across large networks and protection from advanced evasion techniques. The Forcepoint Sidewinder product provides proxy-based firewall software and hardware solutions, designed to allow for clear visibility and control of command filtering, protocol enforcement and application access.

In addition to the principal product lines, Forcepoint provides consulting services of certified engineers who assess, plan, design, analyze and optimize security solutions for its customers' business environments.

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Enterprise Security—Enterprise Security consists of the User and Data Security solution area and the Cloud Access and Network Security solution area. User and Data Security provides risk adaptive data loss prevention; UEBA; and insider threat security products. Forcepoint’s data loss prevention suite of products extend data security control solutions to enterprise cloud applications, end user software applications and sensitive data and intellectual property on laptops, both on- and off-network, and include dynamic data protection, which allows automated enforcement at the individual level driven by analytics-defined risk indicators. Forcepoint’s UEBA products analyze large amounts of data to assess risk. Forcepoint’s insider threat suite of products spans analytics, insider threat, advanced threat protection and related security features. Cloud Access and Network Security solutions provide a range of appliances that consolidate multiple security capabilities and deliver real-time security functionality, including content security and firewall capabilities. The content security solutions integrate Forcepoint's web, email, filtering, and NGFW technologies into a single security architecture that may be deployed in the cloud, on premise (e.g. a proxy server or firewall) and in a hybrid environment. In addition, Forcepoint’s CASB product provides visibility, access and control as users interact with data in cloud applications. The firewall products consist of the Forcepoint NGFW and the Forcepoint Sidewinder proxy firewall products. The Forcepoint NGFW product provides software and hardware solutions that focus on high-availability, centralized management and policy deployment across large networks and protection from advanced evasion techniques. The Forcepoint Sidewinder product provides proxy-based firewall software and hardware solutions, designed to allow for clear visibility and control of command filtering, protocol enforcement and application access.

Sales to the U.S. Government

(In millions, except percentages)	~~2018~~2019			~~2017~~2018			~~2016~~2017
Sales to the U.S. government(1)	$	1820,~~447~~111		$	1618,~~860~~447		$	16,~~083~~860
Sales to the U.S. government as a percentage of Total Net Sales(1)	6869		%	6768		%	67		%
Foreign military sales through the U.S. government	$	34,~~502~~198		$	3,~~311~~502		$	23,~~899~~311
Foreign military sales through the U.S. government as a percentage of Total Net Sales	1314		%	13		%	1213		%


(1)	Excludes foreign military sales through the U.S. government.

Our principal U.S. government customer is the DoD; other U.S. government customers include U.S. Intelligence Community agencies, NASA, the DHS and the FAA.

U.S. Government Contracts and Regulation

We act as a prime contractor or major subcontractor for numerous U.S. government programs. As a result, we are subject to extensive regulations and requirements of the U.S. government agencies and entities that govern these programs, including with respect to the award, administration and performance of contracts under such programs. We are also subject to certain unique business risks associated with U.S. government program funding and appropriations, U.S. government contracts, and supplying technologically-advanced, cutting-edge defense-related products and services to the U.S. government.

U.S. government contracts generally are subject to the Federal Acquisition Regulation (FAR), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. government; department-specific regulations that implement or supplement the FAR, such as the DoD's Defense Federal Acquisition Regulation Supplement (DFARS); and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustment, audit and product integrity requirements. A contractor's failure to comply with these regulations and requirements could result in reductions to the value of contracts, contract modifications or termination, cash withholds on contract payments, forfeiture of profits, and the assessment of penalties and fines, and could lead to suspension or debarment, for cause, from U.S. government contracting or subcontracting for a period of time. In addition, government contractors are also subject to routine audits and investigations by U.S. government agencies such as the Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA). These agencies review a contractor's performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The DCAA and DCMA also review the adequacy of and a contractor's compliance with its internal control systems and policies, including the contractor's accounting, purchasing, property, estimating, earned value management and material management accounting systems. For ~~a discussion of certain risks associated with compliance with U.S. government contract regulations and requirements, see Item 1A of this Form 10-K.~~

U.S. government contracts include both cost reimbursement and fixed-price contracts. Cost reimbursement contracts, subject to a contractual cost-ceiling amount in certain cases, provide for the reimbursement of allowable costs plus the payment of a fee. These contracts fall into three basic types: (1) cost-plus fixed fee contracts which provide for the payment of a fixed fee irrespective of the final cost of performance; (2) cost-plus incentive fee contracts which provide for increases or decreases in the target incentive fee, within specified limits, based upon actual cost results compared to contractual cost targets; and (3) cost-plus award fee contracts which provide for the payment of an award fee determined at the discretion of the customer based upon the performance of the contractor against pre-established criteria. Under cost reimbursement contracts, the contractor is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. Some costs incidental to performing contracts have been made partially or wholly unallowable for reimbursement by statute, the FAR or other regulation. Examples of such costs include charitable contributions, certain merger and acquisition costs, lobbying costs, interest expense and certain litigation defense costs. We also classify time-and-materials (T&M) contracts as cost reimbursement contracts as they are typically used to cover certain contract costs plus a set amount of fee.

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price. Accordingly, under such contracts, the contractor's profit may also be adjusted up or down depending upon whether specified cost objectives are met. Under FFP and FPI type contracts, the contractor usually receives either performance-based payments (PBPs) equaling up to 90% of the contract price or monthly progress payments from the U.S. government generally in amounts equaling 80% of costs incurred under U.S. government contracts. The remaining amount, including profits or incentive fees, is billed upon delivery and acceptance of end items under the contract. The DoD has expressed a preference to utilize FPI as opposed to FFP contracts. In the event we experience a greater proportion of FPI contracts and/or progress payments for our fixed-price DoD contracts in the future than historically, it could have an adverse effect on our operating margins, cash flow and liquidity. For a discussion of certain risks associated with ~~fixed-price~~compliance ~~and cost reimbursement contracts and risks associated~~ with ~~changes in~~ U.S. government ~~procurement~~contract ~~rules,~~ regulations and ~~business practices~~requirements, see Item 1A of this Form 10-K.

Fixed-price contracts are predominantly either firm fixed-price (FFP) contracts or fixed-price incentive (FPI) contracts. Under FFP contracts, the contractor agrees to perform a specific scope of work for a fixed price and as a result, benefits from cost savings and carries the burden of cost overruns. Under FPI contracts, the contractor shares with the U.S. government savings accrued from contracts performed for less than target costs and costs incurred in excess of target costs up to a negotiated ceiling price (which is higher than the target costs) and carries the entire burden of costs exceeding the negotiated ceiling price. Accordingly, under such contracts, the contractor's profit may also be adjusted up or down depending upon whether specified cost objectives are met. Under FFP and FPI type contracts, the contractor usually receives either negotiated performance-based payments (PBPs) or monthly progress payments from the U.S. government generally in amounts equaling 80% of costs incurred under U.S. government contracts. The remaining amount, including profits or incentive fees, is billed upon delivery and acceptance of end items under the contract. The DoD has expressed a preference to utilize FPI as opposed to FFP contracts. In the event we experience a greater proportion of FPI contracts and/or progress payments for our fixed-price DoD contracts in the future than historically, it could have an adverse effect on our operating margins, cash flow and liquidity. For a discussion of certain risks associated with fixed-price and cost reimbursement contracts and risks associated with changes in U.S. government procurement rules, regulations and business practices, see Item 1A of this Form 10-K.

U.S. government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice, at the U.S. government's convenience or for default based on performance. If a contract is terminated for convenience, the contractor is generally entitled to payments for its allowable costs and will receive some allowance for profit on the work performed. If a contract is terminated for default, the contractor is generally entitled to payments for its work that has been accepted by the U.S. government, but a termination arising out of our default could expose us to liability and have a negative impact on our ability to obtain future contracts and orders. The U.S. government's right to terminate its contracts has not had a material adverse effect upon our operations, financial condition or liquidity. For a discussion of the risks associated with the U.S. government's right to terminate its contracts, see Item 1A of this Form 10-K.

U.S. government programs generally are implemented by the award of individual contracts and subcontracts. Congress generally appropriates funds on a fiscal year basis even though a program may extend across several fiscal years. Consequently, programs are often only partially funded initially and additional funds ~~are~~become ~~committed~~contractually obligated only asif Congress makes further appropriations. The contracts and subcontracts under a program generally are subject to termination for convenience or adjustment if appropriations for such programs are not available or change. The U.S. government is required to equitably adjust a contract price for additions or reductions in scope or other changes ordered by it. For a discussion of the risks associated with program funding and appropriations, see Item 1A and “Overview” within Item 7 of this Form 10-K. In addition, because we are engaged in supplying technologically-advanced, cutting-edge defense-related products and services to the U.S. government, we are subject to certain business risks, some of which are specific to our industry. These risks include: (1) the cost and ability to ~~obtain~~attract and retain trained, skilled and qualified employees; (2) the uncertainty and instability of prices and supply of raw materials and components; (3) the problems associated with advanced designs, which may result in unforeseen technological difficulties and cost overruns; (4) the intense competition and the constant necessity for improvement in facility utilization and personnel training; and (5) the impact of potential security and cyber threats. Our sales to the U.S. government may be affected by changes in procurement policies, budget considerations, changing priorities for national defense, global ~~political environments and other factors. See Item 1A and “Overview” within Item 7 of this Form 10-K for a more detailed discussion of these and other related risks.~~

We are also involved in U.S. government programs that are classified by the U.S. government and cannot be specifically described in this Form 10-K. The operating results of these classified programs are included in the applicable business segment's and our consolidated results of operations. The business risks and considerations associated with these and our international classified programs generally do not differ materially from those of our other U.S. government and international programs and products.

(In millions, except percentages)	2018			2017			2016
Total international sales(1)	$	8,105		$	8,085		$	7,616
Total international sales as a percentage of Total Net Sales(1)	30		%	32		%	32		%

(1) Includes foreign military sales through the U.S. government of $3,502 million, $3,311 million and $2,899 million in 2018, 2017 and 2016, respectively.

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Inpolitical ~~connection~~environments ~~with~~and ~~certain~~other ~~international~~factors. ~~sales,~~See weItem 1A ~~utilize~~and ~~the~~“Overview” ~~services~~within Item 7 of ~~sales~~this ~~representatives~~Form ~~who~~10-K ~~are paid commissions in return~~ for ~~services rendered, and international consultants and advisors who are typically paid~~ a ~~fixed~~more ~~retainer~~detailed ~~fee.~~discussion ~~Our Forcepoint joint venture also sells certain products and services, both domestically and internationally, primarily through a network~~ of ~~distributors~~these and ~~value-added~~other ~~resellers~~related risks.

International Sales



(In millions, except percentages)	2019			2018			2017
Total international sales⁽¹⁾	$	8,582		$	8,105		$	8,085
Total international sales as a percentage of Total Net Sales⁽¹⁾	29		%	30		%	32		%


(1)	Includes foreign military sales through the U.S. government of $4,198 million, $3,502 million and $3,311 million in 2019, 2018 and 2017, respectively.

Our international sales are conducted through Raytheon Company and certain U.S. and international subsidiaries. For example, Raytheon Systems Limited (RSL), a U.K. subsidiary, provides a wide range of products and services, most notably with our MS, SAS and IIS business segments, to commercial, defense and other government customers in the U.K. and globally. Raytheon Australia delivers integrated solutions to the Australian Defence Force, most notably with our IDS and IIS business segments. Generally, we internally fund our international subsidiary working capital requirements in the applicable countries. In connection with certain international sales, we utilize the services of sales representatives who are paid commissions in return for services rendered, and international consultants and advisors who are typically paid a fixed retainer fee. Our Forcepoint business segment also sells certain products and services, both domestically and internationally, primarily through a network of distributors and value-added resellers.

Sales and income from international operations and investments are subject to U.S. government laws, regulations and policies, including the International Traffic in Arms Regulations (ITAR), the Export Administration Regulations (EAR) and the Foreign Corrupt Practices Act (FCPA), and other anti-corruption sanctions and export laws and regulations. Depending on the type of international sale, Raytheon must either seek approvals from the U.S. government under the foreign military sales process or may require an export authorization and the issuance of a license by either the U.S. Department of State, the U.S. Department of Commerce or the U.S. Department of the Treasury. Such licenses and authorizations may be denied or delayed for reasons of U.S. national security or foreign policy. In addition, for certain international sales, the Department of State must notify Congress prior to authorizing such exports. Congress may also take action to block or delay certain proposed defense sales.

Our international sales are also subject to foreign government laws, regulations and procurement policies and practices in addition to U.S. government requirements. In addition, our international business is sensitive to changes in the priorities and budgets of international customers and geopolitical uncertainties, which may be driven by changes in threat environments, volatility in worldwide economic conditions, regional and local economic and political factors, U.S. foreign policy and other risks and uncertainties. Additional information regarding the risks associated with our international business is contained in Item 1A of this Form 10-K.

Classified Sales

Classified sales include U.S. government sales on programs designated as classified by the U.S. government, as well as international sales on programs for which the customer, end user or end product is prohibited from being publicly disclosed. Total classified sales as a percentage of total net sales were 20% in 2019, 19% in 2018 and 17% in 2017. The operating results of these classified programs are included in the applicable business segment's and ~~2016~~our consolidated results of operations. The business risks and considerations associated with these classified programs generally do not differ materially from those of our other U.S. government and international programs and products.

					% of Total Backlog
(In millions, except percentages) December 31:	2018		2017		2018		2017
Total U.S. government backlog(1)	$	24,963	$	22,258	59	%	58	%
Total non-U.S. government domestic backlog	689		740		2	%	2	%
Total domestic backlog	25,652		22,998		60	%	60	%
Total foreign military sales backlog	8,578		6,760		20	%	18	%
Total direct foreign government backlog	7,343		7,577		17	%	20	%
Total non-government foreign backlog	847		875		2	%	2	%
Total international backlog	16,768		15,212		40	%	40	%
Total backlog	$	42,420	$	38,210	100	%	100	%

(1) Excludes foreign military sales backlog through the U.S. government which is included in total international backlog.

Approximately half of the December 31, 2018 year-end backlog is not expected to be filled during the following 12 months. These amounts include both funded backlog (unfilled orders for which funding is authorized, appropriated and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated or obligated to us). For additional information related to backlog figures, see “Segment Results” within Item 7 of this Form 10-K.

Competition

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Backlog

in these markets, some of which may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. We frequently partner on various programs with our major suppliers, some of whom are, from time to time, competitors on other programs. In addition, U.S. defense spending levels in the future are difficult to predict. Changes in U.S. defense spending may potentially limit certain future market opportunities. See Item 1A and “Overview” within Item 7 of this Form 10-K for a more detailed discussion of these and other related risks.



					% of Total Backlog
(In millions, except percentages) December 31:	2019		2018		2019		2018
Total U.S. government backlog⁽¹⁾	$	29,679	$	24,963	61	%	59	%
Total non-U.S. government domestic backlog	668		689		1	%	2	%
Total domestic backlog	30,347		25,652		62	%	60	%
Total foreign military sales backlog	7,967		8,578		16	%	20	%
Total direct foreign government backlog	9,596		7,343		20	%	17	%
Total non-government foreign backlog	842		847		2	%	2	%
Total international backlog	18,405		16,768		38	%	40	%
Total backlog	$	48,752	$	42,420	100	%	100	%


(1)	Excludes foreign military sales backlog through the U.S. government which is included in total international backlog.

Approximately half of the December 31, 2019 year-end backlog is not expected to be filled during the following 12 months. These amounts include both funded backlog (unfilled orders for which funding is authorized, appropriated and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated or obligated to us). For additional information related to backlog figures, see “Segment Results” within Item 7 of this Form 10-K.

Competition

We directly participate in most major areas of development in the defense and government electronics, space, information technology and technical services and support markets. Technical superiority, reputation, price, past performance, delivery schedules, and reliability are among the principal competitive factors considered by customers in these markets. We conduct extensive research and development activities to continually enhance our existing products and services and develop new products and services to meet our customers’ changing needs and requirements, and address new market opportunities. We also compete in the commercial cybersecurity market, which is characterized by rapid changes in technology, products, customer specifications and industry standards. We compete worldwide with a number of U.S. and international companies in these markets, some of which may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. We frequently partner on various programs with our major suppliers, some of whom are, from time to time, competitors on other programs. In addition, U.S. defense spending levels in the future are difficult to predict. Changes in U.S. defense spending may potentially limit certain future market opportunities. See Item 1A and “Overview” within Item 7 of this Form 10-K for a more detailed discussion of these and other related risks.

Raw Materials, Suppliers and Seasonality

We are dependent upon the availability of materials and major components and the performance of our suppliers and subcontractors. Some products require relatively scarce raw materials and parts. We generally have not experienced significant difficulties in procuring the necessary raw materials, components and other supplies for our products. However, consolidations and business closures among our suppliers may affect our ability to do so. In addition, our suppliers may experience materials or parts shortages for various reasons, including as a result of geopolitical and international trade developments. Further, some scarce raw materials required for our products are largely controlled by a single country, and therefore the ability to source those materials is dependent on U.S. relations with that country.

In addition, we must comply with specific procurement requirements which may, in effect, limit the suppliers and subcontractors we may utilize. In some instances, for a variety of reasons, we are dependent on sole-source suppliers. We enter into long-term or volume purchase agreements with certain suppliers and take other actions to ensure the availability of needed materials, components and subsystems. We are also dependent on suppliers to provide genuine original equipment manufacturer parts and have a robust set of standardized policies to detect counterfeit material, especially electronic components, throughout our supply chain. For a discussion of the risks associated with our raw materials and suppliers, see Item 1A of this Form 10-K.

In recent years, our revenues in the second half of the year have generally exceeded revenues in the first half. Some of the factors that can affect revenue recognition between accounting periods include the timing of new program awards (including international contract awards and approvals), the availability of U.S. government funding, product deliveries (which are dependent on availability of materials) and customer acceptance. We expect this trend to continue in ~~2019~~2020. Additional ~~information regarding the risks associated with our raw materials, suppliers, and seasonality is contained in Item 1A of this Form 10-K.~~

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information regarding the risks associated with our raw materials, suppliers, and seasonality is contained in Item 1A of this Form 10-K.

Intellectual Property

We own an intellectual property portfolio that includes many U.S. and foreign patents, as well as unpatented trade secrets and know-how, data, software, trademarks and copyrights, all of which contribute to the preservation of our competitive position in the market, and our ability to continue to compete in the market. In certain instances, we have augmented our technology base by licensing the proprietary intellectual property of others. We also license our intellectual property to others, including our customers. The U.S. government has licenses to certain of our intellectual property, including certain patents, developed in the performance of U.S. government contracts, and has the right to use and authorize others to use such intellectual property, including the inventions covered by such patents, for U.S. government purposes. Foreign governments may also have licenses to certain of our intellectual property in connection with our performance of foreign government contracts. While our intellectual property rights in the aggregate are important to our operations, we do not believe that any particular trade secret, patent, trademark, copyright, license or other intellectual property right is of such importance that its loss, expiration or termination would have a material effect on our business. Additional information regarding the risks associated with our intellectual property is contained in Item 1A of this Form 10-K.

Employment

As of December 31, ~~2018~~2019, we had approximately 6770,000 employees.

Environmental Regulation

Our operations are subject to and affected by a variety of international, federal, state and local environmental laws and regulations. A criminal violation of certain U.S. environmental statutes such as the Clean Air Act and Clean Water Act could result in suspension, debarment or disqualification by the U.S. Environmental Protection Agency (EPA). A facility determined to be in violation of the criminal provisions of these statutes can be prohibited from performing any U.S. government contract work until the violation has been corrected and the EPA approves the reinstatement of the facility.

We have potential exposure for environmental remediation at various sites: (1) owned or operated by us, whether currently or in the past; (2) where we have been named a Potentially Responsible Party (PRP) by the EPA or similarly named by an international, state or local government entity; and (3) where a non-governmental third party is pursuing a cost recovery or contribution claim against us. Under existing U.S. environmental laws, liability for site remediation is generally “joint and several,” meaning that the liable party could become solely responsible for the full cost of funding the remediation. Liable parties typically agree amongst themselves to share, on an allocated basis, the costs and expenses of the remediation. In the unlikely event that we are required to fund more than our share or the entire cost of remediation of a site, the statutory framework provides that we may pursue rights of contribution from other responsible parties.

We 10have provided for our estimated share of the costs to complete environmental remediation where we have determined that it is probable that we will incur such costs in the future and the costs can be reasonably estimated. The timing and costs of environmental remediation are difficult to estimate due to uncertainties regarding: (1) the extent of the remediation; (2) the discovery and application of innovative remediation technologies; and (3) the status and interpretation of laws and regulations. Our estimates do not reflect the possibility that we may recover some of our costs from insurance or from pursuing other parties. For multi-party sites, we expect that the actual cost of remediation will be shared among liable parties and our estimates do not reflect the unlikely event that we would be required to fund more than our share or the entire cost of remediation of a site. In addition, the majority of our costs are eligible for future recovery through the pricing of our products and services to the U.S. government.

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international, state or local government entity; and (3) where a non-governmental third party is pursuing a cost recovery or contribution claim against us. Under existing U.S. environmental laws, liability for site remediation is generally “joint and several,” meaning that the liable party could become solely responsible for the full cost of funding the remediation. Liable parties typically agree amongst themselves to share, on an allocated basis, the costs and expenses of the remediation. In the unlikely event that we are required to fund more than our share or the entire cost of remediation of a site, the statutory framework provides that we may pursue rights of contribution from other responsible parties.

We have provided for our estimated share of the costs to complete environmental remediation where we have determined that it is probable that we will incur such costs in the future and the costs can be reasonably estimated. The timing and costs of environmental remediation are difficult to estimate due to uncertainties regarding: (1) the extent of the remediation; (2) the discovery and application of innovative remediation technologies; and (3) the status and interpretation of laws and regulations. Our estimates do not reflect the possibility that we may recover some of our costs from insurance or from pursuing other parties. For multi-party sites, we expect that the actual cost of remediation will be shared among liable parties and our estimates do not reflect the unlikely event that we would be required to fund more than our share or the entire cost of remediation of a site. In addition, a portion of our costs is eligible for future recovery through the pricing of our products and services to the U.S. government.

We manage various government-owned facilities on behalf of the U.S. government. At such facilities, environmental compliance and remediation costs have historically been primarily the responsibility of the U.S. government and we have relied (and continue to rely with respect to past practices) upon U.S. government funding to pay such costs. While the government remains responsible for capital and operating costs associated with environmental compliance, responsibility for fines and penalties associated with environmental noncompliance is typically borne by either the U.S. government or the contractor, depending on the contract and the relevant facts. Fines and penalties are unallowable costs under the contracts pursuant to which such facilities are managed.

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Additional information regarding the effect of compliance with environmental protection requirements and the resolution of environmental claims against us and our operations, including expected remediation costs, is contained in Item 1A, “Commitments and Contingencies” within Item 7 and “Note 10: Commitments and Contingencies” within Item 8 of this Form 10-K.

Available Information

Our internet address is www.raytheon.com. We use our Investor Relations website as a routine channel for distribution of important information, including news releases, analyst presentations and financial information. We make available free of charge on or through our Investor Relations website our annual reports and quarterly reports on Forms 10-K and 10-Q (including related filings in inline eXtensible Business Reporting Language (iXBRL) format), current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). The SEC maintains an internet site at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically, including Raytheon.

Additionally, we also make available on or through our website copies of our key corporate governance documents, including our Governance Principles, Certificate of Incorporation, By-laws and charters for the Audit Committee, Management Development and Compensation Committee (MDCC), Governance and Nominating Committee, Public Policy and Corporate Responsibility Committee and Special Activities Committee of the Board of Directors and our code of ethics entitled “Code of Conduct.” Raytheon stockholders may request free copies of these documents from our Investor Relations Department by writing to Raytheon Company, Investor Relations, 870 Winter Street, Waltham, MA 02451, by calling (781) 522-5123 or by sending an email request to [email protected].

The content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.

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ITEM 1A. RISK FACTORS

This Form 10-K and the information we are incorporating by reference contain forward-looking statements within the meaning of federal securities laws, including information regarding our financial outlook, future plans, objectives, business prospects, products and services, trends and anticipated financial performance including with respect to: the timing and expected completion and impact of the proposed merger with United Technologies Corporation (UTC); our revenue,; our liquidity and capital resources; our bookings and backlog; our international sales, including our ability to do business in the Kingdom of Saudi Arabia (KSA) and future delays in the Congressional Notification process ~~for~~and/or ~~direct~~other ~~commercial~~potential ~~sales~~challenges ~~contracts~~related ~~for~~to ~~precision~~sales ~~guided munitions~~ to certain ~~Middle~~foreign ~~Eastern~~ customers; cybersecurity sales; our pension, ~~and~~ other postretirement benefit (PRB), nonqualified defined benefit and defined contribution plans expense and funding; our recognition of revenue on certain performance obligations; our expectations regarding customer demand and contracts; seasonality of our business; our capital expenditures; our amortization expense; the impact of new accounting pronouncements and tax regulations; our expected tax payments ~~and tax rate~~; our unrecognized tax benefits; our reclassifications of gains or losses on cash flow hedges; the impact of acquisitions, investments and other business arrangements and the tax deductibility of goodwill; the impact and outcome of audits and legal and administrative proceedings, claims, investigations, commitments and contingencies; the impact of certain regional developments; delays and disruptions in delivery of materials and services from suppliers; the impact of changes in fair value of our reporting units; delays and disruption in delivery of materials and services from Turkish suppliers; the impact of changes in foreign currency rates; the impact of Brexit; the impact of competition; growth in our cyber business; as well as information regarding domestic and international defense spending, budgets and business practices. 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 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 below 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, or 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, except as required by law.

We depend on the U.S. government for a substantial portion of our business, and changes in U.S. government defense spending and priorities could impact our financial position, results of operations and overall business.

In 2018, U.S. government sales, excluding foreign military sales, accounted for approximately 68% of our total net sales. Our U.S. government revenues largely result from contracts awarded under various U.S. government programs, primarily defense-related programs with the U.S. Department of Defense (DoD), and a broad range of programs with the U.S. Intelligence Community and other departments and agencies. Our programs are subject to U.S. government policies, budget decisions and appropriation processes which are driven by numerous factors including: (1) geopolitical events; (2) macroeconomic conditions; and (3) the ability of the U.S. government to enact relevant legislation, such as appropriations bills.

In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. The Budget Control Act of 2011 (BCA) established specific limits on annual appropriations for fiscal years (FY) 2012–2021, but was amended a number of times leading to fluctuations and unpredictability in annual DoD funding levels. As compared to the relevant preceding year, the DoD budget fell in FY 2013, remained essentially flat for FY 2014 and 2015, and increased for FY 2016 to 2019. While FY 2019 DoD appropriations were completed before the fiscal year began, BCA caps remain in place for FY 2020 and 2021. Further, the DoD budget requires the agreement and action of both Congress and the President. In addition, in previous years the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both governmental shut-downs and Continuing Resolutions (CRs) providing only enough funds for U.S. government agencies to continue operating. Further, if the U.S. government debt ceiling is not raised and the national debt reaches the statutory debt ceiling, the U.S. government could default on its debts.

As a result, U.S. government defense spending levels are subject to a wide range of outcomes and are difficult to predict beyond the near-term due to numerous factors, including the external threat environment, future governmental priorities and the state of governmental finances. Significant changes in U.S. government defense spending or changes in U.S. government priorities, policies and requirements could have a material adverse effect on our results of operations, financial condition and liquidity.

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~~Our~~We ~~financial~~depend ~~results largely are dependent~~ on ~~our~~the ~~ability to perform on our~~ U.S. government ~~contracts,~~for ~~which~~a ~~are~~substantial ~~subject~~portion ~~to uncertain levels~~ of ~~funding~~our ~~and timing~~business, asand ~~well~~changes asin ~~termination~~U.S. ~~Our~~government ~~financial~~defense ~~results~~spending ~~could~~and ~~also~~priorities becould ~~affected~~impact byour ~~performance~~financial ~~delays~~position, ~~cost~~results ~~overruns,~~of ~~product~~operations ~~failures,~~and ~~materials~~overall ~~or components shortages, or definitization delays in connection with these contracts~~business.

In 2019, U.S. government sales, excluding foreign military sales, accounted for approximately 69% of our total net sales. Our U.S. government revenues largely result from contracts awarded under various U.S. government programs, primarily defense-related programs with the U.S. Department of Defense (DoD), and a broad range of programs with the U.S. Intelligence Community and other departments and agencies. Our programs are subject to U.S. government policies, budget decisions and appropriation processes which are driven by numerous factors including: (1) geopolitical events; (2) macroeconomic conditions; and (3) the ability of the U.S. government to enact relevant legislation, such as appropriations bills.

In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. The Budget Control Act of 2011 (BCA) established specific limits on annual appropriations for fiscal years (FY) 2012–2021, but was amended a number of times leading to fluctuations and unpredictability in annual DoD funding levels. As compared to the relevant preceding year, the DoD budget fell in FY 2013, remained essentially flat for FY 2014 and 2015, and increased each year from FY 2016 to 2020. BCA caps were raised for FY 2021 from their original level, and FY 2021 DoD funding is expected to be similar to FY 2020. Further, the DoD budget requires the agreement and action of both Congress and the President. In addition, in previous years the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both governmental shut-downs and Continuing Resolutions (CRs) providing only enough funds for U.S. government agencies to continue operating at prior year levels. Further, if the U.S. government debt ceiling is not raised and the national debt reaches the statutory debt ceiling, the U.S. government could default on its debts.

Our financial results largely are dependent on our ability to perform on our U.S. government contracts, which are subject to uncertain levels of funding and timing, as well as termination. Our financial results could also be affected by performance delays, cost overruns, product failures, materials or components shortages, or definitization delays in connection with these contracts, as well as by the mix of our contracts and programs.

Our financial results largely are dependent on our performance under our U.S. government contracts. Although we have thousands of U.S. government contracts, the termination of one or more of our contracts, or the occurrence of performance delays, cost overruns, product failures, materials or components shortages, or contract definitization delays could negatively impact our results of operations, financial condition and liquidity.

U.S. government contracts generally permit the government to terminate the contract, in whole or in part, without prior notice, at the U.S. government’s convenience or for default based on performance. If one of our contracts is terminated for convenience, we would generally be entitled to payments for our allowable costs and would receive some allowance for profit on the work performed. If one of our contracts is terminated for default, we would generally be entitled to payments for work accepted by the U.S. government. A termination arising out of our default could expose us to liability and have a negative impact on our ability to obtain future contracts and orders. In addition, we are a subcontractor and not the prime contractor on some contracts. In these arrangements, the U.S. government could terminate the prime contract for convenience or otherwise, without regard to our performance as a subcontractor. Further, we can give no assurance that we would be awarded new U.S. government contracts to offset the revenues lost as a result of the termination of any of our contracts.

The funding of U.S. government programs is subject to congressional appropriations, which are made on a fiscal year basis even for multi-year programs. Consequently, programs are often only partially funded initially and may not continue to be funded in future years. In addition, regular appropriation bills may be delayed, which may result in delays to ~~revenue~~funding, the collection of receivables and our contract performance due to lack of authorized funds to procure related products and services. Under certain circumstances, we may use our own funds to meet our customer’s desired delivery dates or other requirements but we may not be reimbursed. Further, if appropriations for one of our programs become unavailable, reduced or delayed, the U.S. government may terminate for convenience our contract or subcontract under that program.

Our U.S. government contracts typically involve the development, application and manufacture of advanced defense and technology systems and products aimed at achieving challenging goals. New technologies may be untested or unproven. In some instances, product requirements or specifications may be modified. As a result, we may experience technological and other performance difficulties, which may result in delays, setbacks, cost overruns or product failures and could divert our attention or resources from other projects. With the change in the U.S. government focus on new technologies, such as interceptors, space-based sensors, high-energy lasers, hypersonics, and counter-hypersonics, we have more development programs. Our failure to execute effectively on these programs could impact our future sales opportunities. Additionally, in order to win certain U.S. government contracts, we may be required to invest in development prior to award as our customers demand more mature and proven solutions. These additional investment amounts may not be recovered if we are not chosen for new contract awards.

Our U.S. government contracts are typically either fixed-priced contracts or cost reimbursement contracts. Fixed-price contracts represent approximately 61% of our backlog, and are predominantly either firm fixed-price (FFP) contracts or fixed-price incentive (FPI) contracts. Under FFP contracts, we receive a fixed price irrespective of the actual costs we incur and we therefore carry the burden of any cost overruns. Under FPI contracts, we share with the U.S. government savings for cost underruns less than target costs and expenses for cost overruns exceeding target costs up to a negotiated cost ceiling. We carry the entire burden of cost overruns exceeding the cost ceiling amount under FPI contracts. Under cost reimbursable contracts, we are reimbursed for allowable costs and paid a fixed or performance-based fee, but we are generally not reimbursed for unauthorized costs exceeding a cost ceiling amount or costs not allowable under the contract or applicable regulations. Due to the nature of our work under many of our U.S. government contracts, we may experience unforeseen technological difficulties and cost overruns. If we are unable to control costs or if our initial cost estimates are incorrect, our profitability could be negatively affected, particularly under fixed-price development contracts. We may also experience cost underruns which would reduce contract value and related expected revenues, and we may be unable to expand the contract scope or secure additional work to offset the resulting lost revenues. Some of our U.S. government contracts have provisions relating to cost controls and audit rights and if we fail to meet the terms specified in those contracts it could have a negative impact on our results of operations, financial condition and liquidity. Our contracts also require us to comply with extensive and evolving procurement rules and regulations, which are discussed in more detail below.

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Our U.S. government contracts typically involve the development, application and manufacture of advanced defense and technology systems and products aimed at achieving challenging goals. New technologies may be untested or unproven and in some instances, product requirements or specifications may be modified. As a result, we may experience technological and other performance difficulties, which may result in delays, setbacks, cost overruns or product failures and could divert our attention or resources from other projects. With the U.S. government’s greater focus on new technologies, such as interceptors, space-based sensors, high-energy lasers, hypersonics, and counter-hypersonics, we have more development programs. Our failure to execute effectively on these programs could impact our future sales opportunities. Additionally, in order to win certain U.S. government contracts, we may be required to invest in development prior to award as our customers demand more mature and proven solutions. These additional investment amounts may not be worthwhile if we are not chosen for new contract awards.

Our U.S. government contracts are typically either fixed-priced contracts or cost reimbursement contracts. Fixed-price contracts represent approximately 65% of our backlog, and are predominantly either firm fixed-price (FFP) contracts or fixed-price incentive (FPI) contracts. Under FFP contracts, we receive a fixed price irrespective of the actual costs we incur and we therefore carry the burden of any cost overruns. Under FPI contracts, we share with the U.S. government savings for cost underruns less than target costs and expenses for cost overruns exceeding target costs up to a negotiated cost ceiling. We carry the entire burden of cost overruns exceeding the cost ceiling amount under FPI contracts. Under cost reimbursable contracts, we are reimbursed for allowable costs and paid a fixed or performance-based fee, but we are generally not reimbursed for unauthorized costs exceeding a cost ceiling amount or costs not allowable under the contract or applicable regulations. Contracts for development programs with complex design and technical challenges are typically cost reimbursable, but can be FFP or FPI. In addition, other contracts in backlog are for the transition from development to production, which includes starting and stabilizing a manufacturing and test line while the final design is still being validated.

Over the past several years, the DoD has increased its use of Other Transaction Authority (OTA) contracts, under which it awards research and development work without all of the procurement requirements that typically apply to DoD contracts, including justification of sole source awards. OTAs may use fixed-price contracts during all phases of the contract, or mandated contract cost sharing (e.g., one-third of program costs). They may also require non-traditional subcontractor participation and impose other requirements that differ from our other DoD contracts. For example, we were awarded an OTA contract for the Lower Tier Air and Missile Defense Sensor (LTAMDS) in late 2019. If we are unable to perform on our OTA contracts, including any applicable non-traditional requirements, it could negatively impact our results of operations, financial condition and liquidity.

Due to the nature of our work under many of our U.S. government contracts, we may experience unforeseen technological difficulties and cost overruns. If we are unable to control costs or if our initial cost estimates are incorrect, our profitability could be negatively affected, particularly under fixed-price development contracts. We may also experience cost underruns which would reduce contract value and related expected revenues, and we may be unable to expand the contract scope or secure additional work to offset the resulting lost revenues. Some of our U.S. government contracts have provisions relating to cost controls and audit rights and if we fail to meet the terms specified in those contracts it could have a negative impact on our results of operations, financial condition and liquidity. Our contracts also require us to comply with extensive and evolving procurement rules and regulations, which are discussed in more detail below.

From time to time, we may begin performance under an undefinitized contract award with a not-to-exceed price prior to completing contract negotiations in order to support U.S. government priorities. Uncertainties in final contract price, specifications and terms, or loss of negotiating leverage associated with particularly long delays in contract definitization, may negatively affect our profitability.

In addition, we are involved in programs that are classified by the U.S. government which have security requirements that place limits on our ability to discuss our performance on these programs, including any risks, disputes and claims.

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Our future success depends on our ability to develop new offerings and technologies for our current and future markets.

To continue achievement of our growth strategy, we must successfully develop new offerings and technologies or adapt existing offerings and technologies for our current and future markets including new international, civil, and commercial markets. Accordingly, our future performance depends on a number of factors, including our ability in current, emerging and future growth markets to:


–	Identify market needs and growth opportunities;


–	Identify emerging technological and other trends;


–	Identify additional uses for our existing technology to address customer needs;


–	Develop and maintain competitive products and services at competitive prices;


–	Enhance our offerings by adding innovative features that differentiate our offerings from those of our competitors;


–	Develop, manufacture and bring solutions to market quickly at cost-effective prices;


–	Enhance product designs for export and releasability to international markets; and


–	Effectively structure our businesses to reflect the competitive environment including through the use of joint ventures, collaborative agreements and other forms of alliances.

We believe that in order to remain competitive in the future, we will need to continue to invest significant financial resources to develop new, and adapt existing, offerings and technologies. We fund this investment through customer funded and internal research and development, acquisitions and joint ventures or other teaming arrangements. We believe this investment is needed to meet demands and expand in our domestic and international markets, including emerging opportunities within the DoD market and the commercial cybersecurity market in which our Forcepoint ~~joint~~business ~~venture~~segment competes. Our investments to develop new offerings and technologies, or adapt existing offerings and technologies, could divert our attention and resources from other projects. In addition, we cannot be sure that these investments will ultimately lead to the timely development of new offerings and technologies or identification of and expansion into new or growth markets.

Due to the design complexity of our products, we may experience future delays in completing the development and introduction of new products. Any delays could result in increased costs of development or deflect resources from other projects. These risks are heightened by recent increases in new development programs. Further, our competitors may develop competing technologies which gain market acceptance in advance of our products. In addition, there can be no assurance that: (1) the market for our offerings will develop or continue to expand; (2) we will be successful in newly identified markets as we currently anticipate; or (3) the acquisitions, joint ventures or other teaming arrangements we may enter into in pursuit of developing new offerings and technologies will be successful. The failure of our technology to gain market acceptance could significantly reduce our revenues and harm our business.

Our existing technology and offerings may become obsolete due to new competitive technology or offerings. If we fail in our new product development efforts or our products or services fail to achieve market acceptance faster than our competitors, our ability to procure new contracts could be negatively impacted, which would negatively impact our results of operations, financial condition and liquidity.

Competition within our markets may reduce our revenues and market share and limit our future market opportunities.

We operate in highly competitive markets and our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do. We anticipate companies continuing to enhance their competitive position against us in our core markets as a result of continued domestic and cross-border defense industry consolidation and the expansion of competitors’ capabilities throughout the supply chain through vertical integration. We are also facing heightened competition in our domestic and international markets from foreign and multinational firms. In addition, as discussed in more detail above, U.S. defense spending and U.S. government procurement strategies may limit our future market opportunities. For example, the DoD continues to award contracts through competitive bidding. Highly competitive pricing, in which a bidder may anticipate making a substantial investment in a program in order to win the work, has been seen in certain cases. In addition, bid protests from unsuccessful bidders on new program awards are more frequent. Generally, a bid protest will delay the start of contract activities, delay earnings, and could result in the award decision being overturned and require a re-bid of the contract. Additionally, some customers, including the DoD, are increasingly turning to commercial contractors, rather than traditional defense contractors, for information technology and other support work.

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discussed in more detail above, U.S. defense spending and U.S. government procurement strategies may limit our future market opportunities. For example, the DoD continues to award contracts through competitive bidding. Highly competitive pricing, in which a bidder may anticipate making a substantial investment in a program in order to win the work, has been seen in certain cases. In addition, ~~bid protests from unsuccessful bidders on new program awards are becoming more frequent. Generally, a bid protest will delay~~ the start of contract activities, delay earnings, and could result in the award decision being overturned and require a re-bid of the contract. Additionally, some customers, including the DoD, are increasingly turning to commercial contractors, rather than traditional defense contractors, for information technology and other support work. The DoD has also increased its use of Other Transaction Authority (OTA) contracts, under which it awards research and development work without all of the procurement requirements that typically apply to DoD contracts, including justification of sole source awards. In addition, the U.S. government has been awarding more development programs due to changing U.S. government priorities. If we are unable to continue to compete successfully against our current or future competitors in our core markets, we may experience declines in revenues and market share which could negatively impact our results of operations, financial condition and liquidity.

In addition, our Forcepoint cybersecurity ~~joint~~business ~~venture~~segment faces significant competition due to rapid changes in technology, products, customer specifications and industry standards. It also has a wide range of market competitors, some that are significantly larger with broader product and service offerings or have best-of-breed products and/or maintain stronger customer relationships. In order to compete effectively, Forcepoint must successfully execute on its growth strategy, including the development of new products and services. If Forcepoint is unable to compete successfully, it may divert financial and management resources that would otherwise benefit our other operations.

As a U.S. government contractor, we are subject to extensive procurement rules and regulations. Changes in rules, regulations and business practices could negatively affect current programs and potential awards. Our business could be negatively affected if we fail to comply with any procurement rules and regulations.

As a U.S. government contractor, we must comply with specific procurement regulations and other requirements including: (1) export-import control; (2) security; (3) contract pricing and cost; (4) contract termination and adjustment; and (5) audit and product integrity requirements. These requirements impact our performance and compliance costs. In addition, the U.S. government has and may continue to implement initiatives focused on efficiencies, affordability and cost growth and other changes to its procurement practices which may negatively affect our results of operations, financial condition and liquidity. This could also affect whether we pursue certain opportunities and the terms under which we are able to pursue them.

For example, in recent years the DoD has increasingly included contractual payment and cost reimbursement terms such as incentive-based contracts that require contractors to share cost overruns and underruns with the U.S. government.

In addition, failure to comply with procurement regulations and requirements could result in: (1) reductions in contract value; (2) contract modifications or termination; (3) cash withholds on contract payments; (4) forfeiture of profits; and (5) the assessment of civil and criminal penalties and fines. Any of these could negatively impact our results of operations, financial condition and liquidity. Our failure to comply with these regulations and requirements could also lead to suspension or debarment, for cause, from U.S. government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes, including those related to: (1) procurement integrity; (2) export control; (3) U.S. government security regulations; (4) employment practices; (5) protection of the environment; (6) accuracy of records and the recording of costs; and (7) foreign corruption. Penalties or sanctions resulting from any failure to comply with applicable requirements could have a negative impact on our results of operations, financial condition and liquidity. This could also have a negative impact on our reputation, lead to contract terminations and reduce our ability to procure other U.S. government contracts in the future.

Issues with component availability, subcontractor performance or key supplier performance may affect our ability to manufacture and deliver our products and services.

We depend on our suppliers delivering materials, and on our subcontractors assembling major components and subsystems for our products in a timely and satisfactory manner and in full compliance with applicable terms and conditions. We are subject to specific procurement requirements that limit the types of materials we use which may limit the suppliers and subcontractors we may utilize. These procurement ~~requirements~~rules include ~~restrictions~~requirements onfor ~~the~~genuine ~~use~~original ofequipment ~~certain~~manufacturer ~~chemicals~~parts. As we continue to seek further cost efficiencies throughout our business, we may centralize procurements in ~~the~~order ~~European~~to ~~Union~~attain ~~(EU)~~better ~~and~~pricing ~~requirements~~through ~~for~~strategic ~~genuine~~sourcing, ~~original~~which ~~equipment~~may ~~manufacturer~~increase ~~parts~~our dependency on certain suppliers. AsIn some instances, we ~~continue~~are todependent ~~seek~~on sole-source suppliers. In recent years, our supplier pool has become further limited in some areas due to consolidation and supplier business closures.

In 15addition, our suppliers may experience materials or components shortages. In recent times, the industry has experienced shortages of certain microelectronic components. Tariffs currently imposed on certain materials and other trade issues may create or exacerbate existing materials shortages and drive-up material prices. These developments may also result in further supplier business closures. Some products require relatively scarce raw materials, including some which are largely controlled by a single country, and the ability to source those materials is dependent on U.S. relations with the country. Materials or

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~~cost~~components ~~efficiencies~~sourced ~~throughout~~from ~~our~~a ~~business,~~particular wecountry may ~~centralize~~become ~~procurements~~subject ~~in order~~ to ~~attain~~sanctions ~~better~~or ~~pricing~~other ~~through~~bans ~~strategic~~imposed ~~sourcing,~~by ~~which~~the ~~may~~United ~~increase~~States ~~our~~or ~~dependency~~other ~~on certain suppliers~~countries. In ~~some instances~~addition, wesome ~~are~~of ~~dependent~~our onsuppliers ~~sole-source~~or ~~suppliers.~~subcontractors Inmay ~~recent~~be ~~years,~~susceptible ~~our~~to ~~supplier~~changes ~~pool~~in ~~has~~global ~~become~~economic ~~further~~conditions ~~limited~~that incould ~~some~~impair ~~areas~~their ~~due~~ability to ~~consolidation~~meet ~~and~~their ~~supplier~~obligations ~~business~~to ~~closures~~us.

InIf ~~addition,~~certain component materials are not available or if any of our suppliers or subcontractors otherwise fails to meet our needs or becomes insolvent, we may ~~experience~~not ~~materials~~have readily available alternatives or ~~components~~alternatives ~~shortages~~at prices that meet the demands of our customers. ~~Tariffs~~We ~~recently~~enter ~~imposed~~into onlong-term or volume purchase agreements with certain ~~materials~~suppliers and take other ~~trade~~actions, ~~issues~~such ~~may~~as ~~create~~accelerating orsupplier ~~exacerbate~~payments ~~existing~~commensurate ~~materials~~with ~~shortages~~value delivered, to ensure the financial viability of our suppliers and ~~may~~the ~~also~~availability ~~result~~of inneeded ~~further~~materials, ~~supplier~~components ~~business~~and ~~closures~~subsystems. ~~Some~~However, ~~products~~we ~~require~~cannot ~~relatively~~be ~~scarce~~sure ~~raw~~that ~~materials~~such items will be available at all or in the needed quantities. In addition, ~~including~~we ~~some~~require ~~which~~our suppliers to deliver components and services that are ~~largely~~free ~~controlled~~from byviruses aand ~~single~~malicious ~~country~~code that may damage or destroy such components and interrupt such services, and include in our contracts with our suppliers the ~~ability~~DoD requirements mandating the reporting of breaches to ~~source~~information ~~those~~technology ~~materials~~systems iscontaining ~~dependent~~critical ongovernment Uinformation.S. ~~relations~~If ~~with~~we ~~the~~experience ~~country~~a material supplier or subcontractor problem, it could negatively impact our ability to satisfactorily and timely complete our customer obligations. InThis ~~addition~~could result in reduced sales, ~~some~~termination of contracts and damage to our ~~suppliers~~reputation orand ~~subcontractors~~relationships ~~may~~with beour ~~susceptible~~customers. toWe ~~changes~~could also incur additional costs in ~~global~~addressing ~~economic~~this ~~conditions~~type ~~that~~of problem. Any of these events could ~~impair~~have ~~their~~a ~~ability~~negative toimpact ~~meet~~on ~~their~~our ~~obligations~~results toof usoperations, financial condition and liquidity. In addition, we must conduct diligence and provide disclosure regarding the use of certain minerals, known as conflict minerals, which may impact our procurement practices and increase our costs.

If certain component materials are not available or if any of our suppliers or subcontractors otherwise fails to meet our needs or becomes insolvent, we may not have readily available alternatives or alternatives at prices that meet the demands of our customers. We enter into long-term or volume purchase agreements with certain suppliers and take other actions, such as accelerating supplier payments commensurate with value delivered, to ensure financial viability of our suppliers and the availability of needed materials, components and subsystems. However, we cannot be sure that such items will be available at all or in the needed quantities. In addition, we require our suppliers to deliver components and services that are free from viruses and malicious code that may damage or destroy such components and interrupt such services, and include in our contracts with our suppliers the DoD requirements mandating the reporting of breaches to information technology systems containing critical government information. If we experience a material supplier or subcontractor problem, it could negatively impact our ability to satisfactorily and timely complete our customer obligations. This could result in reduced sales, termination of contracts and damage to our reputation and relationships with our customers. We could also incur additional costs in addressing this type of problem. Any of these events could have a negative impact on our results of operations, financial condition and liquidity. In addition, we must conduct diligence and provide disclosure regarding the use of certain minerals, known as conflict minerals, which may impact our procurement practices and increase our costs.

Our international business is subject to geopolitical and economic factors, regulatory requirements and other risks.

Our international business exposes us to geopolitical and economic factors, regulatory requirements, increasing competition and other risks associated with doing business in foreign countries, including those related to tariffs and trade barriers. These risks differ from and may be greater than those associated with our domestic business. In ~~2018~~2019, our sales to customers outside the U.S. (including foreign military sales through the U.S. government) accounted for 3029% of our total net sales. Our exposure to such risks may increase if our international business continues to grow as we anticipate. Any significant impairment of our ability to conduct business outside of the U.S. could negatively impact our results of operations, financial condition and liquidity.

Our international business is sensitive to changes in the priorities and budgets of international customers, which may be driven by: (1) changes in threat environments; (2) geopolitical uncertainties; (3) volatility in worldwide economic conditions; and (4) various regional and local economic and political factors, including volatility in energy prices, changes in U.S. foreign policy, changes in existing free trade laws and regulations and other risks and uncertainties. Our international sales are subject to U.S. laws, regulations and policies, including the International Traffic in Arms Regulations (ITAR), the Export Administration Regulations (EAR), the Foreign Corrupt Practices Act (FCPA), and other anti-corruption, sanctions, and export laws and regulations. WeAny ~~maintain policies and controls to comply with such laws and regulations and exercise oversight of such compliance. However, any~~ failure by us or others working on our behalf to comply with these laws and regulations could result in criminal, civil or administrative penalties including fines, suspension or debarment from government contracts or suspension of our ability to export our products.

In addition, due to the nature of our products, we must obtain licenses and authorizations from various U.S. government agencies before selling our products outside of the U.S. Our ability to obtain these licenses and authorizations timely or at all is subject to risks and uncertainties, including changing U.S. government policies or laws or delays in Congressional action due to geopolitical and other factors. Some of our direct commercial sale contracts with international customers have requirements relating to these licenses and authorizations and may permit the customer to terminate the contract if we fail to receive these approvals in a timely manner. If we are not successful in obtaining or maintaining the necessary licenses or authorizations in a timely manner, our sales relating to those approvals may be reversed, prevented or delayed. WeIn ~~have~~the recent past, we had several direct commercial sales contracts for precision guided munitions with certain Middle Eastern customers for which U.S. government approvals ~~from~~had been delayed until the ~~State~~Administration ~~Department~~directly ~~and~~approved ~~Congress~~these ~~through~~sales. ~~the~~At ~~Congressional~~December ~~Notification~~31, ~~process~~2019, ~~have~~we ~~been~~had pending $1.2 billion of total contract value of these contracts that require U.S. government approvals. Additionally, one of those contracts, which has a contract value of $835 million, also requires U.K. government approval. In addition, new sales to these customers may face similar delays and/or potential challenges given the geopolitical issues.

Certain 16events have caused increased attention on U.S. defense sales to the Kingdom of Saudi Arabia (KSA). Although we currently do not expect to be prevented from doing business in KSA, which represents less than 5% of our sales, if government

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~~delayed~~action ~~and~~impairs ~~which~~our weability ~~expect will continue~~ to befulfill ~~delayed~~our incontractual ~~the~~obligations ~~near future. These contracts contain clauses that permit the customer to terminate the contract, and require refund of any advances received, if those approvals are not received by a stated date~~ or ~~that date is not~~ otherwise ~~changed.~~to Wecontinue ~~have~~to ~~taken contractual actions, such as changing or removing the government approval deadlines, or invoking the force majeure clauses for government delays. However, if we ultimately~~ do ~~not~~business ~~receive~~in ~~the approvals for these direct commercial sales contracts for precision guided munitions~~KSA, it would have a material adverse effect on our financial results. At December 31, 2018, we had approximately $2.3 billion of total contract value, recognized approximately $1 billion of sales for work performed to date and received approximately $850 million in advances from customers on these contracts. On a contract by contract basis, and excluding advances billed but not received, we had $500 million and $350 million of net contract assets and net contract liabilities, respectively, related to these contracts.

In addition, recent events have caused increased attention on U.S. defense sales to the Kingdom of Saudi Arabia (KSA). Although we currently do not expect to be prevented from doing business in KSA, which represents nearly 5% of our sales, if government action impairs our ability to fulfill our contractual obligations or otherwise to continue to do business in KSA, it would have a material adverse effect on our financial results.

Our international sales are also subject to local government laws, regulations, and procurement policies and practices which may differ from U.S. government requirements. These include regulations relating to export-import control, technology transfer, investments, exchange controls and repatriation of earnings. Further, our international sales contracts may be subject to non-U.S. contract laws and regulations and include contractual terms that differ from those of similar contracts in the U.S. or that may be interpreted differently under foreign laws. Delays, cost overruns and product failures, or technological or other difficulties could also affect our ability to perform on our international contracts and negatively affect our profitability. In addition, these contracts may be subject to termination for default based on performance or failure to obtain U.S. government export approvals. These contracts may also be subject to termination at the customer’s convenience, and may be subject to funding risks. In connection with our international business, we also operate subsidiaries domiciled in non-U.S. locations that are subject to local government laws and regulations which may differ from U.S. government requirements. In addition, the timing of orders, customer negotiations, governmental approvals and notifications from our international customers can be less predictable than from our domestic customers. This may lead to variations in international bookings and sales each year.

We must also manage a certain degree of exposure to the risk of currency fluctuations. ~~We have acted to protect ourselves against various risks through insurance, foreign exchange contracts, contract provisions, government guarantees and/or payment terms.~~ Our international sales in functional currencies other than the U.S. dollar were approximately $1.4 billion in both 2019 and 2018, and $1.3 billion in 2017 ~~and 2016~~, the majority of which were in British pounds and Australian dollars with the remainder primarily in euros and Canadian dollars. See ~~total net sales and property, plant and equipment by geographical area set forth in~~ “Note 16: Business Segment Reporting” within Item 8 of this Form 10-K for total net sales and property, plant and equipment by geographical area.

Our international business faces substantial competition from both U.S. companies and foreign companies. In some instances, foreign companies may be owned by foreign governments or may receive loans, marketing subsidies and other assistance from their governments that may not be available to U.S. companies. In addition, foreign companies may be subject to fewer restrictions on technology transfer than U.S. companies.

Our international contracts may include industrial cooperation agreements requiring specific local purchases, manufacturing agreements, technology transfer agreements or financial support obligations, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements. Approvals of offset or ICIP thresholds and requirements may be subjective and time-consuming and may delay contract awards. Offset requirements may, in certain countries, include the creation of a joint venture with a local company which may control the venture. This could result in liability for violations of law for actions taken by these entities, including laws related to anti-corruption, sanctions, export, or local laws which may differ from U.S. laws and requirements. In addition, the ability to recover investments that we make may be dependent upon the success of ventures that we do not control. Such offset obligations are generally multi-year arrangements and may provide for penalties in the event we fail to perform in accordance with the offset requirements. In addition, certain customers’ demands are increasing for greater offset or ICIP commitment levels, higher-value content, including the transfer of technologies and capabilities, and local production and economic development. We also are exposed to risks associated with using third-party foreign representatives and consultants for international sales, and teaming with international subcontractors, partners and suppliers in connection with international programs. As a result of the above factors, we could experience financial penalties and award and funding delays on international programs, our profitability on these programs could be negatively affected, and we could incur losses on these programs which could negatively impact our results of operations, financial condition and liquidity.

We 17depend on the recruitment and retention of qualified personnel, and our failure to attract, train and retain such personnel and to maintain our corporate culture and high ethical standards could seriously harm our business.

Due to the specialized nature of our business, our future performance is highly dependent upon the continued services of our key technical personnel and executive officers, the development of additional management personnel and the hiring of new qualified technical, manufacturing, marketing, sales and management personnel for our operations. Our continued growth increases the need for qualified personnel. Competition for personnel is intense and we may not be successful in attracting, training or retaining qualified personnel with the requisite skills or security clearances. In addition, certain personnel may be required to receive various security clearances and substantial training in order to work on certain programs or perform certain tasks. Necessary security clearances may be delayed, which may impact our ability to perform on our U.S. government contracts. Further, a significant percentage of our current workforce is nearing or eligible for retirement. To the extent that we lose experienced personnel, it is critical that we develop other employees, hire new qualified personnel and successfully

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~~and~~manage wethe ~~could~~transfer ~~incur~~of ~~losses~~critical onknowledge. ~~these~~We ~~programs~~face competition in attracting new qualified personnel, especially in a low unemployment environment. In addition, new qualified personnel may have different expectations from our current workforce, which could ~~negatively~~result ~~impact~~in ~~our~~difficulties ~~results~~attracting and retaining new employees. Loss of ~~operations~~key employees, ~~financial~~failure ~~condition~~to ~~and~~attract ~~liquidity~~new qualified employees or adequately train them, delays in receiving required security clearances, or delays in hiring key personnel could seriously harm our business.

We ~~depend~~believe onthat ~~the~~a ~~recruitment~~critical ~~and~~component ~~retention~~ of our ability to successfully attract, train and retain qualified personnel has been our corporate culture, which we believe fosters innovation, collaboration and a focus on execution, all in an environment of high ethical standards. Our global operations may present challenges in maintaining these important aspects of our corporate culture. Any failure to maintain our corporate culture could negatively impact our ability to attract, train and retain ~~such~~essential qualified personnel ~~could~~who ~~seriously~~are ~~harm~~vital to our business. Further, we rely on our key personnel to lead with integrity and to meet our high ethical standards. To the extent any of our leaders were to behave in a way that is inconsistent with our values, we could experience a materially adverse impact to our reputation and our operating results.

Due to the specialized nature of our business, our future performance is highly dependent upon the continued services of our key technical personnel and executive officers, the development of additional management personnel and the hiring of new qualified technical, manufacturing, marketing, sales and management personnel for our operations. Our continued growth increases the need for qualified personnel. Competition for personnel is intense and we may not be successful in attracting or retaining qualified personnel with the requisite skills or security clearances. In addition, certain personnel may be required to receive various security clearances and substantial training in order to work on certain programs or perform certain tasks. Necessary security clearances may be delayed, which may impact our ability to perform on our U.S. government contracts. Further, a significant percentage of our current workforce is nearing or eligible for retirement. To the extent that we lose experienced personnel, it is critical that we develop other employees, hire new qualified personnel and successfully manage the transfer of critical knowledge. Loss of key employees, failure to attract new qualified employees or adequately train them, delays in receiving required security clearances, or delays in hiring key personnel could seriously harm our business.

Our business could be negatively impacted by cyber attacks, other security breaches and other disruptions.

We routinely experience cyber and other security threats including: threats to our information technology infrastructure, attempts to gain access to our proprietary, sensitive or classified information, and attempts to infiltrate our products and services and sabotage or disable their use by our customers. We also encounter threats to our physical security, including our facilities and personnel, and threats from terrorism or similar acts. In addition, our business could be disrupted by natural disasters, including the impacts of climate change.

As a defense contractor that protects national security information, we are the target of advanced and persistent cyber attacks from a variety of assailants, including nation states, in addition to attacks similar to those encountered in other industries. Our customers, suppliers, subcontractors and other third parties with whom we do business routinely experience similar security threats. Cybersecurity threats include, but are not limited to, malicious software, attempts to access information, online extortion attempts, disruption or denial of service attacks, insider threat attacks, and other cybersecurity events that could lead to disruptions of our systems or unauthorized access to our data. Our information technology networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. In addition, in some cases we must rely on the safeguards put in place by our customers, suppliers, subcontractors and other third parties to protect against and report cyber threats. Cyber attacks could lead to disruptions in mission critical systems, unauthorized release of confidential, personal, other protected information (which may belong to us, our employees, or third parties) or national security information, and corruption of data, networks or systems. We believe we have implemented appropriate measures and controls and have invested in significant resources to appropriately identify and monitor these threats and mitigate potential risks, including risks involving our customers and suppliers. However, due to their persistence, sophistication and volume, we may not be successful in preventing or defending against all cyber attacks and preventing or mitigating associated losses. In addition, because cybersecurity and related data privacy and protection laws and regulations are evolving and present increasing compliance challenges, our compliance costs could increase.

In addition, we provide cybersecurity, defense and other products and services to government and commercial customers, as well as products in which cybersecurity capabilities are embedded. As a result, these products and services are subject to attacks targeting their security, integrity and/or availability. Our cybersecurity products and services ultimately may not be able to effectively detect, prevent, or protect against cyber attacks or otherwise mitigate customer losses and other potential consequences of these attacks. In addition, some products and services that we provide to customers, particularly those related to public security, may raise potential liabilities related to privacy and intellectual property.

The impact of a future cyber incident cannot be predicted, particularly because these threats evolve quickly, their seriousness and scale vary widely, and national security information or other sensitive government functions may be involved. The impact of other business disruptions, such as those related to our physical security or resulting from natural disasters or other events, is also difficult to predict. Further, our insurance coverage may not be adequate to cover all related costs and we may not otherwise be fully indemnified for them. We maintain internal controls and procedures on cybersecurity incident prevention, detection, mitigation, response, recovery and disclosure. However, we may be unsuccessful in detecting, reporting or responding to these events adequately in a timely manner. Cyber attacks, security breaches, and other events could disrupt our operations, or the operations of our customers, suppliers, subcontractors and other third parties, and cause harm to facilities or personnel. They could require significant management attention and resources and could result in the loss of business,

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our operations, or the operations of our customers, suppliers, subcontractors and other third parties, and cause harm to facilities or personnel. They could require significant management attention and resources and could result in the loss of business, regulatory actions and potential liability. They could also negatively impact our reputation among our customers and the public. Any one of these outcomes could have a negative impact on our financial condition, results of operations and liquidity.

Our business could be adversely affected by a negative audit or investigatory finding by the U.S. government.

We are subject to audits and investigations by U.S. government agencies including the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA), the Inspectors General of the DoD and other departments and agencies, the Government Accountability Office (GAO), the Department of Justice (DOJ) and Congressional Committees, in large part because we are a government contractor. From time to time, these and other agencies conduct investigations or audits to determine whether our operations are in compliance with applicable requirements. The DCAA and DCMA also review the adequacy of and our compliance with our internal control systems and policies, including our accounting, purchasing, property, estimating, earned value management and material management accounting systems. Our final allowable incurred costs for each year are subject to audit and have from time to time resulted in disputes between us and the U.S. government. In some cases, the DOJ has convened grand juries to investigate possible irregularities in our costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. An adverse outcome of any audit or investigation could result in civil and criminal penalties and fines which could negatively impact our results of operations, financial condition and liquidity. In addition, if allegations of impropriety were made against us, we could suffer serious reputational harm which could negatively affect our financial position, results of operations and liquidity.

We use estimates in accounting for many of our programs, and changes in our estimates could adversely affect our future financial results.

Accounting for long-term contracts requires estimates and judgments related to our progress toward completion. Significant judgments include potential risks associated with the ability and cost to achieve program schedule, including customer-directed delays or reductions in scheduled deliveries, and technical and other specific contract requirements. Due to the size and long-term nature of many of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Management must make assumptions and estimates regarding contract revenue and cost (including estimates of award fees and penalties), including with respect to: (1) labor productivity and availability; (2) the complexity of the work to be performed; (3) the availability of materials; (4) the length of time to complete the performance obligation; (5) execution by our subcontractors; (6) the availability and timing of funding from our customer; and (7) overhead cost rates, among other variables. Because of the significance of management’s judgments and estimation processes described above, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future results of operations and financial condition.

For a detailed discussion of how our financial statements can be affected by contract accounting policies, see “Critical Accounting Estimates” within Item 7 of this Form 10-K.

Significant changes in key estimates and assumptions, such as discount rates and assumed long-term return on plan assets (ROA), as well as our actual investment returns on our pension plan assets and other actuarial factors, could affect our earnings, equity and pension contributions in future periods.

We must determine our pension and PRB plans’ expense or income which involves significant judgment, particularly with respect to our discount rate, long-term ROA and other actuarial assumptions. The discount rate assumption is set annually and we determine on an annual basis whether it is appropriate to change our long-term ROA assumption. These assumptions and other actuarial assumptions may change significantly due to changes in economic, legislative, and/or demographic experience or circumstances. Changes in our assumptions could result in negative changes to our pension and PRB plans’ expense and funded status, and our cash contributions to such plans, which would negatively impact our results of operations. In addition, differences between our actual investment returns and our long-term ROA assumption would result in a change to our pension and PRB plans’ expense and funded status and our required contributions to the plans. They may also be impacted by changes in regulatory, accounting and other requirements applicable to pensions.

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For a detailed discussion of how our financial statements can be affected by pension and PRB plan accounting policies, see “Critical Accounting Estimates” within Item 7 of this Form 10-K.

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If we fail to manage our acquisitions, investments, divestitures, joint ventures and other transactions successfully, these activities could adversely affect our future financial results.

In pursuing our business strategies, we continually review, evaluate and consider potential investments, acquisitions, divestitures, joint ventures and other teaming and collaborative arrangements. We undertake to identify opportunities that will complement our existing products and services or customer base, as well as expand our offerings and market reach into new areas that naturally extend from our core capabilities. In evaluating such transactions, we are required to make difficult judgments regarding the value of business opportunities, technologies and other assets, and the risks and cost of potential liabilities. Further, these transactions involve certain other risks and uncertainties including: (1) the risks involved with entering new markets; (2) the difficulty in integrating newly-acquired businesses and managing or monitoring other collaborative business arrangements; (3) challenges and failures in achieving strategic objectives and other expected benefits which may result in certain liabilities to us for guarantees and other commitments; (4) unidentified issues not discovered in Raytheon’s due diligence; (5) the diversion of our attention and resources from our operations and other initiatives; (6) the potential impairment of acquired assets; (7) the performance of underlying products, capabilities or technologies; and (8) the potential loss of key employees and customers of acquired businesses. In addition, future transactions may impact our deployment of capital, including dividends, stock repurchases, pension contributions, and investments.

Additionally, the joint venture agreement for our Forcepoint cybersecurity joint venture company, of which Raytheon owns 80.5% and Vista Equity Partners owns 19.5%, provides Vista Equity Partners with certain rights to exit the joint venture, including the right to require Raytheon to purchase all of Vista Equity Partners’ interest in Forcepoint and the right to require Forcepoint to pursue an initial public offering, as well as certain other protective rights with respect to the management of Forcepoint’s business. In addition to the other risks described above, the exercise of any such rights by Vista Equity Partners could adversely affect our results of operations, financial condition and liquidity, or the management of our business as a whole.

For a more detailed discussion regarding Forcepoint, see “Forcepoint” within Item 1 of this Form 10-K.

Goodwill and other intangible assets represent a significant portion of our assets, and any impairment of these assets could negatively impact our results of operations and financial condition.

At December 31, ~~2018~~2019, we had goodwill and other intangible assets of approximately $15.54 billion which represented 4945% of our total assets. Our goodwill is subject to an impairment test annually and is also tested whenever events and circumstances indicate that goodwill may be impaired. In the event of an impairment any excess goodwill must be written off in the period of determination. Intangible assets (other than goodwill) are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an investment in a business which will require us to record goodwill and intangible assets based on the purchase price and the value of the acquired assets. We may subsequently experience unforeseen events that could adversely affect the value of our goodwill or intangible assets and trigger an impairment evaluation. Future determinations of significant impairments of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a negative impact on our results of operations and financial condition.

For a detailed discussion of how our financial statements can be affected by goodwill accounting policies, see “Critical Accounting Estimates” within Item 7 of this Form 10-K.

The outcome of litigation in which we have been named, or may in the future be named, as a defendant is unpredictable, and an adverse decision in any such matter could have a material adverse effect on our results of operations, financial condition and liquidity.

We are the defendant in a number of litigation matters and are subject to various other claims, demands and investigations. In addition, we may be subject to future litigation matters, claims, demands and investigations. These matters may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these matters will be favorable to us. An adverse resolution or outcome of any of these lawsuits, claims, demands or investigations could have a negative impact on our results of operations, financial condition and liquidity.

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We may be unable to adequately protect our intellectual property rights or obtain certain rights in third party intellectual property on reasonable terms, which could affect our ability to compete.

Our efforts to gain awards of contracts and ensure a competitive position in the market depends in part on our ability to ensure that our intellectual property is protected, that our intellectual property rights are not diluted or subject to misuse, and that we are able to license certain third party intellectual property on reasonable terms. We own many U.S. and foreign patents and patent applications, and have rights in unpatented inventions, know-how, data, software, trademarks and copyrights. The U.S. government and foreign governments have licenses under certain of our intellectual property, including certain patents, which are developed or used in performance of government contracts. Governments may use or authorize others (including our competitors) to use such patents and intellectual property for government and other purposes. Governments may challenge the sufficiency of intellectual property rights we have granted in government contracts and attempt to obtain greater rights~~. There can be no assurance that any of our patents and other intellectual property will not be challenged~~, ~~invalidated,~~which ~~misappropriated~~could orreduce ~~circumvented by third parties. In addition, the laws concerning intellectual property vary among nations and the protection provided to~~ our ~~intellectual~~ability ~~property by the laws and courts of foreign nations may differ from those of the U.S. Further, litigation~~ to ~~enforce~~protect our intellectual property rights ~~can be costly,~~ and ~~even~~to ifcompete. ~~successful,~~There can ~~direct~~be ~~our~~no ~~attention~~assurance ~~from~~that ~~other~~any areas of our business. All of the above could diminish the value of our intellectual property, affecting our ability to procure future business or maximize the use of our intellectual property to increase our revenue.

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of our patents and other intellectual property will not be challenged, invalidated, misappropriated or circumvented by third parties. In addition, the laws concerning intellectual property vary among nations and the protection provided to our intellectual property by the laws and courts of foreign nations may differ from those of the U.S. Further, litigation to enforce our intellectual property rights can be costly, and even if successful, can distract our attention from other areas of our business. All of the above could diminish the value of our intellectual property, affecting our ability to procure future business or maximize the use of our intellectual property to increase our revenue.

In some instances, we have augmented our technology base by licensing the proprietary intellectual property of others. Intellectual property obtained from third parties is also subject to challenge, invalidation, misappropriation or circumvention by third parties. In addition, we may not be able to obtain necessary licenses on commercially reasonable terms. In other instances, our ability to procure and perform government contracts requires us to obtain certain rights in the intellectual property of others through government grants. Governments may deny us the right to obtain such rights in the intellectual property of others which may affect our ability to perform government contracts.

WeThe ~~enter into~~ confidentiality and intellectual property assignment agreements we enter into with our employees and ~~enter into~~ non-disclosure obligations and agreements we enter into with our suppliers, consultants and appropriate customers ~~so as to limit access to and prevent disclosure of our trade secrets and other proprietary information. These measures~~ may not adequately protect our proprietary information, deter misappropriation and misuse of our proprietary information, or prevent third-party development of similar technologies, all of which may negatively impact our ability to compete. We may be unable to adequately protect our intellectual property rights, use our intellectual property for a competitive advantage, or continue to access licensed intellectual property of third parties, any of which could have a negative impact on our ability to win and perform on contracts, our reputation, and our results of operations, financial condition and liquidity.

Our operations expose us to the risk of material environmental liabilities.

We use hazardous substances and generate hazardous wastes in our operations. As a result, we are subject to potentially material liabilities related to personal injuries or property damage that may be caused by hazardous substance releases and exposures. For example, we are investigating and remediating contamination related to past practices at a number of properties and, in some cases, have in the past been named as a defendant in related “toxic tort” claims.

We are also subject to laws and regulations that: (1) impose requirements for the proper management, treatment, storage and disposal of hazardous substances and wastes; (2) restrict air and water emissions from our operations (including U.S. government-owned facilities we manage); and (3) require maintenance of a safe workplace. These laws and regulations can lead to substantial fines and criminal sanctions for violations, and may require the installation of costly equipment or operational changes to limit pollution emissions, decrease the likelihood of accidental hazardous substance releases and/or reduce the risks of injury to people. We incur, and expect to continue to incur, capital and other expenditures to comply with these laws and regulations.

A criminal violation of certain U.S. environmental statutes such as the Clean Air Act and Clean Water Act could result in suspension, debarment or disqualification by the U.S. Environmental Protection Agency (EPA). A facility determined to be in violation of the criminal provisions of these statutes can be prohibited from performing any U.S. government contract work until the violation has been corrected and the EPA approves the reinstatement of the facility.

WeIn ~~incur~~addition, ~~and~~new ~~expect~~laws, toregulations, ~~continue~~or togovernmental ~~incur~~policies, ~~capital~~sudden ~~and~~changes ~~operating~~in ~~costs~~the tointerpretation ~~comply~~and ~~with~~enforcement ~~these~~of existing laws and regulations., Inthe ~~addition~~discovery of previously unknown contamination, or the imposition of new ~~laws~~clean-up ~~and~~standards ~~regulations,~~could ~~changes~~require us to incur additional costs in the ~~interpretation~~future ~~and~~that ~~enforcement~~would ofhave ~~existing~~a ~~laws~~negative ~~and~~effect ~~regulations,~~on ~~the~~our ~~discovery~~results of operations, financial condition and liquidity.

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previously unknown contamination, or the imposition of new clean-up standards could require us to incur costs in the future that would have a negative effect on our results of operations, financial condition and liquidity.

We face certain significant risk exposures and potential liabilities that may not be adequately covered by indemnity or insurance.

A significant portion of our business relates to designing, developing and manufacturing advanced defense and technology systems and products. New technologies may be untested or unproven. In addition, we may incur significant liabilities that are unique to our products and services. In some, but not all, circumstances, we may be entitled to indemnification from our customers through contractual provisions, and we may obtain limitations of liability and additional defenses for various reasons including the qualification of our products and services by the Department of Homeland Security (DHS) under the SAFETY Act provisions of the Homeland Security Act of 2002. The amount of the insurance coverage we maintain or indemnification to which we may be contractually or otherwise entitled may not be adequate to cover all claims or liabilities. Accordingly, we may be forced to bear substantial costs resulting from risks and uncertainties of our business which would negatively impact our results of operations, financial condition and liquidity.

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Act provisions of the Homeland Security Act of 2002. The amount of the insurance coverage we maintain or indemnification to which we may be contractually or otherwise entitled may not be adequate to cover all claims or liabilities. Accordingly, we may be forced to bear substantial costs resulting from risks and uncertainties of our business which would negatively impact our results of operations, financial condition and liquidity. Any accident, failure of, or defect in our products and services, even if fully indemnified or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete effectively. It could also affect the cost and availability of available insurance in the future.

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.

We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are transactions and calculations where the ultimate tax determination is uncertain. Further, changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. In addition, we are regularly under audit by tax authorities. The final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Additionally, changes in the geographic mix of our sales could impact our tax liabilities and affect our income tax expense and profitability.

Risks Related to the Proposed Merger with UTC

The Merger is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if at all. Failure to complete the Merger could have material adverse effects on Raytheon.

The completion of the Merger is subject to a number of conditions, including, among other things, the receipt of certain regulatory approvals, the receipt of an Internal Revenue Service (IRS) private letter ruling regarding certain tax matters and certain tax-related opinions and solvency opinions from outside legal counsel, the completion by UTC of the Separation and the Distributions, and a certain amount of net indebtedness of UTC following the Separation and the Distributions (UTC RemainCo), which make the completion and timing of the Merger uncertain.

The failure to satisfy all of the required conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring at all. There can be no assurance that the conditions to the completion of the Merger will be satisfied or waived or that the Merger will be completed.

If the Merger is not completed, Raytheon may be materially adversely affected and, without realizing any of the benefits of having completed the Merger, will be subject to a number of risks, including the following:


–	the market price of Raytheon common stock could decline;


–	Raytheon could owe a substantial termination fee to UTC in specified circumstances;


–	if the Merger Agreement is terminated and the Raytheon Board of Directors seeks another business combination, Raytheon stockholders cannot be certain that Raytheon will be able to find a party willing to enter into a transaction on terms equivalent to or more attractive than the terms that UTC has agreed to in the Merger Agreement;


–	time and resources, financial and other, committed by Raytheon’s management to matters relating to the Merger could otherwise have been devoted to pursuing other beneficial opportunities;


–	Raytheon may experience negative reactions from the financial markets or from its customers, suppliers or employees; and


–	Raytheon will be required to pay its costs relating to the Merger, such as legal, accounting, financial advisory and printing fees, whether or not the Merger is completed.

In addition, if the Merger is not completed, Raytheon could be subject to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against Raytheon to perform its obligations under the Merger Agreement. Any of these risks could materially and adversely impact Raytheon’s ongoing business, financial condition, financial results and stock price.

Similarly, delays in the completion of the Merger could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with delay and uncertainty about completion of the Merger, and could materially

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and adversely impact the ongoing business, financial condition, financial results and stock price of Raytheon prior to the Merger and UTC following completion of the Merger (the Combined Company).

The Merger is subject to the expiration or termination of applicable waiting periods and the receipt of approvals, consents or clearances from several regulatory authorities that may impose conditions that could have an adverse effect on Raytheon or the Combined Company or, if not obtained, could prevent completion of the Merger.

Before the Merger may be completed, any applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act) relating to the completion of the Merger must have expired or been terminated and any authorization or consent from a governmental authority required to be obtained with respect to the Merger under certain other applicable foreign regulatory laws must have been obtained. In deciding whether to grant the required regulatory authorization or consent, the relevant governmental entities will consider the effect of the Merger within their relevant jurisdiction, including, among other things, the impact on the parties’ respective customers and suppliers and the applicable defense ministry and the impact of the parties’ foreign investment in the jurisdiction. The terms and conditions of the authorizations and consents that are granted, if any, may impose requirements, limitations or costs or place restrictions on the conduct of the Combined Company’s business or may materially delay the completion of the Merger.

Under the Merger Agreement, UTC and Raytheon have agreed to use their respective reasonable best efforts to obtain such authorizations and consents, and each of UTC and Raytheon has agreed to take any and all steps necessary to avoid or eliminate impediments under any antitrust laws that may be asserted by any governmental authority so as to enable the completion of the Merger as promptly as practicable. However, UTC’s and Raytheon’s obligations to take such actions are subject to limitations, including that neither UTC nor Raytheon will be required to commit to or effect any sale, divestiture, lease, holding separate pending a sale or other transfer or disposal, or certain other restrictions or actions if such actions, in the aggregate would or would reasonably be expected to have a materially adverse impact on Raytheon, UTC or their respective subsidiaries or affiliates, in each case measured on a scale relative to the size of the Combined Company.

In addition, at any time before or after the completion of the Merger, and notwithstanding the termination of applicable waiting periods, the applicable U.S. or foreign regulatory authorities or any state attorney general could take such action under antitrust or applicable foreign investment laws as such party deems necessary or desirable in the public interest. Such action could include, among other things, seeking to enjoin the completion of the Merger or seeking divestiture of substantial assets of the parties. In addition, in some circumstances, a third party could initiate a private action challenging, seeking to enjoin, or seeking to impose conditions on the Merger. UTC and Raytheon may not prevail and may incur significant costs in defending or settling any such action.

There can be no assurance that the conditions to the completion of the Merger set forth in the Merger Agreement relating to applicable regulatory laws will be satisfied.

The exchange ratio is fixed and will not be adjusted in the event of any change in either UTC’s or Raytheon’s stock price; there is no (and will not be until the completion of the Distributions) trading history with respect to the shares of the UTC aerospace businesses on a standalone basis after giving effect to the Separation and the Distributions.

Upon completion of the Merger, each issued and outstanding share of Raytheon common stock (other than excluded shares) will be converted into the right to receive the Merger consideration, which is equal to 2.3348 fully paid and nonassessable shares of UTC common stock (and, if applicable, cash in lieu of fractional shares). This exchange ratio was fixed in the Merger Agreement and will not be adjusted for changes in the market price of either UTC common stock or Raytheon common stock.

As of the date of this filing, it is impossible to accurately predict the market price of UTC common stock at the completion of the Merger (including as a result of, among other things, the Separation and the Distributions), and therefore, impossible to accurately predict the market value of the shares of UTC common stock that Raytheon stockholders will receive in the Merger. There is no (and will not be until the completion of the Distributions) trading history with respect to the shares of the UTC aerospace businesses on a standalone basis after giving effect to the Separation and the Distributions. The market price for UTC common stock may fluctuate both prior to the completion of the Merger and thereafter for a variety of reasons, including, among others, general market and economic conditions, the demand for UTC’s or Raytheon’s products and services, the Separation and the Distributions, changes in laws and regulations, other changes in UTC’s and Raytheon’s respective businesses, operations, prospects and financial results of operations, market assessments of the likelihood that the Merger will

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be completed, and the expected timing of the Merger. Many of these factors are beyond UTC’s and Raytheon’s control. As a result, the market value represented by the exchange ratio will also vary.

As a result of the Distributions, we expect the market price of shares of UTC common stock to decline because the market price will no longer include the value of the Otis business or the Carrier business. The value of UTC common stock that Raytheon stockholders will receive in the Merger will reflect the combination of the UTC aerospace businesses and Raytheon and will not include the value of the Otis business or the Carrier business as the market price of UTC common stock currently does. We cannot predict the amount of this decline, as the market price of shares of UTC common stock may fluctuate based on the perceived values of the common stock of UTC, the Otis business and the Carrier business in anticipation of the Distributions and the Merger, and it may not be possible to estimate the market value of UTC common stock. In addition, there is no (and will not be until the completion of the Distributions) trading history with respect to the shares of the UTC aerospace businesses on a standalone basis after giving effect to the Separation and Distributions. Therefore, current and historical market prices of UTC common stock are not reflective of the value that Raytheon stockholders will receive in the Merger.

Each party is subject to business uncertainties and contractual restrictions while the Merger is pending, which could adversely affect Raytheon’s, and, following completion of the Merger, the Combined Company’s business and operations.

In connection with the pendency of the Merger, it is possible that some customers, suppliers and other persons with whom UTC and/or Raytheon has a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with UTC or Raytheon, as the case may be, as a result of the Merger or otherwise, which could negatively affect UTC’s or Raytheon’s respective revenues, earnings and/or cash flows, as well as the market price of UTC common stock or Raytheon common stock, regardless of whether the Merger is completed.

Under the terms of the Merger Agreement, each of UTC and Raytheon is subject to certain restrictions on the conduct of its business prior to completing the Merger that may adversely affect its ability to execute certain of its business strategies, including the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness, pay dividends, incur capital expenditures or settle claims. Such limitations could adversely affect each of UTC’s and Raytheon’s business and operations prior to the completion of the Merger.

Each of the risks described above may be exacerbated by delays or other adverse developments with respect to the completion of the Merger.

Completion of the Merger may trigger change in control or other provisions in certain customer and other agreements to which UTC or Raytheon is a party, which may have an adverse impact on the Combined Company’s business and results of operations following completion of the Merger.

The completion of the Merger may trigger change in control and other provisions in certain agreements to which UTC or Raytheon is a party. If UTC or Raytheon is unable to negotiate waivers of those provisions, counterparties may exercise their rights and remedies under the agreements, including terminating the agreements or seeking monetary damages or equitable remedies. Even if UTC and Raytheon are able to negotiate consents or waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to UTC or Raytheon. Any of the foregoing or similar developments may have an adverse impact on the Combined Company’s business and results of operations following completion of the Merger.

Uncertainties associated with the Merger may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations of the Combined Company following completion of the Merger.

UTC and Raytheon are dependent on the experience and industry knowledge of their officers and other key employees to execute their business plans. The Combined Company’s success after the completion of the Merger will depend in part upon the ability of the Combined Company to retain certain key management personnel and employees of UTC and Raytheon. Prior to the completion of the Merger (as well as the Separations and the Distributions), current and prospective employees of UTC and Raytheon may experience uncertainty about their roles following the completion of the transactions, which may have an adverse effect on the ability of each of UTC and Raytheon to attract or retain key management and other key personnel. Furthermore, UTC expects certain key members of its current management will become employees of the entities holding the

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Otis business and the Carrier business and therefore such persons will no longer be employed by UTC. In addition, no assurance can be given that the Combined Company, after the completion of the Merger, will be able to attract or retain key management personnel and other key employees to the same extent that UTC and Raytheon have previously been able to attract or retain their own employees.

If either of the Distributions, together with certain related transactions, were to fail to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, including as a result of subsequent acquisitions of stock of UTC (including pursuant to the Merger), the Combined Company could be subject to significant tax liabilities.

It is a condition to the Distributions and the Merger that UTC receive (1) a private letter ruling from the IRS regarding certain U.S. federal income tax matters relating to the Separation and the Distributions and (2) an opinion of outside counsel regarding the qualification of certain elements of each of the Distributions under Section 355 of the Internal Revenue Code of 1986, as amended (the Code). Further, it is a condition to each of UTC’s and Raytheon’s obligations to complete the Merger that each of UTC and Raytheon receive an opinion of its respective outside counsel to the effect that (a) the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code and (b) the Merger will not cause Section 355(e) of the Code to apply to either of the Distributions.

Notwithstanding receipt of the IRS private letter ruling and the opinions of counsel regarding the Distributions, the IRS could determine that the Distributions and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the representations, assumptions or undertakings upon which the IRS private letter ruling or the opinions of counsel was based are inaccurate or have not been complied with. In addition, the IRS private letter ruling will not address all of the issues that are relevant to determining whether each of the Distributions, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes. Accordingly, notwithstanding receipt by UTC of the IRS private letter ruling and receipt by UTC and Raytheon of opinions of counsel, there can be no assurance that the IRS will not assert that the Distributions and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes (including by reason of the Merger) or that a court would not sustain such a challenge. In the event the IRS were to prevail with such challenge, the Combined Company could be subject to significant U.S. federal income tax liability.

Risks Related to the Combined Company

Following the Merger, the composition of the board of directors of the Combined Company will be different than the composition of the current Raytheon Board of Directors.

The Raytheon Board of Directors currently consists of 13 directors. Upon completion of the Merger, the board of directors of the Combined Company will consist of 15 directors, including seven independent directors designated by UTC, six independent directors designated by Raytheon and the Chief Executive Officer and the Executive Chairman of the Combined Company.

The Combined Company may be unable to successfully integrate the UTC aerospace businesses and Raytheon and realize the anticipated benefits of the Merger.

The success of the Merger will depend, in part, on the Combined Company’s ability to successfully combine and integrate the UTC aerospace businesses and Raytheon, and realize the anticipated benefits, including synergies, cost savings, innovation and technological opportunities and operational efficiencies from the Merger in a manner that does not materially disrupt existing customer, supplier and employee relations and does not result in decreased revenues due to losses of, or decreases in orders by, customers. If the Combined Company is unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected, and the value of the Combined Company common stock may decline. The Combined Company may fail to realize some or all of the anticipated benefits of the Merger if the integration process takes longer than expected or is more costly than expected.

The integration of the two companies may result in material challenges, including, without limitation:


–	managing a larger, more complex combined aerospace and defense business;


–	maintaining employee morale and retaining key management and other employees;

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–	retaining existing business and operational relationships, including customers, suppliers and employees and other counterparties, as may be impacted by contracts containing consent and/or other provisions that may be triggered by the Merger, and attracting new business and operational relationships;


–	the diversion of management’s attention as a result of the devoting attention to the Merger, and/or the Separation and the Distributions;


–	consolidating corporate and administrative infrastructures and eliminating duplicative operations, including unanticipated issues in integrating information technology, communications and other systems;


–	coordinating geographically separate organizations; and


–	unforeseen expenses or delays associated with the Merger, including the Separation and the Distributions.

Many of these factors will be outside of UTC’s and/or Raytheon’s control, and any one of them could result in delays, increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could materially affect the Combined Company’s financial position, results of operations and cash flows.

In addition, UTC completed its Merger with Rockwell Collins on November 26, 2018, and the integration of the UTC aerospace businesses and Rockwell Collins remains in process. This ongoing integration may increase the complexity of, and challenges associated with, the integration of the UTC aerospace businesses and Raytheon, which may make it more difficult for UTC and Raytheon to achieve the anticipated benefits of the Merger fully or at all, or within the anticipated time frame.

Due to legal restrictions, UTC and Raytheon are currently permitted to conduct only limited planning for the integration of the two companies following the Merger. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized on a timely basis, if at all.

The Combined Company may not be able to engage in desirable capital-raising or strategic transactions following the Merger.

Under current U.S. federal income tax law, a spin-off that otherwise qualifies for tax-free treatment can be rendered taxable to the parent corporation and its stockholders as a result of certain post-spin-off transactions, including certain acquisitions of shares or assets of the parent corporation. To preserve the tax-free treatment of the Distributions, the Combined Company may be limited in its ability to pursue certain equity issuances, strategic transactions, repurchases, or other transactions that it may otherwise believe to be in the best interests of its stockholders or that might increase the value of its business.

Upon completion of the Merger, Raytheon stockholders will have different rights under the Combined Company’s governing documents than they do currently under Raytheon’s governing documents.

Upon completion of the Merger, Raytheon stockholders will no longer be stockholders of Raytheon, but will instead become stockholders of the Combined Company and their rights as stockholders will be governed by the terms of the Combined Company’s certificate of incorporation and amended and restated by-laws. The terms of the Combined Company’s certificate of incorporation and amended and restated by-laws will be in some respects different than the terms of Raytheon’s certificate of incorporation and by-laws, which currently govern the rights of Raytheon stockholders.

The Combined Company’s amended and restated by-laws will designate the state courts within the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by Combined Company stockholders, which could discourage lawsuits against the Combined Company and its directors, officers and employees.

Under the Combined Company’s amended and restated by-laws, unless the Combined Company determines otherwise, a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for:


–	any derivative action or proceeding brought on behalf of the Combined Company;


–	any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Combined Company to the Combined Company or to Combined Company stockholders;

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–	any action asserting a claim against the Combined Company or any director or officer or other employee of the Combined Company arising pursuant to any provision of the Delaware General Corporation Law or the Combined Company’s certificate of incorporation or the amended and restated by-laws (as either may be amended from time to time); or


–	any action asserting a claim against the Combined Company or any director or officer or other employee of the Combined Company governed by the internal affairs doctrine.

To the fullest extent permitted by law, this exclusive forum provision will apply to state and federal law claims, including claims under the federal securities laws, including the Securities Act of 1933, as amended (the Securities Act) and the Securities Exchange Act of 1934, as amended (the Exchange Act), although Combined Company stockholders will not be deemed to have waived the Combined Company’s compliance with the federal securities laws and the rules and regulations thereunder. The enforceability of similar choice of forum provisions in other companies’ bylaws has been challenged in legal proceedings, and it is possible that, in connection with claims arising under federal securities laws or otherwise, a court could find the exclusive forum provision contained in the amended and restated by-laws to be inapplicable or unenforceable.

This exclusive forum provision may limit the ability of Combined Company stockholders to commence litigation in a forum that they prefer, which may discourage such lawsuits against the Combined Company and its current or former directors, officers and employees. Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, the Combined Company may incur additional costs associated with resolving such matters in other jurisdictions, which could negatively affect its business, results of operations and financial condition.

The future results of the Combined Company may be adversely impacted if the Combined Company does not effectively manage its complex operations following the completion of the Merger.

Following the completion of the Merger, the size of the Combined Company’s aerospace and defense business will be significantly larger than the current size of either Raytheon’s business or the UTC aerospace businesses, while at the same time the Otis business and Carrier business will no longer be part of UTC. The Combined Company’s ability to successfully manage this expanded aerospace and defense business while having completed the Distributions will depend, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of the UTC aerospace businesses and Raytheon, including UTC’s continuing integration of the Rockwell Collins business, but also the increased scale and scope of the combined business with its associated increased costs and complexity, and the loss of certain scale and scope through the Distributions. There can be no assurances that the Combined Company will be successful in integrating the businesses or that it will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Merger.

Each of UTC and Raytheon expects to incur substantial expenses related to the completion of the Merger and the integration of the UTC aerospace businesses and Raytheon.

Each of UTC and Raytheon will incur substantial expenses in connection with the completion of the Merger (including, in the case of UTC, with respect to the Separation and the Distributions) to integrate a large number of processes, policies, procedures, operations, technologies and systems of UTC and Raytheon in connection with the Merger. The substantial majority of these costs will be non-recurring expenses related to the transactions and facilities and systems consolidation costs. The Combined Company may incur additional costs or suffer loss of business under third-party contracts that are terminated or that contain change in control or other provisions that may be triggered by the completion of the transactions, and/or losses of, or decreases in orders by, customers, and may also incur costs to retain certain key management personnel and employees. UTC and Raytheon will also incur transaction fees and costs related to formulating integration plans for the Combined Company, and the execution of these plans may lead to additional unanticipated costs and time delays. These incremental transaction-related costs may exceed the savings the Combined Company expects to achieve from the elimination of duplicative costs and the realization of other efficiencies related to the integration of the businesses, particularly in the near term and in the event there are material unanticipated costs. Factors beyond the parties’ control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately.

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The market price of the Combined Company’s common stock after the Merger is completed may be affected by factors different from those affecting the price of UTC common stock or Raytheon common stock before the Merger is completed.

Upon completion of the Merger, holders of Raytheon common stock will be holders of common stock of the Combined Company. As the businesses of UTC and Raytheon are different, the results of operations as well as the price of the Combined Company common stock may, in the future, be affected by factors different from those factors affecting each of UTC and Raytheon as an independent stand-alone company. The Combined Company will face additional risks and uncertainties to which each UTC and Raytheon may currently not be exposed. As a result, the market price of the Combined Company’s shares may fluctuate significantly following completion of the Merger. Additionally, as a result of the Distributions, the market price of shares of the Combined Company’s common stock will generally not be affected by factors relating to the Otis business or the Carrier business.

The market price of the Combined Company’s common stock may decline as a result of the Merger, including as a result of some UTC and/or Raytheon stockholders adjusting their portfolios.

The market price of the Combined Company’s common stock may decline as a result of the Merger if, among other things, the operational cost savings estimates in connection with the integration of the businesses of the UTC aerospace businesses and Raytheon’s businesses are not realized, there are unanticipated negative impacts on UTC’s financial position, results of operations or cash flows from either of the Distributions, or if the transaction costs related to the Merger are greater than expected. The market price also may decline if the Combined Company does not achieve the perceived benefits of the Merger (including the Separation and the Distributions) as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the transactions on the Combined Company’s financial position, results of operations or cash flows is not consistent with the expectations of financial or industry analysts.

In addition, sales of the Combined Company’s common stock after the completion of the transactions may cause the market price of such common stock to decrease. It is estimated that UTC will issue approximately 648 million shares, including share equity awards, of UTC common stock in connection with the Merger, based on the number of outstanding shares, including share equity awards, of Raytheon common stock as of July 11, 2019. Raytheon stockholders may decide not to hold the shares of Combined Company common stock they will receive in the Merger. Certain Raytheon stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of Combined Company common stock that they receive in the Merger. UTC stockholders may decide not to continue to hold their shares of common stock following completion of the Merger and/or the Separation and the Distributions. Certain UTC stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell their shares of common stock following completion of the transactions. Such sales of Combined Company common stock could have the effect of depressing the market price for the Combined Company’s common stock.

Any of these events may make it more difficult for the Combined Company to sell equity or equity-related securities, dilute your ownership interest in the Combined Company and have an adverse impact on the price of the Combined Company’s common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We and our subsidiaries operate in a number of plants, laboratories, warehouses and office facilities in the U.S. and abroad.

As of December 31, ~~2018~~2019 we owned, leased and/or utilized (through operating agreements) approximately 2627 million square feet of floor space for manufacturing, engineering, research, administration, sales and warehousing, 92% of which was located in the U.S. Of such total, 4546% was owned (or held under a long-term ground lease with ownership of the improvements), 5049% was leased, and 5% was government owned. In addition to the 2627 million square feet of floor space described above, ~~131~~67,~~102~~081 square feet of space was leased or subleased by us to unrelated third parties.

There are no major encumbrances on any of our facilities other than financing arrangements, which in the aggregate are not material. In the opinion of management, our properties have been well maintained and are suitable and adequate for us to ~~operate at present levels, and the productive capacity and extent of utilization of the facilities are appropriate for our existing real estate requirements.~~

As ~~of December 31, 2018, our business segments had major operations at the following locations:~~29

– Integrated Defense Systems—Huntsville, AL; Fullerton, CA; San Diego, CA; Andover, MA; Marlboro, MA; Tewksbury, MA; Woburn, MA; Maple Lawn, MD; Portsmouth, RI; Canberra, Australia; Kiel, Germany; Warsaw, Poland; Doha, Qatar; Jeddah, Saudi Arabia; Riyadh, Saudi Arabia; and Abu Dhabi, United Arab Emirates.

– Intelligence, Information and Services—Fullerton, CA; Aurora, CO; Indialantic, FL; Orlando, FL; Palm Bay, FL; Indianapolis, IN; Louisville, KY; Billerica, MA; Burlington, MA; Marlboro, MA; Annapolis Junction, MD; Troy, MI; State College, PA; El Paso, TX; Richardson, TX; Dulles, VA; Herndon, VA; Newport News, VA; Springfield, VA; and Calgary, Canada.

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–operate ~~Missile~~at ~~Systems—Huntsville,~~present ~~AL; East Camden~~levels, ~~AR;~~and ~~Tucson,~~the ~~AZ;~~productive ~~Sacramento,~~capacity ~~CA;~~and ~~Louisville,~~extent ~~KY;~~of ~~Albuquerque,~~utilization ~~NM;~~of ~~Farmington,~~the ~~NM;~~facilities ~~Dallas,~~are ~~TX;~~appropriate ~~Richardson,~~for ~~TX;~~our ~~Midland,~~existing ~~Canada;~~real ~~Harlow,~~estate ~~England; Glenrothes, Scotland; and Abu Dhabi, United Arab Emirates~~requirements.

–As ~~Space~~of ~~and Airborne Systems—El Segundo~~December 31, ~~CA; Goleta~~2019, ~~CA;~~our ~~Sunnyvale,~~business ~~CA;~~segments ~~Largo,~~had ~~FL;~~major ~~Fort~~operations ~~Wayne,~~at ~~IN;~~the ~~Cambridge,~~following ~~MA; Marlboro, MA; Forest, MS; Dallas, TX; and McKinney, TX.~~locations:

– ~~Forcepoint~~Integrated Defense Systems—~~Minneapolis~~Huntsville, MNAL; ~~Austin~~Fullerton, TXCA; ~~Salt~~San ~~Lake~~Diego, ~~City~~CA; Andover, UTMA; ~~Herndon~~Marlborough, VAMA; ~~Sydney~~Tewksbury, ~~Australia~~MA; ~~Beijing~~Woburn, ~~China~~MA; ~~Reading~~Maple Lawn, ~~England~~MD; ~~Helsinki~~Portsmouth, ~~Finland~~RI; ~~Bangalore~~Kiel, ~~India~~Germany; ~~Chennai~~Warsaw, ~~India~~Poland; ~~Dublin~~Doha, ~~Ireland~~Qatar; Jeddah, Saudi Arabia; Riyadh, Saudi Arabia; and ~~Ra’anana~~Abu Dhabi, ~~Israel~~United Arab Emirates.


–	Intelligence, Information and Services—Fullerton, CA; Aurora, CO; Orlando, FL; Palm Bay, FL; Indianapolis, IN; Louisville, KY; Billerica, MA; Burlington, MA; Marlborough, MA; Annapolis Junction, MD; Troy, MI; State College, PA; El Paso, TX; Richardson, TX; Dulles, VA; Herndon, VA; Newport News, VA; Springfield, VA; Canberra, Australia; and Calgary, Canada.


–	Missile Systems—Huntsville, AL; East Camden, AR; Tucson, AZ; Sacramento, CA; Louisville, KY; Albuquerque, NM; Farmington, NM; Dallas, TX; Richardson, TX; Midland, Canada; and Abu Dhabi, United Arab Emirates.


–	Space and Airborne Systems—El Segundo, CA; Goleta, CA; Sunnyvale, CA; Largo, FL; Fort Wayne, IN; Cambridge, MA; Marlborough, MA; Forest, MS; Dallas, TX; McKinney, TX; Harlow, England; and Glenrothes, Scotland.


–	Forcepoint—Boston, MA; Minneapolis, MN; Austin, TX; Salt Lake City, UT; Herndon, VA; Sydney, Australia; Reading, England; Helsinki, Finland; Bangalore, India; Chennai, India; Cork, Ireland; Dublin, Ireland; and Tel Aviv, Israel.


–	Corporate—Billerica, MA; Waltham, MA; Greenville, TX; Richardson, TX; Plano, TX; Arlington, VA; and Dulles, VA.

A summary of the space owned, leased and/or utilized by us as of December 31, ~~2018~~2019, by business segment is as follows:

(In square feet)	Leased	Owned(1)	Government owned(2)	Total(3)
Integrated Defense Systems	1,~~368~~319,~~120~~854	3,~~783~~763,~~049~~632	88,~~506~~616	5,~~239~~172,~~675~~102
Intelligence, Information and Services	4,~~663~~791,~~123~~680	~~536~~495,~~776~~732	~~58,800~~132	5,~~258~~287,~~699~~544
Missile Systems	2,~~960~~808,~~916~~888	2,~~923~~919,~~778~~606	1,~~222~~249,~~012~~597	76,~~106~~978,~~706~~091
Space and Airborne Systems	3,~~172~~196,~~747~~102	4,~~219~~991,~~622~~872	—	78,~~392~~187,~~369~~974
Forcepoint	~~534~~588,~~398~~518	—	—	~~534~~588,~~398~~518
Corporate(4)	~~629~~513,~~677~~873	~~321~~292,~~878~~046	45,~~412~~944	~~955~~811,~~967~~863
Total square feet	13,~~328~~218,~~981~~915	1112,~~785~~462,~~103~~888	1,~~373~~344,~~730~~289	2627,~~487~~026,~~814~~092


(1)	Ownership may include either fee ownership of land and improvements or a long-term ground lease with ownership of improvements.


(2)	“Government owned” means space owned by the U.S. or a foreign government utilized by us pursuant to an operating agreement with the U.S. or a foreign government.

(3) Includes 1618,~~301~~000 square feet of vacant space, but excludes ~~131~~67,~~102~~081 square feet of space leased or subleased to unrelated third parties.


(4)	Includes business development and Raytheon International, Inc.

ITEM 3. LEGAL PROCEEDINGS

We primarily engage in providing products and services under contracts with the U.S. government and, to a lesser degree, under direct foreign sales contracts, some of which the U.S. government funds. As a U.S. government contractor, we are subject to many levels of audit and investigation by the U.S. government relating to our contract performance and compliance with applicable rules and regulations. Agencies that oversee contract performance include: the Defense Contract Audit Agency (DCAA); the Defense Contract Management Agency (DCMA); the Inspectors General of the U.S. Department of Defense (DoD) and other departments and agencies; the Government Accountability Office (GAO); the Department of Justice (DOJ); and Congressional Committees. Other areas of our business operations may also be subject to audit and investigation by these and/or other agencies. From time to time, agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. Such investigations and audits may be initiated due to a number of reasons, including as a result of a whistleblower complaint. Such investigations and audits could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, the suspension of government export licenses or the suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in no adverse action against us. Our final allowable incurred costs for each year are also subject to audit and have, from time to time, resulted in disputes between us and the U.S. government, with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their related courts of appeals. In addition, the DOJ has, from time to time, convened grand juries to investigate possible irregularities by us. We also provide products and services to customers outside of the U.S., and those sales are subject to local government laws, regulations and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and International Traffic in Arms Regulations (ITAR)) may also be investigated or audited. Other than as specifically disclosed in this Form 10-K, we do not expect these audits, investigations or disputes to have a material effect on our financial position, results of operations or liquidity, either individually or in the aggregate.

In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened against us. We do not expect these proceedings to result in any additional liability that would materially affect our financial position, results of operations or liquidity. 30

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regulations and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and International Traffic in Arms Regulations (ITAR)) may also be investigated or audited. Other than as specifically disclosed in this Form 10-K, 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

~~EXECUTIVE~~INFORMATION ~~OFFICERS~~ABOUT OFOUR ~~THE~~EXECUTIVE ~~REGISTRANT~~OFFICERS

Our executive officers are listed below. Each executive officer was elected by our Board of Directors to serve for a term of one year and until his or her successor is elected and qualified or until his or her earlier removal, resignation or death.

Ralph H. Acaba

Mr. Acaba has served as President of the Integrated Defense Systems (IDS) business unit since March 2019 and Vice President of Raytheon Company since August 2017. From August 2017 to March 2019, he was Vice President of Raytheon Program Management. From September 2013 to July 2017, Mr. Acaba was Vice President of the Integrated Air and Missile Defense product line within IDS. Mr. Acaba joined Raytheon in 1986 and has held a series of increasingly senior leadership roles in Raytheon, including director of Patriot Systems and director of Maneuver Protection Programs. Age 56.

Roy Azevedo

Mr. Azevedo has served as Vice President of Raytheon Company and President of the Space and Airborne Systems (SAS) business unit since September 2018. From July 2017 to September 2018, he was Vice President and General Manager of the Intelligence, Surveillance and Reconnaissance Systems product line within SAS. From March 2015 to July 2017, Mr. Azevedo was Vice President and General Manager of the Secure Sensor Solutions product line within SAS. From October 2011 to March 2015, Mr. Azevedo was Vice President of the Advanced Concepts and Technology area within SAS and from August 2009 to October 2011, he was Deputy Vice President and General Manager of the Electronic Warfare Systems product line within SAS. Mr. Azevedo joined Raytheon in 1989 and has held positions of increasing responsibility on a variety of programs ranging from system and test design to advanced technology development and program manager. Age 5859.

Frank R. Jimenez

Mr. Jimenez has served as Vice President and General Counsel since January 2015 and Corporate Secretary since April 2015. Prior to joining Raytheon, Mr. Jimenez served as General Counsel, Secretary and Managing Director, Corporate Affairs of Bunge Limited, a leading global agribusiness and food company, from July 2012 to January 2015. From 2011 to 2012, he served as Senior Vice President, General Counsel and Corporate Secretary at Xylem Inc., a global water technology company spun off from ITT Corporation in 2011. From 2009 to 2011, he served as Vice President and General Counsel of ITT Corporation. From 2006 to 2009, he served as General Counsel of the U.S. Department of the Navy. He previously held a variety of other positions in government, including Deputy General Counsel (Legal Counsel) for the U.S. Department of Defense and Chief of Staff at the U.S. Department of Housing and Urban Development, as well as Deputy Chief of Staff and Acting General Counsel to the Governor of Florida. Age 5455.

Thomas A. Kennedy

Dr. Kennedy has served as Chairman of the Board since October 2014, Chief Executive Officer since April 2014 and a Director since January 2014. From April 2013 to March 2014, he served as Executive Vice President and Chief Operating Officer of Raytheon Company. From June 2010 to March 2013, he served as Vice President of Raytheon Company and President of the Integrated Defense Systems (IDS) business unit. From July 2007 to June 2010, he was Vice President of the Tactical Airborne Systems product line within the Space and Airborne Systems (SAS) business unit, and from May 2003 to July 2007, he was Vice President of the Mission System Integration product line within SAS. Dr. Kennedy joined Raytheon in 1983 and has ~~held positions of increasing responsibility as a new business leader and program manager for several radar and electronic warfare systems development programs. Age 63.~~

~~Wesley~~ ~~D. Kremer~~31

Mr. Kremer has served as President of the Integrated Defense Systems (IDS) business unit since July 2015 and Vice President of Raytheon Company since October 2015. From July 2011 to July 2015, he was Vice President of the Air and Missile Defense Systems product line within the Missile Systems (MS) business unit. From May 2010 to July 2011, Mr. Kremer was Director of the Standard Missile-3 program, and from June 2008 to May 2010, he was Director of Systems Design and Performance Engineering within MS. From December 2006 to June 2008, he was General Manager of the Advanced Products Center within the Space and Airborne Systems (SAS) business unit. Prior to joining Raytheon in 2003, Mr. Kremer served 11 years in the U.S. Air Force as a weapon systems officer. Age 53.

Taylor W. Lawrence

Dr. Lawrence has served as Vice President of Raytheon Company and President of the Missiles Systems (MS) business unit since July 2008. Dr. Lawrence joined Raytheon in April 2006 and until July 2008, he served as Vice President, Engineering, Technology and Mission Assurance. From August 2001 to April 2006, Dr. Lawrence was sector vice president and general manager, C4ISR and Space Sensors Division for Northrop Grumman Electronic Systems. From March 1999 to August 2001, Dr. Lawrence was vice president, Products and Technology for Northrop Grumman’s Systems Development and Technology Division. Before joining Northrop Grumman, Dr. Lawrence served as the staff director for the Select Committee on Intelligence

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~~for~~held ~~the~~positions ~~U.S.~~of ~~Senate~~increasing ~~and,~~responsibility ~~previously,~~ as ~~deputy~~a ~~director,~~new ~~Information~~business ~~Systems~~leader ~~Office~~and ofprogram ~~the~~manager ~~Defense~~for ~~Advanced~~several ~~Research~~radar ~~Projects~~and ~~Agency~~electronic warfare systems development programs. Age 5564.

Wesley D. Kremer

Mr. Kremer has served as President of the Missile Systems (MS) business unit since March 2019 and Vice President of Raytheon Company since October 2015. From July 2015 to March 2019, he was President of the Integrated Defense Systems (IDS) business unit. From July 2011 to July 2015, he was Vice President of the Air and Missile Defense Systems product line within MS. From May 2010 to July 2011, Mr. Kremer was Director of the Standard Missile-3 program, and from June 2008 to May 2010, he was Director of Systems Design and Performance Engineering within MS. From December 2006 to June 2008, he was General Manager of the Advanced Products Center within the Space and Airborne Systems (SAS) business unit. Prior to joining Raytheon in 2003, Mr. Kremer served 11 years in the U.S. Air Force as a weapon systems officer. Age 54.

Randa G. Newsome

Ms. Newsome has served as Vice President of Human Resources and Global Security since January 2015. From April 2013 to December 2014, she was Vice President of Human Resources and Security for Raytheon’s Integrated Defense Systems (IDS) business unit. From December 2008 to April 2013, she was Vice President of Human Resources and Security for the former Technical Services ~~(TS)~~ business unit. From May 2004 to December 2008, Ms. Newsome was Director of Organization Performance and Talent Management for the former Intelligence and Information Systems business unit. Ms. Newsome joined Raytheon in 2001 as a human resources manager for the former Network Centric Systems business unit, after holding various assignments of increasing responsibility at Lockheed Martin Corporation. Age 5354.

Anthony F. O’Brien

Mr. O’Brien has served as Vice President and Chief Financial Officer since March 2015. From March 2008 to March 2015, he was Vice President and Chief Financial Officer of Raytheon’s Integrated Defense Systems (IDS) business unit. Mr. O’Brien joined Raytheon in 1986 and has held numerous finance positions of increasing responsibility with the Company over the course of his 3233-year career, including Vice President of Finance and the senior finance executive responsible for Raytheon Airline Aviation Services and Raytheon’s International Landed Companies, and Chief Financial Officer for Raytheon Aircraft Company. Age 5455.

Rebecca R. Rhoads

Ms. Rhoads has served as Vice President of Raytheon Company and President of Global Business Services (GBS) since December 2013. From April 2001 to December 2013, she was a Vice President and the Chief Information Officer for Raytheon Company. From 1999 to April 2001, she was the Vice President of Information Technology for Raytheon’s former Electronics Systems business unit. Ms. Rhoads began her career with General Dynamics as an electrical engineer in 1979, and worked in Engineering and Operations holding various assignments of increasing responsibility at General Dynamics, Hughes and Raytheon. Age 6162.

David C. Wajsgras

Mr. Wajsgras has served as Vice President of Raytheon Company and President of the Intelligence, Information and Services (IIS) business unit since March 2015. From March 2006 to March 2015, he was Senior Vice President and Chief Financial Officer for Raytheon Company. From August 2005 to March 2006, he was Executive Vice President and Chief Financial Officer of Lear Corporation, an automotive interior systems and components supplier. From January 2002 to August 2005, he served as Senior Vice President and Chief Financial Officer of Lear. Mr. Wajsgras joined Lear in September 1999 as Vice President and Controller. Age 5960.

Michael J. Wood

Mr. Wood has served as Vice President, Controller and Chief Accounting Officer since October 2006. Prior to joining Raytheon, Mr. Wood held positions of increasing responsibility over a 16-year career at KPMG LLP, an accounting firm, including as an Audit Partner serving various aerospace and defense clients. Age 5051.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

At February 1110, ~~2019~~2020, there were 2018,~~149~~800 record holders of our common stock. Our common stock is traded on the New York Stock Exchange under the symbol “RTN.” The information required by Item 5 with respect to securities authorized for issuance under equity compensation plans is contained in Item 12 of this Annual Report on Form 10-K.

Stock Performance Graph

The following chart compares the total return on a cumulative basis of $100 invested in our common stock on December 31, ~~2013~~2014 to the Standard & Poor’s (S&P) 500 Stock Index and the S&P Aerospace & Defense Index.

Total Return To Stockholders (Includes reinvestment of dividends)

	Annual Return PercentageYears Ending
Company/Index	12/31/~~2014~~2015	12/31/~~2015~~2016	12/31/~~2016~~2017	12/31/~~2017~~2018		12/31/~~2018~~2019
Raytheon Common Stock(1)	21.50	18.01	17.18	34.21		(16.51	)
Raytheon Common Stock	18.01	17.18	34.21	(16.51	)	45.53
S&P 500 Index	131.6938	111.3896	1121.9683	21(4.8338	)	(431.3849	)
S&P Aerospace & Defense Index	115.43	518.4390	1841.9038	41(8.3807	)	(830.0733	)

	Indexed ReturnsYears Ending
Company/Index	Base Period 12/31/~~2013~~2014		12/31/~~2014~~2015		12/31/~~2015~~2016		12/31/~~2016~~2017		12/31/~~2017~~2018		12/31/~~2018~~2019
Raytheon Common Stock(1)	$	100	$	121.50	$	143.38	$	168.01	$	225.49	$	188.27
Raytheon Common Stock	$	100	$	118.01	$	138.27	$	185.58	$	154.95	$	225.50
S&P 500 Index	100		~~113~~101.6938		~~115~~113.2651		~~129~~138.0529		~~157~~132.2223		~~150~~173.3386
S&P Aerospace & Defense Index	100		~~111~~105.43		~~117~~125.4936		~~139~~177.7024		~~197~~162.5093		~~181~~212.5635

~~(1)~~ In 2018, we changed our calculation of the Annual Return Percentage from a monthly reinvestment of dividends approach to a daily reinvestment of dividends approach and have recast prior periods to conform to our current period presentation.33

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Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value (in Billions) of Shares that May Yet Be Purchased Under the Plans (2)
October (October 1, 2018–October 28, 2018)	241		$206.08	—	$	1.9
October (September 30, 2019–October 27, 2019)	10		$195.64	—	$	0.7
November (October 29, 2018–November 25, 2018)	1,339,112	179.58		1,337,823	1.7
November (October 28, 2019–November 24, 2019)	928	217.54		—	0.7
December (November 26, 2018–December 31, 2018)	936,757	170.76		935,550	1.5
December (November 25, 2018–December 31, 2019)	674	215.79		—	0.7
Total	21,~~276,110~~612		$~~175~~216.9567	~~2,273,373~~—

(1) ~~Includes~~All ~~shares purchased related to~~ activity ~~under our stock plans. Such activity~~ during the fourth quarter of ~~2018~~2019 ~~includes~~relates to the surrender by employees of 21,~~737~~612 shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

(2) In November 2017, our Board authorized the repurchase of up to $2.0 billion of our outstanding common stock. However, the merger agreement with United Technologies Corporation (UTC) restricts us from repurchasing shares other than to satisfy tax withholding obligations. For more information refer to “Note 2: Proposed Merger with United Technologies Corporation (UTC)” within Item 8 of this Form 10-K.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the information contained in Item 7 of this Form 10-K and the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K, which are incorporated herein by reference, in order to understand the factors that may affect the comparability of the financial data presented below.

FIVE-YEAR STATISTICAL SUMMARY

(In millions, except per share amounts and total employees)	~~2018~~2019			~~2017~~2018			~~2016~~2017			~~2015~~2016			~~2014~~2015
Results of Operations
Total net sales	$	2729,~~058~~176		$	2527,~~348~~058		$	2425,~~124~~348		$	2324,~~321~~124		$	2223,~~826~~321
Operating income(1)	4,538			4,231			3,896			3,721			3,628
Operating income	4,774			4,538			4,231			3,896			3,721
Retirement benefits non-service expense(1)	1,230			913			601			654			449
Retirement benefits non-service expense	688			1,230			913			601			654
Income from continuing operations	23,~~883~~328			12,~~999~~883			21,~~212~~999			2,~~094~~212			2,~~193~~094
Income (loss) from discontinued operations, net of tax	(1		)	2(1		)	12			131			6513
Net income attributable to Raytheon Company	23,~~909~~343			2,~~024~~909			2,~~244~~024			2,~~110~~244			2,~~244~~110
Diluted earnings per share from continuing operations attributable to Raytheon Company common stockholders	$	1011.1592		$	610.9415		$	76.5594		$	67.8755		$	6.9787
Diluted earnings per share attributable to Raytheon Company common stockholders	$	1011.1593		$	610.9515		$	76.5595		$	67.9155		$	76.1891
Average diluted shares outstanding	~~286~~280.82			~~291~~286.48			~~296~~291.84			~~305~~296.28			~~312~~305.62
Financial Position at Year-End
Cash and cash equivalents	$	34,~~608~~292		$	3,~~103~~608		$	3,~~303~~103		$	23,~~328~~303		$	32,~~222~~328
Short-term investments	—			~~297~~—			~~100~~297			~~872~~100			~~1,497~~872
Total current assets	12,136			11,326			10,885			10,023			10,279
Total current assets(1)	13,082			12,137			11,319			10,885			10,023
Property, plant and equipment, net	23,~~840~~353			2,~~439~~840			2,~~166~~439			2,~~005~~166			12,~~935~~005
Total assets	31,864			30,860			30,238			29,477			27,716
Total assets(1)	34,566			32,670			31,675			30,238			29,477
Total current liabilities	8,288			7,348			6,539			6,275			5,752
Total current liabilities(1)	9,791			8,463			7,515			6,539			6,275
Long-term liabilities (excluding debt)	6,938			8,287			7,758			7,134			6,918
Long-term liabilities (excluding debt and operating lease liabilities)(1)	8,553			6,922			8,267			7,758			7,134
Long-term debt	43,~~755~~261			4,~~750~~755			54,~~335~~750			5,~~330~~335			5,~~325~~330
Redeemable noncontrolling interest	~~411~~32			~~512~~411			~~449~~512			~~355~~449			—355
Total equity	1112,~~472~~223			911,~~963~~472			109,~~157~~963			10,~~383~~157			910,~~721~~383
Cash Flow and Other Information
Net cash provided by (used in) operating activities from continuing operations	$	34,~~428~~482		$	23,~~747~~428		$	2,~~852~~747		$	2,~~346~~852		$	2,~~064~~346
Net cash provided by (used in) investing activities	(521		)	(817		)	53			(1,744		)	(1,322		)
Net cash provided by (used in) investing activities from continuing operations	(1,006		)	(521		)	(817		)	53			(1,744		)
Net cash provided by (used in) financing activities	(2,~~398~~803		)	(2,~~116~~398		)	(12,~~930~~116		)	(1,~~509~~930		)	(~~936~~1,509		)
Bookings	3236,~~162~~340			2732,~~718~~162			27,~~809~~718			2527,~~145~~809			2425,~~052~~145
Total backlog at year-end	4248,~~420~~752			3842,~~210~~420			3638,~~709~~210			3336,~~839~~709			33,~~571~~839
Dividends declared per share	$	3.4777		$	3.1947		$	23.9319		$	2.6893		$	2.4268
Total employees at year-end	6770,000			6467,000			6364,000			6163,000			61,000

(1) Amounts prior to 2017 do not reflect the impact of the adoption of Accounting Standards Update (ASU) ~~2017~~2016-0702, ~~Compensation~~Leases ~~- Retirement Benefits~~ (Topic ~~715~~842):, ~~Improving~~in the ~~Presentation~~first quarter of ~~Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~2019, inusing the ~~first~~modified ~~quarter~~retrospective ~~of 2018~~approach. See “Note 1: Summary of Significant Accounting Policies” within Item 8 of this Form 10-K for additional information.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Topic	Page
Overview	2936
Financial Summary	3239
Critical Accounting Estimates	3239
Accounting Standards	4047
Consolidated Results of Operations	4047
Segment Results	4855
Financial Condition and Liquidity	6472
Capital Resources	6875
Contractual Obligations	6976
Off-Balance Sheet Arrangements	6977
Commitments and Contingencies	7077

OVERVIEW

Introduction

Raytheon Company develops technologically advanced and integrated products, services and solutions in our core markets: integrated air and missile defense; electronic warfare; command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance; space systems; effects; and cyber. We serve both domestic and international customers primarily as a prime contractor or subcontractor on a broad portfolio of defense and related programs for government customers.

We operate in five segments: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint. For a more detailed description of our segments, see “Business Segments” within Item 1 of this Form 10-K.

As previously announced, effective January 1, ~~2018~~2019, we adopted the requirements of Accounting Standards Update (ASU) ~~2017~~2016-0702, ~~Compensation~~Leases ~~- Retirement Benefits~~ (Topic ~~715~~842): ~~Improving~~using the ~~Presentation~~modified ~~of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost on a~~ retrospective ~~basis~~approach as discussed in “Note 1: Summary of Significant Accounting Policies” within Item 8 of this Form 10-K. ~~All~~We ~~amounts~~reclassified ~~and~~certain ~~disclosures~~balance ~~set~~sheet ~~forth~~amounts into ~~this~~conform ~~Form~~to ~~10-K~~our ~~reflect~~current ~~these~~period ~~changes~~presentation.

On June 9, 2019, Raytheon and United Technologies Corporation (UTC) entered into an agreement to combine in an all-stock merger of equals. The merger is targeted to close early in the second quarter of 2020, subject to and following completion by UTC of the separations and distributions of its Otis and Carrier businesses. Under the terms of the agreement, Raytheon stockholders will receive 2.3348 shares of UTC common stock for each Raytheon share. The agreement provides that upon completion of the merger, UTC stockholders will own approximately 57% and Raytheon stockholders will own approximately 43% of the outstanding shares of common stock of UTC. In addition, the agreement generally restricts certain actions by both Raytheon and UTC. The merger was approved by Raytheon's stockholders at a special meeting of Raytheon held on October 11, 2019, and was approved by UTC stockholders at a special meeting of UTC held on October 11, 2019. For additional information refer to “Note 2: Proposed Merger with United Technologies Corporation (UTC)” within Item 8 of this Form 10-K.

Business Environment

Domestic Considerations

U.S. government sales, excluding foreign military sales, accounted for 6869% of our total net sales in ~~2018~~2019. Our principal U.S. government customer is the U.S. Department of Defense (DoD).

~~DoD~~ funding levels, which are subject to budget and appropriation decisions and processes, are difficult to predict beyond the near-term. The Budget Control Act of 2011 (BCA) imposed spending caps on DoD funding for fiscal years (FY) 2012 to 2021, but the caps have been consistently raised since FY 2013, most recently by the Bipartisan Budget Act (BBA) of 2015 for FY 2016 and 2017 and the BBA of 2018 for FY 2018 and FY 2019. DoD modernization funding, which consists of procurement and research and development, is of particular importance to defense contractors. DoD modernization funding has steadily increased since FY 2015, including for FY 2019, as a result of the BBA of 2015 and the BBA of 2018. However, DoD funding levels for FY 2020 and FY 2021 remain governed by the BCA. While we expect changes to those funding caps, future DoD spending levels are uncertain and would require the agreement and action of both Congress and the President.36

In addition to the DoD budget considerations discussed above, future domestic defense spending levels are impacted by a number of additional factors, including external threats to our national security, funding for on-going counter insurgency/counter terrorism operations overseas, the priorities of the Administration and Congress, overall health of the U.S. and world economies, and the state of governmental finances. However, we also continue to expect the DoD to continue to prioritize

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~~and~~DoD ~~protect~~funding ~~the~~levels, ~~key~~which ~~capabilities~~are ~~required~~subject to ~~execute~~budget ~~its~~and ~~National~~appropriation ~~Defense~~decisions ~~Strategy~~and processes, ~~including~~are ~~being~~difficult ~~able~~ to ~~deter~~predict ~~and~~beyond ~~defeat~~the ~~peer~~near-term. ~~nation~~The ~~threats.~~Budget ~~Such~~Control ~~capabilities~~Act ~~include~~of ~~Intelligence,~~2011 ~~Surveillance~~(BCA) ~~and~~imposed ~~Reconnaissance~~spending caps on DoD funding for fiscal years (~~ISR~~FY), ~~cybersecurity~~2012 to 2021, ~~missile~~however ~~defense~~the caps have been raised each year since FY 2013, ~~electronic~~most ~~warfare~~recently by the Bipartisan Budget Act (BBA) of 2019 for FY 2020 and FY 2021. DoD modernization funding, ~~kinetic~~which consists of procurement and ~~non-kinetic~~research ~~effectors~~and development, ~~undersea~~is ~~warfare~~of particular importance to defense contractors. DoD modernization funding has steadily increased since FY 2015, ~~space~~including ~~systems~~for FY 2020, ~~unmanned~~as ~~systems~~a result of the BBA of 2015, ~~special~~the ~~operations~~BBA ~~forces~~of 2018, and ~~interoperability~~the ~~with~~BBA ~~allied~~of ~~forces~~2019. WeHowever, ~~believe~~future ~~those~~DoD ~~priorities~~spending levels are ~~well~~uncertain ~~aligned~~given ~~with~~the ~~our~~lapse ~~product~~in ~~offerings,~~the ~~technologies,~~BCA ~~services~~after FY 2021 and ~~capabilities~~will require the agreement and action of both Congress and the President.

WeIn ~~currently~~addition ~~are~~to ~~involved~~the inDoD ~~tens~~budget ofconsiderations ~~thousands~~discussed above, future domestic defense spending levels are impacted by a number of ~~contracts~~additional factors, ~~with~~including noexternal ~~single~~threats ~~contract~~to ~~accounting~~U.S. national security, funding for ~~more~~on-going ~~than~~counter 5%insurgency/counter terrorism operations overseas, the priorities of ~~our~~the ~~total~~Administration ~~net~~and ~~sales~~Congress, inoverall ~~2018~~health of the U.S. ~~Although~~and weworld ~~believe~~economies, ~~our~~and ~~diverse~~the ~~portfolio~~state of ~~programs~~governmental finances. However, we expect the DoD to continue to prioritize and ~~capabilities~~protect isthe ~~well~~key ~~suited~~capabilities required to aexecute ~~changing~~its ~~defense~~National ~~environment~~Defense Strategy, weincluding ~~face~~being ~~numerous~~able ~~challenges~~to deter and ~~risks,~~defeat aspeer ~~discussed~~nation ~~above~~threats. ~~For~~Such ~~more~~capabilities ~~information~~include onIntelligence, ~~the~~Surveillance ~~risks~~and Reconnaissance (ISR), cybersecurity, missile defense, electronic warfare, kinetic and ~~uncertainties~~non-kinetic ~~that~~effectors, ~~could~~undersea ~~impact~~warfare, ~~the~~space ~~U.S.~~systems, ~~government’s~~unmanned ~~demand~~systems, ~~for~~special ~~our~~operations ~~products~~forces and ~~services,~~interoperability ~~see~~with ~~Item 1A~~allied offorces. ~~this~~We ~~Form~~believe ~~10-K~~those priorities are well aligned with our product offerings, technologies, services and capabilities.

We currently are involved in tens of thousands of contracts, with no single contract accounting for more than 5% of our total net sales in 2019. Although we believe our diverse portfolio of programs and capabilities is well suited to a changing defense environment, we face numerous challenges and risks, as discussed above. For more information on the risks and uncertainties that could impact the U.S. government’s demand for our products and services, see Item 1A of this Form 10-K.

International Considerations

In ~~2018~~2019, our sales to customers outside of the U.S. accounted for 3029% of our total net sales (including foreign military sales through the U.S. government). Internationally, the growing threat of additional terrorist activity, cyber threats, emerging nuclear states, long-range missiles and conventional military threats have led to an increase in demand for defense systems and services and other security solutions. In Asia, both short- and long-term regional security concerns are increasing demand for air and missile defense, air/naval modernization and maritime security. In the Middle East and North Africa (MENA), threats from state and non-state actors are increasing demand for air and missile defense (including counter-unmanned aerial vehicle (UAV) systems), air/land/naval force modernization, precision engagement, ISR, maritime and border security, and cybersecurity solutions. Given such threat environments, we expect our MENA customers to continue to prioritize security investments even if their budgets are impacted by volatile short-term energy prices. In Europe, some countries have begun to increase spending in response to geopolitical events and conflicts in Eastern Europe and the resulting uncertainty in the security threat environment. Based on ~~the~~these ~~foregoing~~factors, we expect that European nations will continue to seek advanced air and missile defense and other capabilities, including ISR and cyber. Overall, we believe many international defense budgets have the potential to grow ~~and to do so~~ at a faster rate than the U.S. defense budget. However, international demand is sensitive to changes in the priorities and budgets of international customers and geopolitical uncertainties, which may be driven by changes in threat environments, volatility in worldwide economic conditions, regional and local economic and political factors, U.S. foreign policy and other risks and uncertainties. For more information on the risks and uncertainties that could impact international demand for and our ability to sell our products and services, see Item 1A of this Form 10-K.

Because of the breadth of our offerings, our systems integration capability, the value of our solutions and our strong legacy in the international marketplace, we believe that we are well positioned to continue to grow our international business. We continue to enhance our focus on global growth through increased investment in our international business in existing and new international markets. Such investment provides additional resources and capabilities, both in-country and in the U.S., that strengthen the Company’s position to pursue both existing and new opportunities. We also continue to adjust our international business activities to address customer priorities. Although we believe our international business is well positioned to continue to grow, we recognize that we face substantial competition from both U.S. companies and other competitors in international markets, as well as the challenges of changing budget priorities, overall spending pressures, geopolitical uncertainties and the timing of contract awards.

(In millions)	2018		2017		2016
International sales(1)	$	8,105	$	8,085	$	7,616
International bookings	9,850		8,479		8,193

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(In millions)	2019		2018		2017
International sales⁽¹⁾	$	8,582	$	8,105	$	8,085
International bookings	10,352		9,850		8,479


(1)	Includes foreign military sales through the U.S. government.

Our Strategy

The following are the broad elements of our strategy:


–	Build upon our areas of strength within our key mission areas;


–	Focus additional resources on emerging opportunities within the DoD market;


–	Extend Raytheon’s advanced cyber solutions beyond the U.S. government into international and commercial markets; and


–	Engage key countries as individual markets with multiple customers.

We 30believe that our broad mix of technologies, domain expertise and key capabilities, our cost-effective, best-value solutions and the alignment of these strengths with customer needs position us favorably to grow in our key mission areas of: integrated air and missile defense; electronic warfare; command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance; space systems; effects; and cyber. Globally, customers are increasingly seeking cost-effective mission solutions. These solutions can take the form of new electronics or electronic upgrades, but draw on our market focus area capabilities, deep domain expertise and system architecture skills. We continue to explore opportunities to make these affordable solutions more readily available to our international customers, including through enhanced design for export and releasability. We also continue to make investments to support our strategy, including through acquisitions and research and development. We seek to continuously innovate and refresh technology in our current franchises—advanced solution sets for which we expect longer-term customer demand, such as our Patriot Air and Missile Defense (A&MD) system, Air and Missile Defense Radar (AMDR), and Lower Tier Air and Missile Defense Sensor (LTAMDS)—and we use the related expertise to work to create new franchises and expand internationally. Moreover, we expect to continue to expand our customer base in key countries.

~~Table~~We provide cyber capabilities to government customers, including the Intelligence Community, the DoD, the Department of ~~Contents~~Homeland Security (DHS), and other defense and civil global customers, as well as embed information assurance capabilities in our products and our information technology infrastructure. We believe cyber markets continue to represent strong growth markets for Raytheon. We expect to continue to seek opportunities to leverage our extensive cyber capabilities and to grow and scale our cyber businesses.

We believe that our broad mix of technologies, domain expertise and key capabilities, our cost-effective, best-value solutions and the alignment of these strengths with customer needs position us favorably to grow in our key mission areas of: integrated air and missile defense; electronic warfare; command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance; space systems; effects; and cyber. Globally, customers are increasingly seeking cost-effective mission solutions. These solutions can take the form of new electronics or electronic upgrades, but draw on our market focus area capabilities, deep domain expertise and system architecture skills. We continue to explore opportunities to make these affordable solutions more readily available to our international customers, including through enhanced design for export and releasability. We also continue to make investments to support our strategy, including through acquisitions and research and development. We seek to continuously innovate and refresh technology in our current franchises—advanced solution sets for which we expect longer-term customer demand, such as our Patriot Air and Missile Defense (A&MD) system, Air and Missile Defense Radar (AMDR), and Advanced Medium-Range Air-to-Air Missile (AMRAAM)—and we use the related expertise to work to create new franchises and expand internationally. Moreover, we expect to continue to expand our customer base in key countries.

We provide cyber capabilities to government customers, including the Intelligence Community, the DoD, the Department of Homeland Security (DHS), and other defense and civil global customers, as well as embed information assurance capabilities in our products and our information technology infrastructure. We also deliver “defense-grade” cybersecurity solutions to commercial markets worldwide through Forcepoint, our commercial cybersecurity joint venture with Vista Equity Partners. We believe the commercial and global government cyber markets continue to represent strong growth markets for Raytheon. We expect to continue to seek opportunities to leverage our extensive cyber capabilities and to grow and scale our cyber businesses.

For more information on the Forcepoint joint venture transaction, see Item 1 and “Note 11: Forcepoint Joint Venture” within Item 8 of this Form 10-K.

Focus on the Customer and Execution

Our customer focus continues to be critical to the execution of our strategy—underpinned by a focus on performance, relationships and solutions. Performance means being able to meet customer commitments, which is ensured through strong processes, metrics and oversight. We maintain a “process architecture” that spans our defense businesses and our broad programs and pursuits. It consists of ~~enterprise-wide~~enterprisewide processes and systems such as: our Integrated Product Development System (IPDS), which assures consistency of evaluation and execution at each step in a program’s life-cycle; Product Data Management (PDM), which is our business system software for engineering; Achieving Process Excellence (APEX), which is our SAP business system software for accounting, finance and program management; Process Re-Invention Integrating Systems for Manufacturing (PRISM), which is our SAP software for manufacturing operations; Advanced Company Estimating System (ACES), which is our cost proposal system; and Raytheon Enterprise Supplier Assessment (RESA) tool for Supply Chain Management. These processes and systems are linked to an array of front-end and back-end metrics. With this structure, we are able to track results and be alerted to potential issues through numerous oversight mechanisms, including operating reviews and annual operating plan reviews.

We are also continuing to build strong customer relationships by working with customers as partners and including them on Raytheon Six Sigma™ teams to jointly improve their programs and processes. We are increasingly focused on responding to our customers’ changing requirements with rapid and effective solutions to real-world problems. In recognition of our customers’ constraints and priorities, we also continue to drive various cost reductions across the Company by continuing to focus on enterprise collaboration and improving productivity and strong execution throughout our programs. We have worked to reduce costs across the Company and improve efficiencies in our production facilities, and we continue to increase value through Raytheon Six Sigma, the implementation of lean processes, reduced cycle times and strategic supply chain initiatives, in addition to other initiatives. To further increase efficiencies, we are also developing and applying new technologies to our development and production solutions. These technologies include additive manufacturing (AM) for rapid prototyping and novel product realization, and data analytics and machine learning to optimize production and product test.

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in addition to other initiatives. To further increase efficiencies, we are also developing and applying new technologies to our development and production solutions. These technologies include additive manufacturing (AM) for rapid prototyping and novel product realization, and data analytics and machine learning to optimize production and product test.

FINANCIAL SUMMARY

We use the following key financial performance measures to manage our business on a consolidated basis and by business segment, and to monitor and assess our results of operations:


–	Bookings—a forward-looking metric that measures the value of firm orders awarded to us during the year;


–	Net Sales—a growth metric that measures our revenue for the current year;


–	Operating Income—a measure of our profit from continuing operations for the year, before non-operating expenses, net and taxes; and


–	Operating Margin—a measure of our operating income as a percentage of total net sales.

(In millions, except percentages)	~~2018~~2019			~~2017~~2018			~~2016~~2017
Bookings	$	3236,~~162~~340		$	2732,~~718~~162		$	27,~~809~~718
Total backlog	4248,~~420~~752			3842,~~210~~420			3638,~~709~~210
Total net sales	2729,~~058~~176			2527,~~348~~058			2425,~~124~~348
Total operating income(1)	4,~~538~~774			4,~~231~~538			34,~~896~~231
Total operating margin(1)	16.84		%	16.78		%	16.17		%
Operating cash flow from continuing operations	$	34,~~428~~482		$	23,~~747~~428		$	2,~~852~~747

(1) Includes the impact of the FAS/CAS Operating Adjustment, described below in Critical Accounting Estimates, of $1,~~428~~454 million, $1,~~303~~428 million and $1,~~036~~303 million of income in ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017, respectively.

Backlog, which is equivalent to our remaining performance obligations, represents the dollar value of firm orders for which work has not been performed. Backlog generally increases with bookings and generally converts into sales as we incur costs under the related contractual commitments. Therefore, we discuss changes in backlog, including any individually significant cancellations, for each of our segments, as we believe such discussion provides an understanding of the awarded but not executed portions of our contracts. Backlog excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ)). Backlog is affected by changes in foreign exchange rates.

In addition, we maintain a strong focus on program execution and the prudent management of capital and investments in order to maximize operating income and cash. We ~~pursue~~focus aon ~~capital~~earnings ~~deployment~~per ~~strategy~~share ~~that~~(EPS) ~~balances~~and ~~funding~~measures ~~for~~to ~~growing~~assess our ~~business,~~cash ~~including:~~generation ~~(1)~~and ~~capital~~the ~~expenditures,~~efficiency ~~acquisitions~~ and ~~research~~effectiveness ~~and~~of ~~development;~~our ~~(2)~~use ~~prudently~~of ~~managing~~capital, ~~our~~such ~~balance~~as ~~sheet,~~free ~~including~~cash ~~debt~~flow ~~repayments~~(FCF) and ~~pension~~return ~~contributions;~~on ~~and~~invested capital (3ROIC), ~~returning~~both ~~cash~~of towhich ~~our~~are ~~shareholders,~~not ~~including~~defined ~~dividend~~measurements ~~payments~~under U.S. Generally Accepted Accounting Principles (GAAP) and ~~share~~may ~~repurchases~~be calculated differently by other companies.

We also focus on earnings per share (EPS) and measures to assess our cash generation and the efficiency and effectiveness of our use of capital, such as free cash flow (FCF) and return on invested capital (ROIC), both of which are not defined measurements under U.S. Generally Accepted Accounting Principles (GAAP) and may be calculated differently by other companies.

Considered together, we believe these metrics are strong indicators of our overall performance and our ability to create shareholder value. We feel these measures are balanced among long-term and short-term performance, efficiency and growth. We also use these and other performance metrics for executive compensation purposes.

A discussion of our results of operations and financial condition follows below in Consolidated Results of Operations, Segment Results, Financial Condition and Liquidity, and Capital Resources.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are based on the application of U.S. GAAP, which ~~require~~requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our consolidated financial statements. We believe the estimates set forth below may involve a higher degree of judgment and complexity in their application than our other accounting estimates and represent the critical accounting estimates used in the preparation of our consolidated financial statements. We believe our judgments related to these accounting estimates are appropriate. However, if different assumptions or conditions were to prevail, the results could be materially different from the amounts recorded.

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Revenue Recognition

We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer. We classify contract revenues as product or service according to the predominant attributes of the relevant underlying contracts unless the contract can clearly be split between product and service. We define service revenue as revenue from activities that are not associated with the design, development or production of tangible assets, the delivery of software code or ~~a specific~~ capability design. Our service revenue is primarily related to our IIS business segment.

The following provides additional information about our contracts with customers, the judgments we make in accounting for those contracts, and the resulting amounts recognized in our financial statements.

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

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

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

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

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

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

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

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

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Net EAC adjustments had the following impact on our operating results:

(In millions, except per share amounts)	~~2018~~2019(1)		~~2017~~2018(1)		~~2016~~2017
Operating income	$	~~492~~520	$	~~442~~492	$	~~418~~442
Income from continuing operations attributable to Raytheon Company	~~389~~411		~~287~~389		~~283~~287
Diluted EPS from continuing operations attributable to Raytheon Company	$	1.3647	$	01.9836	$	0.9598

(1) ~~2018~~Amounts ~~amounts~~ reflect a U.S. statutory tax rate of 21%, which became effective in 2018 with the adoption of the Tax Cuts and Jobs Act of 2017 (2017 Act).

Pension and Other Postretirement Benefits (PRB) Costs

We have pension plans covering the majority of our employees hired prior to January 1, 2007, including certain employees in foreign countries (Pension Benefits). We must apply both Financial Accounting Standards (FAS) requirements under U.S. GAAP and Cost Accounting Standards (CAS) requirements. U.S. GAAP outlines the methodology used to determine net periodic pension and PRB expense or income for financial reporting purposes (FAS expense). CAS prescribes the allocation to and recovery of pension and PRB costs on U.S. government contracts (CAS expense). The CAS requirements for pension and PRB costs and its calculation methodology differ from the FAS requirements and calculation methodology. As a result, while both CAS and FAS calculation methodologies use long-term assumptions requiring judgment, each method results in different calculated amounts of pension and PRB cost. In addition, we are subject to the funding requirements under the Pension Protection Act of 2006 (PPA), which amended the Employee Retirement Income Security Act of 1974 (ERISA). Under the PPA, we are required to fully fund our pension plans over a rolling seven-year period as determined annually based upon the PPA calculated funded status at the beginning of each year. The funding requirements are primarily based on the year’s expected service cost and amortization of other previously unfunded liabilities. Due to the differences in requirements and calculation methodologies, our FAS expense is not indicative of the PPA funding requirements.

The results of each segment only include pension and PRB expense as determined under CAS. Our FAS expense is split between operating income and non-operating income where only the service cost component of FAS expense is included in operating income. The difference between our CAS expense and the service cost component of our FAS expense is the FAS/CAS Operating Adjustment and is reported as a separate line in our segment results. The FAS/CAS Operating Adjustment effectively decreases the amount of pension expense in operating income so that such amount is equal to the service cost component of FAS expense under U.S. GAAP. The FAS/CAS Operating Adjustment was $1,~~428~~454 million, $1,~~303~~428 million and $1,~~036~~303 million of income in ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017, respectively. The non-service related components of FAS expense are included in retirement benefits non-service expense in non-operating (income) expense, net and were $~~1,230~~688 million, $~~913~~1,230 million and $~~601~~913 million in ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017, respectively.

On December 27, 2011, the CAS Pension Harmonization Rule (CAS Harmonization) was published in the Federal Register. The rule was intended to improve the alignment of the pension cost recovered through contract pricing under CAS and the pension funding requirements under the PPA. The rule shortened the CAS amortization period for gains and losses from 15 to 10 years and requires the use of a discount rate based on high quality corporate bonds, consistent with PPA, to measure liabilities in determining the CAS pension expense. CAS Harmonization increased pension costs under CAS starting in 2014 due to the transition phase in of 0% in 2013, 25% in 2014, 50% in 2015, 75% in 2016 and 100% in 2017 and beyond.

Due to the low interest rate environment, Congress provided for temporary pension funding relief through a provision in the Surface Transportation Extension Act of 2012 (STE Act). The provision was extended through 2020 by the Highway and Transportation Funding Act of 2014 (HATFA) and the Bipartisan Budget Act (BBA) of 2015. The provision adjusts the 24-month average high quality corporate bond rates used to determine the PPA funded status so that they are within a floor and cap, or “corridor,” based on the 25-year average of corporate bond rates. Beginning after 2020, the provision will be gradually phased out. This provision impacts CAS expense as well because CAS Harmonization incorporates the PPA interest rate into CAS calculations. The BBA of 2015 also increases the insurance premiums that we are required to pay the Pension Benefit Guarantee Corporation (PBGC). However, we do not expect the increases to have a material effect on our financial position, results of operations or liquidity.

The assumptions in the calculations of our pension FAS expense and CAS expense, which involve significant judgment, are described below.

FAS 35Expense—Our long-term return on plan assets (ROA) and discount rate assumptions are the key variables in determining the net periodic benefit cost and the pension benefit obligation of our pension plans under U.S. GAAP. Our long-term ROA

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FAS Expense—Our long-term return on plan assets (ROA) and discount rate assumptions are the key variables in determining the net periodic benefit cost and the pension benefit obligation of our pension plans under U.S. GAAP. Our long-term ROA assumption only impacts the retirement benefits non-service expense. The discount rate assumption impacts the service cost component of FAS expense and retirement benefits non-service expense, while also impacting the pension benefit obligation.

The long-term ROA represents the average rate of earnings expected over the long term on the assets invested to provide for anticipated future benefit payment obligations. The long-term ROA used to calculate net periodic pension cost is set annually at the beginning of each year. Given the long-term nature of the ROA assumption, which we believe should not be solely reactive to short-term market conditions that may not persist, we expect the long-term ROA to remain unchanged unless there are significant changes in our investment strategy, the underlying economic assumptions or other major factors.

To establish our long-term ROA assumption we employ a “building block” approach. Under this building block method, the overall expected investment return equals the weighted-average of the individual expected return for each asset class based on the target asset allocation and the long-term capital market assumptions. The expected return for each asset class is composed of inflation plus a risk-free rate of return, plus an expected risk premium for that asset class. The resulting return is then adjusted for administrative, investment management and trading expenses as well as recognition of excess returns, also known as alpha, for active management. We then annually consider whether it is appropriate to change our long-term ROA assumption by reviewing the existing assumption against a statistically determined reasonable range of outcomes. The building block approach and the reasonable range of outcomes are based upon our asset allocation assumptions and long-term capital market assumptions. Such assumptions incorporate the economic outlook for various asset classes over short- and long-term periods and also take into consideration other factors, including historical market performance, inflation and interest rates.

Actuarial Standard of Practice No. 27, Selection of Economic Assumptions for Measuring Pension Obligations (ASOP 27) requires the selection of a reasonable long-term ROA assumption that considers multiple criteria including the purposes of measurement, the actuary’s professional judgment, historical and current economic data and estimates of future experience and has no significant bias. We evaluate our long-term ROA assumption against a reasonable range of possible outcomes which we define as between the 35th to 65th percentile likelihood of achieving a long-term return over future years. We believe that validating our ROA assumption within this reasonable range ensures an unbiased result while also ensuring that the ROA assumption is not solely reactive to short-term market conditions that may not persist, and is consistent with external actuarial practices.

The reasonable range of long-term returns that was used to validate the long-term ROA assumption for the calculation of the net periodic benefit cost for ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017 is shown below.

Percentile	~~2018~~2019		~~2017~~2018		~~2016~~2017
35th	5.49	%	5.8267	%	65.0982	%
65th	7.57	%	7.9681	%	87.1696	%

2016 ROA Assumption—The long-term domestic ROA of 8.0% fell between the 60th and 65th percentiles of the applicable reasonable range for 2016. The 50th percentile of this reasonable range was 7.12%.

2017 ROA Assumption—At year end 2016, we determined that the 8.0% long-term ROA assumption no longer fell within the range of reasonable outcomes, driven primarily by the current outlook on economic assumptions used to develop the reasonable range. As a result, we employed the building block approach described above to develop our 2017 long-term ROA assumption. The building block approach resulted in a long-term ROA assumption of 7.5% for 2017. To validate this assumption, we compared the result against the reasonable range of outcomes and confirmed that the 7.5% fell between the 55th and 60th percentile of the reasonable range for 2017 with the 50th percentile at 6.89%.

Based upon our application of the building block approach and our review of the resulting assumption against the 35th to 65th percentile reasonable range and an analysis of our historical results, we established a 2017 long-term ROA domestic assumption of 7.5% for purposes of determining the net periodic benefit cost for 2017 and determined that the assumption is reasonable and consistent with the provisions of ASOP 27.

2018 ROA Assumption—The long-term domestic ROA of 7.5% fell between the 60th and 65th percentiles of the applicable reasonable range for 2018. The 50th percentile of this reasonable range was 6.74%.

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2019 ROA Assumption—The long-term domestic ROA of 7.5% fell between the 60th and 65th percentiles of the applicable reasonable range for 2019. The 50th percentile of this reasonable range was 6.53%.

~~Once~~ our long-term ROA has been determined to be within the 35th to 65th percentile range of results, we review historical averages and patterns of returns to confirm the reasonableness of our long-term ROA assumption compared to past results. While history is not solely indicative of future market expectations, it does provide insight into general historical trends and long-term asset performance. Our average annual actual rate of return from 1986 to 2018 of 8.59%, determined on an arithmetic basis, exceeds our estimated 7.5% assumed return. Arithmetic annual averages represent the simple average returns over independent annual periods, whereas geometric returns reflect the compound average returns of dependent annual periods. The average annual actual return on a geometric basis for the same period was 7.94%. In addition, the actual annual returns have exceeded our long-term ROA assumption of 7.5% in five of the past ten years.43

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2020 ROA Assumption—At year end 2019, we determined that the 7.5% long-term ROA assumption no longer fell within the range of reasonable outcomes, driven primarily by the current outlook on economic assumptions used to develop the reasonable range. As a result, we employed the building block approach described above to develop our 2020 long-term ROA assumption. The building block approach resulted in a long-term ROA assumption of 7.0% for 2020. To validate this assumption, we compared the result against the reasonable range of outcomes and confirmed that the 7.0% fell between the 60th and 65th percentile of the reasonable range for 2020 with the 50th percentile at 6.31%.

Once our long-term ROA has been determined to be within the 35th to 65th percentile range of results, we review historical averages and patterns of returns to confirm the reasonableness of our long-term ROA assumption compared to past results. While history is not solely indicative of future market expectations, it does provide insight into general historical trends and long-term asset performance. Our average annual actual rate of return from 1986 to 2019 of 8.89%, determined on an arithmetic basis, exceeds our estimated 7.0% assumed return. Arithmetic annual averages represent the simple average returns over independent annual periods, whereas geometric returns reflect the compound average returns of dependent annual periods. The average annual actual return on a geometric basis for the same period was 8.25%. In addition, the actual annual returns have exceeded our long-term ROA assumption of 7.0% in five of the past ten years.

Based upon our application of the building block approach and our review of the resulting assumption against the 35th to 65th percentile reasonable range and an analysis of our historical results, we established a 2020 long-term ROA domestic assumption of 7.0% for purposes of determining the net periodic benefit cost for 2020 and determined that the assumption is reasonable and consistent with the provisions of ASOP 27.

If we significantly change our long-term investment allocation or strategy, or if there is a significant change in the economic assumptions, then our long-term ROA assumption could change in the future.

Our domestic pension plans’ actual rates of return were approximately 19%, (4)%, ~~15%~~ and 615% for ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017, respectively. The difference between the actual rate of return and our long-term ROA assumption is included in deferred gains and losses.

The investment policy asset allocation ranges for our domestic pension plans, as set by our Investment Committee, for the year ended December 31, ~~2018~~2019 were as follows:



Asset Category
Global equity (combined U.S. and international equity)		30%-60%
U.S. equities		20%-35%
International equities		10%-25%
Fixed income		20%-45%
Cash and cash equivalents		0%-10%
Private equity and private real estate funds		10%-20%
Real assets		0%-4%
Other (including absolute return funds)		5%-15%

The long-term ROA assumptions for our foreign Pension Benefits plans are based on the asset allocations and the economic environment prevailing in the locations where the Pension Benefits plans reside. Foreign pension assets do not make up a significant portion of the total assets for all of our Pension Benefits plans.

The discount rate represents the interest rate that should be used to determine the present value of future cash flows currently expected to be required to settle our pension obligations. The discount rate assumption is determined by using a theoretical bond portfolio model consisting of bonds rated AA or better by Moody’s Investors Service for which the timing and amount of cash flows approximate the estimated benefit payments for each of our pension plans. The discount rate assumption for our domestic pension plans at December 31, ~~2018~~2019 is 43.3329%, which represents a weighted-average discount rate across our plans, compared to the December 31, ~~2017~~2018 discount rate of 34.7233%.

CAS Expense—In addition to providing the methodology for calculating pension costs, CAS also prescribes the method for assigning those costs to specific periods. While the ultimate liability for pension costs under FAS and CAS is similar, the pattern of cost recognition is different. The key drivers of CAS pension expense include the funded status and the method used to calculate CAS reimbursement for each of our plans. Under the prior CAS rules, the discount rate used to measure liabilities was required to be consistent with the long-term ROA assumption, which generally does not change annually given its long-term nature. In addition to certain other changes, CAS Harmonization requires contractors to compare the liability under the prior CAS methodology and assumptions to a liability using a discount rate based on high-quality corporate bonds, and use the greater of the two liability calculations in developing CAS expense. In addition, unlike FAS, we can only allocate pension costs for a plan under CAS until such plan is fully funded as determined under CAS requirements. When the estimated future CAS pension costs increase, the estimated CAS cost allocated to our contracts in the future increases.

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~~Other~~pattern ~~FAS~~of ~~and~~cost recognition is different. The key drivers of CAS ~~Considerations—An~~pension ~~increase~~expense orinclude ~~decrease~~the funded status and the method used to calculate CAS reimbursement for each of 25our ~~basis~~plans. ~~points~~Under inthe prior CAS rules, the discount rate used to measure liabilities was required to be consistent with the long-term ROA assumption, ~~would~~which ~~have~~generally ~~had~~does not change annually given its long-term nature. In addition to certain other changes, CAS Harmonization requires contractors to compare the ~~following~~liability ~~approximate~~under ~~impacts~~the prior CAS methodology and assumptions to a liability using a discount rate based on ~~2018~~high-quality ~~domestic~~corporate bonds, and use the greater of the two liability calculations in developing CAS expense. In addition, unlike FAS, we can only allocate pension ~~results:~~costs for a plan under CAS until such plan is fully funded as determined under CAS requirements. When the estimated future CAS pension costs increase, the estimated CAS cost allocated to our contracts in the future increases.

(In millions)	Increase			Decrease
Service cost component of FAS expense	$	(21	)	$	23
Retirement benefits non-service expense	(51		)	52
Projected benefit obligations	(676		)	712

Other FAS and CAS Considerations—An increase or decrease of 25 basis points in the discount rate assumption would have had the following approximate impacts on 2019 domestic FAS pension results:

Changes in the high-quality corporate bond rate assumption could impact the CAS discount rate for purposes of determining CAS pension expense due to CAS Harmonization. However in 2018, the CAS pension expense was not impacted by this assumption due to the passage of the HATFA and the BBA of 2015 which extended the provisions of pension funding relief as described above. The discount rate assumption could impact CAS pension expense in future periods depending upon the interest rate and regulatory environments.



(In millions)	Increase			Decrease
Service cost component of FAS expense	$	(17	)	$	18
Retirement benefits non-service expense	(42		)	43
Projected benefit obligations	(860		)	910

AnChanges ~~increase~~in orthe ~~decrease~~high-quality corporate bond rate assumption could impact the CAS discount rate for purposes of 25determining ~~basis~~CAS ~~points~~pension expense due to CAS Harmonization. However in 2019, the ~~long-term~~CAS ~~ROA~~pension expense was not impacted by this assumption ~~for~~due to the ~~domestic~~passage ~~pension~~of ~~plans~~the ~~would~~HATFA ~~have~~and ~~had~~the BBA of 2015 which extended the ~~following~~provisions ~~approximate~~of ~~impacts~~pension onfunding ~~2018~~relief ~~FAS~~as ~~and~~described above. The discount rate assumption could impact CAS pension ~~results:~~expense in future periods depending upon the interest rate and regulatory environments.

(In millions)	Increase			Decrease
Retirement benefits non-service expense	$	(46	)	$	46
CAS expense	10			(10		)
FAS/CAS Operating Adjustment	10			(10		)

An increase or decrease of 25 basis points in the long-term ROA assumption for the domestic pension plans would have had the following approximate impacts on 2019 FAS and CAS pension results:

A portion of the $10 million change in CAS pension expense would also be allocated to fixed-price contracts in backlog and would either increase or decrease the profit rate on those contracts at the time of such a change (i.e., a change in the long-term ROA assumption on January 1, 2018 would drive a change in estimated costs in EACs and related contract profit rates as of December 31, 2017). The contract impact resulting from the change in CAS pension expense is difficult to estimate because of changes to remaining performance periods, the amount and timing of expected new awards (i.e., the proposals expected to be awarded in the year which will bear their allocated portion of the change in CAS pension expense), and our mix of fixed-price and cost reimbursable contracts. For example, based on our contract profile at December 31, 2017, if we had 63% of our backlog in fixed-price contracts, and they were on average 50% complete, with our actual new award profile for 2018, a 25 basis point increase in our long-term ROA assumption at January 1, 2018 would drive $2 million of unfavorable EAC adjustments at December 31, 2017. In addition, our fixed-price contracts in backlog as of December 31, 2017 would have a lower profit rate in 2018, resulting in a $1 million unfavorable impact as costs are incurred in that year on those contracts. The total impact on 2017 would be an unfavorable $2 million driven by the aggregate EAC adjustments and the total impact on 2018 would be favorable by approximately $55 million (the FAS/CAS Operating Adjustment and retirement benefits non-service expense, partially offset by the lower profit rate impact in 2018 on fixed-price contracts in backlog at December 31, 2017). A change in our long-term ROA assumption would be subject to review by our government customer for reasonableness. Given our history of recovering changes to CAS pension expense, we expect the assumption change would be allocable and allowable, per regulatory guidelines, as long as the assumption is reasonable.



(In millions)	Increase			Decrease
Retirement benefits non-service expense	$	(47	)	$	47
CAS expense	8			(8		)
FAS/CAS Operating Adjustment	8			(8		)

~~The~~A ~~impact~~portion of ~~changing~~the ~~our~~$8 million change in CAS pension expense would also be allocated to fixed-price contracts in backlog and would either increase or decrease the profit rate on those contracts at the time of such a change (i.e., a change in the long-term ROA ~~for~~assumption ~~our~~on ~~domestic~~January ~~pension~~1, ~~plans~~2019 ~~from~~would ~~8.0%~~drive toa ~~7.5%~~change in ~~2017~~estimated ~~increased~~costs ~~our~~in ~~retirement~~EACs ~~benefits~~and ~~non-service~~related ~~expense~~contract byprofit ~~$87~~rates ~~million~~as of December 31, ~~decreased~~2018). ~~our~~The contract impact resulting from the change in CAS pension expense byis ~~$18~~difficult ~~million~~to ~~and~~estimate ~~decreased~~because ~~our~~of ~~FAS/CAS~~changes ~~Operating~~to ~~Adjustment~~remaining toperformance ~~income~~periods, bythe ~~$18~~amount ~~million~~and intiming ~~2017~~of expected new awards (i.e., ~~since~~the ~~long-term~~proposals ~~ROA~~expected ~~does~~to ~~not~~be ~~impact~~awarded in the ~~service~~year ~~cost~~which ~~component~~will bear their allocated portion of ~~FAS~~the change in CAS pension expense), and our mix of fixed-price and cost reimbursable contracts. ~~The~~For ~~CAS~~example, ~~impact~~based ison ~~primarily~~our ~~driven~~contract byprofile ~~whether~~at ~~the~~December ~~pre~~31, 2018, if we had 61% of our backlog in fixed-~~CAS~~price ~~Harmonization~~contracts, ~~methodology~~and ~~applies~~they were on average 50% complete, ~~which~~with ~~uses~~our actual new award profile for 2019, a ~~discount~~25 ~~rate~~basis ~~based~~point onincrease ~~the~~in our long-term ROA assumption at January 1, or2019 ~~the~~would ~~post~~drive $2 million of unfavorable EAC adjustments at December 31, 2018. In addition, our fixed-~~CAS~~price ~~Harmonization~~contracts ~~methodology~~in ~~applies~~backlog as of December 31, ~~which~~2018 ~~uses~~would have a ~~discount~~lower profit rate ~~based~~in on2019, ~~high-quality~~resulting ~~corporate~~in ~~bond~~a ~~rates.~~$1 ~~The~~million ~~actual~~unfavorable ~~CAS~~ impact isas ~~not~~costs ~~linear~~are ~~and~~incurred ~~can~~in ~~vary~~that ~~significantly~~year ~~from~~on ~~the~~those ~~theoretical~~contracts. The total impact ~~described~~on ~~above~~2018 ~~because~~would itbe ~~relies~~an onunfavorable ~~the~~$2 ~~actual~~million ~~change~~driven inby the ~~long-term~~aggregate ~~ROA~~EAC adjustments and the ~~corresponding~~total ~~relationship~~impact ~~between~~on ~~the~~2019 ~~long-term~~would ~~ROA,~~be ~~which~~favorable isby ~~used~~approximately ~~under~~$54 million (the ~~pre-~~FAS/CAS ~~Harmonization~~Operating ~~methodology,~~Adjustment and ~~the~~retirement ~~high~~benefits non-~~quality~~service ~~corporate~~expense, ~~bond~~partially ~~rates,~~offset ~~which~~by ~~are~~the ~~used~~lower ~~under~~profit ~~the~~rate ~~post~~impact in 2019 on fixed-~~CAS~~price ~~Harmonization~~contracts ~~methodology.~~in Inbacklog ~~addition,~~at ~~the~~December ~~timing~~31, of2018). ~~the~~A change ~~relative~~in toour ~~the~~long-term ~~transition~~ROA ~~period~~assumption ~~for~~would ~~CAS~~be ~~Harmonization~~subject ~~affects~~to ~~the~~review ~~CAS~~by ~~impact.~~our ~~The~~government ~~$18~~customer ~~million~~for ~~decrease~~reasonableness. inGiven our ~~CAS~~history ~~expense~~of inrecovering ~~2017~~changes ~~was~~to ~~included~~CAS inpension ~~our~~expense, ~~EACs~~we ~~and~~expect ~~did~~the ~~not~~assumption ~~have~~change awould ~~significant~~be ~~impact~~allocable onand ~~our~~allowable, ~~2016~~per ~~results~~regulatory ~~based~~guidelines, onas ~~our~~long ~~overall~~as ~~ending~~the ~~overhead~~assumption ~~positions~~is reasonable.

The 38impact of changing our long-term ROA for our domestic pension plans from 8.0% to 7.5% in 2017 increased our retirement benefits non-service expense by $87 million, decreased our CAS expense by $18 million and decreased our FAS/CAS Operating Adjustment to income by $18 million in 2017, since long-term ROA does not impact the service cost component of FAS expense. The CAS impact is primarily driven by whether the pre-CAS Harmonization methodology applies, which uses a discount rate based on the long-term ROA assumption, or the post-CAS Harmonization methodology applies, which uses a

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discount rate based on high-quality corporate bond rates. The actual CAS impact is not linear and can vary significantly from the theoretical impact described above because it relies on the actual change in the long-term ROA and the corresponding relationship between the long-term ROA, which is used under the pre-CAS Harmonization methodology, and the high-quality corporate bond rates, which are used under the post-CAS Harmonization methodology. In addition, the timing of the change relative to the transition period for CAS Harmonization affects the CAS impact. The $18 million decrease in our CAS expense in 2017 was included in our EACs and did not have a significant impact on our 2016 results based on our overall ending overhead positions.

In accordance with both FAS and CAS, a calculated “market-related value” of our plan assets is used to develop the amount of deferred asset gains or losses to be amortized. The market-related value of assets is determined using actual asset gains or losses over a certain prior period (three years for FAS and five years for CAS, subject to certain limitations under CAS on the difference between the market-related value and actual market value of assets). Because of this difference in the number of years over which actual asset gains or losses are recognized and subsequently amortized, retirement benefits non-service expense generally tends to reflect recent asset gains or losses faster than CAS. The funded status of our pension plans under CAS is another driver of our CAS expense, but has no impact on our FAS expense. As noted above, CAS expense is only recognized for plans that are not fully funded; consequently, if plans become or cease to be fully funded under CAS due to our asset or liability experience, our CAS expense will change accordingly.

Under FAS, a “corridor” approach may be elected and applied in the recognition of asset and liability gains or losses which limits expense recognition to the net outstanding gains and losses in excess of the greater of 10% of the projected benefit obligation (PBO) or the calculated “market-related value” of assets. We do not use a “corridor” approach in the calculation of FAS pension expense.

Our pension and PRB plans’ investments are stated at fair value. Investments in equity securities are valued at the last reported sales price when an active market exists. Investments in fixed income securities are generally valued using methods based upon market transactions for comparable securities and various relationships between securities which are generally recognized by institutional market participants. Investments in funds are estimated at fair market value, which primarily utilizes net asset values reported by the investment manager or fund administrator. We review additional valuation and pricing information from fund managers, including audited financial statements, to evaluate the net asset values.

The change in accumulated other comprehensive loss (AOCL) related to pension and PRB plans was as follows:

(In millions)

~~2018~~2019

~~2017~~2018

~~2016~~2017

Beginning balance

(1110,~~766~~738

)

(11,~~115~~766

)

(1011,~~912~~115

)

Amortization of net losses included in net income

1,~~655~~068

1,~~191~~655

1,~~006~~191

Gain (loss) arising during the period

(~~627~~1,890

)

(~~1,842~~627

)

(1,~~209~~842

)

Ending balance

(1011,~~738~~560

)

(1110,~~766~~738

)

(11,~~115~~766

)

The balance in AOCL related to our pension and PRB plans is composed primarily of differences between changes in discount rates, differences between actual and expected asset returns, differences between actual and assumed demographic experience and changes in plan provisions. Changes to our pension and PRB obligation as a result of these variables are initially reflected in other comprehensive income. The deferred gains and losses are amortized and included in future retirement benefits non-service expense over the average employee service period of approximately ~~nine~~ten years at December 31, ~~2018~~2019. The $01.69 billion in ~~2018~~2019 losses arising during the period were driven primarily by ~~actual~~the ~~returns~~decrease in the discount rate from 4.33% at December 31, ~~which~~2018 ~~were~~to ~~lower~~3.29% ~~than~~at ~~our~~December ~~expected~~31, ~~return~~2019, ~~and~~which had an impact of approximately $23.25 billion, as well as other actuarial factors, partially offset by anactual ~~increase in the discount rate from 3.72% at December 31~~returns, ~~2017~~which towere ~~4.33%~~higher atthan ~~December~~our ~~31,~~expected ~~2018~~return, ~~which~~and had an impact of approximately $12.91 billion.

The $10.86 billion in ~~2017~~2018 losses arising during the period were driven primarily by ~~the~~actual ~~decrease~~returns, inwhich ~~the~~were ~~discount~~lower ~~rate~~than ~~from~~our ~~4.36%~~expected ~~at December 31~~return, ~~2016~~and ~~to 3.72% at December 31, 2017, which~~ had an impact of approximately $2.12 billion, as well as other actuarial factors, partially offset by ~~actual~~an ~~returns,~~increase ~~which~~in ~~were~~the ~~higher~~discount ~~than~~rate ~~our~~from ~~expected~~3.72% ~~return~~at December 31, ~~and~~2017 to 4.33% at December 31, 2018, which had an impact of approximately $1.39 billion.

The $1.28 billion in ~~2016~~2017 losses arising during the period were driven primarily by the decrease in the discount rate from 4.4736% at December 31, ~~2015~~2016 to 43.3672% at December 31, ~~2016~~2017, which had an impact of approximately $02.51 billion, ~~and actual returns, which were lower than our expected return, and had an impact of approximately $0.4 billion,~~ as well as other ~~actuarial factors.~~

~~Goodwill~~ 46

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~~and~~actuarial compare the estimated fair value of each reporting unit to its net book value, including goodwill. We discount the cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. The weighted-average cost of capital is comprised of the estimated required rate of return on equity, based on publicly available data for peer companies plus an equity risk premium related to specific company risk factors, ~~and~~partially ~~the~~offset ~~after~~by ~~tax~~actual ~~rate of return on debt~~returns, ~~each~~which ~~weighted~~were athigher ~~the~~than ~~relative~~our values of the estimated debt and equity for the industry. Preparation of forecasts for use in the long-range plan and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected ~~future orders~~return, ~~contracts with suppliers, labor agreements~~ and ~~general~~had ~~market~~an ~~conditions.~~impact ~~Significant changes in these forecasts or the discount rate selected could affect the estimated fair value~~ of ~~one~~approximately ~~or more of our reporting units and could result in a goodwill impairment charge in a future period~~$1.3 ~~When available and as appropriate, we also use comparative market multiples to corroborate our DCF model results~~billion. There was no indication of goodwill impairment as a result of our 2018 annual impairment analysis, as the fair values of each of our reporting units substantially exceeded their respective net book values, including goodwill.

Based on our 2018 impairment analysis the reporting unit that was closest to impairment was the Forcepoint reporting unit, which had a fair value in excess of net book value, including goodwill, of approximately 90%. All other factors equal, a 10% decrease in expected future cash flows for our Forcepoint reporting unit would result in an excess of fair value over net book value of approximately 70%. Alternatively, all other factors being equal, a 100 basis points increase in the discount rate used in the calculation of the fair value of our Forcepoint reporting unit would result in an excess of fair value over net book value of approximately 75%. Based on our 2018 impairment analysis of the other reporting units, the reporting unit that was closest to impairment had a fair value in excess of net book value, including goodwill, of approximately 175%. If we are required to record an impairment charge in the future, it could materially affect our results of operations.Goodwill

We evaluate our goodwill for impairment annually as of the first day of our fiscal fourth quarter and in any interim period in which circumstances arise that indicate our goodwill may be impaired. Indicators of impairment include, but are not limited to, the loss of significant business, significant decreases in federal government appropriations or funding for our contracts, or other significant adverse changes in industry or market conditions. No events occurred during the periods presented that indicated the existence of an impairment with respect to our goodwill. We estimate the fair value of our reporting units using a discounted cash flow (DCF) model based on our most recent long-range plan in place at the time of our impairment testing, and compare the estimated fair value of each reporting unit to its net book value, including goodwill. We discount the cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. The weighted-average cost of capital is comprised of the estimated required rate of return on equity, based on publicly available data for peer companies plus an equity risk premium related to specific company risk factors, and the after tax rate of return on debt, each weighted at the relative values of the estimated debt and equity for the industry. Preparation of forecasts for use in the long-range plan and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, contracts with suppliers, labor agreements and general market conditions. Significant changes in these forecasts or the discount rate selected could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. When available and as appropriate, we also use comparative market multiples to corroborate our DCF model results. There was no indication of goodwill impairment as a result of our 2019 annual impairment analysis, as the fair values of each of our reporting units substantially exceeded their respective net book values, including goodwill.

Based on our 2019 impairment analysis the reporting unit that was closest to impairment was the Forcepoint reporting unit, which had a fair value in excess of net book value, including goodwill, of approximately 50%. All other factors equal, a 10% decrease in expected future cash flows for our Forcepoint reporting unit would result in an excess of fair value over net book value of approximately 35%. Alternatively, all other factors being equal, a 100 basis points increase in the discount rate used in the calculation of the fair value of our Forcepoint reporting unit would result in an excess of fair value over net book value of approximately 40%. Based on our 2019 impairment analysis of our other reporting units, the reporting unit that was closest to impairment had a fair value in excess of net book value, including goodwill, of approximately 185%. If we are required to record an impairment charge in the future, it could materially affect our results of operations.

ACCOUNTING STANDARDS

For a discussion of recent accounting pronouncements, see the Accounting Standards section in “Note 1: Summary of Significant Accounting Policies” within Item 8 of this Form 10-K.

CONSOLIDATED RESULTS OF OPERATIONS

Total Net Sales

The composition of external net sales by products and services for each segment in ~~2018~~2019 was approximately the following:



(% of segment total external net sales)	IDS	IIS	MS	SAS	Forcepoint
Products⁽¹⁾	90%	45%	95%	100%	90%
Services	10%	55%	5%	—%	10%


(1)	Products net sales includes software related sales, including software subscriptions.

							% of Total Net Sales
(In millions, except percentages)	~~2018~~2019		~~2017~~2018		~~2016~~2017		~~2018~~2019		~~2017~~2018		~~2016~~2017
Net sales
Products	$	2224,~~633~~435	$	2122,~~416~~633	$	2021,~~309~~416	83.68	%	8483.56	%	84.25	%
Services	4,~~425~~741		34,~~932~~425		3,~~815~~932		16.42	%	1516.54	%	15.85	%
Total net sales	$	2729,~~058~~176	$	2527,~~348~~058	$	2425,~~124~~348	100.0	%	100.0	%	100.0	%

~~Total~~ Net Sales - 2018 vs. 2017—The increase in total net sales of $1,710 million in 2018 compared to 2017 was primarily due to higher external net sales of $545 million at IIS and $482 million at MS. The increase in external net sales at IIS was primarily due to higher net sales on classified programs in both cyber and space, higher net sales in support of the Development, Operations and Maintenance (DOMino) cyber program for the DHS, which was awarded in the fourth quarter of 2017, and higher net sales on programs in support of the U.S. Army’s Warfighter Field Operations Customer Support (Warfighter FOCUS) activities driven principally by customer determined activity levels. The increase in external net sales at MS was primarily due to higher net sales on classified programs, partially offset by lower net sales on the Paveway program principally driven by reductions of expected costs in the third quarter of 2017 to fulfill industrial cooperation agreements, and decreases in production costs and unit pricing.47

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~~Products~~Total ~~and Services~~ Net Sales - ~~2018~~2019 vs. ~~2017~~2018—The increase in ~~products~~total net sales of $12,~~217~~118 million in ~~2018~~2019 compared to ~~2017~~2018 was primarily due to higher external ~~products~~ net sales of $~~446~~725 million at MSIDS and $~~326~~589 million at SAS. The increase in ~~products~~ net sales at MSIDS was primarily due to higher ~~products~~ net sales on certain ~~classified~~European Patriot programs ~~described~~awarded ~~above~~ in ~~Total~~2018 ~~Net~~and ~~Sales~~the ~~and~~second quarter of 2019, higher net ~~product~~ sales on ~~the~~an ~~Standard~~international ~~Missile-3~~air ~~(SM-3)~~and ~~program~~missile ~~due~~defense tosystem ~~planned~~program ~~increases~~awarded in ~~production,~~the ~~partially~~third ~~offset~~quarter byof ~~lower~~2019, ~~net~~driven ~~product~~primarily ~~sales~~by on the ~~Paveway~~recognition ~~program~~of ~~described~~previously ~~above~~deferred inprecontract ~~Total~~and ~~Net~~inventoried ~~Sales.~~costs ~~The~~and ~~increase~~higher ~~in products~~ net sales aton ~~SAS~~a ~~was~~missile ~~primarily~~defense ~~due~~radar toprogram ~~higher~~for ~~products~~an ~~net~~international ~~sales~~customer onwith aawards ~~domestic~~in ~~tactical~~the ~~radar~~second ~~systems~~and ~~production~~fourth ~~program~~quarters ~~due~~of to2019, ~~scheduled~~partially ~~increases~~offset inby ~~production~~lower ~~and higher products~~ net sales on ~~surveillance~~certain ~~and~~international ~~targeting~~Patriot ~~systems~~ programs ~~primarily~~ due to athe scheduled completion of certain production ~~program~~phases ~~for~~of the Uprograms.S. ~~Air~~The ~~Force~~increase ~~awarded~~ in ~~the~~net ~~third~~sales ~~quarter~~at ofSAS ~~2018~~was ~~and~~primarily ~~planned~~due ~~increases~~to inhigher ~~production~~net sales on ~~certain~~classified ~~surveillance~~programs ~~and~~principally ~~targeting~~driven ~~systems~~by ~~programs.~~2018 ~~The~~awards, ~~increase~~higher ~~in services~~ net sales ofon ~~$493~~the ~~million~~Next inGeneration ~~2018~~Overhead ~~compared~~Persistent toInfrared ~~2017~~(Next ~~was~~Gen ~~primarily~~OPIR) ~~due~~program tofor ~~higher~~the ~~external~~U.S. ~~services~~Air ~~net~~Force ~~sales~~awarded ofin ~~$421~~the ~~million~~third atquarter ~~IIS~~of ~~principally~~2018, ~~due to~~ higher ~~services~~ net sales on ~~the~~Identification ~~DOMino~~Friend ~~cyber~~or ~~and~~Foe ~~Warfighter~~(IFF) ~~FOCUS~~production programs ~~described~~primarily ~~above~~due into ~~Total~~increased ~~Net~~customer ~~Sales~~demand and higher ~~services~~ net sales on ~~certain~~tactical ~~classified~~radar systems development programs due to scheduled increases in program activity.

~~Total~~Products and Services Net Sales - ~~2017~~2019 vs. ~~2016~~2018—The increase in ~~total~~products net sales of $1,~~224~~802 million in ~~2017~~2019 compared to ~~2016~~2018 was primarily due to higher external products net sales of $~~681~~614 million at MSSAS and $601 million at IDS, both primarily due to higher products net sales on the ~~Paveway~~programs ~~program~~described ~~principally~~above ~~driven~~in byTotal ~~international~~Net ~~requirements,~~Sales. ~~higher~~The increase in services net sales onof ~~the~~$316 ~~SM-3~~million ~~program~~in ~~principally~~2019 ~~driven~~compared byto ~~planned~~2018 ~~increases~~was inprimarily ~~production,~~due to higher external services net sales onof ~~the~~$160 ~~Standard~~million ~~Missile-2~~at ~~(SM-2)~~IIS ~~program~~principally due to ~~the~~higher ~~recognition~~services ofnet ~~previously~~sales ~~deferred~~from ~~precontract~~the ~~costs~~consolidation ~~based~~of onRange aGeneration ~~contract~~Next ~~award~~LLC (RGNext) in the ~~second~~first quarter of ~~2017~~2019, ~~and~~higher ~~planned~~services ~~increases~~net insales ~~production,~~on certain classified programs and higher services net sales on the ~~Excalibur~~Development, Operations and Maintenance (DOMino) cyber program for the DHS due to ~~recognition~~planned ofprogram ~~previously~~schedule ~~deferred~~requirements, ~~precontract~~partially ~~costs~~offset ~~based~~by lower services net sales on programs in support of the U.S. Army’s Warfighter Field Operations Customer Support (Warfighter FOCUS) activities, which continue to transition to a ~~contract~~number ~~award~~of incompetitively-awarded replacement programs, with the ~~third~~remaining change spread across numerous programs with no individual or common significant driver. In the first quarter of ~~2017~~2019, ~~partially~~we ~~offset~~amended byand ~~lower~~restated ~~net~~the ~~sales~~RGNext onjoint venture agreement and acquired an additional 10% equity ownership in the ~~Exoatmospheric~~joint ~~Kill~~venture, ~~Vehicle~~increasing ~~(EKV)~~our ~~program~~equity ~~due~~ownership to a60% ~~planned~~and ~~decline~~giving us control of the operations of RGNext with the partner having only protective rights. The results of RGNext are included in ~~production~~IIS’s segment results effective as of the February 8, 2019 consolidation date. See “Note 4: Acquisitions, Divestitures and Goodwill” within Item 8 of this Form 10-K for additional detail.

~~Products~~Total ~~and Services~~ Net Sales - ~~2017~~2018 vs. ~~2016~~2017—The increase in ~~products~~total net sales of $1,~~107~~710 million in ~~2017~~2018 compared to ~~2016~~2017 was primarily due to higher external ~~products~~ net sales of $~~593~~545 million at MSIIS ~~primarily~~and ~~due~~$482 tomillion ~~the~~at ~~programs discussed above~~MS. The increase in ~~services~~external net sales ofat ~~$117~~IIS ~~million in 2017 compared to 2016~~ was primarily due to higher ~~external services~~ net sales ofon ~~$89~~classified ~~million~~programs atin ~~IIS~~both cyber and ~~$88 million at MS~~space, ~~partially~~higher ~~offset by lower external services~~ net sales ofin ~~$37~~support ~~million~~of atthe ~~IDS.~~DOMino ~~The~~cyber ~~increase~~program infor ~~services~~the ~~net~~DHS, ~~sales~~which ~~at IIS~~ was ~~spread~~awarded ~~across~~in ~~numerous~~the ~~programs~~fourth ~~with~~quarter noof ~~individual~~2017, orand ~~common~~higher ~~significant~~net ~~driver.~~sales ~~The~~on ~~increase~~programs in ~~services~~support ~~net~~of ~~sales~~the atU.S. MSArmy’s ~~was~~Warfighter FOCUS activities driven principally by ~~higher~~customer ~~services~~determined ~~net~~activity ~~sales~~levels. onThe ~~certain~~increase ~~classified~~in ~~programs~~external ~~and~~net onsales aat ~~land~~MS ~~warfare~~was ~~systems program~~ primarily due to ~~planned~~higher ~~increases in engineering activity. The decrease in external services~~ net sales aton ~~IDS~~classified ~~was~~programs, ~~primarily~~partially ~~driven~~offset by lower ~~services~~ net sales on athe ~~joint~~Paveway ~~battle~~program ~~field~~principally ~~sensor~~driven ~~program~~by ~~that~~reductions ~~substantially~~of ~~completed~~expected costs in ~~2016~~the ~~and~~third ~~lower~~quarter ~~activity~~of on2017 ato ~~radar~~fulfill ~~sustainment~~industrial ~~program~~cooperation ~~for~~agreements, ~~the~~and ~~Missile~~decreases ~~Defense~~in ~~Agency~~production ~~(MDA)~~costs and unit pricing.

Products and Services Net Sales - 2018 vs. 2017—The increase in products net sales of $1,217 million in 2018 compared to 2017 was primarily due to higher external products net sales of $446 million at MS and $326 million at SAS. The increase in products net sales at MS was primarily due to higher products net sales on certain classified programs described above in Total Net Sales and higher products net sales on the Standard Missile-3 (SM-3) program due to planned increases in production, partially offset by lower products net sales on the Paveway program described above in Total Net Sales. The increase in products net sales at SAS was primarily due to higher products net sales on a domestic tactical radar systems production program due to scheduled increases in production and higher products net sales on surveillance and targeting systems programs primarily due to a production program for the U.S. Air Force awarded in the third quarter of 2018 and planned increases in production on certain surveillance and targeting systems programs. The increase in services net sales of $493 million in 2018 compared to 2017 was primarily due to higher external services net sales of $421 million at IIS principally due to higher services net sales on the DOMino cyber and U.S. Army’s Warfighter FOCUS programs described above in Total Net Sales and higher services net sales on certain classified programs.

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Sales to Major Customers

							% of Total Net Sales
(In millions, except percentages)	~~2018~~2019		~~2017~~2018		~~2016~~2017		~~2018~~2019		~~2017~~2018		~~2016~~2017
Sales to the U.S. government(1)(2)	$	1820,~~447~~111	$	1618,~~860~~447	$	16,~~083~~860	6869	%	6768	%	67	%
U.S. direct commercial sales and other U.S. sales	~~506~~483		~~403~~506		~~425~~403		2	%	2	%	2	%
Foreign military sales through the U.S. government	34,~~502~~198		3,~~311~~502		23,~~899~~311		1314	%	13	%	1213	%
Foreign direct commercial sales and other foreign sales(1)	4,~~603~~384		4,~~774~~603		4,~~717~~774		1715	%	1917	%	2019	%
Total net sales	$	2729,~~058~~176	$	2527,~~348~~058	$	2425,~~124~~348	100	%	100	%	100	%


(1)	Excludes foreign military sales through the U.S. government.

(2) Includes sales to the DoD of $1719,~~628~~260 million, or 6566% of total net sales, in ~~2018~~2019, $1617,~~152~~628 million, or 6465% of total net sales, in ~~2017~~2018 and $1516,~~340~~152 million, or 64% of total net sales, in ~~2016~~2017.

As described above in Domestic Considerations, U.S. defense spending levels are difficult to predict due to numerous factors, including U.S. government budget appropriation decisions, geopolitical events and macroeconomic conditions.

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Total Cost of Sales

Cost of sales, for both products and services, consists of labor, materials and subcontractors costs, as well as related allocated costs. For each of our contracts, we manage the nature and amount of direct costs at the contract level, and manage indirect costs through cost pools as required by government accounting regulations. The estimate of the actual amount of direct and indirect costs forms the basis for estimating our total costs at completion of the contract.

							% of Total Net Sales
(In millions, except percentages)	~~2018~~2019		~~2017(1)~~2018		~~2016(1)~~2017		~~2018~~2019		~~2017(1)~~2018		~~2016(1)~~2017
Cost of sales
Products	$	1617,~~108~~747	$	1516,~~252~~108	$	1415,~~462~~252	5960.58	%	6059.25	%	5960.92	%
Services	3,~~465~~666		3,~~088~~465		3,~~045~~088		12.86	%	12.28	%	12.62	%
Total cost of sales	$	1921,~~573~~413	$	1819,~~340~~573	$	1718,~~507~~340	7273.34	%	72.43	%	72.64	%

(Total Cost of Sales - 2019 vs. 2018—The increase in total cost of sales of $1),840 ~~Amounts~~million ~~have~~in ~~been~~2019 ~~recasted~~compared to ~~reflect~~2018 ~~the~~was ~~adoption~~primarily due to higher external cost of ~~ASU~~sales ~~2017-07~~at IDS, ~~Compensation~~MS, -and ~~Retirement~~SAS. ~~Benefits~~The ~~(Topic~~increase ~~715):~~in ~~Improving~~cost of sales at IDS was primarily due to the ~~Presentation~~programs ofdescribed above in Total Net ~~Periodic~~Sales. ~~Pension~~The ~~Cost~~increase ~~and~~in ~~Net~~cost ~~Periodic~~of ~~Postretirement~~sales ~~Benefit~~at ~~Cost~~MS was primarily due to higher cost of sales on classified programs, aspartially ~~discussed~~offset by lower cost of sales on the Paveway program due to planned decreases in ~~“Note~~production, 1:with ~~Summary~~the ofremaining ~~Significant~~change ~~Accounting~~spread ~~Policies”~~across ~~within~~numerous ~~Item~~programs 8with no individual or common significant driver. The increase in cost of ~~this~~sales ~~Form~~at ~~10-K~~SAS was primarily due to the programs described above in Total Net Sales.

~~Total~~Products and Services Cost of Sales - ~~2018~~2019 vs. ~~2017~~2018—The increase in ~~total~~products cost of sales of $1,~~233~~639 million in ~~2018~~2019 compared to ~~2017~~2018 was primarily due to higher external products cost of sales at ~~IIS~~IDS, SAS and MS. The ~~increase~~increases in ~~total~~products ~~costs~~cost of sales at ~~IIS~~IDS ~~was~~and SAS were primarily due to the programs described above in Total Net Sales. The increase in ~~total~~products ~~costs~~cost of sales at MS was due to higher cost of sales on certain classified programs described above in Total Cost of Sales, partially offset by lower cost of sales on the Paveway program described above in Total Cost of Sales, with the remaining change spread across numerous programs with no individual or common significant driver. The increase in services cost of sales of $201 million in 2019 compared to 2018 was primarily due to higher external services cost of sales at IDS and IIS. The increase in services cost of sales at IDS was primarily due to an international technical and logistics support contract awarded in the ~~classified~~third quarter of 2019, driven by the recognition of previously deferred precontract costs, increased support services on missile defense radar programs and increased Patriot support services for an international customer. The increase in services cost of sales at IIS was primarily due to the programs described above in Total Net Sales.

Total Cost of Sales - 2018 vs. 2017—The increase in total cost of sales of $1,233 million in 2018 compared to 2017 was primarily due to higher external cost of sales at IIS and MS. The increase in total costs of sales at IIS was primarily due to the

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programs described above in Total Net Sales. The increase in total costs of sales at MS was primarily due to the classified programs described above in Total Net Sales.

Products and Services Cost of Sales - 2018 vs. 2017—The increase in products cost of sales of $856 million in 2018 compared to 2017 was primarily due to higher external products cost of sales at MS primarily due to the certain classified programs described above in Total Net Sales. The increase in services cost of sales of $377 million in 2018 compared to 2017 was primarily due to higher external services cost of sales at IIS primarily due to the programs described above in Total Net Sales.

Total Cost of Sales - 2017 vs. 2016—The increase in total cost of sales of $833 million in 2017 compared to 2016 was primarily due to higher external cost of sales at MS and IDS. The increase in external cost of sales at MS was driven principally by the activity on the programs described above in Total Net Sales. The increase in external cost of sales at IDS was principally driven by higher external cost of sales on an international early warning radar program awarded in the first quarter of 2017 and the tax-free gain of $158 million from the sale of our equity method investment in Thales-Raytheon Systems Company S.A.S. (TRS SAS) in 2016, partially offset by lower external cost of sales on certain international Patriot programs due to the scheduled completion of certain production phases of the programs.

Products and Services Cost of Sales - 2017 vs. 2016—The increase in products cost of sales of $790 million in 2017 compared to 2016 was primarily due to higher external products cost of sales at MS and IDS both driven principally by the activity described above in Total Net Sales. Services cost of sales in 2017 were relatively consistent with 2016.

General and Administrative Expenses

							% of Total Net Sales
(In millions, except percentages)	~~2018~~2019		~~2017(1)~~2018		~~2016(1)~~2017		~~2018~~2019		~~2017(1)~~2018		~~2016(1)~~2017
Administrative and selling expenses	$	2,~~106~~257	$	2,~~077~~106	$	12,~~996~~077	7.87	%	87.28	%	8.32	%
Research and development expenses	~~841~~732		~~700~~841		~~725~~700		32.15	%	23.81	%	32.08	%
Total general and administrative expenses	$	2,~~947~~989	$	2,~~777~~947	$	2,~~721~~777	10.92	%	1110.09	%	11.30	%

~~(1)~~The ~~Amounts~~increase ~~have~~in ~~been~~administrative ~~recasted~~and toselling ~~reflect~~expenses ~~the~~of ~~adoption~~$151 ofmillion ~~ASU~~in ~~2017-07,~~2019 ~~Compensation~~compared -to ~~Retirement~~2018 ~~Benefits~~was ~~(Topic~~primarily ~~715):~~due ~~Improving~~to ~~the~~$51 ~~Presentation~~million of ~~Net~~costs ~~Periodic~~related ~~Pension~~to ~~Cost~~the ~~and~~proposed ~~Net~~merger ~~Periodic~~with ~~Postretirement~~UTC ~~Benefit~~and ~~Cost,~~higher asadministrative ~~discussed~~and inselling ~~“Note~~expenses 1:at ~~Summary~~IDS ofprimarily ~~Significant~~related ~~Accounting~~to ~~Policies”~~activities ~~within~~to ~~Item~~support 8an ofadvanced ~~this~~radar ~~Form 10-K~~pursuit.

Administrative and selling expenses in 2018 were relatively consistent with 2017.

~~The~~Included ~~increase~~ in administrative and selling expenses ofis ~~$81~~the ~~million~~provision infor ~~2017~~state ~~compared~~income totaxes, ~~2016~~which ~~was~~generally ~~primarily~~can ~~driven~~be byrecovered athrough ~~$58~~the ~~million~~pricing ~~increase~~of atproducts ~~Forcepoint~~and ~~principally~~services ~~driven~~to bythe ~~higher~~U.S. ~~costs~~government. ~~for~~Net ~~the~~state ~~sales~~income ~~organization~~taxes ~~due~~allocated to ~~increased~~our ~~salesforce~~contracts ~~staffing~~were $31 million, $18 million and ~~higher~~$32 ~~amortization~~million ofin 2019, ~~deferred~~2018 ~~commissions~~and 2017, respectively.

The 42decrease in research and development expenses of $109 million in 2019 compared to 2018 was primarily due to lower independent research and development activity at MS due to an increase in customer-funded research and development.

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Included in administrative and selling expenses is the provision for state income taxes, which generally can be recovered through the pricing of products and services to the U.S. government. Net state income taxes allocated to our contracts were $18 million, $32 million and $26 million in 2018, 2017 and 2016, respectively.

The increase in research and development expenses of $141 million in 2018 compared to 2017 was primarily due to higher research and development expenses at SAS related to advanced capabilities and at IDS related to next-generation technologies.

The decrease in research and development expenses of $25 million in 2017 compared to 2016 was primarily due to lower research and development expenses of $25 million at MS driven principally by lower independent research and development activity related to advanced technologies efforts that substantially completed in 2016, partially offset by higher research and development expenses of $15 million at Forcepoint principally driven by the Skyfence acquisition in the first quarter of 2017, with the remaining change spread across numerous items.

Total Operating Expenses

							% of Total Net Sales
(In millions, except percentages)	~~2018~~2019		~~2017(1)~~2018		~~2016(1)~~2017		~~2018~~2019		~~2017(1)~~2018		~~2016(1)~~2017
Total operating expenses	$	2224,~~520~~402	$	2122,~~117~~520	$	2021,~~228~~117	83.26	%	83.32	%	83.93	%

~~(1)~~The ~~Amounts~~increase ~~have~~in ~~been~~total ~~recasted~~operating toexpenses ~~reflect the adoption~~ of ~~ASU 2017-07~~$1,882 ~~Compensation~~million -in ~~Retirement~~2019 ~~Benefits~~compared ~~(Topic~~to ~~715):~~2018 ~~Improving~~was ~~the~~primarily ~~Presentation~~due ofto ~~Net~~the ~~Periodic~~increase ~~Pension~~in ~~Cost~~total ~~and~~cost ~~Net~~of ~~Periodic~~sales ~~Postretirement~~of ~~Benefit~~$1,840 ~~Cost~~million, asthe ~~discussed~~primary indrivers ~~“Note 1: Summary~~ of ~~Significant~~which ~~Accounting~~are ~~Policies”~~described ~~within~~above ~~Item~~in 8Total Cost of ~~this Form 10-K~~Sales.

The increase in total operating expenses of $1,403 million in 2018 compared to 2017 was primarily due to the increase in total cost of sales of $1,233 million, the primary drivers of which are described above in Total Cost of Sales.

The increase in total operating expenses of $889 million in 2017 compared to 2016 was primarily due to the increase in total cost of sales of $833 million, the primary drivers of which are described above in Total Cost of Sales.

Operating Income

							% of Total Net Sales
(In millions, except percentages)	~~2018~~2019		~~2017(1)~~2018		~~2016(1)~~2017		~~2018~~2019		~~2017(1)~~2018		~~2016(1)~~2017
Operating income	$	4,~~538~~774	$	4,~~231~~538	$	34,~~896~~231	16.84	%	16.78	%	16.17	%

~~(1)~~The ~~Amounts~~increase ~~have~~in ~~been~~operating ~~recasted~~income of $236 million in 2019 compared to ~~reflect~~2018 ~~the~~was ~~adoption~~due ofto ~~ASU~~the ~~2017-07,~~increase ~~Compensation~~in -total ~~Retirement~~net ~~Benefits~~sales ~~(Topic~~of ~~715):~~$2,118 ~~Improving~~million, the ~~Presentation~~primary drivers of ~~Net~~which ~~Periodic~~are ~~Pension~~described ~~Cost~~above ~~and~~in Total Net ~~Periodic~~Sales, ~~Postretirement~~partially ~~Benefit~~offset ~~Cost,~~by asthe ~~discussed~~increase in ~~“Note~~total 1:operating ~~Summary~~expenses of ~~Significant~~$1,882 ~~Accounting~~million, ~~Policies”~~the ~~within~~primary ~~Item~~drivers 8 of ~~this~~which ~~Form~~are ~~10-K~~described above in Total Operating Expenses.

~~The~~ increase in operating income of $307 million in 2018 compared to 2017 was due to the increase in total net sales of $1,710 million, the primary drivers of which are described above in Total Net Sales, partially offset by the increase in total operating expenses of $1,403 million, the primary drivers of which are described above in Total Operating Expenses. 50

The increase in operating income of $335 million in 2017 compared to 2016 was due to the increase in total net sales of $1,224 million, the primary drivers of which are described above in Total Net Sales, partially offset by the increase in total operating expenses of $889 million, the primary drivers of which are described above in Total Operating Expenses. Included in total operating expenses in 2016 was the tax-free gain of $158 million from the sale of our equity method investment in TRS SAS in 2016.

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The increase in operating income of $307 million in 2018 compared to 2017 was due to the increase in total net sales of $1,710 million, the primary drivers of which are described above in Total Net Sales, partially offset by the increase in total operating expenses of $1,403 million, the primary drivers of which are described above in Total Operating Expenses.

Total Non-Operating (Income) Expense, Net

(In millions)	~~2018~~2019			~~2017(1)~~2018			~~2016(1)~~2017
Non-operating (income) expense, net
Retirement benefits non-service expense	$	~~1,230~~688		$	~~913~~1,230		$	~~601~~913
Interest expense	~~184~~180			~~205~~184			~~232~~205
Interest income	(3142		)	(2131		)	(1621		)
Other (income) expense, net	8(38		)	218			(621		)
Total non-operating (income) expense, net	$	~~1,391~~788		$	1,~~118~~391		$	~~811~~1,118

The decrease in total non-operating (1income) ~~Amounts~~expense, ~~have~~net ~~been~~of ~~recasted~~$603 million in 2019 compared to ~~reflect~~2018, was primarily due to a decrease in retirement benefits non-service expense of $542 million principally driven by the ~~adoption~~recognition of ~~ASU~~a ~~2017~~non-~~07,~~cash ~~Compensation~~pension -settlement ~~Retirement~~charge ~~Benefits~~of ~~(Topic~~$288 ~~715):~~million ~~Improving~~during the ~~Presentation~~third quarter of ~~Net~~2018 ~~Periodic~~and ~~Pension~~a ~~Cost~~decrease ~~and~~in ~~Net~~the ~~Periodic~~amortization ~~Postretirement~~of ~~Benefit~~net ~~Cost~~actuarial loss in 2019 compared to 2018 due to a decrease in the unamortized loss at December 31, as2018 ~~discussed~~compared to December 31, 2017. The settlement charge was the acceleration of actuarial losses previously included in AOCL for certain Raytheon-sponsored pension plans that purchased a group annuity contract from an insurance company to transfer $923 million of our outstanding pension benefit obligations in the third quarter of 2018. See “Note 114: ~~Summary~~Pension ofand ~~Significant~~Other ~~Accounting~~Employee ~~Policies~~Benefits” within Item 8 of this Form 10-K for further details. Included in the change in other (income) expense, net was a $48 million change in the mark-to-market of marketable securities held in trusts associated with certain of our nonqualified deferred compensation and employee benefit plans, due to net gains of $43 million in 2019 compared to net losses of $5 million in 2018, a $17 million charge related to the settlement of our treasury rate locks in the fourth quarter of 2019 without the issuance of debt due to merger considerations and a non-cash gain of $14 million in the third quarter of 2019 related to the revaluation of an investment in equity securities of a non-publicly traded company due to the availability of updated pricing data from a recent transaction.

The increase in total non-operating (income) expense, net, of $273 million in 2018 compared to 2017, was primarily due to an increase in retirement benefits non-service expense of $317 million, partially offset by a decrease in interest expense of $21 million and a decrease in other (income) expense, net of $13 million. The increase in retirement benefits non-service expense was principally driven by the recognition of a non-cash pension settlement charge of $288 million during the third quarter of 2018, as described above. The remaining change was primarily related to changes in the discount rate, offset by asset performance and the impact of discretionary pension contributions. The settlement charge was the acceleration of actuarial losses previously included in AOCL for certain Raytheon-sponsored pension plans that purchased a group annuity contract from an insurance company to transfer $923 million of our outstanding pension benefit obligations in the third quarter of 2018. See “Note 14: Pension and Other Employee Benefits” within Item 8 of this Form 10-K for further details. The decrease in interest expense was primarily due to the repurchase of long-term debt in the second quarter of 2017. The decrease in other (income) expense, net was principally driven by a $39 million before tax charge associated with the make-whole provision on the early repurchase of long-term debt in the second quarter of 2017, partially offset by a $26 million change in the mark-to-market to fair value of marketable securities held in ~~trust~~trusts associated with certain of our non-qualified deferred compensation and employee benefit plans, due to net losses of $5 million in 2018 compared to net gains of $21 million in 2017.

The increase in total non-operating (income) expense, net, of $307 million in 2017 compared to 2016, was primarily due to an increase in retirement benefits non-service expense of $312 million and an increase in other (income) expense, net of $27 million, partially offset by a decrease in interest expense of $27 million. The increase in retirement benefits non-service expense was principally driven by the change in our long-term ROA assumptions from 8.0% to 7.5% and our actuarial update which takes into account final census data as described in our Form 10-K for the year ended December 31, 2016. The increase in other (income) expense, net was principally driven by the $39 million before tax charge associated with the make-whole provision on the early repurchase of long-term debt in the second quarter of 2017, partially offset by a $13 million change in the mark-to-market to fair value of marketable securities held in trust associated with certain of our non-qualified deferred compensation and employee benefit plans, due to net gains of $21 million in 2017 compared to net gains of $8 million in 2016. The decrease in interest expense was primarily due to the repurchase of long-term debt in the second quarter of 2017.

Federal and Foreign Income Taxes

On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 (2017 Act) which enacted a wide range of changes to the U.S. corporate income tax system. The 2017 Act reduced the U.S. corporate statutory federal tax rate to 21% effective in 2018, eliminated the domestic manufacturing deduction benefit and introduced other tax base broadening measures, changed rules for expensing and capitalizing business expenditures, established a territorial tax system for foreign earnings as well as a minimum tax on certain foreign earnings, provided for a one-time transition tax on previously undistributed foreign earnings, and introduced new rules for the treatment of certain foreign income, including foreign derived intangible income (FDII).



(In millions)	2019		2018		2017
Federal and foreign income taxes	$	658	$	264	$	1,114

~~Also~~The onincrease ~~December~~in ~~22,~~federal ~~2017, the Securities~~ and ~~Exchange~~foreign ~~Commission~~income ~~(SEC)~~taxes ~~issued~~of ~~Staff~~$394 ~~Accounting~~million ~~Bulletin~~in ~~No.~~2019 ~~118~~compared ~~(SAB~~to ~~118),~~2018 ~~which~~was ~~provided~~primarily ~~companies~~due ~~with additional guidance on how~~ to ~~account~~an ~~for~~increase ~~the 2017 Act~~ in ~~their financial statements, allowing companies to use a measurement period. As of December 31, 2017, we made a reasonable estimate of the effects on~~ our ~~existing~~effective ~~deferred~~ tax ~~balances and the one-time transition tax on previously undistributed foreign earnings and recognized provisional amounts totaling $171 million in accordance with SAB 118~~rate, ~~which was included~~ as adiscussed ~~component of income tax expense from continuing operations~~below. ~~As of December 31, 2018, we had finalized our provisional estimates for the~~

The 44decrease in federal and foreign income taxes of $850 million in 2018 compared to 2017 was primarily due to the decrease in the statutory federal rate and foreign derived intangible income (FDII), both as a result of the enactment of the 2017 Act, as discussed below.

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remeasurement of our existing U.S. deferred tax balances and the one-time transition tax for which we recorded a $1 million tax benefit in 2018.

(In millions)	2018				2017				2016
Federal and foreign income taxes	$	264			$	1,114			$	873

The decrease in federal and foreign income taxes of $850 million in 2018 compared to 2017 was primarily due to the decrease in the statutory federal rate and FDII, both as a result of the enactment of the 2017 Act, as discussed above.

The increase in federal and foreign income taxes of $241 million in 2017 compared to 2016 was primarily due to the remeasurement of the deferred tax asset balance at December 31, 2017 and the one-time transition tax on previously undistributed foreign earnings, both as a result of the enactment of the 2017 Act, as discussed above.

Our effective tax rate differed from the U.S. statutory rate due to the following:

	2018		2017		2016
	2019		2018		2017
Statutory tax rate	21.0	%	3521.0	%	35.0	%
Foreign derived intangible income (FDII)	(43.23	)	—(4.2	)	—
Research and development tax credit (R&D tax credit)	(2.43	)	(12.54	)	(1.35	)
Equity compensation	(1.0.3	)	(1.20	)	(1.62	)
Foreign income tax rate differential	10.38		01.23		—0.2
Prior year true-up	(10.14	)	0(1.1	)	—0.1
Tax benefit related to discretionary pension contributions	~~(3.0~~—	)	—(3.0	)	—
R&D tax credit claims related to the 2014-2017 tax years	(2.1	)	—		—
R&D tax credit claims related to the 2014–2017 tax years	—		(2.1	)	—
Irish restructuring	~~(2.0~~—	)	—(2.0	)	—
Change in valuation allowance	~~2.0~~—		—2.0		—
Domestic manufacturing deduction benefit	—		~~(2.5~~—	)	(2.75	)
Remeasurement of deferred taxes	—		~~3.2~~—		—3.2
One-time transition tax on previously undistributed foreign earnings	—		~~2.3~~—		—2.3
TRS SAS tax-free gain	—		—		(1.8	)
Other items, net	0.2		(0.1	)	0.2
Other items, net	(0.1	)	0.2		0.7
Effective tax rate	16.5	%	8.4	%	35.8	%
Effective tax rate	8.4	%	35.8	%	28.3	%

Our ~~2018~~ effective tax rate reflects the ~~21%~~ U.S. statutory rate adjusted for various permanent differences between book and tax reporting. In December 2017, we adjusted our U.S. deferred tax balances that we expected to realize on or after January 1, 2018 to reflect the new 21% U.S. corporate income tax rate applicable under the 2017 Act. We also recorded the impact of the one-time transition tax on previously undistributed foreign earnings. We expect the changes in the 2017 Act to reduce our effective tax rate below 21% on a forward looking basis, and for 2019 we expect our effective tax rate to be in the range of 17.0% to 17.5%.

In the fourth quarter of 2018, Forcepoint completed an Irish restructuring transaction resulting in a deferred tax asset of approximately $63 million. We have evaluated both the positive and negative evidence to support our ability to realize the deferred tax asset associated with the restructuring. We believe it is more likely than not that the benefit from this restructuring transaction will not be realized. Accordingly, we ~~have~~ provided a valuation allowance of $63 million in the fourth quarter of 2018 on the deferred tax asset related to this transaction.

In the third quarter of 2018, the Company recognized a net tax benefit of $110 million related to the completion of the 2017 tax return and additional amended ~~research and development tax credit (~~R&D tax credit) claims related to the 2014-–2016 tax years.

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Also in the third quarter of 2018, we made a discretionary contribution to our pension plans of $1.25 billion. In the second quarter of 2018, we determined we would make this contribution and as a result recorded a net tax benefit of $95 million in the second quarter of 2018. This was primarily due to the remeasurement of the related deferred tax asset balance at the 2017 tax rate of 35% versus the 2018 tax rate of 21% since the discretionary contribution was deductible on our 2017 tax return.

Also on December 22, 2017, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118 (SAB 118), which provided companies with additional guidance on how to account for the 2017 Act in their financial statements, allowing companies to use a measurement period. As of December 31, 2017, we made a reasonable estimate of the effects on our existing deferred tax balances to reflect the new 21% corporate income tax rate under the 2017 Act and the one-time transition tax on previously undistributed foreign earnings and recognized provisional amounts totaling $171 million in accordance with SAB 118, which was included as a component of income tax expense from continuing operations. As of December 31, 2018, we had finalized our provisional estimates for the remeasurement of our existing U.S. deferred tax balances and the one-time transition tax for which we recorded a $1 million tax benefit in 2018.

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We recognize excess tax benefits and tax deficiencies related to our equity compensation in the income statement which could result in fluctuations in our effective tax rate period over period depending on changes to our stock price and how many awards vest in the period.

Our effective tax rate in ~~2018~~2019 was lower than the statutory federal tax rate of 21% primarily due to FDII, which decreased the rate by ~~4.2%, the tax benefit recognized related to the discretionary pension contribution, which decreased the rate by~~ 3.03%, ~~the~~and ~~R&D tax credit, which decreased~~ the ~~rate by 2.4%, additional~~ R&D tax credit ~~claims related to the 2014-2017 tax years~~, which decreased the rate by 2.1%, a prior year true-up primarily due to the remeasurement of the deferred tax asset balance at December 31, 2017, which decreased the rate by 1.1% and the tax benefit recognized upon settlement of equity awards, which decreased the rate by 1.0%. The foreign rate differential increased the rate by 1.3%. The ~~remaining~~offsetting ~~decrease~~increase of 01.1% is composed of various unrelated items, which individually and collectively are not significant.

Our effective tax rate in 2018 was lower than the statutory federal tax rate of 21% primarily due to FDII, which decreased the rate by 4.2%, the tax benefit recognized related to the discretionary pension contribution, which decreased the rate by 3.0%, the R&D tax credit, which decreased the rate by 2.4%, additional R&D tax credit claims related to the 2014–2017 tax years, which decreased the rate by 2.1%, a prior year true-up primarily due to the remeasurement of the deferred tax asset balance at December 31, 2017, which decreased the rate by 1.1% and the tax benefit recognized upon settlement of equity awards, which decreased the rate by 1.0%. The foreign rate differential increased the rate by 1.3%. The remaining decrease of 0.1% is composed of various unrelated items, which individually and collectively are not significant.

Our effective tax rate in 2017 was higher than the statutory federal tax rate of 35% primarily due to the remeasurement of U.S. deferred tax balances, which increased the rate by approximately 3.2% and the one-time transition tax on undistributed foreign earnings, which increased the rate by 2.3%. Items which decreased our effective tax rate were the domestic manufacturing deduction, which decreased the rate by approximately 2.5%, the R&D tax credit, which decreased the rate by approximately 1.5% and the tax benefit recognized upon settlement of stock-based awards, which decreased the rate by 1.2%. The remaining increase of 0.5% is composed of various unrelated items, which individually and collectively are not significant.

Our effective tax rate in ~~2016~~2019 was ~~lower~~8.1% higher than ~~the~~in ~~statutory~~2018 ~~federal~~primarily ~~tax~~due ~~rate~~to ofthe ~~35%~~tax ~~primarily~~benefit ~~due~~recognized related to the ~~domestic~~discretionary ~~manufacturing~~pension ~~deduction~~contribution, which decreased the 2018 rate by ~~approximately 2~~3.70%, the additional R&D tax~~-free~~ ~~gain~~credit claims related to the ~~sale~~2014–2017 oftax ~~our equity method investment in TRS SAS~~years, which decreased the 2018 rate by 12.81%, ~~the~~a ~~tax~~prior ~~benefit~~year ~~recognized~~true-up ~~upon~~primarily ~~settlement~~due to the remeasurement of ~~stock-based~~the ~~awards~~deferred tax asset balance at December 31, 2017, which decreased the 2018 rate by 1.61% and ~~the R&D tax credit~~FDII, which ~~decreased~~increased the rate by ~~approximately 1~~0.39%. The remaining increase of 01.70% is composed of various ~~unrelated~~ items, which individually and collectively are not significant.

Our effective tax rate in 2018 was 27.4% lower than in 2017 primarily due to the decrease in the statutory federal rate, which decreased the rate by 14.0%, FDII, which decreased the rate by 4.2%, the remeasurement of U.S. deferred tax balances, which increased the 2017 rate by 3.2%, the tax benefit recognized related to the discretionary pension contribution, which decreased the rate by 3.0%, the one-time transition tax on undistributed foreign earnings, which increased the 2017 rate by 2.3%, and additional R&D tax credit claims related to the 2014-2017 tax years, which decreased the rate by 2.1%, partially offset by the repeal of the domestic manufacturing deduction, which unfavorably impacted the rate by 2.5%. The remaining decrease of 1.1% is composed of various unrelated items, which individually and collectively are not significant.

~~Our~~On ~~effective~~March ~~tax~~4, ~~rate~~2019, inthe ~~2017~~Treasury ~~was~~Department ~~7.5%~~and ~~higher~~the ~~than~~Internal inRevenue ~~2016~~Service ~~primarily~~(IRS) ~~due~~issued toproposed ~~the~~regulations ~~remeasurement~~providing ofguidance ~~U.S.~~for ~~deferred~~the ~~tax~~determination ~~balances,~~of ~~which increased~~ the ~~rate~~deduction byamount ~~approximately~~of 3FDII.~~2%,~~ ~~the~~Although ~~one-time~~these ~~transition~~rules ~~tax~~would onaffect ~~undistributed~~amounts ~~foreign~~recorded ~~earnings,~~or ~~which~~amounts ~~increased~~expected ~~the~~to ~~rate~~be byrecorded ~~2.3%~~ and ~~the~~could ~~tax-free~~increase ~~gain related to the sale of~~ our ~~equity~~income ~~method~~tax ~~investment in TRS SAS~~expense, ~~which~~we ~~decreased~~do ~~the~~not ~~2016~~expect ~~rate~~any bymaterial ~~1.8%.~~changes ~~The~~to ~~remaining~~our ~~increase~~financial ofstatements ~~0.2%~~if isthe ~~composed~~regulations ofare ~~various~~finalized ~~unrelated~~as ~~items,~~currently ~~which individually and collectively are not significant~~drafted.

On 46September 5, 2019, the Treasury Department and the IRS issued proposed regulations to address changes to tax revenue recognition under the 2017 Act. Subject to further guidance and the final form of the regulations, the Company may have to accelerate the recognition of certain revenue previously deferred for tax purposes. The estimated impact to cash taxes could be an increase of up to approximately $250 million in each of the four years following the release of the final regulations.

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Income from Continuing Operations

(In millions)	~~2018~~2019				~~2017~~2018				~~2016~~2017
Income from continuing operations	$	23,~~883~~328			$	12,~~999~~883			$	21,~~212~~999

The increase in income from continuing operations of $445 million in 2019 compared to 2018 was primarily due to a decrease of $603 million in non-operating (income) expense, net, primarily related to the decrease in retirement benefits non-service expense described above in Total Non-Operating (Income) Expense, Net and an increase of $236 million in operating income, described above in Operating Income, partially offset by an increase of $394 million in federal and foreign income taxes related to the increase in our effective tax rate described above in Federal and Foreign Income Taxes.

The increase in income from continuing operations of $884 million in 2018 compared to 2017 was primarily due to a decrease of $850 million in federal and foreign income taxes, related to the decrease in our effective tax rate described above in Federal and Foreign Income Taxes, and an increase of $307 million in operating income, described above in Operating Income, partially offset by an increase of $273 million in non-operating (income) expense, net, the primary drivers of which are described above in Total Non-Operating (Income) Expense, Net and include the recognition of a non-cash pension settlement charge of $288 million during the third quarter of 2018.

Net Income

The decrease in income from continuing operations of $213 million in 2017 compared to 2016 was primarily due to the $307 million increase in total non-operating (income) expense, net, the primary drivers of which are described above in Total Non-Operating (Income) Expense, Net and the $241 million increase in federal and foreign income taxes, the primary drivers of which are described above in Federal and Foreign Income Taxes, partially offset by the $335 million increase in operating income, described above in Operating Income.



(In millions)	2019		2018		2017
Net income	$	3,329	$	2,882	$	2,001

(In millions)	2018				2017				2016
Net income	$	2,882			$	2,001			$	2,213

The increase in net income of $447 million in 2019 compared to 2018 was primarily due to the increase in income from continuing operations of $445 million described above in Income from Continuing Operations.

The increase in net income of $881 million in 2018 compared to 2017 was primarily due to the increase in income from continuing operations of $884 million described above in Income from Continuing Operations.

The decrease in net income of $212 million in 2017 compared to 2016 was primarily due to the decrease in income from continuing operations of $213 million described above in Income from Continuing Operations.

Diluted EPS from Continuing Operations Attributable to Raytheon Company Common Stockholders

(In millions, except per share amounts)	~~2018~~2019		~~2017~~2018		~~2016~~2017
Income from continuing operations attributable to Raytheon Company	$	23,~~910~~342	$	2,~~022~~910	$	2,~~243~~022
Diluted weighted-average shares outstanding	~~286~~280.82		~~291~~286.48		~~296~~291.84
Diluted EPS from continuing operations attributable to Raytheon Company	$	1011.1592	$	610.9415	$	76.5594

The increase in diluted EPS from continuing operations attributable to Raytheon Company common stockholders of $1.77 in 2019 compared to 2018 was primarily due to the increase in income from continuing operations described above in Income from Continuing Operations, and a decrease in weighted-average shares outstanding, which was driven by the common stock share activity shown in the table below.

The increase in diluted EPS from continuing operations attributable to Raytheon Company common stockholders of $3.21 in 2018 compared to 2017 was primarily due to the increase in income from continuing operations described above in Income from Continuing Operations, and a decrease in weighted-average shares outstanding, which was driven by the common stock share activity shown in the table below. Diluted EPS from continuing operations attributable to Raytheon Company common stockholders was increased by $0.01 in 2018 for the impact of our redeemable noncontrolling interest redemption value adjustments, as discussed in “Note 1: Summary of Significant Accounting Policies” within Item 8 of this Form 10-K.

~~The~~ decrease in diluted EPS from continuing operations attributable to Raytheon Company common stockholders of $0.61 in 2017 compared to 2016 was primarily due to the decrease in income from continuing operations described above in Income from Continuing Operations, partially offset by a decrease in weighted-average shares outstanding, which was driven by the common stock share activity shown in the table below. Diluted EPS from continuing operations attributable to Raytheon Company common stockholders was reduced by $0.01 in 2016 for the impact of our redeemable noncontrolling interest redemption value adjustments, as discussed in “Note 1: Summary of Significant Accounting Policies” within Item 8 of this Form 10-K.54

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Our common stock share activity for the years ended ~~2018~~2019, ~~2017~~2018, and ~~2016~~2017 was as follows:

(Shares in millions)	~~2018~~2019		~~2017~~2018		~~2016~~2017
Beginning balance	~~288~~282.41		~~292~~288.84		~~299~~292.08
Stock plans activity	01.91		10.19		1.51
Share repurchases	(74.28	)	(57.52	)	(75.75	)
Ending balance	~~282~~278.14		~~288~~282.41		~~292~~288.84

Diluted EPS Attributable to Raytheon Company Common Stockholders

(In millions, except per share amounts)	2018		2017		2016
Net income attributable to Raytheon Company	$	2,909	$	2,024	$	2,244
Diluted weighted-average shares outstanding	286.8		291.4		296.8
Diluted EPS attributable to Raytheon Company	$	10.15	$	6.95	$	7.55

The increase in diluted EPS attributable to Raytheon Company common stockholders of $3.20 in 2018 compared to 2017 was primarily due to the $3.21 increase in diluted EPS from continuing operations attributable to Raytheon Company common stockholders described above in Diluted EPS from Continuing Operations Attributable to Raytheon Company Common Stockholders. Diluted EPS attributable to Raytheon Company common stockholders was increased by $0.01 in 2018 for the impact of our redeemable noncontrolling interest redemption value adjustments, as discussed in “Note 1: Summary of Significant Accounting Policies” within Item 8 of this Form 10-K.

The decrease in diluted EPS attributable to Raytheon Company common stockholders of $0.60 in 2017 compared to 2016 was primarily due to the $0.61 decrease in diluted EPS from continuing operations attributable to Raytheon Company common stockholders described above in Diluted EPS from Continuing Operations Attributable to Raytheon Company Common Stockholders. Diluted EPS attributable to Raytheon Company common stockholders was reduced by $0.01 in 2016 for the impact of our redeemable noncontrolling interest redemption value adjustments, as discussed in “Note 1: Summary of Significant Accounting Policies” within Item 8 of this Form 10-K.

SEGMENT RESULTS

We report our results in the following segments: IDS; IIS; MS; SAS; and Forcepoint.

The following provides some context for viewing our segment performance through the eyes of management.

Given the nature of our business, bookings, total net sales and operating income (and the related operating margin percentage), which we disclose and discuss at the segment level, are most relevant to an understanding of management’s view of our segment performance, and often these measures have significant interrelated effects, as described below. In addition, we disclose and discuss backlog, which represents future sales that we expect to recognize over the remaining contract period, which is generally several years. We also disclose total operating expenses and the components of total operating expenses within our segment disclosures.

Bookings—We disclose the amount of bookings and notable contract awards for each segment. Bookings generally represent the dollar value of new external contracts awarded to us during the reporting period and include firm orders for which funding has not been appropriated. We believe bookings are an important measure of future performance and are an indicator of potential future changes in total net sales, because we cannot record revenues under a new contract without first having a booking in the current or a preceding period.

Bookings are impacted by the timing and amounts of awards in a given period, which are subject to numerous factors, including: (1) the desired capability by the customer and urgency of customer needs; (2) customer budgets and other fiscal constraints; (3) political and economic and other environmental factors; (4) the timing of customer negotiations; (5) the timing of governmental approvals and notifications; and (6) the timing of option exercises or increases in scope.



Bookings (in millions)	2019		2018		2017
Integrated Defense Systems	$	9,634	$	8,698	$	4,934
Intelligence, Information and Services	6,891		6,128		6,615
Missile Systems	10,833		8,833		9,672
Space and Airborne Systems	8,335		7,852		5,907
Forcepoint	647		651		590
Total	$	36,340	$	32,162	$	27,718

Included in bookings were international bookings of $10,352 million, $9,850 million and $8,479 million in 2019, 2018 and 2017, respectively, which included foreign military bookings through the U.S. government. International bookings amounted to 28% of total bookings in 2019 and 31% of total bookings in 2018 and 2017. Classified bookings amounted to 22%, 21%, and 17% of total bookings in 2019, 2018 and 2017, respectively.

We record bookings for not-to-exceed contract awards (e.g., undefinitized contract awards, binding letter agreements) based on reasonable estimates of the expected contract definitization. We subsequently adjust bookings to reflect the actual amounts definitized, or prior to definitization when facts and circumstances indicate that our previously estimated amounts are no longer reasonable. The timing of awards that may cover multiple fiscal years influences the size of bookings in each year. Bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ) type contracts), and are reduced for contract cancellations and terminations of bookings recognized in the current year. We reflect contract cancellations and terminations from prior year bookings, as well as the impact of changes in foreign exchange rates, directly as an adjustment to backlog in the period in which the cancellation or termination occurs and the impact is determinable. Contract cancellations and terminations include contract underruns on cost-type programs.

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Bookings (in millions)	2018		2017		2016
Integrated Defense Systems	$	8,698	$	4,934	$	5,377
Intelligence, Information and Services	6,128		6,615		5,563
Missile Systems	8,833		9,672		7,894
Space and Airborne Systems	7,852		5,907		8,414
Forcepoint	651		590		561
Total	$	32,162	$	27,718	$	27,809

Included in bookings were international bookings of $9,850 million, $8,479 million and $8,193 million in 2018, 2017 and 2016, respectively, which included foreign military bookings through the U.S. government. International bookings amounted to 31% of total bookings in 2018 and 2017 and 29% of total bookings in 2016. Classified bookings amounted to 21%, 17%, and 20% of total bookings in 2018, 2017 and 2016, respectively.

We record bookings for not-to-exceed contract awards (e.g., undefinitized contract awards, binding letter agreements) based on reasonable estimates of the expected contract definitization. We subsequently adjust bookings to reflect the actual amounts definitized, or prior to definitization when facts and circumstances indicate that our previously estimated amounts are no longer reasonable. The timing of awards that may cover multiple fiscal years influences the size of bookings in each year. Bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ type contracts), and are reduced for contract cancellations and terminations of bookings recognized in the current year. We reflect contract cancellations and terminations from prior year bookings, as well as the impact of changes in foreign exchange rates, directly as an adjustment to backlog in the period in which the cancellation or termination occurs and the impact is determinable. Contract cancellations and terminations include contract underruns on cost-type programs.

Backlog—We disclose period-end backlog for each segment. Backlog, which is equivalent to our remaining performance obligations, represents the dollar value of firm orders for which work has not been performed. Backlog generally increases with bookings and generally converts into sales as we incur costs under the related contractual commitments. Therefore, we discuss changes in backlog, including any individually significant cancellations, for each of our segments, as we believe such discussion provides an understanding of the awarded but not executed portions of our contracts. Backlog excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ)). Backlog is affected by changes in foreign exchange rates.

Backlog (in millions) December 31:	~~2018~~2019		~~2017~~2018		~~2016~~2017
Integrated Defense Systems	$	1114,~~557~~180	$	911,~~186~~557	$	109,~~159~~186
Intelligence, Information and Services	6,~~233~~674		6,~~503~~233		56,~~662~~503
Missile Systems	1315,~~976~~835		13,~~426~~976		1113,~~568~~426
Space and Airborne Systems	1011,~~126~~525		810,~~611~~126		8,~~834~~611
Forcepoint(1)	528		484		486
Forcepoint	538		528		484
Total(2)	$	42,420	$	38,210	$	36,709
Total(1)	$	48,752	$	42,420	$	38,210

(1) ~~Forcepoint~~Included in the change in backlog ~~excludes~~at ~~the~~December ~~unfavorable~~31, ~~impact~~2019 compared to December 31, 2018 was backlog adjustments of $20.8 ~~million~~billion, ~~$12~~primarily ~~million~~related to contract underruns and ~~$45~~contract ~~million~~deobligations. Included in the change in backlog at December 31, 2018, compared to December 31, 2017 ~~and~~was ~~December~~backlog ~~31,~~adjustments ~~2016,~~of ~~respectively~~$0.9 billion, primarily related to ~~the~~contract ~~acquisition~~underruns ~~accounting~~and ~~adjustments~~contract todeobligations, ~~record~~and ~~acquired~~the ~~deferred~~effect ~~revenue~~of atthe ~~fair~~change ~~value~~in foreign exchange rates.

(2) Included in the change in backlog at December 31, 2018 compared to December 31, 2017 was backlog adjustments of $0.9 billion, primarily related to contract underruns and contract deobligations, and the effect of the change in foreign exchange rates. Included in the change in backlog at December 31, 2017 compared to December 31, 2016 was backlog adjustments of $0.8 billion, primarily related to contract underruns and contract deobligations.

Total Net Sales—We generally express changes in total net sales in terms of volume. Volume generally refers to increases or decreases in revenues related to varying amounts of total operating expenses incurred on individual contracts (i.e., from performance against contractual commitments on our bookings related to engineering, production or service activity). Therefore, we discuss volume changes attributable principally to individual programs or product lines unless there is a discrete event (e.g., a major contract termination, natural disaster or major labor strike), or some other unusual item that has a material effect on changes in a segment’s volume for a reported period. Due to the nature of our contracts, the amount of costs incurred and related revenues will naturally fluctuate over the lives of our contracts. As a result, in any reporting period, the changes in volume on numerous contracts are likely to be due to normal fluctuations in our engineering, production or service activities, depending on the phase of the contracts’ lifecycle.

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Total net sales by segment were as follows:

Total Net Sales (in millions)	~~2018~~2019			~~2017~~2018			~~2016~~2017
Integrated Defense Systems	$	6,~~180~~927		$	56,~~804~~180		$	5,~~529~~804
Intelligence, Information and Services	67,~~722~~151			6,~~177~~722			6,~~169~~177
Missile Systems	8,~~298~~726			78,~~787~~298			7,~~096~~787
Space and Airborne Systems	67,~~748~~427			6,~~430~~748			6,~~182~~430
Forcepoint	~~634~~658			~~608~~634			~~586~~608
Eliminations	(1,~~514~~712		)	(1,~~423~~514		)	(1,~~361~~423		)
Total business segment sales	2729,~~068~~177			2527,~~383~~068			2425,~~201~~383
Acquisition Accounting Adjustments	(101		)	(3510		)	(7735		)
Total	$	2729,~~058~~176		$	2527,~~348~~058		$	2425,~~124~~348

Total Operating Expenses—We generally disclose operating expenses for each segment in terms of the following: (1) cost of sales—labor; (2) cost of sales—materials and subcontractors; and (3) other ~~costs~~cost of sales and other operating expenses. Included in cost of sales—labor is the incurred direct labor costs associated with the performance of contracts in the current period and any applicable overhead and fringe costs. Included in cost of sales—materials and subcontractors is the incurred direct materials costs, subcontractor costs (which could include effort performed by other Raytheon segments or locations) and applicable overhead allocations in the current period. Included in other costs of sales and other operating expenses is other direct costs not captured in labor or materials and subcontractors costs, such as previously deferred precontract costs recognized in the period, applicable overhead allocations, general and administrative expenses, which include administrative and selling expenses (including bid and proposal costs) and research and development expenses, other direct costs (such as ancillary services and travel expenses) and adjustments for loss contracts.

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Operating Income (and the related operating margin percentage)—We generally express changes in segment operating income in terms of volume, net changes in EAC adjustments or changes in contract mix and other program performance.

The impact of changes in volume on operating income excludes the impact of net EAC adjustments and the impact of changes in contract mix and other program performance and is calculated based on changes in costs on individual programs at an overall margin for the segment. As such, changes in volume do not impact operating margins.

Changes in net EAC adjustments relate to changes in operating income and margin due to revisions to total estimated revenues and costs at completion. These changes reflect improved or deteriorated operating performance or award fee rates. For a full description of our EAC process, refer to Critical Accounting Estimates. Given that we have thousands of individual contracts and the types and complexity of the assumptions and estimates we must make on an on-going basis, we have both favorable and unfavorable EAC adjustments. We had the following aggregate EAC adjustments for the periods presented:

EAC Adjustments (in millions)	~~2018~~2019			~~2017~~2018			~~2016~~2017
Gross favorable	$	1,~~028~~167		$	1,~~116~~028		$	~~900~~1,116
Gross unfavorable	(~~536~~647		)	(~~674~~536		)	(~~482~~674		)
Total net EAC adjustments	$	~~492~~520		$	~~442~~492		$	~~418~~442

In recent years, our net EAC adjustments generally have been between 1.5% and 2.0% of total net sales. Our net EAC adjustments as a percentage of total net sales were 1.8% in 2019 and 2018 and 1.7% in 2017 ~~and 2016~~.

Significant EAC adjustments in ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017 are discussed in the Operating Income and Margin section of each business segment’s discussion below. The $5028 million increase in net EAC adjustments in ~~2018~~2019 compared to ~~2017~~2018 was primarily due to the increase in net EAC adjustments at ~~SAS~~IDS and IIS, partially offset by the decrease in net EAC adjustments at ~~IDS~~MS, all of which are described below in the respective segment’s results. The $2450 million increase in net EAC adjustments in ~~2017~~2018 compared to ~~2016~~2017 was primarily due to the increase in net EAC adjustments at ~~IDS~~SAS and MSIIS, partially offset by the decrease in net EAC adjustments at ~~SAS~~IDS, all of which are described below in the respective segment’s results.

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Changes in contract mix and other program performance refer to changes in operating income and margin due to a change in the relative volume of contracts with higher or lower fee rates such that the overall average margin rate for the segment changes, and other drivers of program performance including margin rate increases or decreases due to EAC adjustments in prior periods. A higher or lower expected fee rate at the initial award of a contract typically correlates to the contract’s risk profile, which is often specifically driven by the type of customer and related procurement regulations, the type of contract (e.g., fixed-price vs. cost-plus), the maturity of the product or service and the scope of work. Changes in contract mix and other performance also include all other items which are not related to volume or EAC adjustments (e.g., real estate transactions).

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Operating income by segment was as follows:

Operating Income (in millions)	~~2018~~2019			~~2017~~2018			~~2016~~2017
Integrated Defense Systems	$	1,~~023~~111		$	~~935~~1,023		$	~~971~~935
Intelligence, Information and Services	538			455			467
Intelligence, Information and Services(1)	658			538			455
Missile Systems	~~973~~959			~~1,010~~973			~~921~~1,010
Space and Airborne Systems	~~884~~991			~~862~~884			~~808~~862
Forcepoint	58			335			9033
Eliminations	(~~170~~184		)	(~~148~~170		)	(~~142~~148		)
Total business segment operating income	3,~~253~~543			3,~~147~~253			3,~~115~~147
Acquisition Accounting Adjustments	(~~126~~112		)	(~~160~~126		)	(~~198~~160		)
FAS/CAS Operating Adjustment	1,~~428~~454			1,~~303~~428			1,~~036~~303
Corporate	(17		)	(59		)	(57		)
Corporate and Reclassification(1)(2)	(111		)	(17		)	(59		)
Total	$	4,~~538~~774		$	4,~~231~~538		$	34,~~896~~231

(1)

In the third quarter of 2019, the Company revalued an investment in equity securities of a non-publicly traded company due to the availability of updated pricing data from a recent transaction and recognized a non-cash gain of $14 million. The gain is included in IIS’s operating income in 2019 as it is part of management’s evaluation of the segment’s performance and reclassified to other (income) expense, net on our consolidated statements of operations for financial reporting purposes as the gain is not related to our core operations. No amounts were recorded in 2018 or 2017.


(2)	In the fourth quarter of 2019, we were selected by the U.S. Army for the Lower Tier Air and Missile Defense Sensor (LTAMDS). The net expenses related to the LTAMDS project of $13 million in 2019 are included in Corporate operating income as they are not included in management’s evaluation of business segment results. No amounts were recorded in 2018 or 2017.

Integrated Defense Systems

										% Change
(In millions, except percentages)	~~2018~~2019			~~2017~~2018			~~2016~~2017			~~2018~~2019 compared to ~~2017~~2018		~~2017~~2018 compared to ~~2016~~2017
Total net sales	$	6,~~180~~927		$	56,~~804~~180		$	5,~~529~~804		612.51	%	56.05	%
Total operating expenses
Cost of sales—labor	2,~~231~~390			2,~~138~~231			12,~~983~~138			47.31	%	74.83	%
Cost of sales—materials and subcontractors	2,~~022~~303			12,~~845~~022			1,~~867~~845			913.69	%	(19.26	)%
Other cost of sales and other operating expenses	~~904~~1,123			~~886~~904			~~708~~886			224.02	%	252.10	%
Total operating expenses	5,~~157~~816			45,~~869~~157			4,~~558~~869			512.98	%	65.89	%
Operating income	$	1,~~023~~111		$	~~935~~1,023		$	~~971~~935		98.46	%	(39.74	)%
Operating margin	16.60		%	16.16		%	1716.61		%

Change in Operating Income (in millions)			Year Ended ~~2018~~2019 Versus Year Ended ~~2017~~2018					Year Ended ~~2017~~2018 Versus Year Ended ~~2016~~2017
Volume			$	42135				$	2342
Net change in EAC adjustments			~~(33~~60				)	39(33				)
Mix and other performance			79(107				)	~~(98~~79				)
Total change in operating income			$	88				$	~~(36~~88			)
								% Change
(In millions, except percentages)	~~2018~~2019		~~2017~~2018		~~2016~~2017			~~2018~~2019 compared to ~~2017~~2018			~~2017~~2018 compared to ~~2016~~2017
Bookings	$	89,~~698~~634	$	48,~~934~~698	$	54,~~377~~934		7610.38		%	(876.23	)%
Total Backlog	1114,~~557~~180		911,~~186~~557		109,~~159~~186			2522.87		%	(925.68	)%

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IDS is a leader in integrated air and missile defense; large land- and sea-based radar solutions; command, control, communications, computers, cyber and intelligence solutions; naval combat and ship electronic and sensing systems; and undersea sensing and effects solutions. IDS delivers combat-proven performance against the complete spectrum of airborne and ballistic missile threats and is a world leader in the technology, development, and production of sensors and mission systems. IDS provides solutions to the U.S. Department of Defense (DoD), and more than 50 international customers which represent more than half of IDS’s business.

Total Net Sales—The increase in total net sales of $~~376~~747 million in ~~2018~~2019 compared to ~~2017~~2018 was primarily due to higher net sales of $~~426~~402 million on ancertain ~~international~~European Patriot ~~program~~programs awarded in ~~the first quarter of~~ 2018, ~~which~~and ~~included an estimated $90 million of net sales recognized in~~ the ~~first~~second quarter of ~~2018 from previously inventoried costs~~2019, higher net sales of $~~113~~279 million on ~~various Patriot programs for~~ an international ~~customer~~air ~~driven~~and bymissile ~~planned~~defense ~~increases~~system ~~in production, higher net sales of $84 million on an international Patriot~~ program awarded in the ~~second~~third quarter of ~~2018~~2019, ~~and~~driven ~~higher~~primarily ~~net~~by ~~sales~~the recognition of ~~$71~~previously ~~million~~deferred onprecontract ~~close~~and ~~combat~~inventoried ~~tactical~~costs ~~radar~~of ~~programs~~$130 million and higher net sales of $64145 million on a ~~naval~~missile defense radar program ~~both~~for ~~driven~~an byinternational customer with awards in ~~2018~~the second and fourth quarters of 2019, partially offset by lower net sales of $~~371~~343 million on certain international Patriot programs due to the scheduled completion of certain production phases of the programs.

The increase in total net sales of $~~275~~376 million in ~~2017~~2018 compared to ~~2016~~2017 was primarily due to higher net sales of $~~260~~426 million on an international ~~early~~Patriot ~~warning radar~~ program awarded in the first quarter of ~~2017~~2018, ~~and~~which included an estimated $90 million of net sales recognized in the first quarter of 2018 from previously inventoried costs, higher net sales of $~~106~~113 million on various Patriot programs for an international ~~Patriot~~customer ~~program~~ driven by planned increases in production, higher net sales of $84 million on an ~~award~~international Patriot program awarded in the ~~fourth~~second quarter of ~~2016~~2018, ~~partially~~and ~~offset~~higher bynet sales of $~~161~~71 million on close combat tactical radar programs and higher net sales of $64 million on a naval radar program both driven by awards in 2018, partially offset by lower net sales of $371 million on certain international Patriot programs due to the scheduled completion of certain production phases of the programs.

Total Operating Expenses—The increase in total operating expenses of $~~288~~659 million in ~~2018~~2019 compared to ~~2017~~2018 was primarily due to an increase in materials and subcontractors costs of $~~177~~281 million, ~~driven~~an increase in other cost of sales and other operating expenses of $219 million and an increase in labor costs of $159 million. The increase in materials and subcontractors costs was principally due to higher activity on the certain European Patriot programs, and on the international air and missile defense system program awarded in the third quarter of 2019, both described above in Total Net Sales, and the completion of a transaction to satisfy all of our existing offset obligations on various Patriot programs for a MENA customer, partially offset by lower activity on the certain international Patriot programs described above in Total Net Sales. The increase in other cost of sales and other operating expenses was primarily due to a change in the amount of previously deferred precontract costs recognized based on contract awards, primarily due to $67 million recognized in the third quarter of 2019 related to the international air and missile defense system program awarded in the ~~first~~third quarter of ~~2018~~2019, and $58 million recognized in the fourth quarter of 2019 related to the additional award on the missile defense radar program for an international customer, both described above in Total Net Sales. The increase in labor costs was primarily due to higher activity on the certain European Patriot programs described above in Total Net Sales, higher activity on a naval radar program ~~and~~driven by awards in the ~~close~~first ~~combat~~and ~~tactical~~fourth quarters of 2019, higher activity on Patriot engineering services support for U.S. and international customers primarily driven by increased scope, and higher activity on the missile defense radar ~~programs~~program for an international customer described above in Total Net Sales, partially offset by lower activity on the certain international Patriot programs described above in Total Net Sales and lower activity on an international Patriot program awarded in the first quarter of 2018 driven by the recognition of previously inventoried costs in the first quarter of 2018.

The increase in total operating expenses of $~~311~~288 million in ~~2017~~2018 compared to ~~2016~~2017 was primarily due to an increase in ~~other~~materials ~~cost of sales~~ and ~~other~~subcontractors ~~operating~~costs ~~expenses~~ of $~~178~~177 million, ~~and~~driven anprincipally ~~increase~~by inactivity ~~labor~~on ~~costs~~the ofinternational ~~$155~~Patriot ~~million.~~program ~~The~~awarded ~~increase~~ in ~~other cost of sales and other operating expenses was principally driven by~~ the ~~tax-free~~first ~~gain~~quarter of ~~$158~~2018, ~~million from~~ the ~~sale~~naval ofradar ~~our~~program ~~equity~~and ~~method~~the ~~investment~~close incombat ~~TRS~~tactical ~~SAS~~radar inprograms ~~2016.~~described ~~Almost~~above ~~half of the increase~~ in ~~labor~~Total ~~costs~~Net ~~was~~Sales, ~~driven~~partially offset by activity on the certain international ~~early~~Patriot ~~warning~~programs ~~radar program~~ described above in Total Net Sales ~~with the remaining change spread across numerous programs with no individual or common significant driver~~.

Operating Income and Margin—The increase in operating income of $88 million in ~~2018~~2019 compared to ~~2017~~2018 was primarily due to aan ~~change~~increase in ~~mix~~volume ~~and other performance~~ of $79135 million and ana ~~increase~~net change in ~~volume~~EAC adjustments of $4260 million, partially offset by a ~~net~~ change in ~~EAC~~mix ~~adjustments~~and other performance of $33107 million. The ~~change~~increase in ~~mix~~volume ~~and other performance~~ was ~~principally~~primarily ~~driven~~due byto ~~higher~~activity ~~sales~~ on the ~~international Patriot program awarded in the first quarter of 2018 and the various Patriot~~ programs ~~for an international customer~~ described above in Total Net Sales,. ~~which~~The ~~had~~net achange ~~combined~~in ~~impact~~EAC ofadjustments ~~$134~~was ~~million,~~primarily ~~partially~~driven ~~offset~~ by ~~other~~$30 ~~activity~~million ~~with~~of nofavorable ~~individual~~profit oradjustments ~~common significant driver. Included~~ in the ~~change~~first inquarter ~~mix and other performance was $10 million~~ of ~~gains~~2019 onrelated ~~real~~to ~~estate~~the ~~transactions~~offset intransaction ~~2017.~~discussed ~~The~~above ~~increase~~ in ~~volume~~Total ~~was~~Operating ~~primarily~~Expenses due to ~~the~~a ~~activity~~reduction onof ~~the~~expected ~~programs~~costs ~~described~~to ~~above~~fulfill inour ~~Total~~offset ~~Net~~obligations ~~Sales.~~on ~~The~~several ~~net~~contracts, ~~change~~and ~~in EAC adjustments was primarily driven by~~ a $26 million negative profit adjustment in the third quarter of 2018 on a fixed price radar development program due to schedule delays from challenges in first-time production. ~~The increase in operating margin in 2018 compared to 2017 was primarily due to the change in mix and other performance, partially offset by the net change in EAC adjustments.~~

~~The~~ decrease in operating income of $36 million in 2017 compared to 2016 was primarily due to a change in mix and other performance of $98 million, partially offset by a net change in EAC adjustments of $39 million and higher volume of $23 million. The change in mix and other performance was driven principally by the tax-free gain of $158 million from the sale of our equity method investment in TRS SAS in 2016, partially offset by activity on the international Patriot program awarded in the fourth quarter of 2016 discussed above in Total Net Sales. Also included in the change in mix and other performance was $10 million of gains on real estate transactions in 2017 and $9 million of gains on real estate transactions in 2016. The net change in EAC adjustments was primarily driven by a negative profit adjustment of $36 million in the first quarter of 2016 on an international command and control program driven by costs to replace or repair shelters which the subcontractor refused to remedy resulting in the subcontractor being terminated. The increase in volume was primarily due to the international early 59

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~~warning~~In ~~radar~~total, the offset transaction resulted in $44 million of operating income in the first quarter of 2019. The change in mix and other performance was principally driven by lower sales on an international Patriot program awarded in the first quarter of 2018 driven by the recognition of previously inventoried costs in the first quarter of 2018 and lower sales on various Patriot programs for an international customer driven by the scheduled completion of certain ~~international~~production ~~Patriot~~phases of the programs, ~~described~~with ~~above~~the remaining change spread across numerous programs with no individual or common significant driver. Included in ~~Total~~the ~~Net~~change ~~Sales~~in mix and other performance was a $6 million gain on a real estate transaction in the first quarter of 2019. The decrease in operating margin in ~~2017~~2019 compared to ~~2016~~2018 was primarily due to the change in mix and other performance, partially offset by the net change in EAC adjustments.

~~Backlog~~The ~~and~~increase ~~Bookings—Backlog~~in ~~was~~operating income of $~~11,557~~88 million, in 2018 compared to 2017 was primarily due to a change in mix and other performance of $~~9,186~~79 million and an increase in volume of $1042 million,~~159~~ partially offset by a net change in EAC adjustments of $33 million. atThe ~~December 31,~~change in mix and other performance was principally driven by higher sales on the international Patriot program awarded in the first quarter of 2018 and the various Patriot programs for an international customer described above in Total Net Sales, ~~2017~~which ~~and~~had ~~2016~~a combined impact of $134 million, ~~respectively~~partially offset by other activity with no individual or common significant driver. ~~The~~Included ~~increase~~in the change in ~~backlog~~mix ofand other performance was $~~2,371~~10 million atof ~~December 31,~~gains ~~2018~~on ~~compared~~real toestate ~~December 31,~~transactions in 2017. The increase in volume was primarily due to ~~bookings~~the inactivity ~~excess~~on ofthe ~~sales~~programs atdescribed ~~our~~above ~~Integrated~~in ~~Air~~Total ~~and~~Net ~~Missile~~Sales. ~~Defense~~The ~~(IAMD)~~net ~~product~~change ~~line.~~in ~~The~~EAC ~~decrease~~adjustments inwas ~~backlog~~primarily ofdriven by a $~~973~~26 million atnegative ~~December 31,~~profit ~~2017~~adjustment ~~compared~~in tothe ~~December~~third ~~31,~~quarter ~~2016~~of ~~was~~2018 ~~primarily~~on ata ~~our~~fixed ~~IAMD~~price ~~product~~radar ~~line~~development ~~principally~~program due to ~~sales~~schedule indelays ~~excess~~from ofchallenges ~~bookings,~~in ~~partially~~first-time ~~offset~~production. byThe ~~our~~increase ~~Mission~~in ~~Systems~~operating ~~and~~margin ~~Sensors~~in ~~(MSS)~~2018 ~~product~~compared ~~line~~to 2017 was primarily due to ~~bookings~~the change in ~~excess~~mix ofand ~~sales~~other performance, partially offset by the net change in EAC adjustments.

~~The~~Backlog ~~bookings~~and ~~increase~~Bookings—Backlog ~~of $3,764 million in 2018 compared to 2017~~ was ~~driven primarily by the~~ $314,~~289~~180 million ~~increase in the specifically disclosed bookings below. In 2018~~, ~~IDS booked~~ $~~1.6 billion to provide advanced Patriot air and missile defense capability to an international customer~~11,557 ~~$1.3 billion to provide advanced Patriot air and missile defense capability for Poland, $676~~ million ~~to provide advanced Patriot air~~ and ~~missile defense capability for Sweden~~$9,186 ~~$380~~ million toat ~~provide Guidance Enhanced Missiles (GEM-T) for an international customer~~December 31, ~~$375 million to provide advanced Patriot air and missile defense capability for Romania~~2019, ~~$317~~2018 ~~million to provide Patriot engineering services support for U.S.~~ and ~~international customers~~2017, ~~$316 million on the AMDR program for the U~~respectively.S. ~~Navy,~~The ~~$276~~increase ~~million~~in ~~for~~backlog ~~the~~of ~~Collins class submarine program for the Royal Australian Navy~~$2,623 ~~$228~~ million ~~for~~at ~~the Army Navy/Transportable Radar Surveillance-Model 2 (AN/TPY-2) radar sustainment program for the MDA~~December 31, ~~$205~~2019 ~~million~~compared to ~~provide~~December 31, ~~Consolidated~~2018 ~~Contractor~~was ~~Logistics~~primarily ~~Support~~due ~~(CCLS)~~to ~~for~~bookings ~~the~~in ~~MDA,~~excess ~~$191~~of ~~million~~sales ~~for~~at ~~the~~our ~~Forward~~Integrated ~~Expeditionary~~Air ~~Advanced~~and ~~Vehicle~~Missile ~~Radar~~Defense (~~FEAVR~~IAMD) ~~program~~product ~~for the U~~line.S. ~~Army,~~The ~~$142~~increase ~~million~~in tobacklog ~~provide~~of ~~Patriot spares for an international customer~~$2,371 ~~$141~~ million toat ~~provide Patriot depot support for an international customer~~December 31, ~~$95~~2018 ~~million~~compared onto ~~the~~December ~~Multi-Function RF System (MFRFS) program for the U.S. Army~~31, ~~$83~~2017 ~~million~~was ~~for~~primarily ~~the~~due ~~Barracuda~~to ~~mine~~bookings ~~neutralization~~in ~~system~~excess ~~for~~of ~~the~~sales ~~U.S.~~at ~~Navy~~our ~~and~~IAMD ~~$76~~product ~~million for a lightweight torpedo program for the U~~line.~~S. Navy and international customers.~~

The bookings ~~decrease~~increase of $~~443~~936 million in ~~2017~~2019 compared to ~~2016~~2018 was driven primarily by the $~~319~~708 million ~~decrease~~increase in the specifically disclosed bookings below. In ~~2017~~2019, IDS booked $1~~,030~~.8 ~~million~~billion ~~for~~on ~~the~~a ~~Upgraded~~direct ~~Early~~commercial ~~Warning~~contract ~~Radar~~to provide National Advanced Surface-to-Air Missile System (~~UEWR~~NASAMS) ~~system~~to ~~for~~the State of Qatar, $~~448~~1.1 ~~million~~billion on two direct commercial contracts to provide advanced Patriot air and missile defense ~~capabilities~~capability ~~for~~to ~~certain~~existing international customers, ~~including~~ $~~145~~827 million on the AMDR program for ~~Qatar~~the ~~and~~U.S. Navy, $~~303~~504 million ~~for~~on ~~two~~NASAMS ~~other~~for ~~international customers~~Australia, $~~440~~486 million onto ~~the~~provide ~~AMDR~~advanced ~~program~~Patriot ~~for~~air ~~the~~and ~~U.S.~~missile ~~Navy~~defense capability for Romania, $~~304~~420 million on anthe ~~Early~~Army ~~Warning~~Navy/Transportable ~~Surveillance~~ Radar ~~System~~Surveillance-Model 2 (~~EWSRS~~AN/TPY-2) ~~support~~radar program for anthe ~~international~~Kingdom ~~customer~~of Saudi Arabia (KSA), $~~303~~375 million to provide ~~CCLS~~advanced Patriot air and missile defense capability for the ~~MDA~~State of Qatar, $~~263~~360 million to provide Patriot engineering services support for the U.S. Army and international customers, $~~180~~355 million to provide technical and logistics support for the Hawk and Patriot air and missile defense program for the KSA, $206 million on the Multi-Function Radio Frequency System (MFRFS) program for the U.S. Army, ~~and~~ $~~144~~205 million on the ~~AN/TPY-2~~Aegis ~~radar~~weapon ~~sustainment~~system ~~program~~for the U.S. Navy and international customers, $170 million to provide Consolidated Contractor Logistics Support (CCLS) for the Missile Defense Agency (MDA), $105 million to provide advanced Patriot air and missile defense capability for Germany, $103 million to provide advanced Patriot air and missile defense capability for the U.S. Army and other international customers and $93 million to provide engineering support services for an international customer.

The bookings increase of $3,764 million in 2018 compared to 2017 was driven primarily by the $3,289 million increase in the specifically disclosed bookings below. In ~~2016~~2018, IDS booked ~~approximately~~ $1.86 billion to provide advanced Patriot air and missile defense ~~capabilities~~capability ~~for~~to ~~certain~~an international ~~customers~~customer, ~~including~~ $~~480~~1.3 ~~million~~billion ~~for~~to ~~Kuwait,~~provide ~~$163~~advanced ~~million~~Patriot ~~for~~air ~~Qatar,~~ and ~~$623~~missile ~~million~~defense capability for Poland, $~~265~~676 million ~~and~~to ~~$226~~provide ~~million~~advanced ~~for~~Patriot ~~three~~air ~~international~~and ~~customers.~~missile ~~IDS~~defense ~~also~~capability ~~booked~~for Sweden, $~~373~~380 million onto ~~the~~provide ~~Aegis~~Guidance ~~weapon~~Enhanced ~~system~~Missiles (GEM-T) for ~~the~~an ~~U.S. Navy and~~ international ~~customers~~customer, $~~228~~375 million to provide ~~CCLS~~advanced ~~for~~Patriot ~~the~~air ~~MDA~~and missile defense capability for Romania, $~~227~~317 million to provide Patriot engineering services support for U.S. and international customers, $~~200~~316 million on the ~~AN/TPY-2~~AMDR ~~radar sustainment~~ program for the ~~MDA~~U.S. Navy, $~~117~~276 million for ~~in-service support for~~ the Collins class submarine program for the Royal Australian Navy, $~~110~~228 million onfor the ~~AMDR~~AN/TPY-2 radar sustainment program for the ~~U.S. Navy~~MDA, $92205 million ~~for~~to ~~the~~provide ~~engineering~~CCLS ~~and~~for ~~manufacturing~~the ~~development~~MDA, ~~phase~~$191 onmillion for the ~~competitively~~Forward ~~awarded~~Expeditionary ~~Enterprise~~Advanced ~~Air~~Vehicle ~~Surveillance~~ Radar (~~EASR~~FEAVR) program for the U.S. ~~Navy~~Army, ~~and~~ $86142 million to provide ~~advanced~~Patriot spares for an international customer, $141 million to provide Patriot ~~air~~depot ~~and~~support ~~missile~~for ~~defense~~an ~~capability~~international customer, $95 million on the MFRFS program for the U.S. Army., ~~IDS~~$83 ~~also~~million ~~booked~~for the Barracuda mine neutralization system for the U.S. Navy and $~~198~~76 million onfor a ~~classified~~lightweight torpedo program for the U.S. Navy and international customers.

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Table of Contents

In 2017, IDS booked $1,030 million for the Upgraded Early Warning Radar (UEWR) system for Qatar, $448 million to provide advanced Patriot air and missile defense capabilities for certain international customers, including $145 million for Qatar and $303 million for two other international customers, $440 million on the AMDR program for the U.S. Navy, $304 million on an Early Warning Surveillance Radar System (EWSRS) support program for an international customer, $303 million to provide CCLS for the MDA, $263 million to provide Patriot engineering services support for U.S. and international customers, $180 million on the MFRFS program for the U.S. Army and $144 million on the AN/TPY-2 radar sustainment program for the MDA.

Intelligence, Information and Services

										% Change
(In millions, except percentages)	~~2018~~2019			~~2017~~2018			~~2016~~2017			~~2018~~2019 compared to ~~2017~~2018		~~2017~~2018 compared to ~~2016~~2017
Total net sales	$	67,~~722~~151		$	6,~~177~~722		$	6,~~169~~177		86.84	%	08.18	%
Total operating expenses
Cost of sales—labor	2,~~762~~926			2,~~610~~762			2,~~478~~610			5.89	%	5.38	%
Cost of sales—materials and subcontractors	2,~~610~~748			2,~~309~~610			2,~~400~~309			135.03	%	(313.80	)%
Other cost of sales and other operating expenses	~~812~~819			~~803~~812			~~824~~803			10.19	%	(21.51	)%
Total operating expenses	6,~~184~~493			56,~~722~~184			5,~~702~~722			85.10	%	08.41	%
Operating income	$	~~538~~658		$	~~455~~538		$	~~467~~455		1822.23	%	(218.62	)%
Operating margin	89.02		%	78.40		%	7.64		%

Change in Operating Income (in millions)		Year Ended ~~2018~~2019 Versus Year Ended ~~2017~~2018		Year Ended ~~2017~~2018 Versus Year Ended ~~2016~~2017
Volume		$	3231	$	—32
Net change in EAC adjustments		4133		341
Mix and other performance		1056		~~(15~~10		)
Total change in operating income		$	83120	$	~~(12~~83	)
				% Change
(In millions, except percentages)	~~2018~~2019

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