Overview

We develop technologically advanced, integrated products, services and solutions in four core defense markets: Sensing; Effects; Command, Control, Communications and Intelligence (C3I); and Mission Support. We serve all branches of the U.S. Military and numerous other U.S. Government agencies, the North Atlantic Treaty Organization (NATO) and many allied governments.

We operate in six business segments: Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). 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, 2008.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 and our financial statements included in this Form 10-Q.

Consolidated Results of Operations

As described in our Cautionary Note Regarding Forward-Looking Statements on page 3 of this Form 10-Q, our interim period results of operations and period-to-period comparisons of such results, particularly at a segment level, may not be indicative of our future operating results. Additionally, we use a fiscal calendar, which may cause the number of workdays in the current and comparable prior interim period to differ and could affect period-to-period comparisons. There were 61 workdays in the first quarter of 2009 compared to 63 workdays in the first quarter of 2008. The following discussions of comparative results among periods should be viewed in this context.

As discussed in Note 1, Basis of Presentation, we prepared the accompanying unaudited consolidated financial statements (Financial Statements) of Raytheon Company on the same basis as our annual consolidated financial statements, which included the adoption on January 1, 2008 of Emerging Issues Task Force (EITF) No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements and EITF No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements, except for the adoptions in the first quarter of 2009 of:
Statement of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS No. 160); Financial Accounting Standards Board (FASB) Staff Position EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP EITF No. 03-6-1); SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161); SFAS No. 141(R), Business Combinations, which will be applied prospectively to business combinations with acquisition dates on or after January 1, 2009; and SFAS No. 157, Fair Value Measurements (SFAS No. 157), for all nonfinancial assets and nonfinancial liabilities not recognized or disclosed at fair value in the consolidated financial statements on a recurring basis.

In our discussions of comparative period results, we generally express changes in Net sales in terms of volume. Volume generally refers to increases or decreases in revenues related to varying production activity or service levels on individual contracts. Volume changes will typically drive a corresponding Operating income change based on the profit rate for a particular contract. In addition to volume, changes in segment operating income are based on changes in segment operating margin, which we usually express in terms of program performance and contract mix. Changes in program performance typically relate to profit recognition associated with revisions to total estimated costs or revenues at completion that reflect improved or deteriorated operating performance or award fee rates. We record changes in estimates of contract sales, costs, including indirect cost allocations, and profits using a cumulative catch-up, which recognizes in the current period the cumulative effect of the changes in estimates on current and prior periods. Changes in contract mix reflect changes in the composition of our sales from contracts with differing profit rates.

Selected consolidated results were as follows:

                                                                       Three Months Ended                          % of Net Sales
(In millions, except percentages)                            March 29, 2009          March 30, 2008       March 29, 2009     March 30, 2008
Net sales                                                   $           5,884       $          5,354
Gross margin                                                            1,187                  1,096                20.2 %             20.5 %
Administrative and selling expenses                                       364                    380                 6.2                7.1
Research and development expenses                                         111                    107                 1.9                2.0
Operating income                                                          712                    609                12.1               11.4
Interest expense                                                           32                     34                 0.5                0.6
Interest income                                                             4                     23                 0.1                0.4
Other expense, net                                                          5                      5                 0.1                0.1
Federal and foreign income taxes                                          222                    192                 3.8                3.6
Income from continuing operations                                         457                    401                 7.8                7.5
Income (loss) from discontinued operations, net of tax                      3                     (2 )               0.1                 -
Net income                                                                460                    399                 7.8                7.5
Less: Net income attributable to noncontrolling interests                   8                      1                 0.1                 -
Net income attributable to Raytheon Company                               452                    398                 7.7                7.4

The overall increase in Net sales in the first quarter of 2009 was spread across all segments, as discussed below in Segment Results. Net sales to the U.S. Department of Defense (DoD) were 84% of total Net sales in the first quarter of 2009 compared to 82% of total Net sales in the first quarter of 2008 and Net sales to the U.S. Government were 88% of total Net sales in the first quarter of 2009 compared to 87% of total Net sales in the first quarter of 2008. Included in U.S. Government sales were foreign military sales of $570 million and $398 million in the first quarters of 2009 and 2008, respectively. Total international sales, including foreign military sales, were $1,154 million or 19.6% of total Net sales in the first quarter of 2009 compared to $1,044 million or 19.5% of total Net sales in the first quarter of 2008.

Gross margin included a FAS/CAS Pension Adjustment of $11 million of income compared to $33 million of expense in the three months ended March 29, 2009 and March 30, 2008, respectively. The FAS/CAS Pension Adjustment, which we report as a separate line item in our segment results, represents the difference between our pension expense or income under SFAS No. 87 Employers' Accounting for Pensions (SFAS No. 87), and our pension expense under U.S. Government cost accounting standards (CAS). For more information on the FAS/CAS Pension Adjustment, see our discussion below in Segment Results. The results of each segment only include pension expense under CAS that we generally recover through the pricing of our products and services to the U.S. Government.

In accordance with the requirements of SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 87, pension and other postretirement benefit assets and liabilities are valued annually at the end of the year for purposes of determining funded status and future year pension expense. Our long-term return on assets and discount rate assumptions are key variables in making such determinations and are discussed in more detail under "Critical Accounting Estimates" within Item 7 of our Form 10-K for the year ended December 31, 2008. There has been a slightly negative return on pension assets through March 29, 2009 compared to our assumption of a positive annual return of 8.75% at December 31, 2008. If the actual rate of return on plan assets continues to be below our assumed 8.75% rate of return through December 31, 2009, it would negatively impact our funded status at year-end and increase pension expense in future years. Alternatively, if the current corporate bond yield environment as of March 29, 2009 continues through December 31, 2009, it may result in a higher discount rate than our discount rate assumption of 6.5% at December 31, 2008 and positively impact our funded status at year-end. The ultimate impact on our future pension expense and funded status will be determined based upon market conditions in effect when we perform our annual valuation for the December 31, 2009 financial statements.

The changes in Operating income by segment are described below in Segment Results.

The decrease in Administrative and selling expenses as a percentage of Net sales in the first quarter of 2009 was primarily due to the timing of certain costs and cost reduction efforts.

Research and development expenses as a percentage of Net sales of in the first quarter of 2009 remained relatively consistent with the first quarter of 2008.

The decrease in Interest expense in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to $2 million of amortization of the $37 million gain on the termination of all our interest rate swap agreements in the first quarter of 2009.

The decrease in Interest income in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to a decrease in interest rates driven by a shift in our strategy to invest in U.S. Treasury bills.

Other expense, net in the first quarter of 2009 remained consistent with the first quarter of 2008.

The effective tax rate from continuing operations was 32.7% and 32.4% in the first quarter of 2009 and 2008, respectively, reflecting the U.S. statutory rate adjusted for various permanent differences between book and tax reporting. The effective tax rate in the first quarter of 2009 was lower than the statutory rate due to manufacturing tax benefits, the research and development tax credit and certain dividend deductions, and was partially offset by various non-deductible expenses. The effective tax rate in the first quarter of 2008 was lower than the statutory rate due to manufacturing tax benefits, certain dividend deductions and tax benefits related to certain refund claims, and was partially offset by various non-deductible expenses. The effective rate in the first quarter of 2009 was 0.3% higher than the first quarter of 2008 primarily due to the tax benefits related to certain refund claims in the first quarter of 2008.

Income from continuing operations was $457 million or $1.11 per diluted share on 404.0 million average diluted shares outstanding in the first quarter of 2009 compared to $401 million or $0.92 per diluted share on 434.7 million average diluted shares outstanding in the first quarter of 2008. The increase in Income from continuing operations of $56 million in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to the following:

• $59 million of volume, net of program performance and a $44 million lower FAS/CAS Pension Adjustment, both discussed below in Segment Results.

These were partially offset by:

• $30 million of higher taxes related primarily to our higher income and higher net interest expense of $17 million.

Net income was $460 million in the first quarter 2009 compared to $399 million in the first quarter of 2008. Net income attributable to noncontrolling interests was $8 million in the first quarter of 2009 compared to $1 million in the first quarter of 2008.

Net income attributable to Raytheon Company common stockholders was $452 million or $1.12 per diluted share in the first quarter of 2009 compared to $398 million or $0.92 per diluted share in the first quarter of 2008.

Segment Results

Segment financial results were as follows:



                                                     Three Months Ended
    Net Sales (In millions)                 March 29, 2009        March 30, 2008
    Integrated Defense Systems             $          1,262      $          1,192
    Intelligence and Information Systems                784                   692
    Missile Systems                                   1,368                 1,319
    Network Centric Systems                           1,154                 1,067
    Space and Airborne Systems                        1,046                   977
    Technical Services                                  696                   521
    Corporate and Eliminations                         (426 )                (414 )

    Total                                  $          5,884      $          5,354

                                                     Three Months Ended
     Operating Income (In millions)          March 29, 2009       March 30, 2008
     Integrated Defense Systems             $            188      $           211
     Intelligence and Information Systems                 61                   52
     Missile Systems                                     158                  139
     Network Centric Systems                             163                  124
     Space and Airborne Systems                          139                  117
     Technical Services                                   44                   35
     FAS/CAS Pension Adjustment                           11                  (33 )
     Corporate and Eliminations                          (52 )                (36 )

     Total                                  $            712      $           609


                                                     Three Months Ended
     Bookings (In millions)                  March 29, 2009       March 30, 2008
     Integrated Defense Systems             $          1,209      $        1,106
     Intelligence and Information Systems                503               1,019
     Missile Systems                                     775               1,642
     Network Centric Systems                           1,234               1,592
     Space and Airborne Systems                        1,037                 728
     Technical Services                                  451                 418
     Corporate                                            -                   11

     Total                                  $          5,209      $        6,516

Bookings represent the dollar value of new contract awards recognized during the period and includes firm orders for which funding has not been appropriated. Bookings for not-to-exceed contract awards are recorded based on a reasonable estimate of the expected contract definitization, which will generally not be less than 75% of the award, and are subsequently adjusted to reflect the actual amounts definitized or, when prior to definitization, facts and circumstances indicate the previous estimate is no longer reasonable. Bookings in each year are influenced by the timing of awards that may cover multiple fiscal years. 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.

                                                   Funded Backlog                           Total Backlog
(In millions)                            March 29, 2009       Dec. 31, 2008      March 29, 2009       Dec. 31, 2008
Integrated Defense Systems               $         5,735     $         4,802     $         9,684     $        9,883
Intelligence and Information Systems               1,761               1,890               4,818              5,137
Missile Systems                                    5,605               6,082               9,355              9,937
Network Centric Systems                            4,816               4,593               5,850              5,733
Space and Airborne Systems                         3,284               2,731               5,613              5,442
Technical Services                                 1,821               1,888               2,619              2,752

Total                                    $        23,022     $        21,986     $        37,939     $       38,884

Total backlog includes both funded backlog (unfilled orders for which funding is authorized, appropriated and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated and/or contractually obligated by the customer). 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. Backlog is increased by bookings and is converted into sales as work is performed or deliveries are made.

Integrated Defense Systems



                                                     Three Months Ended
 (In millions, except percentages)    March 29, 2009       March 30, 2008      % Change
 Net Sales                           $          1,262     $          1,192          5.9 %
 Operating Income                                 188                  211        -10.9 %
 Operating Margin                                14.9 %               17.7 %

 Bookings                            $          1,209     $          1,106          9.3 %

Net Sales. The increase in Net sales of $70 million in the first quarter of 2009 was primarily due to $62 million of higher volume on domestic and international Patriot programs.

Operating Income and Margin. The decrease in Operating income of $23 million in the first quarter of 2009 was primarily due to a change in contract mix driven by the completion of certain programs and positive program performance adjustments in 2008, partially offset by an increase in volume. IDS' operating income also benefited from $14 million of sales on certain licensed software in the first quarter of 2008. Operating margin declined from the first quarter of 2008 because of the change in contract mix, program performance adjustments in 2008 and the sales of software in 2008.

Backlog and Bookings. Backlog was $9,684 million at March 29, 2009 compared to $9,883 million at December 31, 2008. Bookings in the first quarter of 2009 were $103 million higher than the first quarter of 2008 primarily due to the Patriot awards in the first quarter of 2009. In the first quarter of 2009, IDS booked $741 million in new international and domestic Patriot awards, including $185 million for the United Arab Emirates (UAE), $139 million for Taiwan, $159 million to provide engineering services and $115 million for the Patriot Pure Fleet program for the U.S. Army.

Intelligence and Information Systems



                                                     Three Months Ended
 (In millions, except percentages)    March 29, 2009       March 30, 2008      % Change
 Net Sales                           $            784     $            692         13.3 %
 Operating Income                                  61                   52         17.3 %
 Operating Margin                                 7.8 %                7.5 %

 Bookings                            $            503     $          1,019        -50.6 %

Net Sales. The increase in Net sales of $92 million in the first quarter of 2009 was primarily due to higher volume on a number of classified contracts.

Operating Income and Margin. The increase in Operating income of $9 million in the first quarter of 2009 was primarily due to increased volume. Operating margin in the first quarter of 2009 remained relatively consistent with the first quarter of 2008.

Backlog and Bookings. Backlog was $4,818 million at March 29, 2009 compared to $5,137 million at December 31, 2008. Bookings in the first quarter of 2009 were $516 million lower than the first quarter of 2008 primarily due to classified bookings of $556 million in the first quarter of 2008. In the first quarter of 2009, IIS booked $236 million on a number of classified contracts.

Missile Systems



                                                     Three Months Ended
 (In millions, except percentages)    March 29, 2009       March 30, 2008      % Change
 Net Sales                           $          1,368     $          1,319          3.7 %
 Operating Income                                 158                  139         13.7 %
 Operating Margin                                11.5 %               10.5 %

 Bookings                            $            775     $          1,642        -52.8 %

Net Sales. The increase in Net sales in the first quarter of 2009 of $49 million was primarily due to $111 million of higher volume from the Standard Missile, Advanced Medium-Range Air-to-Air Missile (AMRAAM) and Evolved Sea Sparrow Missile (ESSM) programs, which was partially offset by lower volume on other programs, primarily the Rolling Airframe Missile (RAM) program.

Operating Income and Margin. The increase in Operating income of $19 million and the related improvement in operating margin in the first quarter of 2009 were primarily due to improved program performance.

Backlog and Bookings. Backlog was $9,355 million at March 29, 2009 compared to $9,937 million at December 31, 2008. Bookings in the first quarter of 2009 were $867 million lower than the first quarter of 2008, primarily due to a $578 million award for Standard Missile-3 in the first quarter of 2008. In the first quarter of 2009, MS booked $119 million for the continued development and production on the Exoatmospheric Kill Vehicle (EKV) program.

Network Centric Systems



                                                     Three Months Ended
 (In millions, except percentages)    March 29, 2009       March 30, 2008      % Change
 Net Sales                           $          1,154     $          1,067          8.2 %
 Operating Income                                 163                  124         31.5 %
 Operating Margin                                14.1 %               11.6 %

 Bookings                            $          1,234     $          1,592        -22.5 %

Net Sales. The increase in Net sales in the first quarter of 2009 of $87 million was primarily due to higher volume of $65 million from certain U.S. Army programs, including an improved target acquisition system, a weapon locating radar program, a long-range multi-sensor system program and an integrated ground combat surveillance program, partially offset by lower volume on a communications program.

Operating Income and Margin. The increase in Operating income of $39 million in the first quarter of 2009 was primarily due to improved program performance and increased volume on certain U.S. Army programs. The increase in operating margin was primarily due to improved program performance.

Backlog and Bookings. Backlog was $5,850 million at March 29, 2009 compared to $5,733 million at December 31, 2008. Bookings in the first quarter of 2009 were $358 million lower than the first quarter of 2008 primarily due to a $309 million award for Horizontal Technology Integration (HTI) forward-looking infrared kits and a $203 million award for Improved Target Acquisition System (ITAS) in the first quarter of 2008.

Space and Airborne Systems



                                                     Three Months Ended
 (In millions, except percentages)    March 29, 2009       March 30, 2008      % Change
 Net Sales                           $          1,046     $            977          7.1 %
 Operating Income                                 139                  117         18.8 %
 Operating Margin                                13.3 %               12.0 %

 Bookings                            $          1,037     $            728         42.4 %

Net Sales. The increase in Net sales in the first quarter of 2009 of $69 million was primarily due to higher volume of $100 million on classified contracts and a new international tactical radar program, partially offset by lower volume on other programs primarily on certain domestic tactical radar programs.

Operating Income and Margin. The increase in Operating income of $22 million and the related increase in operating margin in the first quarter of 2009 was primarily due to a $12 million benefit from the favorable settlement of affirmative claims on two contracts and increased volume.

Backlog and Bookings. Backlog was $5,613 million at March 29, 2009 compared to $5,442 million at December 31, 2008. Bookings in the first quarter of 2009 were $309 million higher than the first quarter of 2008, primarily due to a first quarter of 2009 award for $422 million to supply APG-63 fire control radars and support equipment for the Japan Air Self-Defense Force. SAS also booked $130 million for the B-2 Radar Modernization Program (RMP) in the first quarter of 2009.

Technical Services



                                                     Three Months Ended
 (In millions, except percentages)    March 29, 2009       March 30, 2008      % Change
 Net Sales                           $            696     $            521         33.6 %
 Operating Income                                  44                   35         25.7 %
 Operating Margin                                 6.3 %                6.7 %

 Bookings                            $            451     $            418          7.9 %

Net Sales. The increase in Net sales of $175 million in the first quarter of 2009 was primarily due to $187 million of growth on our training programs, primarily on the U.S. Army's Warfighter Field Operations Customer Support (FOCUS) contract for the U.S Army, partially offset by lower volume on a Defense . . .