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4-Traders Homepage  >  Equities  >  Nyse  >  Raytheon Company    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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07/28/2016 | 04:13pm CEST

OVERVIEW

We develop technologically advanced and integrated products, services and
solutions in our core markets: sensing; effects; command, control,
communications, computers, cyber and intelligence; mission support; and
cybersecurity. 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.

As previously announced, effective January 1, 2016, we reorganized certain
product areas of our Integrated Defense Systems (IDS) and Intelligence,
Information and Services (IIS) businesses to more efficiently leverage our
capabilities. Additionally, also effective January 1, 2016, we reclassified,
with respect to our IDS, IIS, Missile Systems (MS) and Space and Airborne
Systems (SAS) businesses, acquisition accounting adjustments related to the
amortization of acquired intangibles and adjustments to record acquired deferred
revenue at fair value, such that they are no longer reported within the business
segments and are instead reported in the Acquisition Accounting Adjustments line
item. Prior to January 1, 2016, only those acquisition accounting adjustments
associated with our Forcepoint business were reported in the Acquisition
Accounting Adjustments line item. The amounts and presentation of our business
segments, including corporate and eliminations for intersegment activity, set
forth in this Form 10-Q reflect these changes. None of the changes impact our
previously reported consolidated balance sheets, statements of operations or
statements of cash flows. See "Note 14: Business Segment Reporting" for
additional information.

We operate in five segments: IDS; IIS; MS; 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, 2015.


In the second quarter of 2016, Thales S.A. and Raytheon amended and restated the
Thales-Raytheon Systems Co. Ltd. (TRS) joint venture agreement to reduce the
existing joint venture arrangement to Thales-Raytheon Systems Air and Missile
Defense Command and Control S.A.S. (TRS AMDC2) only and limit its scope to
NATO-only business opportunities involving air command and control systems,
theatre missile defense and ballistic missile defense. The amendment and
restatement of the TRS joint venture agreement resulted in Raytheon acquiring
Thales S.A.'s noncontrolling interest in Raytheon Command and Control Solutions
LLC (RCCS LLC), previously called Thales-Raytheon Systems LLC, and selling our
equity method investment in Thales-Raytheon Systems Company S.A.S. (TRS SAS),
which resulted in a non-cash tax-free gain of $158 million that was recorded in
operating income through a reduction in cost of sales, and a net cash payment to
Thales S.A. of $90 million. See "Note 7: Thales-Raytheon Systems Co. Ltd. (TRS)
Joint Venture" for additional information. As a result, going forward IDS'
results will no longer include the equity method income on TRS SAS, which was
$11 million, $12 million and $7 million in 2015, 2014 and 2013, respectively. In
addition, our earnings per share (EPS) will no longer be impacted by the
noncontrolling interest in RCCS LLC, which had the impact of decreasing net
income attributable to Raytheon Company by $10 million, $14 million and $17
million in 2015, 2014 and 2013, respectively.

The following discussion should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2015 and our unaudited consolidated
financial statements included in this Quarterly Report on 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 IDS, IIS, MS,
SAS and Forcepoint for the second quarter of 2016 was relatively consistent with
the year ended December 31, 2015, which is shown in the table below.
External Net Sales by Products and Services (% of segment total external net sales)
                                         IDS              IIS               MS              SAS   Forcepoint
Products                                  90 %             45 %            100 %             95 %         95 %
Services                                  10 %             55 %              - %              5 %          5 %




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                                              Three Months Ended                 % of Total Net Sales
(In millions, except percentages)       Jul 3, 2016        Jun 28, 2015      Jul 3, 2016     Jun 28, 2015
Net sales
Products                              $    5,037          $       4,894           83.5 %            83.7 %
Services                                     998                    954           16.5 %            16.3 %
Total net sales                       $    6,035          $       5,848          100.0 %           100.0 %



Total Net Sales - Second Quarter of 2016 vs. Second Quarter of 2015-The increase
in total net sales of $187 million in the second quarter of 2016 compared to the
second quarter of 2015 was primarily due to higher external net sales of $141
million at SAS, $97 million at MS and $82 million at Forcepoint, partially
offset by lower external net sales of $164 million at IDS. The higher external
net sales at SAS were primarily due to higher net sales on classified programs,
principally driven by an international classified program awarded in the first
quarter of 2016. The higher external net sales at MS were primarily due to
higher net sales on the Paveway™ program principally driven by international
requirements. The higher external net sales at Forcepoint were driven
principally by higher sales resulting from the acquisitions of Websense in the
second quarter of 2015 and Stonesoft in the first quarter of 2016. The lower
external net sales at IDS were primarily due to lower net sales on an
international Patriot program awarded in the second quarter of 2015 driven by
the recognition of previously deferred precontract costs in the second quarter
of 2015.

Products and Services Net Sales - Second Quarter of 2016 vs. Second Quarter of
2015-The increase in products net sales of $143 million in the second quarter of
2016 compared to the second quarter of 2015 was primarily due to higher external
products net sales of $184 million at SAS and $93 million at MS, partially
offset by lower external products net sales of $184 million at IDS. The
increases in external products net sales at SAS and MS, and the decrease in
external products net sales at IDS, were primarily due to the programs described
above. The increase in services net sales of $44 million in the second quarter
of 2016 compared to the second quarter of 2015 was primarily due to higher
external services net sales of $55 million at IIS, spread across numerous
programs with no individual or common significant driver.

                                               Six Months Ended                  % of Total Net Sales
(In millions, except percentages)       Jul 3, 2016        Jun 28, 2015      Jul 3, 2016     Jun 28, 2015
Net sales
Products                              $       9,826      $        9,281           83.3 %            83.3 %
Services                                      1,972               1,855           16.7 %            16.7 %
Total net sales                       $      11,798      $       11,136          100.0 %           100.0 %



Total Net Sales - First Six Months of 2016 vs. First Six Months of 2015-The
increase in total net sales of $662 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to higher external
net sales of $342 million at MS, $239 million at SAS and $194 million at
Forcepoint, partially offset by lower external net sales of $133 million at IDS.
The higher external net sales at MS were primarily due to higher net sales on
the Paveway program principally driven by international requirements. The higher
external net sales at SAS were driven principally by higher net sales on
classified programs, principally driven by an international classified program
awarded in the first quarter of 2016. The higher external net sales at
Forcepoint were primarily due to higher sales resulting from the acquisitions of
Websense in the second quarter of 2015 and Stonesoft in the first quarter of
2016. The lower external net sales at IDS were driven principally by lower net
sales from the scheduled completion of certain production phases on our missile
defense radar production programs and from the scheduled completion of certain
production phases on a U.S. Navy combat systems program, partially offset by
higher net sales on integrated air and missile defense programs, including
higher net sales on an international Patriot program awarded in the fourth
quarter of 2014 due to a scheduled increase in production and lower net sales
from the scheduled completion of certain production phases on an international
air and missile defense systems program.

Products and Services Net Sales - First Six Months of 2016 vs. First Six Months
of 2015-The increase in products net sales of $545 million in the first six
months of 2016 compared to the first six months of 2015 was primarily due to
higher external products net sales of $337 million at MS, $271 million at SAS
and $179 million at Forcepoint, partially offset by lower external products net
sales of $194 million at IDS. The increases in external products net sales at MS
and SAS, and the decrease in external products net sales at IDS, were primarily
due to the programs described above. The increase in external products net sales
at Forcepoint was driven principally by the acquisitions of Websense and
Stonesoft described above. The increase in services net sales of $117 million in
the first six months of 2016 compared to the first six months of 2015 was
primarily due to higher external services net sales of $69 million at IIS,
spread across numerous mission support and modernization programs with no
individual or common

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significant driver, and higher external services net sales of $61 million at IDS, driven principally by higher services net sales on radar sustainment programs for the Missile Defense Agency (MDA) and various Patriot support programs.

Sales to Major Customers - Second Quarter of 2016 vs. Second Quarter of 2015 and First Six Months of 2016 vs. First Six Months of 2015

                                              Three Months Ended                  % of Total Net Sales
(In millions, except percentages)       Jul 3, 2016        Jun 28, 2015      Jul 3, 2016      Jun 28, 2015
Sales to the U.S. government(1)       $    4,015          $       3,993            67 %             68 %
Sales to the U.S. Department of
Defense(1)                                 3,794                  3,745            63 %             64 %
Total international sales(2)               1,907                  1,769            32 %             30 %
Foreign direct commercial sales(1)         1,186                  1,149            20 %             20 %
Foreign military sales through the
U.S. government                              721                    620            12 %             11 %


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

(2) Includes foreign military sales through the U.S. government. Due to rounding,

the total international sales percentage may not equal the sum of the

percentages for foreign direct commercial sales and foreign military sales

    through the U.S. government.



                                               Six Months Ended                  % of Total Net Sales
(In millions, except percentages)       Jul 3, 2016       Jun 28, 2015      Jul 3, 2016      Jun 28, 2015
Sales to the U.S. government(1)       $       7,923      $       7,743            67 %             70 %
Sales to the U.S. Department of
Defense(1)                                    7,518              7,261            64 %             65 %
Total international sales(2)                  3,646              3,254            31 %             29 %
Foreign direct commercial sales(1)            2,228              1,953            19 %             18 %
Foreign military sales through the
U.S. government                               1,418              1,301            12 %             12 %


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

(2) Includes foreign military sales through the U.S. government. Due to rounding,

the total international sales percentage may not equal the sum of the

percentages for foreign direct commercial sales and foreign military sales

through the U.S. government.




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)       Jul 3, 2016        Jun 28, 2015      Jul 3, 2016     Jun 28, 2015
Cost of sales
Products                              $    3,566          $       3,727           59.1 %            63.7 %
Services                                     814                    798           13.5 %            13.6 %
Total cost of sales                   $    4,380          $       4,525           72.6 %            77.4 %



Total Cost of Sales - Second Quarter of 2016 vs. Second Quarter of 2015-The
decrease in total cost of sales of $145 million in the second quarter of 2016
compared to the second quarter of 2015 was primarily due to lower external cost
of sales at IDS of $328 million, partially offset by higher external cost of
sales of $136 million at SAS. The decrease in external cost of sales at IDS was
driven principally by a tax-free $158 million gain from the sale of our equity
method investment in TRS SAS as described in MD&A Overview on page 23, and by
the programs discussed above in Total Net Sales. The increase in external cost
of sales at SAS was primarily due to the programs discussed above in Total Net
Sales.

Products and Services Cost of Sales - Second Quarter of 2016 vs. Second Quarter
of 2015-The decrease in products cost of sales of $161 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily due to
lower products cost of sales of $341 million at IDS, partially offset by higher
products cost of sales of $170 million at SAS. The decrease in products cost of
sales at IDS was driven principally by the tax-free $158 million gain from the
sale of our equity method investment in TRS SAS as described in MD&A Overview on
page 23, and by the programs described above in Total Net Sales. The increase in
products cost of sales at SAS was primarily due to the programs described above
in Total Net Sales. Services cost of sales in the second quarter of 2016 was
relatively consistent with the second quarter of 2015.

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                                               Six Months Ended                 % of Total Net Sales
(In millions, except percentages)       Jul 3, 2016       Jun 28, 2015      Jul 3, 2016     Jun 28, 2015
Cost of sales
Products                              $       7,164      $       6,823           60.7 %            61.3 %
Services                                      1,616              1,535           13.7 %            13.8 %
Total cost of sales                   $       8,780      $       8,358           74.4 %            75.1 %



Total Cost of Sales - First Six Months of 2016 vs. First Six Months of 2015-The
increase in total cost of sales of $422 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to higher external
cost of sales of $265 million at MS, $250 million at IIS, and $233 million at
SAS, partially offset by lower external cost of sales of $258 million at IDS and
$116 million of lower expense related to the FAS/CAS adjustment as described
below in Segment Results beginning on page 30. The increases in external cost of
sales at MS and SAS were primarily due to the programs described above in Total
Net Sales. The increase in external cost of sales at IIS was driven principally
by a $181 million impact from the eBorders settlement in the first quarter of
2015. In March 2015, Raytheon Systems Limited (RSL) reached a settlement with
the U.K. Home Office concluding the parties' dispute regarding the U.K. Home
Office's July 2010 termination of RSL's eBorders contract within our IIS
segment. The settlement included a cash payment from the U.K. Home Office to RSL
of £150 million (approximately $226 million based on foreign exchange rates as
of the settlement date) for the resolution of all claims and counterclaims of
both parties related to the matter. After certain expenses and derecognition of
the outstanding receivables, IIS recorded $181 million in operating income
through a reduction in cost of sales. The decrease in external cost of sales at
IDS was driven principally by the tax-free $158 million gain from the sale of
our equity method investment in TRS SAS as described in MD&A Overview on page
23, and by the programs described above in Total Net Sales.

Products and Services Cost of Sales - First Six Months of 2016 vs. First Six
Months of 2015-The increase in products cost of sales of $341 million in the
first six months of 2016 compared to the first six months of 2015 was primarily
due to higher external products cost of sales of $261 million at SAS, $260
million at MS and $184 million at IIS, partially offset by lower external
products cost of sales of $310 million at IDS and $94 million of lower expense
related to the FAS/CAS adjustment. The increases in external products cost of
sales at MS and SAS were primarily due to the programs described above in Total
Net Sales. The increase in external products cost of sales at IIS was driven
principally by the $181 million impact from the eBorders settlement in the first
quarter of 2015 described above. The lower products cost of sales at IDS was
principally driven by the tax-free $158 million gain from the sale of our equity
method investment in TRS SAS as described in MD&A Overview on page 23, and by
the programs described above in Total Net Sales. The increase in services cost
of sales of $81 million in the first six months of 2016 compared to the first
six months of 2015 was primarily due to higher external services cost of sales
of $66 million at IIS, spread across numerous mission support and modernization
programs with no individual or common significant driver, and higher external
services cost of sales of $52 million at IDS, driven principally by the programs
described above in Total Net Sales.

General and Administrative Expenses

                                                Three Months Ended               % of Total Net Sales
(In millions, except percentages)         Jul 3, 2016      Jun 28, 2015      Jul 3, 2016     Jun 28, 2015
Administrative and selling expenses       $      514      $         489            8.5 %             8.4 %
Research and development expenses                181                186            3.0 %             3.2 %

Total general and administrative expenses $ 695 $ 675

       11.5 %            11.6 %



The increase in administrative and selling expenses of $25 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily driven by a
$46 million increase at Forcepoint principally driven by the acquisition of
Websense, partially offset by $23 million of Websense acquisition and
integration related expenses recorded at Corporate in the second quarter of
2015.

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 $(2) million and $14 million in the second quarters of 2016 and
2015, respectively.

Research and development expenses in the second quarter of 2016 were relatively consistent with the second quarter of 2015.

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                                                   Six Months Ended                 % of Total Net Sales
(In millions, except percentages)           Jul 3, 2016       Jun 28, 2015      Jul 3, 2016     Jun 28, 2015
Administrative and selling expenses       $       1,066      $         962            9.0 %             8.6 %
Research and development expenses                   380                328            3.2 %             2.9 %

Total general and administrative expenses $ 1,446 $ 1,290

          12.3 %            11.6 %



The increase in administrative and selling expenses of $104 million in the first
six months of 2016 compared to the first six months of 2015 was primarily driven
by a $104 million increase at Forcepoint principally driven by the acquisition
of Websense.

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 $11 million and $29 million in the first six months of 2016 and
2015, respectively.

The increase in research and development expenses of $52 million in the first
six months of 2016 compared to the first six months of 2015 was primarily due to
increased research and development expenses of $33 million at Forcepoint driven
by our acquisition of Websense and development activity related to new
commercial products, and $28 million at MS, driven principally by higher
independent research and development activity related to advanced technologies.

Total Operating Expenses
                                             Three Months Ended                   Six Months Ended
(In millions, except percentages)      Jul 3, 2016       Jun 28, 2015      Jul 3, 2016       Jun 28, 2015
Total operating expenses              $     5,075       $      5,200      $     10,226      $      9,648
% of Total Net Sales                         84.1 %             88.9 %            86.7 %            86.6 %



The decrease in total operating expenses of $125 million in the second quarter
of 2016 compared to the second quarter of 2015 was primarily due to the decrease
in total cost of sales of $145 million, the primary drivers of which are
described above in Total Cost of Sales.

The increase in total operating expenses of $578 million in the first six months
of 2016 compared to the first six months of 2015 was due to the increase in
total cost of sales of $422 million, the primary drivers of which are described
above in Total Cost of Sales, and the increase in general and administrative
expenses of $156 million, the primary drivers of which are described above in
General and Administrative Expenses.

Operating Income

                                             Three Months Ended                  Six Months Ended
(In millions, except percentages)      Jul 3, 2016       Jun 28, 2015      Jul 3, 2016      Jun 28, 2015
Operating income                      $       960       $        648      $     1,572      $      1,488
% of Total Net Sales                         15.9 %             11.1 %           13.3 %            13.4 %



The increase in operating income of $312 million in the second quarter of 2016
compared to the second quarter of 2015 was due to the increase in total net
sales of $187 million, the primary drivers of which are described above in Total
Net Sales, and the decrease in total operating expenses of $125 million, the
primary drivers of which are described above in Total Operating Expenses and
includes the tax-free $158 million gain from the sale of our equity method
investment in TRS SAS in the second quarter of 2016 as described in MD&A
Overview on page 23.

The increase in operating income of $84 million in the first six months of 2016
compared to the first six months of 2015 was due to the increase in total net
sales of $662 million, the primary drivers of which are described above in Total
Net Sales, partially offset by the increase in total operating expenses of $578
million, the primary drivers of which are described above in Total Operating
Expenses.

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Total Non-Operating (Income) Expense, Net

                                                 Three Months Ended                    Six Months Ended
(In millions)                              Jul 3, 2016       Jun 28, 2015       Jul 3, 2016       Jun 28, 2015
Non-operating (income) expense, net
Interest expense                          $        58       $        59        $       116       $        117
Interest income                                    (4 )              (2 )               (8 )               (6 )
Other (income) expense, net                        (1 )              (1 )               (3 )               (3 )

Total non-operating (income) expense, net $ 53 $ 56

$ 105 $ 108




Total non-operating (income) expense, net in the second quarter and first six
months of 2016 was relatively consistent with the second quarter and first six
months of 2015.

Federal and Foreign Income Taxes

                                             Three Months Ended                   Six Months Ended
(In millions, except percentages)      Jul 3, 2016       Jun 28, 2015      Jul 3, 2016       Jun 28, 2015
Federal and foreign income taxes      $       202       $         90      $       358       $        324
Effective tax rate                           22.3 %             15.2 %           24.4 %             23.5 %



Our effective tax rate in the second quarter of 2016 was 22.3% compared to 15.2%
in the second quarter of 2015. The increase of 7.1% was primarily due to tax
settlements of $88 million in 2015, which decreased the 2015 rate by 14.8%, and
the domestic manufacturing deduction, which increased the rate by 2.1%,
partially offset by the tax-free gain related to the sale of our equity method
investment in TRS SAS as described in MD&A Overview on page 23, which decreased
the rate by 6.1% and the tax benefit recognized upon settlement of stock-based
awards due to the adoption of the new accounting standard for stock-based
compensation in the first quarter of 2016 as discussed further in "Note 2:
Accounting Standards", which decreased the rate by 3.1%. The remaining decrease
of 0.6% is composed of various items which individually or collectively are not
significant. The adoption of the new accounting standard could result in
fluctuations in our effective tax rate period over period depending on how many
awards vest in a quarter as well as the volatility of our stock price.

Our effective tax rate in the second quarter of 2016 was 12.7% lower than the
statutory federal rate primarily due to the tax-free gain related to the sale of
our equity method investment in TRS SAS as described in MD&A Overview on page
23, which decreased the rate by 6.1%, the tax benefit recognized upon settlement
of stock-based awards as discussed above, which decreased the rate by 3.1%, the
domestic manufacturing deduction, which decreased the rate by 2.3%, and the
research and development (R&D) tax credit, which decreased the rate by 1.0%. The
remaining decrease of 0.2% is composed of various items which individually or
collectively are not significant.

Our effective tax rate in the second quarter of 2015 was 19.8% lower than the
statutory federal rate primarily due to tax settlements of $88 million which
decreased the rate by 14.8%, the domestic manufacturing deduction, which
decreased the rate by 4.3%, and the foreign rate differential, which decreased
the rate by 1.1%. The remaining increase of 0.4% is composed of various items
which individually or collectively are not significant.

Our effective tax rate in the first six months of 2016 was 24.4% compared to
23.5% in the first six months of 2015. The increase of 0.9% was primarily due to
tax settlements of $88 million in 2015, which decreased the 2015 rate by 6.5%,
and the foreign rate differential, which increased the rate by 1.3%, partially
offset by the tax-free gain related to the sale of our equity method investment
in TRS SAS as described in MD&A Overview on page 23, which decreased the rate by
3.8%, and the tax benefit recognized upon settlement of stock-based awards as
discussed above, which decreased the rate by 3.0%. The remaining decrease of
0.1% is composed of various items which individually or collectively are not
significant.

Our effective tax rate in the first six months of 2016 was 10.6% lower than the
statutory federal rate primarily due to the tax-free gain related to the sale of
our equity method investment in TRS SAS as described in MD&A Overview on page
23, which decreased the rate by 3.8%, the tax benefit recognized upon settlement
of stock-based awards as discussed above, which decreased the rate by 3.0%, the
domestic manufacturing deduction, which decreased the rate by 2.8%, and the R&D
tax credit, which decreased the rate by 1.2%. The remaining increase of 0.2% is
composed of various items which individually or collectively are not
significant.

Our effective tax rate in the first six months of 2015 was 11.5% lower than the
statutory federal rate primarily due to tax settlements of $88 million which
decreased the rate by 6.5%, the domestic manufacturing deduction, which
decreased the rate by 3.7%, and

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the foreign rate differential, which decreased the rate by 1.2%. The remaining
decrease of 0.1% is composed of various items which individually or collectively
are not significant.

Income from Continuing Operations

                                            Three Months Ended                    Six Months Ended
(In millions)                         Jul 3, 2016      Jun 28, 2015        Jul 3, 2016       Jun 28, 2015
Income from continuing operations     $      705      $         502      $  

1,109 $ 1,056




The increase in income from continuing operations of $203 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily due to an
increase of $312 million in operating income, the primary drivers of which are
described above in Operating Income, partially offset by an increase of $112
million in federal and foreign income taxes, related primarily to the increase
in operating income and the change in effective tax rate described above in
Federal and Foreign Income Taxes.

The increase in income from continuing operations of $53 million in the first
six months of 2016 compared to the first six months of 2015 was primarily due to
an increase of $84 million in operating income, the primary drivers of which are
described above in Operating Income, partially offset by an increase of $34
million in federal and foreign income taxes, related primarily to the increase
in operating income and the change in effective tax rate described above in
Federal and Foreign Income Taxes.

Net Income
                       Three Months Ended                   Six Months Ended
(In millions)     Jul 3, 2016        Jun 28, 2015     Jul 3, 2016      Jun 28, 2015
Net income    $     704             $         503    $       1,109    $       1,057



The increase in net income of $201 million in the second quarter of 2016
compared to the second quarter of 2015 was primarily due to the $203 million
increase in income from continuing operations, the primary drivers of which are
described above in Income from Continuing Operations.

The increase in net income of $52 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to the $53 million
increase in income from continuing operations, the primary drivers of which are
described above in Income from Continuing Operations.

Diluted EPS from Continuing Operations Attributable to Raytheon Company Common Stockholders

                                                 Three Months Ended                  Six Months Ended
(In millions, except per share amounts)    Jul 3, 2016      Jun 28, 2015       Jul 3, 2016      Jun 28, 2015
Income from continuing operations
attributable to Raytheon Company           $      710     $          504     $       1,138     $       1,055
Diluted weighted-average shares
outstanding                                     297.6              305.7             298.6             307.2
 Diluted EPS from continuing operations
attributable to Raytheon Company           $     2.38     $         1.65    

$ 3.81 $ 3.44




The increase in diluted EPS from continuing operations attributable to Raytheon
Company common stockholders of $0.73 in the second quarter of 2016 compared to
the second quarter of 2015 was primarily due to the increase in income from
continuing operations described above and a decrease in weighted-average shares
outstanding, which was affected by the common stock share activity shown in the
table below.

The increase in diluted EPS from continuing operations attributable to Raytheon
Company common stockholders of $0.37 in the first six months of 2016 compared to
the first six months of 2015 was primarily due to the increase in income from
continuing operations described above and a decrease in weighted-average shares
outstanding, which was affected by the common stock share activity shown in the
table below.


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Our common stock share activity was as follows:

                            Three Months Ended               Six Months Ended
(In millions)          Jul 3, 2016     Jun 28, 2015    Jul 3, 2016    Jun 28, 2015
Beginning balance          296.9             305.9         299.0           307.3
Stock plans activity         0.2                 -           1.6             1.8
Share repurchases           (2.0 )            (2.3 )        (5.5 )          (5.5 )
Ending balance             295.1             303.6         295.1           303.6


Diluted EPS Attributable to Raytheon Company Common Stockholders

                                              Three Months Ended                    Six Months Ended
(In millions, except per share
amounts)                               Jul 3, 2016       Jun 28, 2015        Jul 3, 2016       Jun 28, 2015
Net income attributable to Raytheon
Company                                $      709      $          505      $       1,138      $       1,056
Diluted weighted-average shares
outstanding                                 297.6               305.7              298.6              307.2
Diluted EPS attributable to Raytheon
Company                                $     2.38      $         1.65      $        3.81      $        3.44



The increase in diluted EPS attributable to Raytheon Company common stockholders
of $0.73 in the second quarter of 2016 compared to the second quarter of 2015
was primarily due to the $0.73 increase in diluted EPS from continuing
operations attributable to Raytheon Company common stockholders described above.

The increase in diluted EPS attributable to Raytheon Company common stockholders
of $0.37 in the first six months of 2016 compared to the first six months of
2015 was primarily due to the $0.37 increase in diluted EPS from continuing
operations attributable to Raytheon Company common stockholders described above.

SEGMENT RESULTS
We report our results in the following segments: Integrated Defense Systems
(IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space
and Airborne Systems (SAS); and Forcepoint.

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


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

Bookings-We disclose the amount of bookings and notable contract awards for each
segment. Bookings generally represent the dollar value of new 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 the desired capability by the
customer and urgency of customer needs; customer budgets and other fiscal
constraints; political and economic and other environmental factors; the timing
of customer negotiations; the timing of governmental approvals and
notifications; and 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.

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                                                  Three Months Ended                    Six Months Ended
Bookings (in millions)                      Jul 3, 2016       Jun 28, 2015       Jul 3, 2016       Jun 28, 2015
Integrated Defense Systems                $    1,273         $       2,650     $       2,290     $        3,978
Intelligence, Information and Services         1,599                 1,425             2,852              2,513
Missile Systems                                1,906                 2,216             3,538              3,621
Space and Airborne Systems                     2,217                 1,240             4,419              1,871
Forcepoint                                       123                    49               220                 68
Total                                     $    7,118         $       7,580     $      13,319     $       12,051



Included in bookings were international bookings of $2,212 million and $3,494
million in the second quarters of 2016 and 2015, respectively, and $3,867
million and $4,999 million in the first six months of 2016 and 2015,
respectively, which included foreign military bookings through the U.S.
government. International bookings amounted to 31% and 46% of total bookings in
the second quarters of 2016 and 2015, respectively, and 29% and 41% of total
bookings in the first six months of 2016 and 2015, respectively.

We record bookings for not-to-exceed contract awards (e.g., undefinitized
contract awards, binding letter agreements) based on reasonable estimates of
expected contract definitization, which generally will not be less than 75% of
the award. We subsequently adjust bookings to reflect the actual amounts
definitized or, when 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.

Backlog-We disclose period-ending backlog for each segment. Backlog 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 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.
                                                   Funded Backlog                          Total Backlog
Backlog (in millions)                      Jul 3, 2016        Dec 31, 2015        Jul 3, 2016        Dec 31, 2015
Integrated Defense Systems               $       8,584      $        8,961      $       9,959      $       10,629
Intelligence, Information and Services           2,745               2,933              6,060               6,367
Missile Systems                                  8,646               7,998             10,943              10,885
Space and Airborne Systems                       5,691               4,692              7,877               6,309
Forcepoint(1)                                      469                 476                471                 479
Total                                    $      26,135      $       25,060      $      35,310      $       34,669

(1) Forcepoint funded and total backlog excludes the unfavorable impact of $76

million and $86 million at July 3, 2016 and December 31, 2015, respectively,

related to the acquisition accounting adjustments to record acquired deferred

    revenue at fair value.



Total backlog includes both funded backlog (firm orders for which funding is
authorized, appropriated and contractually obligated by the customer but for
which work has not been performed) and unfunded backlog (firm orders for which
funding has not been appropriated and/or contractually obligated by the customer
and for which work has not been performed). Revenue is generally not recognized
on backlog until funded. Backlog excludes unexercised contract options and
potential orders under ordering-type contracts (e.g., IDIQ). Both funded and
unfunded backlog are affected by changes in foreign exchange rates.

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

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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                 Six Months Ended
Total Net Sales (in millions)              Jul 3, 2016      Jun 28, 2015     Jul 3, 2016      Jun 28, 2015
Integrated Defense Systems                $     1,399      $      1,565     $      2,736     $      2,872
Intelligence, Information and Services          1,642             1,594            3,135            3,055
Missile Systems                                 1,656             1,559            3,376            3,032
Space and Airborne Systems                      1,547             1,416            2,997            2,774
Forcepoint                                        138                57              274               81
Eliminations                                     (326 )            (333 )           (673 )           (668 )
Total business segment sales                    6,056             5,858           11,845           11,146
Acquisition Accounting Adjustments                (21 )             (10 )            (47 )            (10 )
Total                                     $     6,035      $      5,848     $     11,798     $     11,136



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
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, 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, costs previously deferred into inventory on contracts using commercial
or units of delivery accounting, 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". 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                      Six Months Ended
EAC Adjustments (in millions)           Jul 3, 2016         Jun 28, 2015        Jul 3, 2016        Jun 28, 2015
Gross favorable                       $         228       $          150      $         407       $         331
Gross unfavorable                               (94 )               (110 )             (252 )              (170 )
Total net EAC adjustments             $         134       $           40      $         155       $         161



Significant EAC adjustments in the second quarters and first six months of 2016
and 2015 are discussed in the Operating Income and Margin section of each
business segment's discussion below. The increase in net EAC adjustments of $94
million in the second quarter of 2016 compared to the second quarter of 2015 was
primarily due to the increase in net EAC adjustments at IDS and SAS. Total net
EAC adjustments in the first six months of 2016 were relatively consistent with
the first six months of 2015. Refer to the individual segment results for
further information.


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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.

Because each segment has thousands of contracts in any reporting period, changes
in operating income and margin are likely to be due to normal changes in volume,
net EAC adjustments, and contract mix and other performance on many contracts
with no single change, or series of related changes, materially driving a
segment's change in operating income or operating margin percentage.

Operating income by segment was as follows:

                                                 Three Months Ended                 Six Months Ended
Operating Income (in millions)             Jul 3, 2016       Jun 28, 2015     Jul 3, 2016     Jun 28, 2015
Integrated Defense Systems                $       375       $        202     $       522     $        385
Intelligence, Information and Services            124                122             224              417
Missile Systems                                   223                184             415              391
Space and Airborne Systems                        203                195             376              377
Forcepoint                                          7                 (1 )            21               (1 )
Eliminations                                      (34 )              (36 )           (67 )            (69 )
Total business segment operating income           898                666           1,491            1,500
Acquisition Accounting Adjustments                (51 )              (32 )          (109 )            (46 )
FAS/CAS Adjustment                                109                 49             214               98
Corporate                                           4                (35 )           (24 )            (64 )
Total                                     $       960       $        648     $     1,572     $      1,488



Integrated Defense
Systems
                                        Three Months Ended                            Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016     Jun 28, 2015    % Change     Jul 3, 2016     Jun 28, 2015    % Change
Total net sales             $     1,399     $      1,565      (10.6 )%   $     2,736     $      2,872       (4.7 )%
Total operating expenses
Cost of sales-labor                 498              486        2.5  %         1,007              940        7.1  %
Cost of sales-materials
and subcontractors                  482              557      (13.5 )%           935            1,035       (9.7 )%
Other cost of sales and
other operating expenses             44              320      (86.3 )%           272              512      (46.9 )%
Total operating expenses          1,024            1,363      (24.9 )%         2,214            2,487      (11.0 )%
Operating income            $       375     $        202       85.6  %   $       522     $        385       35.6  %
Operating margin                   26.8 %           12.9 %                      19.1 %           13.4 %



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Change in Operating           Three Months Ended July 3, 2016 Versus       Six Months Ended July 3, 2016 Versus Six
Income (in millions)              Three Months Ended Jun 28, 2015                 Months Ended Jun 28, 2015
Volume                                       $        (27 )                               $        (17 )
Net change in EAC
adjustments                                            59                                           19
Mix and other performance                             141                                          135
Total change in operating
income                                       $        173                                 $        137

                                        Three Months Ended                             Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016      Jun 28, 2015    % Change     Jul 3, 2016     Jun 28, 2015    % Change
Bookings                    $      1,273     $      2,650      (52.0 )%   $     2,290     $      3,978      (42.4 )%



Total Net Sales-The decrease in total net sales of $166 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily due to
lower net sales of $111 million on an international Patriot program awarded in
the second quarter of 2015 driven by the recognition of previously deferred
precontract costs in the second quarter of 2015.

The decrease in total net sales of $136 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to lower net sales of
$78 million from the scheduled completion of certain production phases on our
missile defense radar production programs and $47 million from the scheduled
completion of certain production phases on a U.S. Navy combat systems program,
partially offset by higher net sales of $42 million on integrated air and
missile defense programs, including $115 million of higher net sales on an
international Patriot program awarded in the fourth quarter of 2014 due to a
scheduled increase in production and $99 million of lower net sales from the
scheduled completion of certain production phases on an international air and
missile defense systems program.

Total Operating Expenses-The decrease in total operating expenses of $339
million in the second quarter of 2016 compared to the second quarter of 2015 was
primarily due to a decrease in other cost of sales and other operating expenses
of $276 million and a decrease in materials and subcontractors costs of $75
million. The decrease in other cost of sales and other operating expenses was
principally driven by the tax-free $158 million gain from the sale of our equity
method investment in TRS SAS in the second quarter of 2016 as described in MD&A
Overview on page 23, and a change in previously deferred precontract costs of
$101 million in the second quarter of 2015 related to the international Patriot
program awarded in the second quarter of 2015. The decrease in materials and
subcontractors costs was primarily due to lower activity on an international air
and missile defense systems program due to scheduled production phases.

The decrease in total operating expenses of $273 million in the first six months
of 2016 compared to the first six months of 2015 was due to a decrease in other
cost of sales and other operating expenses of $240 million and a decrease in
materials and subcontractors costs of $100 million, partially offset by an
increase in labor costs of $67 million. The decrease in other cost of sales and
other operating expenses was principally driven by the tax-free $158 million
gain from the sale of our equity method investment in TRS SAS in the second
quarter of 2016 as described in MD&A Overview on page 23, and a change in
previously deferred precontract costs of $101 million in the second quarter of
2015 related to the international Patriot program awarded in the second quarter
of 2015. The decrease in materials and subcontractors costs was primarily due to
lower activity on an international air and missile defense systems program as
described above in Total Net Sales. The increase in labor costs was primarily
due to the activity on the international Patriot program awarded in the fourth
quarter of 2014 described above in Total Net Sales.

Operating Income and Margin-The increase in operating income of $173 million and
the related increase in operating margin in the second quarter of 2016 compared
to the second quarter of 2015 was primarily due to a change in mix and other
performance of $141 million, principally driven by the tax-free $158 million
gain from the sale of our equity method investment in TRS SAS in the second
quarter of 2016 as described in MD&A Overview on page 23. Included in the net
change in EAC adjustments was a negative profit adjustment of $33 million in the
second quarter of 2015 to eliminate all remaining estimated incentive fees
related to the Air Warfare Destroyer (AWD) program due to the shipbuilder
extending the planned schedule and related increase in costs to complete its
portion of the program and a $29 million favorable change in net EAC adjustments
driven by labor and material production efficiencies on integrated air and
missile defense programs.

The increase in operating income of $137 million and the related increase in
operating margin in the first six months of 2016 compared to the first six
months of 2015 was primarily due to a change in mix and other performance of
$135 million driven principally by the tax-free $158 million gain from the sale
of our equity method investment in TRS SAS in the second quarter of 2016 as
described in MD&A Overview on page 23. Included in the net change in EAC
adjustments was a $43 million favorable change in net EAC adjustments driven by
labor and material production efficiencies on integrated air and missile defense
programs, a negative profit adjustment of $36 million in the first quarter of
2016 on an international command and control program driven

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by costs to replace or repair shelters which the subcontractor refused to remedy
resulting in the subcontractor being terminated and a negative profit adjustment
of $33 million in the second quarter of 2015 on the AWD program as described
above.

Backlog and Bookings-Backlog was $9,959 million at July 3, 2016 compared to
$10,629 million at December 31, 2015. The decrease in backlog of $670 million or
6% at July 3, 2016 compared to December 31, 2015 was primarily due to sales in
excess of bookings at our Integrated Air and Missile Defense product line.
Bookings decreased by $1,377 million in the second quarter of 2016 compared to
the second quarter of 2015. In the second quarter of 2016, IDS booked $487
million to provide advanced Patriot air and missile defense capabilities for
Kuwait. IDS also booked $354 million on the Aegis weapon system for the U.S.
Navy and international customers and $117 million for in-service support for the
Collins class submarine for the Royal Australian Navy. In the second quarter of
2015, IDS booked $2.0 billion to provide advanced Patriot air and missile
defense capabilities for the Kingdom of Saudi Arabia. IDS also booked $132
million to provide satellite communication ground terminals for an international
customer.

Bookings decreased by $1,688 million in the first six months of 2016 compared to
the first six months of 2015. In addition to the bookings noted above, in the
first six months of 2016, IDS booked $191 million to provide Patriot engineering
services support for U.S. and international customers and $84 million to provide
advanced Patriot air and missile defense capability for the U.S. Army. IDS also
booked $198 million on a classified program. In addition to the bookings noted
above, in the first six months of 2015, IDS booked $769 million to provide
advanced Patriot air and missile defense capability for the Republic of Korea.
IDS also booked $213 million to provide Patriot engineering services support for
U.S. and international customers.

Intelligence, Information and Services

                                        Three Months Ended                            Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016     Jun 28, 2015    % Change     Jul 3, 2016     Jun 28, 2015    % Change
Total net sales             $     1,642     $      1,594        3.0  %   $     3,135     $      3,055        2.6  %
Total operating expenses
Cost of sales-labor                 648              636        1.9  %         1,283            1,224        4.8  %
Cost of sales-materials
and subcontractors                  615              645       (4.7 )%         1,188            1,225       (3.0 )%
Other cost of sales and
other operating expenses            255              191       33.5  %           440              189      132.8  %
Total operating expenses          1,518            1,472        3.1  %         2,911            2,638       10.3  %
Operating income            $       124     $        122        1.6  %   $       224     $        417      (46.3 )%
Operating margin                    7.6 %            7.7 %                       7.1 %           13.6 %



Change in Operating           Three Months Ended July 3, 2016 Versus       Six Months Ended July 3, 2016 Versus Six
Income (in millions)              Three Months Ended Jun 28, 2015                  Months Ended Jun 28, 2015
Volume                                       $          3                                  $          7
Net change in EAC
adjustments                                            (4 )                                          (6 )
Mix and other performance                               3                                          (194 )
Total change in operating
income                                       $          2                                  $       (193 )

                                        Three Months Ended                             Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016      Jun 28, 2015    % Change     Jul 3, 2016      Jun 28, 2015    % Change
Bookings                    $      1,599     $      1,425        12.2 %   $      2,852     $      2,513        13.5 %



Total Net Sales-The increase in total net sales of $48 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily due to
higher net sales of $77 million on various cybersecurity and special missions
programs with no individual or common significant driver. The increase in total
net sales was partially offset by lower net sales of $25 million on training
activities on the Air Traffic Control Optimum Training Solutions (ATCOTS)
contract for the Federal Aviation Administration (FAA), which ended in 2015.


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The increase in total net sales of $80 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to higher net sales
of $106 million on various cybersecurity and special missions programs with no
individual or common significant driver, partially offset by lower net sales of
$50 million on the ATCOTS contract for the FAA, which ended in 2015.

Total Operating Expenses-The increase in total operating expenses of $46 million
in the second quarter of 2016 compared to the second quarter of 2015 was
primarily due to an increase in other cost of sales and other operating expenses
of $64 million, driven principally by activity on the various cybersecurity and
special missions programs described above in Total Net Sales.

The increase in total operating expenses of $273 million in the first six months
of 2016 compared to the first six months of 2015 was primarily due to an
increase in other cost of sales and other operating expenses of $251 million,
driven principally by the $181 million impact from the eBorders settlement in
the first quarter of 2015 as described in Consolidated Results of Operations
beginning on page 23, and activity on the various cybersecurity and special
missions programs described above in Total Net Sales.

Operating Income and Margin-Operating income and margin in the second quarter of 2016 were relatively consistent with the second quarter of 2015.


The decrease in operating income of $193 million and the related decrease in
operating margin in the first six months of 2016 compared to the first six
months of 2015 was primarily due to a change in mix and other performance of
$194 million, driven principally by the $181 million impact of the eBorders
settlement in the first quarter of 2015 as described in Consolidated Results of
Operations beginning on page 23.

Backlog and Bookings-Backlog was $6,060 million at July 3, 2016 compared to
$6,367 million at December 31, 2015. Bookings increased by $174 million in the
second quarter of 2016 compared to the second quarter of 2015. In the second
quarter of 2016, IIS booked $445 million on domestic training programs and $129
million on foreign training programs in support of Warfighter FOCUS activities.
IIS also booked $453 million on a number of classified contracts. In the second
quarter of 2015, IIS booked $387 million on domestic training programs, $151
million on foreign training programs in support of Warfighter FOCUS activities
and $77 million on the NextGen Weather Processor (NWP) program for the FAA. IIS
also booked $376 million on a number of classified contracts.

Bookings increased by $339 million in the first six months of 2016 compared to
the first six months of 2015. In addition to the bookings above, in the first
six months of 2016, IIS booked $301 million for a U.S. Air Force program and
$555 million on a number of classified contracts. In addition to the bookings
above, in the first six months of 2015, IIS booked $103 million on the Wide Area
Augmentation System (WAAS) program for the FAA and $547 million on a number of
classified contracts.

Missile Systems
                                        Three Months Ended                            Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016     Jun 28, 2015    % Change     Jul 3, 2016     Jun 28, 2015    % Change
Total net sales             $     1,656     $      1,559         6.2 %   $     3,376     $      3,032        11.3 %
Total operating expenses
Cost of sales-labor                 527              505         4.4 %         1,053              985         6.9 %
Cost of sales-materials
and subcontractors                  667              649         2.8 %         1,313            1,276         2.9 %
Other cost of sales and
other operating expenses            239              221         8.1 %           595              380        56.6 %
Total operating expenses          1,433            1,375         4.2 %         2,961            2,641        12.1 %
Operating income            $       223     $        184        21.2 %   $       415     $        391         6.1 %
Operating margin                   13.5 %           11.8 %                      12.3 %           12.9 %



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Change in Operating Three Months Ended July 3, 2016 Versus Three Six Months Ended July 3, 2016 Versus Six Income (in millions)

                 Months Ended Jun 28, 2015                      Months Ended Jun 28, 2015
Volume                                       $           8                                  $         41
Net change in EAC
adjustments                                             12                                           (57 )
Mix and other performance                               19                                            40
Total change in operating
income                                       $          39                                  $         24

                                         Three Months Ended                             Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016      Jun 28, 2015     % Change     Jul 3, 2016      Jun 28, 2015    % Change
Bookings                    $      1,906     $       2,216      (14.0 )%   $      3,538     $      3,621       (2.3 )%



Total Net Sales-The increase in total net sales of $97 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily due to $98
million of higher net sales on the Paveway program principally driven by
international requirements.

The increase in total net sales of $344 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to $265 million of
higher net sales on the Paveway program principally driven by international
requirements.

Total Operating Expenses-Operating expenses in the second quarter of 2016 were relatively consistent with the second quarter of 2015.


The increase in total operating expenses of $320 million in the first six months
of 2016 compared to the first six months of 2015 was primarily due to an
increase in other cost of sales and other operating expenses of $215 million and
an increase in labor costs of $68 million. The increase in other cost of sales
and other operating expenses was driven principally by an $86 million change in
previously deferred precontract costs based on contract awards or funding, a $49
million increase in other cost of sales on the Paveway program driven by the
program requirements discussed above in Total Net Sales and a $25 million
favorable resolution of a contractual issue in the first quarter of 2015. The
increase in labor costs was spread across numerous programs with no individual
or common significant driver.

Operating Income and Margin-The increase in operating income of $39 million and
the related increase in operating margin in the second quarter of 2016 compared
to the second quarter of 2015 was primarily due to a change in mix and other
performance of $19 million and a net change in EAC adjustments of $12 million.
The change in mix and other performance was spread across numerous programs with
no individual or common significant driver. The net change in EAC adjustments
was principally driven by a favorable change in net EAC adjustments on the
Paveway program due to labor and material production efficiencies.

The increase in operating income of $24 million in the first six months of 2016
compared to the first six months of 2015 was due to an increase in volume of $41
million and a change in mix and other performance of $40 million, partially
offset by a net change in EAC adjustments of $57 million. The increase in volume
and the change in mix and other performance were driven principally by the
Paveway program described above in Total Net Sales. The net change in EAC
adjustments was principally driven by a $29 million unfavorable change on a
missile defense interceptor program driven primarily by a decrease in estimated
incentive fees due to re-phasing incentive events in the first quarter of 2016
and an increase in expected cost to complete the program, and a $25 million
favorable resolution of a contractual issue in the first quarter of 2015,
partially offset by a $26 million favorable change in net EAC adjustments on the
Paveway program due to labor and material production efficiencies. The remaining
change in net EAC adjustments was spread across numerous programs with no
individual or common significant driver. The decrease in operating margin in the
first six months of 2016 compared to the first six months of 2015 was primarily
due to the net change in EAC adjustments, partially offset by the change in mix
and other performance.

Backlog and Bookings-Backlog was $10,943 million at July 3, 2016 compared to
$10,885 million at December 31, 2015. Bookings decreased by $310 million in the
second quarter of 2016 compared to the second quarter of 2015. In the second
quarter of 2016, MS booked $298 million for AIM-9X® Sidewinder short-range
air-to-air missiles for the U.S. Navy, U.S. Air Force, U.S. Army and
international customers, $292 million for Paveway for the U.S. Air Force and
international customers, $230 million for Standard Missile-3 (SM-3®) for the MDA
and an international customer, $186 million for the Woomera Mobile Range Upgrade
program for the Royal Australian Air Force, $122 million for the Miniature Air
Launched Decoy (MALD®) for the U.S. Air Force, $118 million for Evolved
SeaSparrow Missiles (ESSM®) for the U.S. Navy and international customers, and
$109 million for Advanced Medium-Range Air-to-Air Missiles (AMRAAM®) for the
U.S. Air Force, U.S. Navy, and international customers. In the second quarter of
2015, MS booked $529 million for SM-3 for the MDA, $511 million on ESSM for the
U.S. Navy and international customers, $363 million for Paveway for
international customers, and $143 million for Standard Missile-6 (SM-6®) for the
U.S. Navy. MS also booked $99 million on a classified program.

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Bookings decreased by $83 million in the first six months of 2016 compared to
the first six months of 2015. In addition to the bookings above, in the first
six months of 2016, MS booked $646 million for AMRAAM for the U.S. Air Force,
U.S. Navy and international customers, $272 million for SM-6 for the U.S. Navy
and $225 million for Paveway for the U.S. Air Force and international customers.
In addition to the bookings above, in the first six months of 2015, MS booked
$539 million for AMRAAM for the U.S. Air Force, U.S. Navy and international
customers, $231 million for Tomahawk for the U.S. Navy, $110 million for SM-6
for the U.S. Navy and $92 million for MALD for the U.S. Air Force.

Space and Airborne
Systems
                                        Three Months Ended                            Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016     Jun 28, 2015    % Change     Jul 3, 2016     Jun 28, 2015    % Change
Total net sales             $     1,547     $      1,416        9.3  %   $     2,997     $      2,774        8.0  %
Total operating expenses
Cost of sales-labor                 626              626          -  %         1,226            1,233       (0.6 )%
Cost of sales-materials
and subcontractors                  462              335       37.9  %           854              668       27.8  %
Other cost of sales and
other operating expenses            256              260       (1.5 )%           541              496        9.1  %
Total operating expenses          1,344            1,221       10.1  %         2,621            2,397        9.3  %
Operating income            $       203     $        195        4.1  %   $       376     $        377       (0.3 )%
Operating margin                   13.1 %           13.8 %                      12.5 %           13.6 %


Change in Operating           Three Months Ended July 3, 2016 Versus       Six Months Ended July 3, 2016 Versus Six
Income (in millions)              Three Months Ended Jun 28, 2015                  Months Ended Jun 28, 2015
Volume                                       $         19                                  $         34
Net change in EAC
adjustments                                            27                                            38
Mix and other performance                             (38 )                                         (73 )
Total change in operating
income                                       $          8                                  $         (1 )

                                        Three Months Ended                             Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016      Jun 28, 2015    % Change     Jul 3, 2016      Jun 28, 2015    % Change
Bookings                    $      2,217     $      1,240        78.8 %   $      4,419     $      1,871       136.2 %



Total Net Sales-The increase in total net sales of $131 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily due to
higher net sales of $153 million on classified programs, principally driven by
$97 million on an international classified program awarded in the first quarter
of 2016.

The increase in total net sales of $223 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to higher net sales
of $282 million on classified programs, principally driven by $151 million on an
international classified program awarded in the first quarter of 2016.

Total Operating Expenses-The increase in total operating expenses of $123
million in the second quarter of 2016 compared to the second quarter of 2015 was
primarily due to an increase in materials and subcontractors costs of $127
million, principally driven by activity on the classified programs described
above in Total Net Sales. In the first quarter of 2016, we eliminated
intra-segment charging between SAS product lines for work performed on other SAS
product lines' contracts. Second quarter of 2015 operating expense amounts have
been retroactively reclassified to reflect these changes resulting in a $30
million and $65 million increase in other cost of sales and other operating
expenses and labor costs, respectively, and a corresponding $95 million decrease
in materials and subcontractors costs.

The increase in total operating expenses of $224 million in the first six months
of 2016 compared to the first six months of 2015 was primarily due to an
increase in materials and subcontractors costs of $186 million and an increase
in other costs of sales and other operating expenses of $45 million. The
increase in materials and subcontractors costs was primarily driven by the
activity on the programs described above in Total Net Sales. The increase in
other cost of sales and other operating expenses was primarily due to the amount
of previously deferred precontract costs based on contract awards or funding,
which had an impact of $69 million, with the remaining change spread across
numerous programs with no individual or common significant driver. In the first

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quarter of 2016, we eliminated intra-segment charging between SAS product lines
for work performed on other SAS product lines' contracts. First six months of
2015 operating expense amounts have been retroactively reclassified to reflect
these changes resulting in a $61 million and $127 million increase in other cost
of sales and other operating expenses and labor costs, respectively, and a
corresponding $188 million decrease in materials and subcontractors costs.

Operating Income and Margin-The increase in operating income of $8 million in
the second quarter of 2016 compared to the second quarter of 2015 was due to a
net change in EAC adjustments of $27 million and an increase in volume of $19
million, partially offset by a change in mix and other performance of $38
million. The net change in EAC adjustments was principally driven by labor and
material production efficiencies on international tactical radar systems
programs and improved performance on protected communication systems programs in
the second quarter of 2016. The increase in volume was principally driven by the
classified programs described above in Total Net Sales. The change in mix and
other performance was primarily driven by activity on a tactical radar systems
program and on an international classified program awarded in the first quarter
of 2016, and an $11 million gain on a real estate transaction in the second
quarter of 2015. The decrease in operating margin in the second quarter of 2016
compared to the second quarter of 2015 was primarily due to the change in mix
and other performance, partially offset by the net change in EAC adjustments.

Operating income in the first six months of 2016 was relatively consistent with
the first six months of 2015. The change in mix and other performance of $73
million was primarily driven by activity on a tactical radar systems program and
on an international classified program awarded in the first quarter of 2016, and
an $11 million gain on a real estate transaction in the second quarter of 2015.
The net change in EAC adjustments of $38 million was primarily driven by labor
and material production efficiencies on international tactical radar systems
programs. The increase in volume of $34 million was principally driven by the
classified programs described above in Total Net Sales. The decrease in
operating margin in the first six months of 2016 compared to the first six
months of 2015 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 $7,877 million at July 3, 2016 compared to
$6,309 million at December 31, 2015. The increase in backlog of $1,568 million
or 25% at July 3, 2016 compared to December 31, 2015 was primarily due to
bookings in excess of sales in the first six months of 2016, principally within
our Electronic Warfare Systems, Space Systems and Intelligence, Surveillance and
Reconnaissance Systems product lines. Bookings increased by $977 million in the
second quarter of 2016 compared to the second quarter of 2015. In the second
quarter of 2016, SAS booked $992 million on the Next Generation Jammer (NGJ)
program for the U.S. Navy and $90 million on the next-generation Multi-Spectral
Targeting System (MTS) for the U.S. Air Force. SAS also booked $424 million on a
number of classified contracts. In the second quarter of 2015, SAS booked $153
million on a multimission radar program for the U.S. Navy and an international
customer, $99 million on an Active Electronically Scanned Array (AESA) radar
Performance Based Logistics (PBL) contract for an international customer, and
$82 million to provide communication subsystems for the U.S. Navy and an
international customer. SAS also booked $250 million on a number of classified
contracts.

Bookings increased by $2,548 million in the first six months of 2016 compared to
the first six months of 2015. In addition to the bookings noted above, in the
first six months of 2016, SAS booked over $650 million on an international
classified program, $553 million on the Joint Polar Satellite System (JPSS)
program for NASA, and $470 million on a number of domestic classified contracts.
In addition to the bookings noted above, in the first six months of 2015, SAS
booked $210 million on a number of classified contracts.


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Forcepoint
                                         Three Months Ended                              Six Months Ended
(In millions, except
percentages)                 Jul 3, 2016      Jun 28, 2015      % Change    Jul 3, 2016      Jun 28, 2015      % Change
Total net sales             $       138     $        57               NM   $       274     $        81               NM
Total operating expenses
Cost of sales                        27              11               NM            51              17               NM
Selling and marketing                52              19               NM           100              24               NM
Research and development             32              21               NM            64              31               NM
General and
administrative                       20               7               NM            38              10               NM
Total operating expenses            131              58               NM           253              82               NM
Operating income (loss)     $         7     $        (1 )             NM   $        21     $        (1 )             NM
Operating margin                    5.1 %          (1.8 )%                         7.7 %          (1.2 )%
NM = Not meaningful


                                         Three Months Ended                              Six Months Ended
(In millions, except
percentages)                  Jul 3, 2016      Jun 28, 2015     % Change     Jul 3, 2016      Jun 28, 2015     % Change
Bookings                    $         123     $          49           NM   $         220     $          68           NM
NM = Not meaningful



Total Net Sales-The increase in total net sales of $81 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily due to $79
million of higher sales resulting from the acquisitions of Websense in the
second quarter of 2015 and Stonesoft in the first quarter of 2016. Total net
sales excluded the unfavorable impact related to the deferred revenue
acquisition accounting adjustments described below in Acquisition Accounting
Adjustments.

The increase in total net sales of $193 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to $184 million of
higher sales resulting from the acquisitions of Websense in the second quarter
of 2015 and Stonesoft in the first quarter of 2016. 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 Forcepoint,
which excludes amortization of acquired intangible assets, 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.

• 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 second quarter of 2016 increased $73 million
compared to the second quarter of 2015. The increase in all of the categories of
total operating expenses was primarily due to the acquisition of Websense in the
second quarter of 2015. Total operating expenses excluded amortization of
acquired intangible assets as described below in Acquisition Accounting
Adjustments.

Total operating expenses in the first six months of 2016 increased $171 million
compared to the first six months of 2015. The increase in all of the categories
of total operating expenses was primarily due to the acquisition of Websense in
the second quarter of 2015. Total operating expenses excluded amortization of
acquired intangible assets as described below in Acquisition Accounting
Adjustments.

Operating Income and Margin-The increase in operating income of $8 million in
the second quarter of 2016 compared to the second quarter of 2015 was primarily
due to the acquisition of Websense. Operating income excludes the acquisition
accounting adjustments described below in Acquisition Accounting Adjustments.
The increase in operating margin in the second quarter of 2016 compared to the
second quarter of 2015 was primarily due to the acquisition of Websense.

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The increase in operating income of $22 million in the first six months of 2016
compared to the first six months of 2015 was primarily due to the acquisition of
Websense. Operating income excludes the acquisition accounting adjustments
described below in Acquisition Accounting Adjustments. The increase in operating
margin in the first six months of 2016 compared to the first six months of 2015
was primarily due to the acquisition of Websense.

Backlog and Bookings-Backlog was $471 million at July 3, 2016 compared to $479
million at December 31, 2015. Bookings increased by $74 million in the second
quarter of 2016 compared to the second quarter of 2015 primarily due to the
acquisitions of Websense and Stonesoft.

Bookings increased by $152 million in the first six months of 2016 compared to
the first six months of 2015 primarily due to the acquisitions of Websense and
Stonesoft.

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
("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                   Six Months Ended
(In millions)                               Jul 3, 2016       Jun 28, 2015      Jul 3, 2016       Jun 28, 2015
Deferred revenue adjustment                $       (21 )     $        (10 )    $       (47 )     $        (10 )
Amortization of acquired intangibles               (30 )              (22 )            (62 )              (36 )

Total Acquisition Accounting Adjustments $ (51 ) $ (32 )

$ (109 ) $ (46 )

The deferred revenue adjustment for the second quarters and first six months of 2016 and 2015 all relates to the Forcepoint segment.

Amortization of acquired intangibles by segment was as follows:

                                                Three Months Ended                 Six Months Ended
(In millions)                              Jul 3, 2016     Jun 28, 2015      Jul 3, 2016     Jun 28, 2015
Integrated Defense Systems                $         -     $           1     $         -     $           1
Intelligence, Information and Services              4                 3               9                 6
Missile Systems                                     1                 1               1                 1
Space and Airborne Systems                          4                 9               9                18
Forcepoint                                         21                 8              43                10
Total                                     $        30     $          22     $        62     $          36



The change in our Acquisition Accounting Adjustments of $19 million in the
second quarter of 2016 compared to the second quarter of 2015 was due to an $11
million increase in the deferred revenue adjustment, principally driven by the
acquisition of Stonesoft in the first quarter of 2016 and an $8 million increase
in the intangibles amortization adjustment, principally driven by the
acquisition of Websense in the second quarter of 2015.

The change in our Acquisition Accounting Adjustments of $63 million in the first
six months of 2016 compared to the first six months of 2015 was due to a $37
million increase in the deferred revenue adjustment and a $26 million increase
in the intangibles amortization adjustment, both principally driven by the
acquisition of Websense in the second quarter of 2015.

FAS/CAS Adjustment
The FAS/CAS Adjustment represents the difference between 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). 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.


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The components of the FAS/CAS Adjustment were as follows:

                                              Three Months Ended                  Six Months Ended
FAS/CAS Adjustment Income
(Expense) (in millions)                 Jul 3, 2016      Jun 28, 2015      Jul 3, 2016      Jun 28, 2015
FAS/CAS Pension Adjustment             $       108      $          48      $      213      $          96
FAS/CAS PRB Adjustment                           1                  1               1                  2
FAS/CAS Adjustment                     $       109      $          49      $      214      $          98

The components of the FAS/CAS Pension Adjustment were as follows:

                                   Three Months Ended                 Six Months Ended
(In millions)                 Jul 3, 2016      Jun 28, 2015     Jul 3, 2016      Jun 28, 2015
FAS (expense)                $     (262 )     $      (292 )    $      (527 )    $      (583 )
CAS expense                         370               340              740              679
FAS/CAS Pension Adjustment   $      108       $        48      $       213      $        96



The change in our FAS/CAS Pension Adjustment of $60 million in the second
quarter of 2016 compared to the second quarter of 2015 was driven by a $30
million increase in our CAS expense and a $30 million decrease in our FAS
expense. The change in our FAS/CAS Pension Adjustment of $117 million in the
first six months of 2016 compared to the first six months of 2015 was driven by
a $61 million increase in our CAS expense and a $56 million decrease in our FAS
expense. The increase in our CAS expense in the second quarter and first six
months of 2016 was primarily due to the CAS Harmonization phased transition to
the use of a discount rate based on high quality corporate bonds, consistent
with the Pension Protection Act of 2006, to measure liabilities in determining
the CAS pension expense. The change in the discount rate used to measure
liabilities for purposes of determining CAS pension expense has been included in
our contracts through our overhead forward pricing rates. The decrease in our
FAS expense in the second quarter and first six months of 2016 was primarily due
to the higher discount rate at December 31, 2015 compared to the discount rate
at December 31, 2014.

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                    Six Months Ended
(In millions)      Jul 3, 2016        Jun 28, 2015     Jul 3, 2016       Jun 28, 2015
Corporate       $     4              $        (35 )   $       (24 )     $        (64 )



The change in operating income related to Corporate of $39 million in the second
quarter of 2016 compared to the second quarter of 2015 was primarily due to $23
million of Websense acquisition and integration related expenses in the second
quarter of 2015.

The change in operating income related to Corporate of $40 million in the first
six months of 2016 compared to the first six months of 2015 was primarily due to
$25 million of Websense acquisition and integration related expenses in the
first six months of 2015.

FINANCIAL CONDITION AND LIQUIDITY

Overview

We pursue a capital deployment strategy that balances funding for growing our
business, including capital expenditures, acquisitions and research and
development; prudently managing our balance sheet, including debt repayments and
pension contributions; and 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 twelve months and for the foreseeable future.

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In addition, the following table highlights selected measures of our liquidity
and capital resources at July 3, 2016 and December
31, 2015:
(In millions)                               Jul 3, 2016      Dec 31, 2015
Cash and cash equivalents                  $       2,016    $       2,328
Short-term investments                               703              872
Working capital                                    3,836            3,686
Amount available under credit facilities           1,250            1,250



Operating Activities
                                                                        Six Months Ended
(In millions)                                                    Jul 3,

2016 Jun 28, 2015 Net cash provided by (used in) operating activities from continuing operations

                                         $     1,071          $         431
Net cash provided by (used in) operating activities                 1,071                    432



The increase in net cash provided by operating activities from continuing
operations of $640 million in the first six months of 2016 compared to the first
six months of 2015, was primarily due to a decrease in tax payments and pension
contributions in the first six months of 2016 as discussed below, as well as the
timing of vendor payments, partially offset by the eBorders settlement payment
received in the second quarter of 2015.

Pension Plan Contributions-We made the following contributions to our pension and PRB plans during the first six months of 2016 and 2015:

                                         Six Months Ended
(In millions)                      Jul 3, 2016       Jun 28, 2015
Required pension contributions   $    79            $         170
PRB contributions                     10                       10



Tax Payments and Refunds-We made the following net tax payments during the first six months of 2016 and 2015:

                         Six Months Ended
(In millions)      Jul 3, 2016       Jun 28, 2015
Federal         $     165           $         488
Foreign                27                      12
State                  18                      32


We expect full-year net federal, foreign and state tax payments to be approximately $794 million in 2016.

Interest Payments-We made interest payments on our outstanding debt of $116 million in both the first six months of 2016 and 2015.

Investing Activities
                                                              Six Months Ended
(In millions)                                          Jul 3, 2016       Jun 28, 2015
Net cash provided by (used in) investing activities   $       (186 )   $    

(1,222 )

The change in net cash provided by (used in) investing activities of $1,036 million in the first six months of 2016 compared to the first six months of 2015 was primarily due to the acquisition of Websense, partially offset by our short-term investments activity, both of which are described below.

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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:
                                                          Six Months Ended
(In millions)                                       Jul 3, 2016       Jun 28, 2015
Additions to property, plant and equipment       $     237           $      

143

Additions to capitalized internal use software          26                  

26




We expect our property, plant and equipment and internal use software
expenditures to be between approximately $465-$525 million and $75-$95 million,
respectively, in 2016, 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:
                                              Six Months Ended
(In millions)                           Jul 3, 2016      Jun 28, 2015

Purchases of short-term investments $ (472 ) $ (148 ) Sales of short-term investments

                  -              209
Maturities of short-term investments           599              774



Acquisitions-In pursuing our business strategies, we acquire and make investments in certain businesses that meet strategic and financial criteria. Payments for purchases of acquired companies, net of cash acquired, were as follows:

                                                                      Six Months Ended
(In millions)                                                  Jul 3, 2016       Jun 28, 2015
Payments for purchases of acquired companies, net of cash
acquired                                                      $        (57 )    $     (1,892 )



The decrease of $1,835 million in payments for purchases of acquired companies,
net of cash acquired, was due to the acquisition of Websense in May 2015 from
Vista Equity Partners for approximately $1.9 billion, partially offset by
Forcepoint's acquisition of the Stonesoft next-generation firewall (NGFW)
business, including the Sidewinder proxy firewall technology, in January 2016.

Financing Activities
                                                             Six Months Ended
(In millions)                                          Jul 3, 2016      Jun 28, 2015
Net cash provided by (used in) financing activities   $     (1,197 )   $    

(604 )




We have used 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 $593 million in the first six
months of 2016 compared to the first six months of 2015 was primarily due to the
sale of noncontrolling interest in Forcepoint in the second quarter of 2015 and
our share repurchases, both of which are described below, as well as the $90
million net cash payment that we made to Thales S.A. in the second quarter of
2016 related to our acquisition of Thales S.A.'s noncontrolling interest in RCCS
LLC and the sale of our equity method investment in TRS SAS as described in MD&A
Overview on page 23.

Share Repurchases-From time to time, our Board of Directors authorizes the
repurchase of shares of our common stock. In November 2013, our Board authorized
the repurchase of up to $2.0 billion. Our Board also authorized the repurchase
of up to an additional $2.0 billion of our outstanding common stock in November
2015. At July 3, 2016, we had approximately $1.9 billion available under the
2015 repurchase program. Share repurchases will take place from time to time at
management's discretion depending on market conditions.

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

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Our share repurchases were as follows:

                                                             Six Months Ended
(In millions)                                     Jul 3, 2016               Jun 28, 2015
                                                 $         Shares           $         Shares
Shares repurchased under our share
repurchase programs                         $      602        4.8      $      500        4.6
Shares repurchased to satisfy tax
withholding obligations                             92        0.7              96        0.9
Total share repurchases                     $      694        5.5      $      596        5.5


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

                                                  Six Months Ended

(In millions, except per share amounts) Jul 3, 2016 Jun 28, 2015 Cash dividends declared per share $ 1.465 $ 1.34 Total dividends paid

                             419                   391


In March 2016, our Board of Directors authorized a 9.3% increase to our annual
dividend payout rate from $2.68 to $2.93 per share. Dividends are subject to
quarterly approval by our Board of Directors.
Sale of Noncontrolling Interest in Forcepoint-In connection with the Websense
acquisition in the second quarter of 2015, we combined Websense with Raytheon
Cyber Products to form Forcepoint, and then sold 19.7% of the equity interest in
Forcepoint to Vista Equity Partners for $343 million.

CAPITAL RESOURCES
Total debt was $5.3 billion at July 3, 2016 and December 31, 2015. Our
outstanding debt bears contractual interest at fixed interest rates ranging from
2.5% to 7.2% and matures at various dates from 2018 through 2044.

Cash and Cash Equivalents and Short-term Investments-Cash and cash equivalents
and short-term investments were $2.7 billion and $3.2 billion at July 3, 2016
and December 31, 2015, 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 $666 million and $1,040
million at July 3, 2016 and December 31, 2015, respectively. Earnings from our
foreign subsidiaries are currently deemed to be indefinitely reinvested. We do
not expect such reinvestment to affect our liquidity and capital resources, and
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.

Credit Facilities-In November 2015, we entered into a $1.25 billion revolving
credit facility maturing in November 2020 and terminated the previous $1.4
billion credit facility entered into in December 2011. 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 July 3, 2016, borrowings would generally bear interest at LIBOR plus
80.5 basis points. The credit facility is composed of commitments from 20
separate highly rated lenders, each committing no more than 10% of the facility.
As of July 3, 2016 and December 31, 2015 there were no borrowings outstanding
under the $1.25 billion credit facility. We had no outstanding letters of credit
at July 3, 2016 or December 31, 2015.

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 during the six months
ended July 3, 2016 and full-year 2015. Our ratio of total debt to total
capitalization, as those terms are defined in the credit facility, was 34.1% at
July 3, 2016. 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.


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Credit Ratings-Three major corporate debt rating organizations, Fitch Ratings
(Fitch), Moody's Investors Service (Moody's) and Standard & Poor's (S&P), assign
ratings to our short-term and long-term debt. The following chart reflects the
current ratings assigned by each of these agencies as of July 3, 2016 to our
short-term and long-term senior unsecured debt:
                Short-Term     Long-Term Senior Debt
Rating Agency   Debt Rating    Rating        Outlook     Date of Last Action
Fitch               F2           A -         Stable        September 2008
Moody's             P-2          A3          Stable         October 2011
S&P                 A-1           A          Stable           May 2014



Shelf Registrations-We have an effective shelf registration with the 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 consider such recovery probable based on government contracting
regulations and our long history of receiving reimbursement for such costs, and
accordingly have recorded the estimated future recovery of these costs from the
U.S. government within contracts in process, net, in our consolidated balance
sheets. Our estimates regarding remediation costs to be incurred were as
follows:
(In millions, except percentages)       Jul 3, 2016     Dec 31, 2015
Total remediation costs-undiscounted   $       219     $        224
Weighted average discount rate                 5.2 %            5.2 %

Total remediation costs-discounted $ 151 $ 149 Recoverable portion

                             95               94



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

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

Financing Arrangements and Other-We issue guarantees, and banks and surety
companies issue, on our behalf, letters of credit and surety bonds to meet
various bid, performance, warranty, retention and advance payment obligations of
us or our affiliates. These instruments expire on various dates through 2024.
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)        Jul 3, 2016      Dec 31, 2015
Guarantees          $         199    $         213
Letters of credit           2,567            2,242
Surety bonds                  255              264



Included in guarantees and letters of credit described above were $189 million
and $47 million, respectively, at July 3, 2016, and $203 million and $187
million, respectively, at December 31, 2015, related to our joint venture in
TRS. The joint venture agreement for the TRS joint venture was amended and
restated in the second quarter of 2016, as described in MD&A Overview on page
23, reducing the scope of the joint venture to TRS AMDC2 only. 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 July 3, 2016,
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 July 3, 2016. We had an
estimated liability of $4 million and $8 million, respectively, at July 3, 2016
and December 31, 2015 related to these guarantees and letters of credit.

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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
any time after two years following the closing date. In the event of a put
option, Vista Equity Partners could require Raytheon to purchase all (but not
less than all) of Vista Equity Partners' interest in Forcepoint for cash at a
price equal to fair value as determined under the joint venture agreement.
Lastly, at any time after three years following the closing date, Raytheon has
the option to purchase all (but not less than all) of Vista Equity Partners'
interest in Forcepoint at a price equal to fair value as determined under the
joint venture agreement.
We have entered into industrial cooperation agreements, sometimes referred to as
offset agreements, as a condition to obtaining orders for our products and
services from certain customers in foreign countries. At July 3, 2016, the
aggregate amount of our offset agreements had an outstanding notional value of
approximately $6.0 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; the Department of Justice (DoJ); and Congressional
Committees. From time to time, these and other agencies investigate or conduct
audits to determine whether our operations are being conducted in accordance
with applicable requirements. Such investigations and audits could result in
administrative, civil or criminal liabilities, including repayments, fines or
penalties being imposed upon us, the suspension of government export licenses or
the suspension or debarment from future U.S. government contracting. U.S.
government investigations often take years to complete and many result in no
adverse action against us. Our final allowable incurred costs for each year are
also subject to audit and have, from time to time, resulted in disputes between
us and the U.S. government, with litigation resulting at the Court of Federal
Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their
related courts of appeals. In addition, the DoJ has, from time to time, convened
grand juries to investigate possible irregularities by us. We also provide
products and services to customers outside of the U.S., and those sales are
subject to local government laws, regulations and procurement policies and
practices. Our compliance with such local government regulations or any
applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act
(FCPA) and International Traffic in Arms Regulations (ITAR)) may also be
investigated or audited. Other than as specifically disclosed herein, we do not
expect these audits, investigations or disputes to have a material effect on our
financial position, results of operations or liquidity, either individually or
in the aggregate.

On June 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, the global markets and currencies have been adversely
impacted, including a decline in the value of the British pound as compared to
the U.S. dollar. Volatility in exchange rates is expected to continue in the
short term 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,

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we may be entitled to insurance recovery for qualified legal costs. We do not expect any insurance recovery to have a material impact on the financial exposure that could result from these matters.


Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic
606), which will replace numerous requirements in U.S. GAAP, including
industry-specific requirements, and provide companies with a single revenue
recognition model for recognizing revenue from contracts with customers. The
core principle of the new standard is that a company should recognize revenue to
depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. The two permitted transition methods under
the new standard are the full retrospective method, in which case the standard
would be applied to each prior reporting period presented and the cumulative
effect of applying the standard would be recognized at the earliest period
shown, or the modified retrospective method, in which case the cumulative effect
of applying the standard would be recognized at the date of initial application.
In July 2015, the FASB approved the deferral of the new standard's effective
date by one year. The new standard is effective for annual reporting periods
beginning after December 15, 2017. The FASB will permit companies to adopt the
new standard early, but not before the original effective date of annual
reporting periods beginning after December 15, 2016.

In 2014, we established a cross-functional implementation team consisting of
representatives from across all of our business segments. We utilized a
bottoms-up approach to analyze the impact of the standard on our contract
portfolio by reviewing our current accounting policies and practices to identify
potential differences that would result from applying the requirements of the
new standard to our revenue contracts. In addition, we identified, and are in
the process of implementing, appropriate changes to our business processes,
systems and controls to support recognition and disclosure under the new
standard. The implementation team has reported the findings and progress of the
project to management and the Audit Committee on a frequent basis over the last
two years.
We have been closely monitoring FASB activity related to the new standard, as
well as working with various non-authoritative groups to conclude on specific
interpretative issues. In the second quarter of 2016, we made progress toward
completing our evaluation of the potential changes from adopting the new
standard on our future financial reporting and disclosures. Our progress was
aided by the FASB issuing ASU 2016-10, Identifying Performance Obligations and
Licensing, which amended the current guidance on performance obligations and
provided additional clarity on this topic, and the significant progress of the
non-authoritative groups in concluding on specific interpretative issues. We
also made significant progress on our contract reviews and detailed policy
drafting in the second quarter of 2016. Based on our evaluation, we expect to
early adopt the requirements of the new standard in the first quarter of 2017
and anticipate using the full retrospective transition method.
The impact of adopting the new standard on our 2015 and 2016 total net sales and
operating income is not expected to be material. We also do not expect a
material impact to our consolidated balance sheet. The immaterial impact of
adopting ASU 2014-09 primarily relates to the deferral of commissions on our
commercial software arrangements, which previously were expensed as incurred but
under the new standard will generally be capitalized and amortized over the
period of contract performance, and policy changes related to the recognition of
revenue and costs on our defense contracts to better align our policies with the
new standard. The impact to our results is not material because the analysis of
our contracts under the new revenue recognition standard supports the
recognition of revenue over time under the cost-to-cost method for the majority
of our contracts, which is consistent with our current revenue recognition
model. Revenue on the majority of our contracts will continue to be recognized
over time because of the continuous transfer of control to the customer. For
U.S. government contracts, this continuous transfer of control to the customer
is supported by clauses in the contract that allow the customer to unilaterally
terminate the contract for convenience, pay us for costs incurred plus a
reasonable profit, and take control of any work in process. Similarly, for
non-U.S. government contracts, the customer typically controls the work in
process as evidenced either by contractual termination clauses or by our rights
to payment for work performed to date to deliver products or services that do
not have an alternative use to the company. Under the new standard, the
cost-to-cost measure of progress continues to best depict the transfer of
control of assets to the customer, which occurs as we incur costs. In addition,
the number of our performance obligations under the new standard is not
materially different from our contract segments under the existing standard.
Lastly, the accounting for the estimate of variable amounts is not expected to
be materially different compared to our current practice.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting, which
amends the accounting for employee share-based payment transactions to require
recognition of the tax effects resulting from the settlement of stock-based
awards as income tax expense or benefit in the income statement in the reporting
period in which they occur. In addition, the ASU requires that all tax-related
cash flows resulting from share-based payments, including the excess tax
benefits related to the settlement of stock-based awards, be classified as cash
flows from operating activities in the statement of cash flows. The ASU also
requires that cash paid by directly withholding shares for tax withholding
purposes be classified as a financing activity in the statement of cash flows.
In addition, the ASU allows companies

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to make an accounting policy election to either estimate the number of awards
that are expected to vest, consistent with current U.S. GAAP, or account for
forfeitures when they occur. The new standard is effective for annual reporting
periods beginning after December 15, 2016 with early adoption permitted. We
elected to early adopt the requirements of the amended standard in the first
quarter of 2016. In accordance with U.S. GAAP, we adopted the amendment
requiring recognition of excess tax benefits and tax deficiencies in the income
statement prospectively beginning in the first quarter of 2016, which could
result in fluctuations in our effective tax rate period over period depending on
how many awards vest in a quarter as well as the volatility of our stock price.
In addition, we elected to adopt the amendment related to the presentation of
excess tax benefits within operating activities on the statement of cash flows
prospectively beginning in the first quarter of 2016. We had previously
classified cash paid for tax withholding purposes as a financing activity in the
statement of cash flows, therefore there is no change related to this
requirement. Furthermore, we elected to change our accounting policy to account
for forfeitures when they occur for consistency with our government recovery
accounting practices on a modified retrospective basis.

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 annual reporting periods
beginning after December 15, 2018 with early adoption permitted. We are
currently evaluating the potential changes from this ASU to our future financial
reporting and disclosures. We expect the standard to have a material impact 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 to our results of
operations or liquidity.

Other new pronouncements issued but not effective until after July 3, 2016 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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