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RAYTHEON (RTN)
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RAYTHEON C : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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04/26/2018 | 04:16pm CEST

OVERVIEW

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 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 our Annual Report on Form 10-K for the year
ended December 31, 2017.

As previously announced, effective January 1, 2018, we adopted the requirements
of Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits
(Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost on a retrospective basis as discussed in
"Note 2: Accounting Standards" within Item 1 of this Form 10-Q. All amounts and
disclosures set forth in this Form 10-Q reflect these changes.

The following discussion should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2017 and our unaudited consolidated
financial statements included in this Form 10-Q.

CONSOLIDATED RESULTS OF OPERATIONS
As described in our "Cautionary Note Regarding Forward-Looking Statements" on
page 3 of this Form 10-Q, our interim period results of operations and
period-to-period comparisons of such results, particularly at a segment level,
may not be indicative of our future operating results. Additionally, we use a
fiscal calendar, which may result in differences in the number of work days in
the current and comparable prior interim period and could affect
period-to-period comparisons. The following discussions of comparative results
among periods, including the discussion of segment results, should be viewed in
this context.

Total Net Sales
The composition of external net sales by products and services for each segment
for the first quarter of 2018 was approximately the following:
(% of segment total external net sales) IDS   IIS   MS   SAS   Forcepoint
Products                                 90 %  45 % 95 % 100 %         90 %
Services                                 10 %  55 %  5 %   - %         10 %



                                              Three Months Ended                 % of Total Net Sales
(In millions, except percentages)       Apr 1, 2018         Apr 2, 2017      Apr 1, 2018     Apr 2, 2017
Net sales
Products                              $    5,254          $       5,044           83.8 %           84.1 %
Services                                   1,013                    956           16.2 %           15.9 %
Total net sales                       $    6,267          $       6,000          100.0 %          100.0 %



Total Net Sales - First Quarter of 2018 vs. First Quarter of 2017-The increase
in total net sales of $267 million in the first quarter of 2018 compared to the
first quarter of 2017 was primarily due to higher external net sales of $91
million at IDS, $90 million at IIS and $85 million at MS. The increase in
external net sales at IDS was primarily due to higher net sales on an
international Patriot® program awarded in the first quarter of 2018, partially
offset by lower net sales on certain international Patriot programs due to the
scheduled completion of certain production phases of the programs. The increase
in external net sales at IIS was primarily due to higher net sales on classified
programs 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 and higher net sales on the Standard Missile-2 (SM-2) program due to
planned increases in production, partially offset by lower net sales on the
Exoatmospheric Kill Vehicle (EKV) program and lower net sales on the
Tube-launched, Optically-tracked, Wireless-guided (TOW®) program both due to
planned declines in production.


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Products and Services Net Sales - First Quarter of 2018 vs. First Quarter of
2017-The increase in products net sales of $210 million in the first quarter of
2018 compared to the first quarter of 2017 was primarily due to higher external
products net sales of $89 million at IDS and $69 million at MS. The increase in
external products net sales at IDS was primarily due to the programs discussed
above. The increase in external products net sales at MS was primarily due to
the programs discussed above, partially offset by lower external product net
sales on the Paveway™ program due to international requirements. The increase in
services net sales of $57 million in the first quarter of 2018 compared to the
first quarter of 2017 was primarily due to higher external services net sales of
$64 million at IIS primarily due to the programs in support of the U.S. Army's
Warfighter FOCUS activities discussed above with the remaining change spread
across numerous programs with no individual or common significant driver.

Sales to Major Customers - First Quarter of 2018 vs. First Quarter of 2017

                                              Three Months Ended                 % of Total Net Sales
(In millions, except percentages)       Apr 1, 2018         Apr 2, 2017      Apr 1, 2018      Apr 2, 2017
Sales to the U.S. government(1)(2)    $    4,260          $       3,984            68 %               66 %
U.S. direct commercial sales and
other U.S. sales                             120                     98             2 %                2 %
Foreign military sales through the
U.S. government                              718                    768            11 %               13 %
Foreign direct commercial sales and
other foreign sales(1)                     1,169                  1,150            19 %               19 %
Total net sales                       $    6,267          $       6,000           100 %              100 %

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

(2) Includes sales to the U.S. Department of Defense (DoD) of $4,080 million, or

65% of total net sales, in the first quarter of 2018 and $3,782 million, or

63% of total net sales, in the first quarter of 2017.



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.
                                                Three Months Ended                   % of Total Net Sales
(In millions, except percentages)       Apr 1, 2018         Apr 2, 2017(1)      Apr 1, 2018     Apr 2, 2017(1)
Cost of sales
Products                              $    3,737          $          3,617           59.6 %              60.3 %
Services                                     795                       749           12.7 %              12.5 %
Total cost of sales                   $    4,532          $          4,366           72.3 %              72.8 %

(1) Amounts have been recasted to reflect the adoption of ASU 2017-07,

Compensation - Retirement Benefits (Topic 715): Improving the Presentation of

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as

discussed in "Note 2: Accounting Standards" within Item 1 of this Form 10-Q.



Total Cost of Sales - First Quarter of 2018 vs. First Quarter of 2017-The
increase in total cost of sales of $166 million in the first quarter of 2018
compared to the first quarter of 2017 was primarily due to higher external cost
of sales at IIS and MS primarily due to the programs described above in Total
Net Sales.

Products and Services Cost of Sales - First Quarter of 2018 vs. First Quarter of
2017-The increase in products cost of sales of $120 million in the first quarter
of 2018 compared to the first quarter of 2017 was primarily due to higher
external products cost of sales at MS primarily due to the programs described
above in Total Net Sales. The increase in services cost of sales of $46 million
in the first quarter of 2018 compared to the first quarter of 2017 was primarily
due to higher external services cost of sales at IIS primarily due to the
programs described above in Total Net Sales, with the remaining change spread
across numerous programs with no individual or common significant driver.

General and Administrative Expenses

                                                  Three Months Ended                 % of Total Net Sales
(In millions, except percentages)         Apr 1, 2018       Apr 2, 2017(1)      Apr 1, 2018     Apr 2, 2017(1)
Administrative and selling expenses       $      528      $            523            8.4 %               8.7 %
Research and development expenses                166                   163            2.6 %               2.7 %
Total general and administrative expenses $      694      $            686           11.1 %              11.4 %


(1) Amounts have been recasted to reflect the adoption of ASU 2017-07,

Compensation - Retirement Benefits (Topic 715): Improving the Presentation of

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as

discussed in "Note 2: Accounting Standards" within Item 1 of this Form 10-Q.



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Administrative and selling expenses in the first quarter of 2018 were relatively consistent with the first quarter of 2017.

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 $10 million and $9 million in the first quarters of 2018 and
2017, respectively.

Research and development expenses in the first quarter of 2018 were relatively consistent with the first quarter of 2017.

Total Operating Expenses

                                         Three Months Ended

(In millions, except percentages) Apr 1, 2018 Apr 2, 2017(1) Total operating expenses $ 5,226 $ 5,052 % of Total Net Sales

                    83.4 %             84.2 %


(1) Amounts have been recasted to reflect the adoption of ASU 2017-07,

Compensation - Retirement Benefits (Topic 715): Improving the Presentation of

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as

discussed in "Note 2: Accounting Standards" within Item 1 of this Form 10-Q.



The increase in total operating expenses of $174 million in the first quarter of
2018 compared to the first quarter of 2017 was primarily due to the increase in
total cost of sales of $166 million, the primary drivers of which are described
above in Total Cost of Sales.

Operating Income
                                          Three Months Ended

(In millions, except percentages) Apr 1, 2018 Apr 2, 2017(1) Operating income

                  $    1,041       $         948
% of Total Net Sales                    16.6 %              15.8 %


(1) Amounts have been recasted to reflect the adoption of ASU 2017-07,

Compensation - Retirement Benefits (Topic 715): Improving the Presentation of

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as

discussed in "Note 2: Accounting Standards" within Item 1 of this Form 10-Q.



The increase in operating income of $93 million in the first quarter of 2018
compared to the first quarter of 2017 was due to the increase in total net sales
of $267 million, the primary drivers of which are described above in Total Net
Sales, partially offset by the increase in total operating expenses of $174
million, the primary drivers of which are described above in Total Operating
Expenses.

Total Non-Operating (Income) Expense, Net

                                                  Three Months Ended
(In millions)                              Apr 1, 2018       Apr 2, 2017(1)
Non-operating (income) expense, net
Retirement benefits non-service expense   $       239       $          207
Interest expense                                   47                   58
Interest income                                    (7 )                 (5 )
Other (income) expense, net                         5                   (7 )

Total non-operating (income) expense, net $ 284 $ 253

(1) Amounts have been recasted to reflect the adoption of ASU 2017-07,

Compensation - Retirement Benefits (Topic 715): Improving the Presentation of

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as

discussed in "Note 2: Accounting Standards" within Item 1 of this Form 10-Q.



The increase in total non-operating (income) expense, net of $31 million in the
first quarter of 2018 compared to the first quarter of 2017 was primarily due to
an increase in retirement benefits non-service expense of $32 million
principally driven by the lower discount rate at December 31, 2017 compared to
the discount rate at December 31, 2016 and our annual actuarial update which
takes into account final census data as described in our Annual Report on Form
10-K for the year ended December 31, 2017, partially offset by favorable asset
performance and higher discretionary pension contributions in 2017. Also
included in the change in total non-operating (income) expense, net was a $12
million change in the mark-to-market of marketable securities held in trust
associated with certain of our non-qualified deferred compensation and employee
benefit plans, due to net losses of $4 million in the first quarter of 2018
compared to net gains of $8 million in the first quarter of 2017, and a decrease
in interest expense of $11 million due to the repurchase of long-term debt in
the second quarter of 2017.

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Federal and Foreign Income Taxes

                                        Three Months Ended

(In millions, except percentages) Apr 1, 2018 Apr 2, 2017 Federal and foreign income taxes $ 133 $ 198 Effective tax rate

                       17.6 %            28.5 %



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 export
sales.

At April 1, 2018, we have not completed our accounting for the tax effects of
enactment of the 2017 Act. We continue to prepare, review and assess certain
information and perform analyses related to the 2017 Act. For a more detailed
discussion of the effects of the 2017 Act refer to "Note 14: Income Taxes"
within Item 1 of this Form 10-Q.

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 the volatility of our stock
price and how many awards vest in the period.

Our effective tax rate in the first quarter of 2018 was 17.6% compared to 28.5%
in the first quarter of 2017. The decrease of 10.9% was primarily due to the
decrease in the statutory federal rate, which decreased the rate by 14.0%,
foreign derived intangible income (FDII), which decreased the rate by 3.0% and
the tax benefit recognized upon settlement of stock-based awards, which
decreased the rate by 1.5%, partially offset by the repeal of the domestic
manufacturing deduction, which unfavorably impacted the rate by 3.0%, the
foreign rate differential, which increased the rate by 1.9% and the one-time
transition tax on undistributed foreign earnings, which increased the rate by
1.7%. The remaining increase of 1.0% is composed of various unrelated items
which individually or collectively are not significant.

Our effective tax rate in the first quarter of 2018 was 3.4% lower than the
statutory federal rate primarily due to the tax benefit recognized upon
settlement of stock-based awards, which decreased the rate by 3.4%, FDII, which
decreased the rate by 3.0% and the Research and Development tax credit (R&D tax
credit), which decreased the rate by 1.8%. Items which increased the effective
tax rate were the foreign rate differential, which increased the rate by 1.9%
and the one-time transition tax on undistributed foreign earnings, which
increased the rate by 1.7%. The remaining increase of 1.2% is composed of
various unrelated items which individually or collectively are not significant.

Our effective tax rate in the first quarter of 2017 was 6.5% lower than the
statutory federal rate primarily due to the domestic manufacturing deduction,
which decreased the rate by 3.0%, the tax benefit recognized upon settlement of
equity awards, which decreased the rate by 1.9% and the R&D tax credit, which
decreased the rate by 1.4%. The remaining decrease of 0.2% is composed of
various items which individually or collectively are not significant.

Income from Continuing Operations

                                           Three Months Ended
(In millions)                         Apr 1, 2018        Apr 2, 2017
Income from continuing operations $     624             $         497



The increase in income from continuing operations of $127 million in the first
quarter of 2018 compared to the first quarter of 2017 was primarily due to an
increase of $93 million in operating income, the primary drivers of which are
described above in Operating Income and a decrease of $65 million in federal and
foreign income taxes, related to the decrease in our effective tax rate
described above in Federal and Foreign Income Taxes, partially offset by an
increase of $31 million in total non-operating (income) expense, net, the
primary drivers of which are described above in Total Non-Operating (Income)
Expense, Net.


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Net Income
                       Three Months Ended
(In millions)     Apr 1, 2018        Apr 2, 2017
Net income    $     623             $         500



The increase in net income of $123 million in the first quarter of 2018 compared
to the first quarter of 2017 was primarily due to the $127 million increase in
income from continuing operations, the primary drivers of which are described
above in Income from Continuing Operations.

Diluted Earnings Per Share (EPS) from Continuing Operations Attributable to Raytheon Company Common Stockholders

                                                                    Three Months Ended
(In millions, except per share amounts)                       Apr 1, 2018   

Apr 2, 2017 Income from continuing operations attributable to Raytheon Company

                                                       $      634      $         503
Diluted weighted-average shares outstanding                        288.8    

292.8

 Diluted EPS from continuing operations attributable to
Raytheon Company                                              $     2.20      $        1.73



The increase in diluted EPS from continuing operations attributable to Raytheon
Company common stockholders of $0.47 in the first quarter of 2018 compared to
the first quarter of 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 affected 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 first quarter of 2017 for the impact of our redeemable
noncontrolling interest redemption value adjustments, as discussed in "Note 4:
Earnings Per Share (EPS)" within Item 1 of this Form 10-Q.

Our common stock share activity was as follows:

                            Three Months Ended
(In millions)          Apr 1, 2018     Apr 2, 2017
Beginning balance          288.4            292.8
Stock plans activity         1.0              1.1
Share repurchases           (2.2 )           (2.9 )
Ending balance             287.2            291.0


Diluted EPS Attributable to Raytheon Company Common Stockholders

                                                       Three Months Ended
(In millions, except per share amounts)           Apr 1, 2018        Apr 2, 

2017

Net income attributable to Raytheon Company    $      633           $       

506

Diluted weighted-average shares outstanding         288.8                   

292.8

Diluted EPS attributable to Raytheon Company   $     2.19           $       

1.74



The increase in diluted EPS attributable to Raytheon Company common stockholders
of $0.45 in the first quarter of 2018 compared to the first quarter of 2017 was
primarily due to the $0.47 increase in diluted EPS from continuing operations
attributable to Raytheon Company common stockholders described above in Diluted
Earnings Per Share (EPS) from Continuing Operations Attributable to Raytheon
Company Common Stockholders.

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

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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. In addition, due to these factors, quarterly bookings tend to
fluctuate from period to period, particularly on a segment basis. As a result,
we believe comparing bookings on a quarterly basis or for periods less than one
year is less meaningful than for longer periods and that shorter term changes in
bookings may not necessarily indicate a material trend.
                                                Three Months Ended
Bookings (in millions)                     Apr 1, 2018       Apr 2, 2017
Integrated Defense Systems               $    2,475         $       1,631
Intelligence, Information and Services        1,074                 1,734
Missile Systems                               1,390                   743
Space and Airborne Systems                    1,272                 1,475
Forcepoint                                      100                   105
Total                                    $    6,311         $       5,688



Included in bookings were international bookings of $2,848 million and $1,892
million in the first quarters of 2018 and 2017, respectively, which included
foreign military bookings through the U.S. government. International bookings
amounted to 45% and 33% of total bookings in the first quarters of 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.

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.,
IDIQ). Backlog is affected by changes in foreign exchange rates.
Backlog (in millions)                     Apr 1, 2018      Dec 31, 2017
Integrated Defense Systems               $      10,160    $        9,186
Intelligence, Information and Services           6,079             6,503
Missile Systems                                 13,037            13,426
Space and Airborne Systems                       8,414             8,611
Forcepoint(1)                                      449               484
Total                                    $      38,139    $       38,210

(1) Forcepoint backlog excludes the unfavorable impact of $8 million and $12

million at April 1, 2018 and December 31, 2017, respectively, related to the

Acquisition Accounting Adjustments to record acquired deferred revenue at

    fair value.



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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, which are comprised of cost of
sales and general and administrative expenses, which include administrative and
selling expenses (including bid and proposal costs) and research and development
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.

Total net sales by segment were as follows:

                                              Three Months Ended
Total Net Sales (in millions)             Apr 1, 2018     Apr 2, 2017
Integrated Defense Systems               $    1,489      $     1,398
Intelligence, Information and Services        1,582            1,507
Missile Systems                               1,848            1,756
Space and Airborne Systems                    1,568            1,555
Forcepoint                                      141              144
Eliminations                                   (357 )           (350 )
Total business segment sales                  6,271            6,010
Acquisition Accounting Adjustments               (4 )            (10 )
Total                                    $    6,267      $     6,000



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 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
cost of sales and other operating expenses is other direct costs not captured in
labor or material and subcontractor costs, such as precontract costs previously
deferred, 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.

Operating Income (and the related operating margin percentage)-We generally
express changes in segment operating income in terms of volume, net changes in
Estimate at Completion (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.

Changes in net EAC adjustments typically relate to the current period impact of
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 "Note 3: Changes in Estimates
under Percentage of Completion Contract Accounting" within Item 1 of this Form
10-Q. 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:
                                      Three Months Ended
EAC Adjustments (in millions)   Apr 1, 2018         Apr 2, 2017
Gross favorable               $         206       $         229
Gross unfavorable                       (91 )              (175 )
Total net EAC adjustments     $         115       $          54




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Significant EAC adjustments in the first quarters of 2018 and 2017 are discussed
in the Operating Income and Margin section of each business segment's discussion
below. The increase in net EAC adjustments of $61 million in the first quarter
of 2018 compared to the first quarter of 2017 was primarily due to the increase
in net EAC adjustments at MS, IDS, and SAS.

Changes in contract mix and other program performance refer to changes in
operating 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).

Operating income by segment was as follows:

                                                Three Months Ended
Operating Income (in millions)             Apr 1, 2018      Apr 2, 2017
Integrated Defense Systems                $      273       $       212
Intelligence, Information and Services           117               111
Missile Systems                                  212               216
Space and Airborne Systems                       193               190
Forcepoint                                        (7 )              16
Eliminations                                     (40 )             (37 )
Total business segment operating income          748               708
Acquisition Accounting Adjustments               (33 )             (42 )
FAS/CAS Operating Adjustment                     354               315
Corporate                                        (28 )             (33 )
Total                                     $    1,041       $       948



Integrated Defense Systems
                                                                  Three Months Ended
(In millions, except percentages)                       Apr 1, 2018     Apr 2, 2017    % Change
Total net sales                                        $     1,489     $     1,398        6.5  %
Total operating expenses
Cost of sales-labor                                            553             535        3.4  %
Cost of sales-materials and subcontractors                     466             419       11.2  %
Other cost of sales and other operating expenses               197             232      (15.1 )%
Total operating expenses                                     1,216           1,186        2.5  %
Operating income                                       $       273     $       212       28.8  %
Operating margin                                              18.3 %          15.2 %


                                                       Three Months Ended Apr 1, 2018 Versus Three
Change in Operating Income (in millions)                         Months Ended Apr 2, 2017
Volume                                                                  $   

4

Net change in EAC adjustments                                               

15

Mix and other performance                                                   

42

Total change in operating income                                        $   

61

                                                                    Three Months Ended
(In millions, except percentages)                       Apr 1, 2018       Apr 2, 2017     % Change
Bookings                                               $      2,475     $       1,631        51.7 %




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Total Net Sales-The increase in total net sales of $91 million in the first
quarter of 2018 compared to the first quarter of 2017 was primarily due to
higher net sales of $203 million on an international Patriot program awarded in
the first quarter of 2018, partially offset by lower net sales of $120 million
on certain international Patriot programs due to the scheduled completion of
certain production phases of the programs. Included in the change in net sales
on the international Patriot programs discussed above was an estimated $90
million of net sales recognized in the first quarter of 2018 from previously
inventoried costs.

Total Operating Expenses-The increase in total operating expenses of $30 million
in the first quarter of 2018 compared to the first quarter of 2017 was primarily
due to an increase in materials and subcontractors costs of $47 million and an
increase in labor costs of $18 million, partially offset by a decrease in other
cost of sales and other operating expenses of $35 million. The increase in
materials and subcontractors costs was primarily due to activity on the programs
described above in Total Net Sales. The increase in labor costs was primarily
due to activity on the international Patriot program awarded in the first
quarter of 2018 described above in Total Net Sales and activity on an
international early warning radar program awarded in the first quarter of 2017,
partially offset by activity on the certain international Patriot programs
described above in Total Net Sales. The decrease in other cost of sales and
other operating expenses was primarily due to previously deferred precontract
costs of $32 million recognized in the first quarter of 2017 related to the
international early warning radar program awarded in the first quarter of 2017.

Operating Income and Margin-The increase in operating income of $61 million and
the related increase in operating margin in the first quarter of 2018 compared
to the first quarter of 2017 was primarily due to a change in mix and other
performance of $42 million principally driven by higher sales on the
international Patriot program awarded in the first quarter of 2018 described
above in Total Net Sales.

Backlog and Bookings-Backlog was $10,160 million at April 1, 2018 compared to
$9,186 million at December 31, 2017. The increase in backlog of $974 million at
April 1, 2018 compared to December 31, 2017 was primarily due to bookings in
excess of sales principally within the Integrated Air and Missile Defense
product line. Bookings increased by $844 million in the first quarter of 2018
compared to the first quarter of 2017. In the first quarter of 2018, IDS booked
$1.6 billion to provide advanced Patriot air and missile defense capability to
an international customer, $226 million to provide Patriot engineering services
support for U.S. and international customers, $150 million to provide Patriot
depot support for an international customer and $139 million to provide Patriot
spares for an international customer. In the first quarter of 2017, IDS booked
$987 million for the Upgraded Early Warning Radar (UEWR) system for Qatar and
$220 million to provide Patriot engineering services support for U.S. and
international customers.

Intelligence, Information and Services

                                                                  Three Months Ended
(In millions, except percentages)                       Apr 1, 2018     Apr 2, 2017    % Change
Total net sales                                        $     1,582     $     1,507        5.0 %
Total operating expenses
Cost of sales-labor                                            693             656        5.6 %
Cost of sales-materials and subcontractors                     578             546        5.9 %
Other cost of sales and other operating expenses               194             194          - %
Total operating expenses                                     1,465           1,396        4.9 %
Operating income                                       $       117     $       111        5.4 %
Operating margin                                               7.4 %           7.4 %


                                                         Three Months Ended Apr 1, 2018 Versus
Change in Operating Income (in millions)                     Three Months Ended Apr 2, 2017
Volume                                                                  $   

5

Net change in EAC adjustments                                               

9

Mix and other performance                                                        (8 )
Total change in operating income                                        $   

6

                                                                   Three Months Ended
(In millions, except percentages)                       Apr 1, 2018      Apr 2, 2017    % Change
Bookings                                               $      1,074     $     1,734      (38.1 )%



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Total Net Sales-The increase in total net sales of $75 million in the first quarter of 2018 compared to the first quarter of 2017 was primarily due to higher net sales of $31 million on classified programs and higher net sales of $22 million on programs in support of the U.S. Army's Warfighter FOCUS activities driven principally by customer determined activity levels.

Total Operating Expenses-The increase in total operating expenses of $69 million
in the first quarter of 2018 compared to the first quarter of 2017 was primarily
due to an increase in labor costs of $37 million and an increase in materials
and subcontractors costs of $32 million. Approximately half of the increase in
labor costs was driven by activity on the programs described above in Total Net
Sales, with the remaining change spread across numerous programs with no
individual or common significant driver. The increase in materials and
subcontractors' cost was driven principally by activity on the classified
programs described above in Total Net Sales.

Operating Income and Margin-The increase in operating income of $6 million in
the first quarter of 2018 compared to the first quarter of 2017 was primarily
due to a net change in EAC adjustments of $9 million and an increase in volume
of $5 million, partially offset by a change in mix and other performance of $8
million, all of which were spread across numerous programs with no individual or
common significant driver. Operating margin in the first quarter of 2018 was
consistent with the first quarter of 2017.

Backlog and Bookings-Backlog was $6,079 million at April 1, 2018 compared to
$6,503 million at December 31, 2017. The decrease in backlog of $424 million at
April 1, 2018 compared to December 31, 2017 was primarily due to sales in excess
of bookings principally within the Global Training Solutions product line driven
by Warfighter FOCUS program activity. See Commitments and Contingencies for a
discussion of our recent failure to win the Army Training Aids, Devices,
Simulators and Simulations Maintenance Program (ATMP) and subsequent protest.
Bookings decreased by $660 million in the first quarter of 2018 compared to the
first quarter of 2017. In the first quarter of 2018, IIS booked $80 million on
domestic and foreign training programs in support of Warfighter FOCUS
activities. IIS also booked $514 million on a number of classified contracts. In
the first quarter of 2017, IIS booked approximately $930 million on U.S. Air
Force programs and $390 million on a number of classified contracts.

Missile Systems

                                                                  Three Months Ended
(In millions, except percentages)                       Apr 1, 2018     Apr 2, 2017    % Change
Total net sales                                        $     1,848     $     1,756        5.2  %
Total operating expenses
Cost of sales-labor                                            622             549       13.3  %
Cost of sales-materials and subcontractors                     826             781        5.8  %
Other cost of sales and other operating expenses               188             210      (10.5 )%
Total operating expenses                                     1,636           1,540        6.2  %
Operating income                                       $       212     $       216       (1.9 )%
Operating margin                                              11.5 %          12.3 %


                                                         Three Months Ended Apr 1, 2018 Versus
Change in Operating Income (in millions)                     Three Months Ended Apr 2, 2017
Volume                                                                  $   

13

Net change in EAC adjustments                                               

20

Mix and other performance                                                       (37 )
Total change in operating income                                        $   

(4 )

                                                                   Three Months Ended
(In millions, except percentages)                       Apr 1, 2018      Apr 2, 2017    % Change
Bookings                                               $      1,390     $       743        87.1 %



Total Net Sales-The increase in total net sales of $92 million in the first
quarter of 2018 compared to the first quarter of 2017 was primarily due to
higher net sales of $123 million on classified programs and higher net sales of
$41 million on the Standard Missile-2 (SM-2) program due to planned increases in
production, partially offset by lower net sales of $36 million on the

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Exoatmospheric Kill Vehicle (EKV) program and lower net sales of $35 million on
the Tube-launched, Optically-tracked, Wireless-guided (TOW) program both due to
planned declines in production.

Total Operating Expenses-The increase in total operating expenses of $96 million
in the first quarter of 2018 compared to the first quarter of 2017 was primarily
due to the increase in labor costs of $73 million and the increase in materials
and subcontractors costs of $45 million, partially offset by the decrease in
other cost of sales and other operating expense of $22 million. The increase in
labor costs was driven principally by the activity on the classified programs
described above in Total Net Sales. Approximately half of the increase in
materials and subcontractors costs was driven by international requirements on
the Paveway program and activity on the programs described above in Total Net
Sales, with the remaining change spread across numerous programs with no
individual or common significant driver. The decrease in other cost of sales and
other operating expense was primarily due to a $14 million change in the amount
of previously deferred precontract costs recognized based on contract awards,
lower general and administrative expenses driven primarily by the timing of
independent research and development costs, partially offset by the timing of
costs applied to contracts through rates, with the remaining change spread
across numerous programs with no individual or common significant driver.

Operating Income and Margin-Operating income in the first quarter of 2018 was
relatively consistent with the first quarter of 2017. The change in mix and
other performance of $37 million was principally driven by activity on the
Paveway program, which had an impact of $22 million, primarily due to
international requirements. The net change in EAC adjustments of $20 million was
principally driven by a net change in EAC adjustments on the Advanced
Medium-Range Air-to-Air Missile (AMRAAM®) program due to an increase in
estimated labor and material production costs in the first quarter of 2017. The
increase in volume of $13 million was primarily driven by activity on the
classified programs described above in Total Net Sales. The decrease in
operating margin in the first quarter of 2018 compared to the first quarter of
2017 was primarily due to the change in mix and other performance partially
offset by the net change in EAC adjustments.

Backlog and Bookings-Backlog was $13,037 million at April 1, 2018 compared to
$13,426 million at December 31, 2017. The decrease in backlog of $389 million at
April 1, 2018 compared to December 31, 2017 was primarily due to sales in excess
of bookings, principally within our Air and Missile Defense Systems product
line. Bookings increased by $647 million in the first quarter of 2018 compared
to the first quarter of 2017. In the first quarter of 2018, MS booked $552
million for AMRAAM for the U.S. Air Force, U.S. Navy and international
customers, $186 million for Small Diameter Bomb II (SDB II™) for the U.S. Air
Force and $114 million for Commander's Independent Thermal Viewers (CITV) for
the U.S. Army and an international customer. MS also booked $130 million on a
number of classified contracts. In the first quarter of 2017, MS booked $203
million for AIM-9X Sidewinder short-range air-to-air missiles for U.S. and
international customers and $159 million for Paveway for international
customers.

Space and Airborne Systems
                                                                  Three Months Ended
(In millions, except percentages)                       Apr 1, 2018     Apr 2, 2017    % Change
Total net sales                                        $     1,568     $     1,555        0.8  %
Total operating expenses
Cost of sales-labor                                            688             666        3.3  %
Cost of sales-materials and subcontractors                     391             442      (11.5 )%
Other cost of sales and other operating expenses               296             257       15.2  %
Total operating expenses                                     1,375           1,365        0.7  %
Operating income                                       $       193     $       190        1.6  %
Operating margin                                              12.3 %          12.2 %



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                                                         Three Months Ended Apr 1, 2018 Versus
Change in Operating Income (in millions)                     Three Months Ended Apr 2, 2017
Volume                                                                  $   

1

Net change in EAC adjustments                                               

13

Mix and other performance                                                       (11 )
Total change in operating income                                        $   

3

                                                                   Three Months Ended
(In millions, except percentages)                       Apr 1, 2018      Apr 2, 2017    % Change
Bookings                                               $      1,272     $     1,475      (13.8 )%


Total Net Sales-Total net sales in the first quarter of 2018 were relatively consistent with the first quarter of 2017.

Total Operating Expenses-Total operating expenses in the first quarter of 2018
were relatively consistent with the first quarter of 2017. The increase in other
cost of sales and other operating expenses of $39 million was driven primarily
by higher other direct program costs principally due to an increase in software
royalty and licensing costs based on the timing of program requirements. The
decrease in materials and subcontractors costs of $51 million was principally
driven by activity on classified programs due to planned reduced schedule
requirements.

Operating Income and Margin-Operating income and margin in the first quarter of
2018 were relatively consistent with the first quarter of 2017. The net change
in EAC adjustments of $13 million was primarily driven by a change in net EAC
adjustments on protected communication systems development and production
programs due to an increase in estimated labor and material costs in the first
quarter of 2017. The change in mix and other performance of $11 million was
primarily driven by activity on an international tactical radar systems program
due to scheduled completion of certain production phases.

Backlog and Bookings-Backlog was $8,414 million at April 1, 2018 compared to
$8,611 million at December 31, 2017. The decrease in backlog of $197 million at
April 1, 2018 compared to December 31, 2017 was primarily due to sales in excess
of bookings principally within the Space Systems product line. Bookings
decreased by $203 million in the first quarter of 2018 compared to the first
quarter of 2017. In the first quarter of 2018, SAS booked $87 million for the
next-generation Multi-Spectral Targeting System (MTS) for the U.S. Air Force and
$85 million for radar components for the U.S. Navy. SAS also booked $356 million
on a number of classified contracts. In the first quarter of 2017, SAS booked
$256 million for Active Electronically Scanned Array (AESA) radars for the U.S.
Air Force and $250 million on two contracts for international customers, one for
military processors and one for radar warning receivers. SAS also booked $402
million on a number of classified contracts.

Forcepoint

                                                Three Months Ended
(In millions, except percentages)    Apr 1, 2018      Apr 2, 2017    % Change
Total net sales                     $     141        $       144       (2.1 )%
Total operating expenses
Cost of sales                              27                 25        8.0  %
Selling and marketing                      64                 54       18.5  %
Research and development                   37                 32       15.6  %
General and administrative                 20                 17       17.6  %
Total operating expenses                  148                128       15.6  %
Operating income (loss)             $      (7 )      $        16     (143.8 )%
Operating margin                         (5.0 )%            11.1 %


                                                Three Months Ended
(In millions, except percentages)    Apr 1, 2018      Apr 2, 2017     % Change
Bookings                            $         100    $         105      (4.8 )%



Total Net Sales-Total net sales in the first quarter of 2018 were relatively
consistent with the first quarter of 2017. Included in the change in total net
sales was $6 million of lower Commercial Security sales, primarily due to lower
sales related to filtering

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products, and $3 million of higher Global Government and Critical Infrastructure
sales, primarily due to higher mix of bookings with upfront sales recognition.
Total net sales excluded the unfavorable impact related to the deferred revenue
acquisition accounting adjustments described below in Acquisition Accounting
Adjustments.

Total Operating Expenses-We disclose our operating expenses for the segment, which excludes amortization of acquired intangible assets and certain other acquisition and acquisition related expenses, in terms of the following: - Cost of sales-labor and overhead costs associated with analytic and technical

support services; infrastructure costs associated with maintaining our

databases; and labor, materials and overhead costs associated with providing

our product offerings;

- Selling and marketing-labor costs related to personnel engaged in selling and

marketing and customer support functions; costs related to public relations,

    advertising, promotions and travel; and related overhead costs;


-   Research and development-labor costs for the development and management of
    new and existing products; and related overhead costs; and

- General and administrative expenses-labor costs for our executive, finance

and administrative personnel; third party professional service fees; and

    related overhead costs.



Total operating expenses in the first quarter of 2018 increased $20 million
compared to the first quarter of 2017 primarily due to an increase in selling
and marketing expense of $10 million, an increase in research and development of
$5 million and an increase in general and administrative of $3 million. The
increase in selling and marketing expense was principally driven by higher costs
for the sales organization due to increased staffing and training. The increase
in research and development was due to the acquisitions of Skyfence in the first
quarter of 2017 and RedOwl in the third quarter of 2017. The increase in general
and administrative was primarily due to increased staffing and professional
services fees. Total operating expenses excluded amortization of acquired
intangible assets as described below in Acquisition Accounting Adjustments and
certain unallocated costs which are included in Corporate.

Operating Income (Loss) and Margin-The decrease in operating income (loss) of
$23 million and related decrease in operating margin in the first quarter of
2018 compared to the first quarter of 2017 was primarily driven by the increase
in total operating expenses described above in Total Operating Expenses.

Backlog and Bookings-Backlog was $449 million at April 1, 2018 compared to $484
million at December 31, 2017. The decrease in backlog of $35 million at April 1,
2018 compared to December 31, 2017 was primarily due to the seasonality of the
Commercial Security products experiencing higher bookings in the fourth quarter
of each year. Bookings decreased by $5 million in the first quarter of 2018
compared to the first quarter of 2017 primarily due to a decrease in Commercial
Security bookings.

Acquisition Accounting Adjustments
Acquisition Accounting Adjustments include the adjustments to record acquired
deferred revenue at fair value as part of our purchase price allocation process,
referred to as the deferred revenue adjustment, and the amortization of acquired
intangible assets related to historical acquisitions. These adjustments are not
considered part of management's evaluation of segment results.

The components of Acquisition Accounting Adjustments were as follows:

                                                 Three Months Ended
(In millions)                               Apr 1, 2018       Apr 2, 2017
Deferred revenue adjustment                $        (4 )     $       (10 )
Amortization of acquired intangibles               (29 )             (32 )

Total Acquisition Accounting Adjustments $ (33 ) $ (42 )

The deferred revenue adjustment for the first quarters of 2018 and 2017 relates to acquisitions in the Forcepoint segment.

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Amortization of acquired intangibles related to acquisitions in the segments was
as follows:
                                                   Three Months Ended
(In millions)                                 Apr 1, 2018          Apr 2, 2017
Integrated Defense Systems               $        -               $           -
Intelligence, Information and Services            5                           5
Missile Systems                                   -                           -
Space and Airborne Systems                        2                           3
Forcepoint                                       22                          24
Total                                    $       29               $          32



The change in our Acquisition Accounting Adjustments of $9 million in the first
quarter of 2018 compared to the first quarter of 2017 was due to a $6 million
decrease in the deferred revenue adjustment, principally driven by lower amounts
recognized related to the Websense acquisition in the second quarter of 2015.

FAS/CAS Operating Adjustment
The FAS/CAS Operating Adjustment represents the difference between the service
cost component of our pension and other postretirement benefit (PRB) expense or
income under Financial Accounting Standards (FAS) requirements under U.S.
Generally Accepted Accounting Principles (GAAP) and our pension and PRB expense
under U.S. government Cost Accounting Standards (CAS). In the first quarter of
2018, we adopted the requirements of ASU 2017-07, Compensation - Retirement
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost, on a retrospective basis, which
reclassified all components of FAS expense, other than service cost, to
non-operating income. The results of each segment only include pension and PRB
expense under CAS that we generally recover through the pricing of our products
and services to the U.S. government.

The pension and PRB components of the FAS/CAS Operating Adjustment were as follows:

                                                Three Months Ended
(In millions)                              Apr 1, 2018        Apr 2, 2017
FAS/CAS Pension Operating Adjustment   $     351             $         311
FAS/CAS PRB Operating Adjustment               3                         4
FAS/CAS Operating Adjustment           $     354             $         315


The FAS expense and CAS expense components of the FAS/CAS Operating Adjustment
were as follows:
                                     Three Months Ended
(In millions)                   Apr 1, 2018      Apr 2, 2017
FAS service cost (expense)     $     (128 )     $      (118 )
CAS expense                           482               433
FAS/CAS Operating Adjustment   $      354       $       315



The change in our FAS/CAS Operating Adjustment of $39 million in the first
quarter of 2018 compared to the first quarter of 2017 was driven by a $49
million increase in our CAS expense and a $10 million increase in our FAS
service cost. The increase in our CAS expense in the first quarter of 2018 was
primarily due to our annual actuarial update, which takes into account final
census data as described in our Annual Report on Form 10-K for the year ended
December 31, 2017. The increase in our FAS service cost in the first quarter of
2018 was principally driven by the lower discount rate at December 31, 2017
compared to the discount rate at December 31, 2016.


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Corporate

Corporate operating income consists of unallocated costs and certain other corporate costs not considered part of management's evaluation of reportable segment operating performance.

Operating income related to Corporate was as follows:

                      Three Months Ended
(In millions)    Apr 1, 2018       Apr 2, 2017
Corporate       $       (28 )     $       (33 )


Operating income related to Corporate in the first quarter of 2018 was relatively consistent with the first quarter of 2017.

FINANCIAL CONDITION AND LIQUIDITY

Overview

We pursue a capital deployment strategy that balances funding for growing our
business, including: (1) capital expenditures, acquisitions and research and
development; (2) prudently managing our balance sheet, including debt repayments
and pension contributions; and (3) returning cash to our shareholders, including
dividend payments and share repurchases, as outlined below. Our need for, cost
of and access to funds are dependent on future operating results, as well as
other external conditions. We currently expect that cash and cash equivalents,
available-for-sale securities, cash flow from operations and other available
financing resources will be sufficient to meet anticipated operating, capital
expenditure, investment, debt service and other financing requirements during
the next 12 months and for the foreseeable future.

In addition, the following table highlights selected measures of our liquidity and capital resources at April 1, 2018 and December 31, 2017: (In millions)

                               Apr 1, 2018      Dec 31, 2017
Cash and cash equivalents                  $       2,748    $       3,103
Short-term investments                                 -              297
Working capital                                    4,181            3,978
Amount available under credit facilities             950              950



Operating Activities
                                                                   Three Months Ended
(In millions)                                                 Apr 1, 2018  

Apr 2, 2017 Net cash provided by (used in) operating activities from continuing operations

                                         $      283      $       (41 )
Net cash provided by (used in) operating activities                  284    

(41 )



The increase in net cash provided by operating activities of $325 million in the
first quarter of 2018 compared to the first quarter of 2017 was primarily due to
a favorable change in contract assets and contract liabilities principally
driven by an increase in contract assets in the first quarter of 2017 related to
the timing of milestone payments on certain international and domestic programs,
improved operating performance in the first quarter of 2018, and an increase in
tax refunds in the first quarter of 2018 as described below in Tax Payments and
Refunds. This increase was partially offset by an unfavorable change in
receivables, net primarily due to billings on an international Patriot program
awarded in the first quarter of 2018.

Pension Plan Contributions-We made the following contributions to our pension and PRB plans:

                                           Three Months Ended
(In millions)                         Apr 1, 2018          Apr 2, 2017
Required pension contributions   $       58               $          37
PRB contributions                         3                           5




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Tax Payments and Refunds-We made or (received) the following net tax payments or
(refunds):
                      Three Months Ended
(In millions)    Apr 1, 2018      Apr 2, 2017
Federal         $     (260 )     $      (160 )
Foreign                 17                13
State                    2                 8



We expect full-year net federal, foreign and state tax payments to be
approximately $580 million in 2018. In the near term, we expect the changes in
the 2017 Act to reduce our cash tax payments compared to those required under
prior law.

Interest Payments-We made interest payments on our outstanding debt of $25
million and $33 million in the first quarters of 2018 and 2017, respectively.

Investing Activities
                                                                    Three Months Ended
(In millions)                                                 Apr 1, 2018       Apr 2, 2017
Net cash provided by (used in) investing activities           $       77    

$ (430 )



The change in net cash provided by (used in) investing activities of $507
million in the first quarter of 2018 compared to the first quarter of 2017 was
primarily due to our short-term investments activity as described below in
Short-term Investments Activity, partially offset by an increase in additions to
property, plant and equipment as described below in Additions to Property, Plant
and Equipment and Capitalized Internal Use Software.

Additions to Property, Plant and Equipment and Capitalized Internal Use
Software-Additions to property, plant and equipment and capitalized internal use
software were as follows:
                                                                     Three Months Ended
(In millions)                                                  Apr 1, 2018       Apr 2, 2017
Additions to property, plant and equipment                    $       219      $          86
Additions to capitalized internal use software                         12                 16



The increase in additions to property, plant and equipment of $133 million in
the first quarter of 2018 compared to the first quarter of 2017 was primarily
driven by program related requirements due to recent and anticipated growth and
investment in productivity initiatives, including high-technology production
facilities and continuing factory automation upgrades.

We expect our property, plant and equipment and internal use software
expenditures to be between approximately $835-$860 million and $75-$90 million,
respectively, in 2018, consistent with the anticipated needs of our business and
for specific investments including capital assets and facility improvements.

Short-term Investments Activity-We invest in marketable securities in accordance
with our short-term investment policy and cash management strategy. These
marketable securities are classified as available-for-sale and are recorded at
fair value as short-term investments in our consolidated balance sheets.
Activity related to short-term investments was as follows:
                                             Three Months Ended
(In millions)                            Apr 1, 2018      Apr 2, 2017
Purchases of short-term investments    $   -             $      (399 )
Maturities of short-term investments     309                     100



Acquisitions-In pursuing our business strategies, we acquire and make investments in certain businesses that meet strategic and financial criteria. In the first quarter of 2017, Forcepoint acquired the Skyfence cloud access security broker business for $39 million. There were no acquisitions in the first quarter of 2018.

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Financing Activities
                                                            Three Months Ended
(In millions)                                          Apr 1, 2018      Apr 2, 2017
Net cash provided by (used in) financing activities   $     (707 )     $    

(645 )



We generally use cash provided by operating activities and proceeds from the
issuance of new debt as our primary source for the repayment of debt, payment of
dividends, pension contributions and the repurchase of our common stock. The
change in net cash used in financing activities of $62 million in the first
quarter of 2018 compared to the first quarter of 2017 was primarily due to our
share repurchases to satisfy tax withholding obligations as described below in
Share Repurchases.

Share Repurchases-From time to time, our Board of Directors authorizes the
repurchase of shares of our common stock. In November 2015, our Board authorized
the repurchase of up to $2.0 billion of our outstanding common stock. In
November 2017, our Board also authorized the repurchase of up to an additional
$2.0 billion of our outstanding common stock. At April 1, 2018, we had
approximately $2.4 billion available under the 2017 and 2015 repurchase
programs. Share repurchases will take place from time to time at management's
discretion depending on market conditions.

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

Our share repurchases were as follows:

                                                            Three Months Ended
(In millions)                                     Apr 1, 2018                Apr 2, 2017
                                                 $         Shares           $         Shares
Shares repurchased under our share
repurchase programs                         $      400        1.9      $      400        2.7
Shares repurchased to satisfy tax
withholding obligations                             72        0.3              38        0.2
Total share repurchases                     $      472        2.2      $      438        2.9


Cash Dividends-Our Board of Directors authorized the following cash dividends:

                                                Three Months Ended

(In millions, except per share amounts) Apr 1, 2018 Apr 2, 2017 Cash dividends declared per share $ 0.8675 $ 0.7975 Total dividends paid

                               230              215


In March 2018, our Board of Directors authorized an 8.8% increase to our annual
dividend payout rate from $3.19 to $3.47 per share. Dividends are subject to
quarterly approval by our Board of Directors.

CAPITAL RESOURCES
Total long-term debt was $4.8 billion at April 1, 2018 and December 31, 2017.
Our outstanding debt bears contractual interest at fixed interest rates ranging
from 2.5% to 7.2% and matures at various dates from 2020 through 2044.

Cash and Cash Equivalents and Short-term Investments-Cash and cash equivalents
and short-term investments were $2.7 billion and $3.4 billion at April 1, 2018
and December 31, 2017, respectively. We may invest in: U.S. Treasuries; AAA/Aaa
rated money market funds; certificates of deposit, time deposits and commercial
paper of banks with a minimum long-term debt rating of A or A2 and minimum
short-term debt rating of A-1 and P-1; and commercial paper of corporations with
a minimum long-term debt rating of A- or A3 and minimum short-term debt rating
of A-2 and P-2. Cash and cash equivalents and short-term investments balances
held at our foreign subsidiaries were approximately $807 million and $1,246
million at April 1, 2018 and December 31, 2017, respectively. Our undistributed
earnings of our foreign subsidiaries are not permanently reinvested. We
continuously evaluate our liquidity needs and ability to meet global cash
requirements as a part of our overall capital deployment strategy. Factors that
affect our global capital deployment strategy include anticipated cash flows,
the ability to repatriate cash in a tax efficient manner, funding requirements
for operations and investment activities, acquisitions and divestitures and
capital market conditions.

Commercial Paper-The Company may issue up to $1.25 billion of unsecured commercial paper notes, as the commercial paper is backed by our credit facility. The commercial paper notes outstanding have original maturities of not more than 90 days from the date of issuance. At April 1, 2018, short-term commercial paper borrowings outstanding were $300 million, which had a

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weighted-average interest rate and original maturity period of 2.051% and 9
days, respectively. The maximum amount of short-term commercial paper borrowings
outstanding during the first quarter of 2018 was $300 million. At December 31,
2017, short-term commercial paper borrowings outstanding were $300 million,
which had a weighted-average interest rate and original maturity period of
1.583% and 20 days, respectively.

Credit Facilities-In November 2015, we entered into a $1.25 billion revolving
credit facility maturing in November 2020. Under the $1.25 billion credit
facility, we can borrow, issue letters of credit and backstop commercial paper.
Borrowings under this facility bear interest at various rate options, including
LIBOR plus a margin based on our credit ratings. Based on our credit ratings at
April 1, 2018, borrowings would generally bear interest at LIBOR plus 80.5 basis
points. The credit facility is composed of commitments from approximately 20
separate highly rated lenders, each committing no more than 10% of the facility.
As of April 1, 2018 and December 31, 2017 there were no borrowings or letters of
credit outstanding under this credit facility. The $300 million of commercial
paper outstanding at April 1, 2018, reduced the amount available under our
credit facility to $950 million.

Under the $1.25 billion credit facility we must comply with certain covenants,
including a ratio of total debt to total capitalization of no more than 60%. We
were in compliance with the credit facility covenants as of April 1, 2018. Our
ratio of total debt to total capitalization, as those terms are defined in the
credit facility, was 33.0% at April 1, 2018. We are providing this ratio as this
metric is used by our lenders to monitor our leverage and is also a threshold
that could limit our ability to utilize this facility.

Shelf Registrations-We have an effective shelf registration statement with the
Securities and Exchange Commission (SEC), filed in June 2016, which covers the
registration of debt securities, common stock, preferred stock and warrants.

COMMITMENTS AND CONTINGENCIES
Environmental Matters-We are involved in various stages of investigation and
cleanup related to remediation of various environmental sites. Our estimate of
the liability of total environmental remediation costs includes the use of a
discount rate and takes into account that a portion of these costs is eligible
for future recovery through the pricing of our products and services to the U.S.
government. We regularly assess the probability of recovery of these costs,
which requires us to make assumptions about the extent of cost recovery under
our contracts and the amount of future contract activity. We consider such
recovery probable based on government contracting regulations and our long
history of receiving reimbursement for such costs, and accordingly have recorded
the estimated future recovery of these costs from the U.S. government within
prepaid expenses and other current assets, in our consolidated balance sheets.
Our estimates regarding remediation costs to be incurred were as follows:
(In millions, except percentages)       Apr 1, 2018     Dec 31, 2017
Total remediation costs-undiscounted   $       210     $        206
Weighted-average discount rate                 5.2 %            5.2 %

Total remediation costs-discounted $ 147 $ 142 Recoverable portion

                             95               92



We also lease certain government-owned properties and generally are not liable
for remediation of preexisting environmental contamination at these sites. As a
result, we generally do not provide for these costs in our consolidated
financial statements.

Due to the complexity of environmental laws and regulations, the varying costs
and effectiveness of alternative cleanup methods and technologies, the
uncertainty of insurance coverage and the unresolved extent of our
responsibility, it is difficult to determine the ultimate outcome of
environmental matters. However, we do not expect any additional liability to
have a material adverse effect on our financial position, results of operations
or liquidity.

Financing Arrangements and Other-We issue guarantees, and banks and surety
companies issue, on our behalf, letters of credit and surety bonds to meet
various bid, performance, warranty, retention and advance payment obligations
for us or our affiliates. These instruments expire on various dates through
2026. Additional guarantees of project performance for which there is no stated
value also remain outstanding. The stated values outstanding consisted of the
following:
(In millions)        Apr 1, 2018      Dec 31, 2017
Guarantees          $         224    $         216
Letters of credit           2,797            2,416
Surety bonds                  166              166



All guarantees at April 1, 2018 and December 31, 2017 related to our joint
venture in Thales-Raytheon Systems Air and Missile Defense Command and Control
S.A.S. (TRS AMDC2). Included in letters of credit above were $49 million and $47
million at

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April 1, 2018 and December 31, 2017, respectively, related to our joint venture
in TRS AMDC2. We provide these guarantees and letters of credit to TRS AMDC2 and
other affiliates to assist these entities in obtaining financing on more
favorable terms, making bids on contracts and performing their contractual
obligations. While we expect these entities to satisfy their loans and meet
their project performance and other contractual obligations, their failure to do
so may result in a future obligation to us. We periodically evaluate the risk of
TRS AMDC2 and other affiliates failing to meet their obligations described
above. At April 1, 2018, we believe the risk that TRS AMDC2 and other affiliates
will not be able to meet their obligations is minimal for the foreseeable future
based on their current financial condition. All obligations were current at
April 1, 2018. We had an estimated liability of $2 million at both April 1, 2018
and December 31, 2017, related to these guarantees.

The joint venture agreement between Raytheon and Vista Equity Partners relating
to Forcepoint provides Vista Equity Partners with certain rights to require
Forcepoint to pursue an initial public offering at any time after four years and
three months following the closing date of May 29, 2015, or pursue a sale of the
company at any time after five years following the closing date. In either of
these events, Raytheon has the option to purchase all, but not less than all, of
Vista Equity Partners' interest in Forcepoint for cash at a price equal to fair
value as determined under the joint venture agreement. Additionally, Vista
Equity Partners has the ability to liquidate its ownership through a put option,
which became exercisable on May 29, 2017. The put option allows Vista Equity
Partners to require Raytheon to purchase all, but not less than all, of Vista
Equity Partners' interest in Forcepoint for cash at a price equal to fair value
as determined under the joint venture agreement. Lastly, at any time on or after
May 29, 2018, Raytheon has the option to purchase all, but not less than all, of
Vista Equity Partners' interest in Forcepoint at a price equal to fair value as
determined under the joint venture agreement. The joint venture agreement
provides for the process under which the parties would determine the fair value
of the interest and could result in a payment by Raytheon shortly after the
exercise of Vista Equity Partners' put option or Raytheon's purchase option;
however, the ultimate timing will depend on the actions of the parties and other
factors. At April 1, 2018, the fair value of the noncontrolling interest was
estimated at $492 million and is subject to change based upon market conditions
and business performance. The estimate of fair value for purposes of presenting
the redeemable noncontrolling interest, outside of stockholders' equity, in our
consolidated balance sheets could differ from the parties' determination of fair
value for the interest under the joint venture agreement.
We have entered into industrial cooperation agreements, sometimes in the form of
either offset agreements or in-country industrial participation (ICIP)
agreements, as a condition to obtaining orders for our products and services
from certain customers in foreign countries. At April 1, 2018, the aggregate
amount of our offset agreements, both agreed to and anticipated to be agreed to,
had an outstanding notional value of approximately $9.5 billion. These
agreements are designed to return economic value to the foreign country by
requiring us to engage in activities supporting local defense or commercial
industries, promoting a balance of trade, developing in-country technology
capabilities or addressing other local development priorities. Offset agreements
may be satisfied through activities that do not require a direct cash payment,
including transferring technology, providing manufacturing, training and other
consulting support to in-country projects, and the purchase by third parties
(e.g., our vendors) of supplies from in-country vendors. These agreements may
also be satisfied through our use of cash for activities such as subcontracting
with local partners, purchasing supplies from in-country vendors, providing
financial support for in-country projects and making investments in local
ventures. Such activities may also vary by country depending upon requirements
as dictated by their governments. We typically do not commit to offset
agreements until orders for our products or services are definitive. The amounts
ultimately applied against our offset agreements are based on negotiations with
the customers and typically require cash outlays that represent only a fraction
of the notional value in the offset agreements. Offset programs usually extend
over several or more years and may provide for penalties in the event we fail to
perform in accordance with offset requirements. We have historically not been
required to pay any such penalties.

As a U.S. government contractor, we are subject to many levels of audit and
investigation by the U.S. government relating to our contract performance and
compliance with applicable rules and regulations. Agencies that oversee contract
performance include: the Defense Contract Audit Agency (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

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U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and
International Traffic in Arms Regulations (ITAR)) may also be investigated or
audited. Other than as specifically disclosed herein, we do not expect these
audits, investigations or disputes to have a material effect on our financial
position, results of operations or liquidity, either individually or in the
aggregate.

On March 15, 2018, we were notified that another company was awarded the ATMP
contract, one of a number of planned replacement programs for the Warfighter
FOCUS contract activities currently performed by IIS. On April 2, 2018, we filed
a protest challenging the award. The current Warfighter FOCUS program is
scheduled to transition to the replacement programs in October 2018, though the
current activities may be extended for two six-month option periods. ATMP
replaces approximately one-third of the current work scope under Warfighter
FOCUS.

We do not expect any material impact on our financial results from regional
developments regarding Qatar. Almost all of our contracts in Qatar are foreign
military sales contracts through the U.S. government and represent less than
5.8% of our backlog at April 1, 2018. In addition, with respect to pending U.S.
government approval of certain of our contracts for other Gulf Cooperation
Council members, we believe the timing of these pending approvals will not have
a material impact on our financial results. Our direct commercial sale contracts
for precision guided munitions to certain Middle Eastern customers contain
requirements for U.S. government approvals from the State Department and
Congress through the Congressional Notification process. These contracts also
contain clauses which may terminate the contract if those approvals are not
received by a stated date or that date is not otherwise changed. While some
uncertainty exists over the timing of those approvals, we believe it is probable
we will receive the approvals by the stated dates or have otherwise changed the
contracts such that we believe it is probable we will meet the requirements.
However, if we do not meet the requirements or approvals by the stated dates, as
applicable, it could have a material adverse effect on our financial results. As
of April 1, 2018, we had approximately $2.3 billion of total contract value and
had recognized approximately $500 million of sales for work performed to date on
these contracts and the related customer advances and payments for these
contracts.

On June 23, 2016, the U.K. held a referendum in which British citizens approved
an exit from the European Union (EU), commonly referred to as "Brexit." As a
result of the referendum, there has been volatility in exchange rates versus the
U.S. dollar which may continue as the U.K. negotiates its exit from the EU. The
British pound is the functional currency for approximately 2% of our sales. In
addition, for any contracts that are not denominated in the same currency as the
functional currency (for example, contracts denominated in British pounds where
the functional currency is the U.S. dollar), we enter into foreign currency
forward contracts to hedge our risk related to foreign currency exchange rate
fluctuations. As a result, we currently do not expect the U.K.'s exit from the
EU to have a material impact on our financial position, results of operations or
liquidity.

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

Accounting Standards
In February 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-02, Income Statement - Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income, which allows companies to reclassify
stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (2017
Act), from accumulated other comprehensive income to retained earnings. These
stranded tax effects refer to the tax amounts included in accumulated other
comprehensive income at the previous 35% U.S. statutory tax rate, for which the
related deferred tax asset or liability was remeasured to the new 21% U.S.
corporate statutory federal tax rate in the period of the 2017 Act enactment.
The new standard is effective for fiscal years beginning after December 15,
2018, with early adoption permitted, and can be applied either in the period of
adoption or retrospectively to each period impacted by the 2017 Act. We elected
to early adopt the new standard in the first quarter of 2018 and we elected to
reclassify the stranded income tax effects of the 2017 Act from accumulated
other comprehensive income to retained earnings in the period of adoption. This
resulted in an increase to accumulated other comprehensive loss (AOCL) of $1,451
million and an increase in retained earnings of $1,451 million in the first
quarter of 2018, almost all of which related to our pension and other
postretirement benefit (PRB) plans, net. The standard did not have an impact on
our results of operations or liquidity. Income tax effects remaining in
accumulated other comprehensive income will be released into earnings as the
related pretax amounts are reclassified to earnings.

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In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits
(Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost, which changed certain presentation and
disclosure requirements for employers that sponsor defined benefit pension and
PRB plans. The new standard required the service cost component of the net
benefit cost to be in the same line item as other compensation in operating
income and the other components of net benefit cost to be presented outside of
operating income on a retrospective basis. The new standard was effective for
fiscal years beginning after December 15, 2017. We adopted the requirements of
the new standard in the first quarter of 2018 on a retrospective basis for the
presentation of only the service cost component in operating expenses, and the
reclassification of the other components of the net benefit cost to retirement
benefits non-service expense within non-operating (income) expense, net. The
impact to our fiscal quarters and year-ended 2017 and year-ended 2016 financial
results was as follows:
                                                       Three Months Ended                                     Twelve Months Ended
(In millions)                  Dec 31, 2017       Oct 1, 2017       Jul 2, 2017       Apr 2, 2017      Dec 31, 2017        Dec 31, 2016
Cost of sales                $         (186 )   $        (222 )   $        (164 )   $        (164 )   $        (736 )     $        (458 )
General and administrative
expenses                                (44 )             (48 )             (42 )             (43 )            (177 )              (143 )
Total operating expenses               (230 )            (270 )            (206 )            (207 )            (913 )              (601 )
Operating income                        230               270               206               207               913                 601
Total non-operating (income)
expense, net                            230               270               206               207               913                 601
Income from continuing
operations after taxes                    -                 -                 -                 -                 -                   -
Net income                   $            -     $           -     $           -     $           -     $           -       $           -


The remaining provisions of the standard did not have a material impact on our financial position, results of operations or liquidity.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which
requires lessees to recognize a right-of-use asset and lease liability for most
lease arrangements. The new standard is effective for fiscal years beginning
after December 15, 2018, with early adoption permitted, and must be adopted
using the modified retrospective approach. We intend to adopt the standard on
the effective date of January 1, 2019. We are currently evaluating the potential
changes from this ASU to our future financial reporting and disclosures and
designing and implementing related processes and controls. We expect the
standard to have an impact of approximately $1 billion on our assets and
liabilities for the addition of right-of-use assets and lease liabilities, but
we do not expect it to have a material impact on our results of operations or
liquidity.

Other new pronouncements issued but not effective until after April 1, 2018 are
not expected to have a material impact on our financial position, results of
operations or liquidity.

© Edgar Online, source Glimpses

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