Document
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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-13699
________________________________________________________________________________
RAYTHEON COMPANY
(Exact name of Registrant as Specified in its Charter)
________________________________________________________________________________ 
Delaware
 
95-1778500
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
870 Winter Street, Waltham, Massachusetts 02451
(Address of Principal Executive Offices) (Zip Code)
(781) 522-3000
(Registrant’s telephone number, including area code)
________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
RTN
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒   No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒   No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
 
 
Accelerated Filer
 
Non-accelerated Filer
 
 
Smaller Reporting Company
 
 
 
 
 
Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No ☒
Number of shares of common stock outstanding as of July 22, 2019 was 278,534,000.


Table of Contents

RAYTHEON COMPANY
TABLE OF CONTENTS
 
 
 
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 

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Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of federal securities laws, including information regarding our financial outlook, future plans, objectives, business prospects, products and services, trends and anticipated financial performance, including with respect to: the timing and expected completion and impact of the proposed merger with United Technologies Corporation (UTC); our revenue; our liquidity and capital resources; our capital expenditures; our bookings and backlog; our international sales, including our ability to do business in the Kingdom of Saudi Arabia (KSA) and U.S. government actions related to delays in the Congressional Notification process for direct commercial sales contracts for precision guided munitions to certain Middle Eastern customers; our expected tax payments; our pension, nonqualified defined benefit and defined contribution plans funding; our share repurchase activities; the impact of new accounting pronouncements and tax regulations; our unrecognized tax benefits; our recognition of revenue on certain performance obligations; our treasury rate lock contracts and future debt issuance; our reclassifications of gains or losses on cash flow hedges; the impact and outcome of audits, legal and administrative proceedings, claims, investigations and commitments and contingencies; the impact of certain regional developments; and the impact of changes in foreign currency rates. You can identify these statements by the fact that they include words such as “will,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” or variations of these words, or similar expressions. These forward-looking statements are not statements of historical facts and represent only our current expectations regarding such matters. These statements inherently involve a wide range of known and unknown uncertainties. Our actual actions and results could differ materially from what is expressed or implied by these statements. Specific factors that could cause such a difference include, but are not limited to, those set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and in this Quarterly Report on Form 10-Q and other important factors disclosed previously and from time to time in our other filings with the Securities and Exchange Commission (SEC). Given these factors, as well as other variables that may affect our operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance, or use historical trends to anticipate results or trends in future periods. We expressly disclaim any obligation or intention to provide updates to the forward-looking statements and the estimates and assumptions associated with them, except as required by law.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

RAYTHEON COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions, except per share amounts)
 
Jun 30, 2019
 
Dec 31, 2018
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
2,173

 
$
3,608

Receivables, net
 
1,607

 
1,648

Contract assets
 
6,130

 
5,594

Inventories
 
932

 
758

Prepaid expenses and other current assets
 
684

 
529

Total current assets
 
11,526

 
12,137

Property, plant and equipment, net
 
2,982

 
2,840

Operating lease right-of-use assets
 
888

 
805

Goodwill
 
14,882

 
14,864

Other assets, net
 
1,908

 
2,024

Total assets
 
$
32,186

 
$
32,670

 
 
 
 
 
Liabilities, Redeemable Noncontrolling Interests and Equity
 
 

 
 

Current liabilities
 
 

 
 

Commercial paper and current portion of long-term debt
 
$
800

 
$
300

Contract liabilities
 
2,944

 
3,309

Accounts payable
 
1,368

 
1,964

Accrued employee compensation
 
1,361

 
1,509

Other current liabilities
 
1,398

 
1,381

Total current liabilities
 
7,871

 
8,463

Accrued retiree benefits and other long-term liabilities
 
6,699

 
6,922

Long-term debt
 
4,257

 
4,755

Operating lease liabilities
 
720

 
647

Commitments and contingencies (Note 13)
 


 


 
 
 
 
 
Redeemable noncontrolling interests
 
435

 
411

 
 
 
 
 
Equity
 
 

 
 

Raytheon Company stockholders’ equity
 
 

 
 

Common stock, par value, $0.01 per share, 1,450 shares authorized, 278 and 282 shares outstanding at June 30, 2019 and December 31, 2018, respectively
 
3

 
3

Additional paid-in capital
 

 

Accumulated other comprehensive loss
 
(8,182
)
 
(8,618
)
Retained earnings
 
20,383

 
20,087

Total Raytheon Company stockholders’ equity
 
12,204

 
11,472

Noncontrolling interests in subsidiaries
 

 

Total equity
 
12,204

 
11,472

Total liabilities, redeemable noncontrolling interests and equity
 
$
32,186

 
$
32,670


The accompanying notes are an integral part of the unaudited consolidated financial statements.

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RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
 
Jun 30, 2019
 
Jul 1, 2018
 
Jun 30, 2019
 
Jul 1, 2018
Net sales
 
 
 
 
 
 
 
 
Products
 
$
5,994

 
$
5,507

 
$
11,556

 
$
10,761

Services
 
1,165

 
1,118

 
2,332

 
2,131

Total net sales
 
7,159

 
6,625

 
13,888

 
12,892

Operating expenses
 
 
 
 
 
 
 
 
Cost of sales—products
 
4,302

 
3,903

 
8,304

 
7,640

Cost of sales—services
 
903

 
874

 
1,778

 
1,669

General and administrative expenses
 
778

 
748

 
1,517

 
1,442

Total operating expenses
 
5,983

 
5,525

 
11,599

 
10,751

Operating income
 
1,176

 
1,100

 
2,289

 
2,141

Non-operating (income) expense, net
 
 
 
 
 
 
 
 
Retirement benefits non-service expense
 
181

 
238

 
362

 
477

Interest expense
 
45

 
46

 
89

 
93

Interest income
 
(7
)
 
(8
)
 
(20
)
 
(15
)
Other (income) expense, net
 
(8
)
 
(3
)
 
(28
)
 
2

Total non-operating (income) expense, net
 
211

 
273

 
403

 
557

Income from continuing operations before taxes
 
965

 
827

 
1,886

 
1,584

Federal and foreign income taxes
 
152

 
37

 
298

 
170

Income from continuing operations
 
813

 
790

 
1,588

 
1,414

Income (loss) from discontinued operations, net of tax
 

 
1

 

 

Net income
 
813

 
791

 
1,588

 
1,414

Less: Net income (loss) attributable to noncontrolling interests in subsidiaries
 
(4
)
 
(9
)
 
(10
)
 
(19
)
Net income attributable to Raytheon Company
 
$
817

 
$
800

 
$
1,598

 
$
1,433

 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to Raytheon Company common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
2.92

 
$
2.78

 
$
5.69

 
$
4.98

Income (loss) from discontinued operations, net of tax
 

 

 

 

Net income
 
2.92

 
2.78

 
5.69

 
4.98

Diluted earnings per share attributable to Raytheon Company common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
2.92

 
$
2.78

 
$
5.69

 
$
4.98

Income (loss) from discontinued operations, net of tax
 

 

 

 

Net income
 
2.92

 
2.78

 
5.69

 
4.97

Amounts attributable to Raytheon Company common stockholders:
 

 
 
 
 
 
 
Income from continuing operations
 
$
817

 
$
799

 
$
1,598

 
$
1,433

Income (loss) from discontinued operations, net of tax
 

 
1

 

 

Net income
 
$
817

 
$
800

 
$
1,598

 
$
1,433


The accompanying notes are an integral part of the unaudited consolidated financial statements.

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RAYTHEON COMPANY 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended
 
Six Months Ended
(In millions)
Jun 30, 2019

 
Jul 1, 2018

 
Jun 30, 2019

 
Jul 1, 2018

Net income
$
813

 
$
791

 
$
1,588

 
$
1,414

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Pension and other postretirement benefit plans, net:
 
 
 
 
 
 
 
Amortization of prior service cost
2

 
2

 
3

 
3

Amortization of net actuarial loss
274

 
346

 
550

 
693

Pension and other postretirement benefit plans, net
276

 
348

 
553

 
696

Foreign exchange translation
(6
)
 
(43
)
 
2

 
(19
)
Cash flow hedges
8

 

 
(2
)
 
(10
)
Unrealized gains (losses) on investments and other, net

 

 

 

Other comprehensive income (loss), before tax
278

 
305

 
553

 
667

Income tax benefit (expense) related to items of other comprehensive income (loss)
(61
)
 
(73
)
 
(117
)
 
(144
)
Other comprehensive income (loss), net of tax
217

 
232

 
436

 
523

Reclassification of stranded tax effects

 

 

 
(1,451
)
Total comprehensive income (loss)
1,030

 
1,023

 
2,024

 
486

Less: Comprehensive income (loss) attributable to noncontrolling interests in subsidiaries
(4
)
 
(9
)
 
(10
)
 
(19
)
Comprehensive income attributable to Raytheon Company
$
1,034

 
$
1,032

 
$
2,034

 
$
505


The accompanying notes are an integral part of the unaudited consolidated financial statements.


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RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In millions)
 
Common stock

 
Additional paid-in capital

 
Accumulated other comprehensive income (loss)

 
Retained earnings

 
Total Raytheon Company stockholders’ equity

 
Noncontrolling interests in subsidiaries(1)

 
Total equity

Balance at March 31, 2019
 
$
3

 
$

 
$
(8,399
)
 
$
20,104

 
$
11,708

 
$

 
$
11,708

Net income (loss)
 
 
 
 
 
 
 
817

 
817

 

 
817

Other comprehensive income (loss), net of tax
 
 
 
 
 
217

 
 
 
217

 
 
 
217

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
(7
)
 
(7
)
 
 
 
(7
)
Dividends declared
 
 
 

 
 
 
(264
)
 
(264
)
 
 
 
(264
)
Common stock plans activity
 
 
 
33

 
 
 
 
 
33

 
 
 
33

Share repurchases
 
 
 
(33
)
 
 
 
(267
)
 
(300
)
 
 
 
(300
)
Balance at June 30, 2019
 
$
3

 
$

 
$
(8,182
)
 
$
20,383

 
$
12,204

 
$

 
$
12,204

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
$
3

 
$

 
$
(8,618
)
 
$
20,087

 
$
11,472

 
$

 
$
11,472

Net income (loss)
 
 
 
 
 
 
 
1,598

 
1,598

 

 
1,598

Other comprehensive income (loss), net of tax
 
 
 
 
 
436

 
 
 
436

 
 
 
436

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
(2
)
 
(2
)
 
 
 
(2
)
Dividends declared
 
 
 
1

 
 
 
(529
)
 
(528
)
 
 
 
(528
)
Common stock plans activity
 
 
 
94

 
 
 
 
 
94

 
 
 
94

Share repurchases
 
 
 
(95
)
 
 
 
(771
)
 
(866
)
 
 
 
(866
)
Balance at June 30, 2019
 
$
3

 
$

 
$
(8,182
)
 
$
20,383

 
$
12,204

 
$

 
$
12,204

(1)
Excludes redeemable noncontrolling interests which are not considered equity. See “Note 14: Redeemable Noncontrolling Interests” for additional information.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In millions)
 
Common stock

 
Additional paid-in capital

 
Accumulated other comprehensive income (loss)

 
Retained earnings

 
Total Raytheon Company stockholders’ equity

 
Noncontrolling interests in subsidiaries(1)

 
Total equity

Balance at April 1, 2018
 
$
3

 
$

 
$
(9,095
)
 
$
19,329

 
$
10,237

 
$

 
$
10,237

Net income (loss)
 
 
 
 
 
 
 
800

 
800

 

 
800

Other comprehensive income (loss), net of tax
 
 
 
 
 
232

 
 
 
232

 
 
 
232

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
(30
)
 
(30
)
 
 
 
(30
)
Dividends declared
 
 
 

 
 
 
(248
)
 
(248
)
 
 
 
(248
)
Common stock plans activity
 
 
 
35

 
 
 
 
 
35

 
 
 
35

Share repurchases
 
 
 
(35
)
 
 
 
(384
)
 
(419
)
 
 
 
(419
)
Balance at July 1, 2018
 
$
3

 
$

 
$
(8,863
)
 
$
19,467

 
$
10,607

 
$

 
$
10,607

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
3

 
$

 
$
(7,935
)
 
$
17,895

 
$
9,963

 
$

 
$
9,963

Net income (loss)
 
 
 
 
 
 
 
1,433

 
1,433

 

 
1,433

Other comprehensive income (loss), net of tax
 
 
 
 
 
523

 
 
 
523

 
 
 
523

Reclassification of stranded tax effects
 
 
 
 
 
(1,451
)
 
1,451

 

 
 
 

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
(19
)
 
(19
)
 
 
 
(19
)
Dividends declared
 
 
 
1

 
 
 
(500
)
 
(499
)
 
 
 
(499
)
Common stock plans activity
 
 
 
97

 
 
 
 
 
97

 
 
 
97

Share repurchases
 
 
 
(98
)
 
 
 
(793
)
 
(891
)
 
 
 
(891
)
Balance at July 1, 2018
 
$
3

 
$

 
$
(8,863
)
 
$
19,467

 
$
10,607

 
$

 
$
10,607

(1)
Excludes redeemable noncontrolling interests which are not considered equity. See “Note 14: Redeemable Noncontrolling Interests” for additional information.

The accompanying notes are an integral part of the unaudited consolidated financial statements.


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RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Six Months Ended
(In millions)
 
Jun 30, 2019
 
Jul 1, 2018
Cash flows from operating activities
 
 
 
 
Net income
 
$
1,588

 
$
1,414

(Income) loss from discontinued operations, net of tax
 

 

Income from continuing operations
 
1,588

 
1,414

Adjustments to reconcile to net cash provided by (used in) operating activities from continuing operations, net of the effect of acquisitions and divestitures
 
 
 
 
Depreciation and amortization
 
291

 
274

Stock-based compensation
 
91

 
101

Deferred income taxes
 
3

 
8

Changes in assets and liabilities
 
 
 
 
Receivables, net
 
53

 
7

Contract assets and contract liabilities
 
(865
)
 
(442
)
Inventories
 
(174
)
 
(133
)
Prepaid expenses and other current assets
 
(17
)
 
62

Income taxes receivable/payable
 
(203
)
 
168

Accounts payable
 
(502
)
 
(73
)
Accrued employee compensation
 
(157
)
 
(98
)
Other current liabilities
 
17

 
(70
)
Accrued retiree benefits
 
365

 
239

Other, net
 
(78
)
 
(18
)
Net cash provided by (used in) operating activities from continuing operations
 
412

 
1,439

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

 
1

Net cash provided by (used in) operating activities
 
412

 
1,440

Cash flows from investing activities
 
 
 
 
Additions to property, plant and equipment
 
(438
)
 
(366
)
Additions to capitalized internal-use software
 
(25
)
 
(28
)
Maturities of short-term investments
 

 
309

Payments for purchases of acquired companies, net of cash received
 
(8
)
 

Proceeds from sale of business, net of transaction costs
 

 
11

Other
 
2

 
(3
)
Net cash provided by (used in) investing activities
 
(469
)
 
(77
)
Cash flows from financing activities
 
 
 
 
Dividends paid
 
(510
)
 
(480
)
Net borrowings (payments) on commercial paper
 

 

Repurchases of common stock under share repurchase programs
 
(800
)
 
(800
)
Repurchases of common stock to satisfy tax withholding obligations
 
(66
)
 
(91
)
Other
 
(5
)
 
(5
)
Net cash provided by (used in) financing activities
 
(1,381
)
 
(1,376
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(1,438
)
 
(13
)
Cash, cash equivalents and restricted cash at beginning of the year
 
3,624

 
3,115

Cash, cash equivalents and restricted cash at end of period
 
$
2,186

 
$
3,102


The accompanying notes are an integral part of the unaudited consolidated financial statements.

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RAYTHEON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation
We prepared the accompanying unaudited consolidated financial statements of Raytheon Company and all wholly-owned, majority-owned or otherwise controlled subsidiaries on the same basis as our annual audited financial statements. We condensed or omitted certain information and footnote disclosures normally included in our annual audited financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Our quarterly financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018. As used in this report, the terms “we,” “us,” “our,” “Raytheon” and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another meaning.

In the opinion of management, our financial statements reflect all adjustments, which are of a normal recurring nature, necessary for presentation of financial statements for interim periods in accordance with U.S. GAAP and with the instructions to Form 10-Q in Article 10 of Securities and Exchange Commission (SEC) Regulation S-X. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates, and any such differences may be material to our financial statements.

Effective January 1, 2019, we adopted the requirements of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) using the modified retrospective approach as discussed below in “Note 3: Accounting Standards.” We reclassified certain balance sheet amounts to conform to our current period presentation. All amounts disclosed in this Form 10-Q reflect these changes.

Note 2: Proposed Merger with United Technologies Corporation (UTC)
On June 9, 2019, Raytheon, United Technologies Corporation, a Delaware corporation (UTC), and Light Merger Sub Corp., a Delaware corporation and wholly-owned subsidiary of UTC (Merger Sub), entered into an Agreement and Plan of Merger (the Merger Agreement). The Merger Agreement provides for, among other things and subject to the satisfaction or waiver of specified conditions, the merger of Merger Sub with and into Raytheon (the Merger), with Raytheon surviving the Merger as a wholly-owned subsidiary of UTC.

At the effective time of the Merger (the Effective Time), each share of common stock of Raytheon issued and outstanding immediately prior to the Effective Time (except for shares held by Raytheon as treasury stock) will be converted into the right to receive 2.3348 shares of common stock of UTC (and, if applicable, cash in lieu of fractional shares), less any applicable withholding taxes. At the Effective Time, Raytheon’s stockholders will hold approximately 43%, and UTC’s stockholders will hold approximately 57%, of the outstanding shares of common stock of UTC.

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

The parties’ obligations to consummate the Separation, the Distributions and the Merger are subject to customary conditions, including the approval of the Merger by Raytheon’s stockholders, the approval of the issuance of shares of UTC Common Stock in connection with the Merger by UTC’s stockholders, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act), and the receipt of other required regulatory approvals. In addition, the parties’ obligations to consummate the Merger are subject to the prior completion of the Separation and the Distributions.

The Merger Agreement includes customary representations, warranties and covenants of Raytheon and UTC (generally excluding the Otis business and the Carrier business). Between the date of execution of the Merger Agreement and the Effective Time, each of Raytheon and UTC (generally with respect to its aerospace business) has agreed to use reasonable best efforts to conduct its businesses in all material respects in the ordinary course consistent with past practice and to comply with certain operating covenants. In addition, the Merger Agreement generally restricts certain actions by both Raytheon and UTC, including the incurrence or issuance of new debt in excess of $1 billion in the aggregate (unless used to refinance existing debt), acquisitions or divestitures in excess of $500 million in the aggregate, and repurchases or issuances of shares other than in accordance with our existing equity award programs. In addition, the Merger Agreement provides that, immediately prior to the consummation of

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the Merger, the adjusted net indebtedness of UTC’s aerospace business will not exceed an amount as provided for under the Merger Agreement.

Subject to certain exceptions, each of Raytheon and UTC has agreed to use reasonable best efforts to cause the Merger to be completed. The Merger Agreement includes certain termination provisions for both UTC and Raytheon and provides that, in connection with a termination of the Merger Agreement under specified circumstances, Raytheon will be required to pay UTC a termination fee of $1.785 billion, or UTC will be required to pay Raytheon a termination fee of $2.365 billion.

The Merger is expected to close in the first half of 2020, subject to and following completion by UTC of the Separation and Distributions.

Note 3: Accounting Standards
In February 2016, the Financial Accounting Standards Board (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. Effective January 1, 2019, we adopted the requirements of the new lease standard using the modified retrospective approach, applying the new lease requirements at the beginning of the earliest period presented. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows us to carry forward the historical lease classification. We did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets. The standard resulted in the recognition of operating lease right-of-use assets of $805 million and operating lease liabilities of $841 million, of which $194 million was classified as current and is included in other current liabilities in our consolidated balance sheet, as of December 31, 2018, with immaterial changes to other balance sheet accounts. The standard had no impact on our results of operations or cash flows. In addition, new disclosures are provided to enable users to assess the amount, timing and uncertainty of cash flows arising from leases.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which eliminates the disclosure requirement of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and modifies certain disclosure requirements related to Level 3 recurring and nonrecurring fair value measurements. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Effective January 1, 2019, we elected to early adopt the requirements of the new standard on a prospective basis. The standard did not have an impact on our financial position, results of operations or liquidity.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-24): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Effective January 1, 2019, we elected to early adopt the requirements of the new standard on a prospective basis. The standard did not have a material impact on our financial position, results of operations or liquidity.

Other new pronouncements adopted and issued but not effective until after June 30, 2019 did not and are not expected to have a material impact on our financial position, results of operations or liquidity.

Note 4: Significant Accounting Policies Update
Our significant accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies” within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to our accounting policies as a result of adopting Topic 842 are discussed below:

LeasesWe determine if an arrangement is a lease or contains an embedded lease at inception. For lease agreements with both lease and nonlease components (e.g., common-area maintenance costs), we account for the nonlease components separately. Consideration is allocated to the lease and nonlease components based on the estimated standalone prices.

All of our leases are operating leases. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. The current portion of operating lease liabilities is included in other current liabilities in our consolidated balance sheets. For the majority of our leases, the discount rate used to determine the present value of the lease payments is our incremental borrowing rate as of the lease commencement date, as the implicit rate is not readily determinable. The operating lease right-of-use assets also includes any initial direct costs and any lease payments made at or before the commencement date, and is reduced for any unrestricted incentives received at or before the commencement date.

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Some of our leases include options to extend or terminate the lease. We include these options in the recognition of our right-of-use assets and lease liabilities when it is reasonably certain that we will exercise the option. Very few of our leases include variable lease-related payments, such as escalation clauses based on consumer price index (CPI) rates, or residual guarantees. Variable payments that are based on an index or a rate are included in the recognition of our right-of-use assets and lease liabilities using the index or rate at lease commencement; however, changes to these lease payments due to rate or index updates are recorded as lease expense in the period incurred. Amounts probable of payment under residual guarantees are also included in the recognition of our right-of-use assets and lease liabilities.

Note 5: Changes in Estimates under Percentage of Completion Contract Accounting
We have a companywide standard and disciplined quarterly Estimate at Completion (EAC) process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by our subcontractors, the availability and timing of funding from our customer, and overhead cost rates, among other variables. These estimates also include the estimated cost of satisfying our industrial cooperation agreements, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements, required under certain contracts. These obligations may or may not be distinct depending on their nature.

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

Net EAC adjustments had the following impact on our operating results:
 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
Jun 30, 2019
 
Jul 1, 2018
 
Jun 30, 2019
 
Jul 1, 2018
Operating income
$
123

 
$
129

 
$
246

 
$
244

Income from continuing operations attributable to Raytheon Company
97

 
102

 
194

 
193

Diluted earnings per share (EPS) from continuing operations attributable to Raytheon Company
$
0.35

 
$
0.35

 
$
0.69

 
$
0.67



In addition, net revenue recognized from our performance obligations satisfied in previous periods was $171 million and $162 million in the second quarters of 2019 and 2018, respectively, and $329 million and $300 million in the first six months of 2019 and 2018, respectively. This primarily relates to EAC adjustments that impacted revenue.

Note 6: Earnings Per Share (EPS)
We compute basic and diluted EPS using actual income from continuing operations attributable to Raytheon Company common stockholders, income (loss) from discontinued operations attributable to Raytheon Company common stockholders and net income attributable to Raytheon Company, and our actual weighted-average shares outstanding rather than the numbers presented within our unaudited consolidated financial statements, which are rounded to the nearest million. As a result, it may not be possible to recalculate EPS as presented in our unaudited consolidated financial statements. Furthermore, it may not be possible to recalculate EPS attributable to Raytheon Company common stockholders by adjusting EPS from continuing operations by EPS from discontinued operations.


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We include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic EPS calculation as they are considered participating securities. As a result, we have included all of our outstanding unvested awards of restricted stock, as well as restricted stock units (RSUs) and Long-term Performance Plan (LTPP) awards that meet the retirement eligible criteria in our calculation of basic EPS. We disclose EPS for common stock and unvested stock-based payment awards, and separately disclose distributed and undistributed earnings. Distributed earnings represent common stock dividends and dividends earned on unvested awards of restricted stock and stock-based payment awards of retirement eligible employees. Undistributed earnings represent earnings that were available for distribution but were not distributed. Common stock and unvested stock-based payment awards earn dividends equally.

As described in “Note 14: Redeemable Noncontrolling Interests,” we record redeemable noncontrolling interest related to Vista Equity Partners’ interest in Forcepoint. We reflect the redemption value adjustments related to this redeemable noncontrolling interest in both the basic and diluted EPS calculation for the portion of redemption value that is in excess of the fair value of noncontrolling interest. There was no impact to basic or diluted EPS in the second quarter or first six months of 2019 or 2018 related to the redemption value adjustments.

EPS from continuing operations attributable to Raytheon Company common stockholders and unvested stock-based payment awards was as follows: 
 
 
Three Months Ended
 
Six Months Ended
 
 
Jun 30, 2019
 
Jul 1, 2018
 
Jun 30, 2019
 
Jul 1, 2018
Basic EPS attributable to Raytheon Company common stockholders:
 
 
 
 
 
 
 
 
Distributed earnings
 
$
0.94

 
$
0.86

 
$
1.88

 
$
1.73

Undistributed earnings
 
1.98

 
1.92

 
3.81

 
3.25

Total
 
$
2.92

 
$
2.78

 
$
5.69

 
$
4.98

Diluted EPS attributable to Raytheon Company common stockholders:
 
 
 
 
 
 
 
 
Distributed earnings
 
$
0.94

 
$
0.86

 
$
1.88

 
$
1.73

Undistributed earnings
 
1.98

 
1.92

 
3.81

 
3.25

Total
 
$
2.92

 
$
2.78

 
$
5.69

 
$
4.98



Income attributable to participating securities was as follows:
 
Three Months Ended
 
Six Months Ended
(In millions)
Jun 30, 2019
 
Jul 1, 2018
 
Jun 30, 2019
 
Jul 1, 2018
Income from continuing operations attributable to participating securities
$
8

 
$
8

 
$
16

 
$
15

Income (loss) from discontinued operations, net of tax attributable to participating securities

 

 

 

Net income attributable to participating securities
$
8

 
$
8

 
$
16

 
$
15


The weighted-average shares outstanding for basic and diluted EPS were as follows: 
 
Three Months Ended
 
Six Months Ended
(In millions)
Jun 30, 2019
 
Jul 1, 2018
 
Jun 30, 2019
 
Jul 1, 2018
Shares for basic EPS(1)
279.7

 
287.3

 
280.8

 
287.9

Effect of dilutive securities
0.2

 
0.3

 
0.2

 
0.3

Shares for diluted EPS
279.9

 
287.6

 
281.0

 
288.2

(1)
Includes 2.7 million and 2.9 million participating securities in the second quarters of 2019 and 2018, respectively, and 2.7 million and 3.0 million participating securities in the first six months of 2019 and 2018, respectively.
 

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Note 7: Inventories
Inventories consisted of the following: 
(In millions)
 
Jun 30, 2019
 
Dec 31, 2018
Materials and purchased parts
 
$
76

 
$
75

Work in process
 
834

 
662

Finished goods
 
22

 
21

Total
 
$
932

 
$
758



Precontract costs are costs incurred to fulfill a contract prior to contract award. Precontract costs, including general and administrative expenses that are specifically chargeable to the customer, are deferred in inventories if we determine that the costs are probable of recovery under a specific anticipated contract. All other precontract costs, including start-up costs, are expensed as incurred. Costs that are deferred are recognized as contract costs upon the receipt of the anticipated contract. We included deferred precontract costs of $298 million and $163 million in inventories as work in process at June 30, 2019 and December 31, 2018, respectively.

Note 8: Contract Assets and Contract Liabilities
Our contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. The noncurrent portion of deferred revenue is included in accrued retiree benefits and other long-term liabilities in our consolidated balance sheets.

Net contract assets (liabilities) consisted of the following:
(In millions, except percentages)
 
Jun 30, 2019
 
Dec 31, 2018
 
$ Change
 
% Change
Contract assets
 
$
6,130

 
$
5,594

 
$
536

 
10
%
Contract liabilities—current
 
(2,944
)
 
(3,309
)
 
365

 
11
%
Contract liabilities—noncurrent
 
(139
)
 
(150
)
 
11

 
7
%
Net contract assets (liabilities)
 
$
3,047

 
$
2,135

 
$
912

 
43
%


The $912 million increase in our net contract assets (liabilities) from December 31, 2018 to June 30, 2019 was primarily due to a $536 million increase in our contract assets, principally due to contractual billing terms on U.S. government and foreign military sales contracts and the timing of approvals on direct commercial sales contracts for precision guided munitions to certain Middle Eastern customers. On May 24, 2019, the Administration announced an emergency certification authorizing the immediate export of 22 pending arms sales to Jordan, the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA), waiving the requirement of Congressional Notification of these arms sales. As a result, we were able to obtain the necessary regulatory approvals and licenses for contracts, which had approximately $1.2 billion of total contract value, and for which we have recognized approximately $950 million of sales for work performed to date and received approximately $350 million in advances as of June 30, 2019. On a contract-by-contract basis, and excluding advances billed but not received, we had $600 million of net contract assets related to these contracts. For those contracts for which we have not yet obtained the regulatory approval and licenses and that are not subject to the emergency certification, we had approximately $1.1 billion of total contract value, recognized approximately $300 million of sales for work performed to date and received approximately $500 million in advances as of June 30, 2019. On a contract-by-contract basis, and excluding advances billed but not received, we had $100 million and $300 million of net contract assets and net contract liabilities, respectively, related to the contracts pending approval.

In the second quarter and first six months of 2019, we recognized revenue of $496 million and $1,390 million, respectively, related to our contract liabilities at January 1, 2019. In the second quarter and first six months of 2018, we recognized revenue of $311 million and $963 million, respectively, related to our contract liabilities at January 1, 2018.

Impairment losses recognized on our receivables and contract assets were de minimis in the second quarters and first six months of 2019 and 2018.


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Note 9: Deferred Commissions
Our incremental direct costs of obtaining a contract, which consist of sales commissions primarily for our security software sales at Forcepoint, are deferred and amortized over the period of contract performance or a longer period, generally the estimated life of the customer relationship, if renewals are expected and the renewal commission is not commensurate with the initial commission. We classify deferred commissions as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets, and other assets, net, respectively, in our consolidated balance sheets. At June 30, 2019 and December 31, 2018, we had deferred commissions of $50 million and $55 million, respectively. Amortization expense related to deferred commissions was $9 million and $7 million in the second quarters of 2019 and 2018, respectively, and $13 million and $15 million in the first six months of 2019 and 2018, respectively.

Note 10: Acquisitions, Divestitures and Goodwill
In pursuing our business strategies, we acquire and make investments in certain businesses that meet strategic and financial criteria, and divest of certain non-core businesses, investments and assets when appropriate. We did not have any divestitures in the first six months of 2019.

In 2013, we formed the Range Generation Next LLC (RGNext) joint venture with General Dynamics Information Technology (GDIT) through our Intelligence, Information and Services (IIS) segment, in which we held a 50% equity ownership that was accounted for using the equity method. On February 8, 2019, we amended and restated the RGNext joint venture agreement and acquired an additional 10% equity ownership in the joint venture, increasing our equity ownership to 60% and giving us control of the operations of RGNext. Effective as of February 8, 2019, we consolidate the results of RGNext in our consolidated financial statements and report its results in our IIS segment. We also remeasured our equity method investment in RGNext to fair value, which resulted in a non-cash gain of $21 million that was recorded in operating income through a reduction to cost of sales at our IIS segment; recognized redeemable noncontrolling interest for GDIT’s interest in RGNext at a fair value of $32 million; and recognized $90 million of net assets, including cash acquired, at fair value. As part of our purchase price allocation, we recorded $19 million of goodwill, primarily related to the value of the existing workforce, and $34 million of intangible assets, primarily related to customer relationships with a weighted-average life of 7 years.

Pro forma financial information and revenue from the date of acquisition has not been provided as it is not material.

A rollforward of goodwill by segment was as follows: 
(In millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint(1)

 
Total

Balance at December 31, 2018
 
$
1,704

 
$
2,965

 
$
4,154

 
$
4,103

 
$
1,938

 
$
14,864

Acquisitions
 

 
19

 

 

 

 
19

Effect of foreign exchange rates and other
 
(1
)
 

 

 

 

 
(1
)
Balance at June 30, 2019
 
$
1,703

 
$
2,984

 
$
4,154

 
$
4,103

 
$
1,938

 
$
14,882

(1)
At June 30, 2019, Forcepoint’s fair value was estimated to exceed its net book value by approximately $900 million. As discussed in “Note 14: Redeemable Noncontrolling Interests,” we are required to determine Forcepoint’s fair value on a quarterly basis due to the accounting related to the redeemable noncontrolling interest.

Note 11: Derivatives and Other Financial Instruments
Derivatives—Our primary market exposures are to foreign exchange rates and interest rates, and we use certain derivative financial instruments to help manage these exposures. We execute these instruments with financial institutions that we judge to be credit-worthy. The majority of our foreign currency forward contracts are denominated in currencies of major industrial countries. We do not hold or issue derivative financial instruments for trading or speculative purposes.

We use foreign currency forward contracts to fix the functional currency value of specific commitments, payments and receipts denominated in foreign currencies. The aggregate notional amount of our outstanding foreign currency forward contracts was $1,737 million and $1,772 million at June 30, 2019 and December 31, 2018, respectively. The net notional exposure of these contracts was $757 million and $840 million at June 30, 2019 and December 31, 2018, respectively.

We may also enter into and designate treasury rate lock contracts as cash flow hedges to reduce variability in cash flows due to changes in interest payments attributable to increases or decreases in the benchmark interest rate during the period leading up to the probable issuance of long-term debt. Cash flows associated with these instruments are presented in the same category as the cash flows from the hedged item. In May 2019, we entered into treasury rate lock contracts with a notional amount of $375 million,

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which will mature in the fourth quarter of 2019, in anticipation of the probable issuance of debt. These treasury rate lock contracts were designated as cash flow hedges and are included in the assessment of effectiveness. There were no treasury rate lock contracts outstanding at December 31, 2018.

The fair value of asset derivatives included in other assets, net and liability derivatives included in other current liabilities in our consolidated balance sheets related to foreign currency forward contracts and treasury rate lock contracts were as follows:
(In millions)
 
Jun 30, 2019
 
Dec 31, 2018
Asset derivatives related to foreign currency forward contracts
 
$
26

 
$
26

Liability derivatives related to foreign currency forward contracts
 
30

 
34

Liability derivatives related to treasury rate lock contracts
 
7

 



The fair value of these derivatives is Level 2 in the fair value hierarchy because they are determined based on a market approach utilizing externally quoted foreign currency forward rates and treasury rates for similar contracts.

Our foreign currency forward contracts and treasury rate lock contracts contain offset or netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. We measure and record the impact of counterparty credit risk into our valuation and at June 30, 2019 and December 31, 2018, the fair value of our counterparty default exposure was less than $1 million and was spread across numerous highly rated counterparties.

Other Financial InstrumentsWe hold financial instruments, including cash and cash equivalents, commercial paper and long-term debt. The carrying amounts for cash and cash equivalents and commercial paper approximated their fair values. The carrying value of long-term debt was recorded at amortized cost. The estimated fair value of long-term debt was determined based on quoted prices in inactive markets, which falls within Level 2 of the fair value hierarchy. The carrying value and estimated fair value of long-term debt were as follows:
(In millions)
 
Jun 30, 2019
 
Dec 31, 2018
Carrying value of long-term debt(1)
 
$
4,757

 
$
4,755

Fair value of long-term debt(2)
 
5,256

 
5,063


(1)
Carrying value of long-term debt at June 30, 2019 includes current portion of long-term debt carrying value of $500 million.
(2)
Fair value of long-term debt at June 30, 2019 includes current portion of long-term debt fair value of $507 million.

At June 30, 2019, short-term commercial paper borrowings outstanding were $300 million, which had a weighted-average interest rate and original maturity period of 2.502% and 12 days, respectively. At December 31, 2018, short-term commercial paper borrowings outstanding were $300 million, which had a weighted-average interest rate and original maturity period of 2.954% and 16 days, respectively. The commercial paper notes outstanding have original maturities of not more than 90 days from the date of issuance.

Supplemental Cash Flow Information—Cash and cash equivalents reported within our consolidated balance sheets excludes restricted cash of $13 million and $16 million at June 30, 2019 and December 31, 2018, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.

Note 12: Leases
We enter into operating leases primarily for: real estate, including for manufacturing, engineering, research, administration, sales and warehousing facilities; information technology (IT) equipment; and other equipment. At June 30, 2019 and December 31, 2018, we did not have any finance leases. Approximately 90% of our future lease commitments, and related lease liability, relate to our real estate leases. Some of our leases also include options to extend the lease or terminate the lease. A small portion of our leases include variable escalation clauses, which are typically based on CPI rates, or other variable lease-related payments.


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The components of lease expense were as follows:
 
 
Three Months Ended
 
Six Months Ended
(In millions)
 
Jun 30, 2019
 
Jul 1, 2018
 
Jun 30, 2019
 
Jul 1, 2018
Operating lease cost
 
$
60

 
$
58

 
$
113

 
$
116

Variable lease cost(1)
 

 

 

 

Sublease income
 
(1
)
 
(2
)
 
(1
)
 
(2
)
Total lease cost
 
$
59

 
$
56

 
$
112

 
$
114

(1)
Variable lease cost was expense of less than $1 million in the second quarters and first six months of 2019 and 2018.

Gains and losses on sale and leaseback transactions were de minimis in the second quarters and first six months of 2019 and 2018.

At June 30, 2019, our future lease payments under non-cancellable leases were as follows:
(In millions)
 

2019 (excluding the six months ended June 30, 2019)
$
118

2020
212

2021
190

2022
145

2023
103

Thereafter
286

Total future lease payments(1)
1,054

Imputed interest
(127
)
Total lease liabilities
$
927

(1)
Total future lease payments excluded $20 million of future lease payments related to leases that were signed but had not yet commenced as of June 30, 2019.

Our lease liabilities recognized in our consolidated balance sheet at June 30, 2019 were as follows:
(In millions)
 
 
Operating lease liabilities—current
 
$
207

Operating lease liabilities—noncurrent
 
720

Total lease liabilities
 
$
927



The weighted-average remaining lease term related to our operating leases was 8 years and 7 years as of June 30, 2019 and December 31, 2018, respectively. The weighted-average discount rate related to our operating leases was 3.1% as of June 30, 2019 and December 31, 2018.

Other information related to leases was as follows:
 
 
Six Months Ended
(In millions)
 
Jun 30, 2019
 
Jul 1, 2018
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
122

 
$
124

Right-of-use assets obtained in exchange for new operating lease obligations
 
173

 
106



There were no material restrictions or covenants imposed by our leases at June 30, 2019 or December 31, 2018. In addition, we do not have any related party leases and our sublease transactions are de minimis.


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Note 13: Commitments and Contingencies
Environmental MattersWe are involved in various stages of investigation and cleanup related to remediation of various environmental sites. Our estimate of the liability of total environmental remediation costs includes the use of a discount rate and takes into account that a portion of these costs is eligible for future recovery through the pricing of our products and services to the U.S. government. We regularly assess the probability of recovery of these costs, which requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract activity. We consider such recovery probable based on government contracting regulations and our long history of receiving reimbursement for such costs, and accordingly have recorded the estimated future recovery of these costs from the U.S. government within prepaid expenses and other current assets in our consolidated balance sheets. Our estimates regarding remediation costs to be incurred were as follows:
(In millions, except percentages)
 
Jun 30, 2019
 
Dec 31, 2018
Total remediation costs—undiscounted
 
$
193

 
$
193

Weighted-average discount rate
 
5.1
%
 
5.1
%
Total remediation costs—discounted
 
$
131

 
$
128

Recoverable portion
 
86

 
82



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

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

Financing Arrangements and Other—We issue guarantees, and banks and surety companies issue, on our behalf, letters of credit and surety bonds, to meet various bid, performance, warranty, retention and advance payment obligations for us or our affiliates. These instruments expire on various dates through 2028. Additional guarantees of project performance for which there is no stated value also remain outstanding.