Company Description

Krause Fund Research

Fall 2018

Raytheon Company (RTN) Industrials – Aerospace and Defense

Analysts:

Matt Conway Julia Garry Matthew-t-conway@uiowa.edu Julia-garry@uiowa.edu

Heidi Hannenberg Emily Kwak Heidi-hannenberg@uiowa.edu Emily-a-kwak@uiowa.edu

November 12, 2018

Stock Rating:

Investment Thesis:

We recommend a buy rating for Raytheon Corporation because we believe the company is well positioned to take advantage of consumer trends in the industrials aerospace and defense industry due to its market share dominance in the business, excellent operating margins in its product segments, and corporate strategy of acquiring other companies.

Drivers of Thesis We forecast revenues to grow at 4.5% driven by an initial sales growth of

11% in their guided missile segment.

We expect Raytheon to increase capital expenditures to pursue new

product segments due to emerging markets in aerospace and defense

sector.

Recent trends toward cyber security products leave Raytheon well

positioned for future growth.

68% of Raytheon’s sales are dominated by the military, and foreign

countries have been increasing military spending causing the United

States aerospace and defense companies to thrive.

Risks to Thesis Geopolitical and economic environments are causing some volatility in

the aerospace and defense sector.

Raytheon needs to continue to cut old product lines in order to rapidly adapt to demand for innovative defense products.

Earnings Estimates:

Company Description:

BUY

12 Month Performance:

Raytheon Company (RTN), is an international aerospace and defense company and a technology and innovation leader specializing in defense, civil government, and cyber security solutions. Raytheon was founded in 1922 and provides state-of-the-art electronics, mission system integration, C51 products and services, sensing, effects and mission support services. Raytheon is headquartered in Waltham, Massachusetts, and serves customers in 80 countries. In 2017, Raytheon’s total revenues rose by 5%.

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As of November 12, 2018, our analyst team is recommending a “Buy” rating for Raytheon. We believe that Raytheon will see net income growth in the next seven years based on steady demand of products and their efforts to enter new emerging markets. Our analysts believe that the growth will be steady long-term focused. Based on the market demand, new product categories emerging, and increased consumers in the market, we assume that Raytheon will experience long-term growth.

We have projected their share price to be $213.53 based on our DCF model. This estimated value is quite larger than their current intrinsic value of $182.03 which indicates that the stock is undervalued. Real GDP GDP is important to the industrials sector because it represents the overall health of the economy. The industrials sector is highly sensitive to the state of the economy and its performance is driven by macroeconomic factors, which are portrayed through GDP. When the economy is strong, more companies are in the financial position to expand production or improve current production through capital expenditures. A higher GDP can lead to an increase in production of industrial goods, durable goods orders, defense and infrastructure spending, corporations’ access to capital, corporate financial health, and in transportation needs.18 Percent Change in Quarterly Real GDP over the Past Year

Source: St. Louis Federal Reserve

As shown in the graph above, the U.S. experienced exceedingly high real GDP growth of 4.2 percent in the second quarter of 2018. Third quarter results came in lower at 3.5 percent but are still above the ideal rate of 2-3 percent. Interest Rates Interest rates are a very important economic indicator especially in the industrial aerospace and defense industry. This is because many companies within this industry have significant capital expenditures and invest highly in research and development. By doing so, they require financing and in turn need to pay interest on those investments. Customers of industrial aerospace and defense companies also require financing to purchase the specific products that are built. Which means that an increase or decrease of interest rates would impact the customer’s demand for the industrial industry’s products. The current interest rates are heavily influenced by the 10 year U.S. Treasury Bond rate which is currently at 3.213%19. The Federal Reserve has also raised interest rates to a target rate of 2.00-2.25% as of September 26, 2018. In November 2018, Federal Open Market Committee’s meeting, the Fed has discussed that rates are likely to be hiked up in the future20. Industrial companies rely heavily on borrowing to finance projects and the increasing interest rates will put more pressure on the industry because investors will continue to require a higher rate of return. This could lead to a decreasing amount of capital expenditures because of the increasing cost of purchasing property, plant and equipment. Exchange Rates Due to the increasing trend of American businesses expanding globally, exchange rates are a very important economic indicator. This is especially important when looking at industrial companies because of the amount of goods and materials that they import. The most significant exchange rates are the U.S dollar compared to the Euro, the Chinese Yuan, and the Japanese Yen. Currently, the Euro is trading at $0.876 per U.S. dollar, the Yuan is trading at $6.916 per U.S. dollar the Yen is trading at $ 113.31 per U.S dollar21. Exchange rates impact the cost of materials for industrial companies and can lead to firms choosing specific suppliers based on those prices. Uncertainty with exchange rates is seen as a risk factor for the industrial machinery industry.

Economic Analysis

Executive Summary

Government Spending Transportation involves the vehicles that move product

from one location to another. It does not include the Government spending is a major driver for the industrials production of these vehicles. Some examples of industry growth. In the aerospace and defense industry, commercial services & supplies involve commercial military spending is a crucial factor to industrial firms. The printing, data processing, and staffing services.1 The government spends nearly 2% of GDP yearly on military aerospace sector is comprised of production, sales, and spending, and demand for expenditures depends on service of commercial aircraft. Many of the companies that wartime needs, equipment maintenance, and upgrade operate in the industry are very large and have to manage cycle18. The aerospace and defense industry has a very high massive overhead costs. The defense sector is dependent correlation in regards to military spending, but this does not on the military needs for advanced weapons and mean it always leads to an increase in sector performance. technology systems for combat or defense. Some defense

products include: aircraft, helicopters, fighter jets, military spacecraft, aircraft launching gear, parachutes, engines, turbines, military trucks, ships and boats, tanks, artillery, and missiles. There are hundreds of companies in the United States alone that compete in niche markets within the aerospace and defense industry.2

The industrial industry typically shifts with macroeconomic and geopolitical factors. Since it is closely tied with these factors, the industrial industry has the highest correlation of any sector to the S&P 500. Below is an image depicting the correlations with the different segments of the industrial industry with the market:

Source: Forbes Industrial Sector Growth vs. GDP Growth

S&P 500 Stock Index

The S&P 500 Index is designed to measure changes in stock price of component companies, and is a key driver in industrial firms. Industrials have the highest correlation of any sector to the S&P 500. Firms within this industry tend to have lower profit margins due to the sensitivity to raw materials used in production.

Industry Analysis

Source: Fisher Investments on Industrials

Industry Overview Since the industrial industry is tied so closely to macroeconomic factors, it makes it very appealing for

Fisher Investments segments the industrial industry into investors that want a low volatile investment in their

three basic categories: Capital Goods, Transportation, and portfolio. Commercial Services & Supplies. Capital Goods are the

largest category within the industrial industry. Capital Industry Life Cycle goods include production of machinery, making of

industrial goods like airplanes, vehicles, and even defense The industrials industry is currently in the mature state of

products. Raytheon falls into the capital goods as an its life cycle. While the industry is forecasted to grow, it will

aerospace and defense company. Transportation is the not grow at a faster rate than the national GDP. The product

second largest segment in the industrial industry. life cycle includes development, production, maintenance, and support. Additionally, it relies on the performance of

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companies that they serve within the industry. There has been an increasing amount of consolidations in the industrials industry.2 Raytheon has made a number of acquisitions in the past years, including Blackbird Technologies, Visual Analytics, Government Solutions Business of Safenet Inc., Teligy Inc., Applied Signal Technology, and Trusted Computer Solutions.3

Recent Developments and Trends

Companies within the Aerospace and Defense industry are aiming to reduce costs and develop themselves by focusing their assets on their distinctive competitive advantages. The number of companies joining the aerospace and defense sector continue to grow as different emerging technologies in defense have become competitive for several new players in the market. The trend for efficient technology has been emerging in this sector and customers are attracted to companies with innovative modifications and digitized devices.4

Many aerospace and defense companies need to be aware of old product lines that need to be released from production in the future. These can create massive sunk costs for aerospace and defense companies and can cause catastrophic damages to their profitability and survival. In the coming years, it will be very common to identify a trend of companies reducing unnecessary costs.4

Catalysts for Growth and Change

A new wave of innovation technology will bring vast opportunities to the aerospace and defense industry including hypersonic weapons, robotics, undersea systems, cyber warfare, and other cutting-edge technologies. New programs in the future such as next generation intelligence, surveillance, and reconnaissance ISR technologies will also be highly demanded products in the industry. There will be opportunities for companies to develop products to address threats in cyber security and unmanned combat vehicles on land, sea, and by air.

Northrop Grumman, one of the largest aerospace and defense companies in the United States, plans to increase capital expenditures by eleven percent in order to aggressively pursue these new products. Raytheon management announced that they will be increasing capital expenditures by fifty percent in the coming years to also pursue these technologies.3 Lockheed Martin, another large competitor in the aerospace and defense industry, intends on investing into new weapons development.

However, Lockheed Martin did not add a price tag as to how much they would increase their capital expenditures. Thales has recently acquired Gemalto for more than five billion dollars and also plans to pursue these new technologies.

Source: USA Today - Countries Spending the Most on the Military

The chart above depicts the amount in dollars that international countries spend on their military needs. On average, countries nearly 3% of their GDP on military spending. Saudi Arabia spends nearly 10% of their GDP on military and defense. The United States spends roughly 3.8% of their GDP on military needs which equates to nearly $619 billion dollars. China is pushing to develop a stronger artificial intelligence within its military which will be a catalyst for growth in the aerospace and defense sector. China and Russia are demanding more advancements in air- to-air missiles which could be a major growth opportunity for Raytheon.5

Key Investment Positives and Negatives

Positives Some of the key positives to invest into the aerospace and defense industry include:

Aerospace and defense stocks have been rallying

exceptionally, and there’s a positive outlook for

future businesses in this industry.

Several international countries are increasing

military spending therefore causing United States

based aerospace and defense companies to thrive.

S&P Global Ratings expects credit ratios of global

aerospace and defense companies to improve in

revenue growth and higher margins.

Geopolitical connections have increased demand

and growth for United States defense companies

due to terrorist threats, civil wars, and border

disputes.

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Increased demands in flights for commercial and

trade imports have increased air traffic which has

been creating a higher demand in the aerospace

industry.

Innovative technologies in welfare and demand for

cost-efficient production are driving revenue

growth for the U.S. Aerospace and Defense

industry.6

Negatives Some of the investment negatives in the aerospace and defense industry include:

There is increased volatility in the geopolitical and

economic environment which causes augmented

volatility in the aerospace and defense industry.

Large aerospace and defense companies are having

difficulties managing internal and external supply

chains as demand shifts.

There has been increased competition in domestic

and international markets for aerospace and

defense. There are hundreds of companies in the

United States alone that are competing in small

niche markets.

Exposure to cybersecurity events is becoming more

competitive as the market grows.

Foreign currency and commodity price fluctuations

are causing more uncertainty in the international

markets for aerospace and defense sales.

Aerospace and defense are regulated under

particular laws and regulations that are constantly

changing and creating additional restrictions in the

industry.

Raytheon Compared to Other High Performing Firms

Raytheon has a market capitalization of over $53 billion with revenues reaching over twenty-five million dollars in 2017.7 Some of the other comparable companies in the aerospace and defense industry include:

Boeing Currently with a market capitalization of nearly $210 billion dollars, Boeing operates in four revenue categories including commercial airplanes productions, defense products, space and security, and global services.8

Airbus A large producer of commercial airplanes that is a privately traded company.

Lockheed Martin Arguably Raytheon’s top competitor in the aerospace and defense industry. Lockheed Martin carries a $89 billion dollar market capitalization and operates through four main segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. Lockheed Martin also competes with Raytheon on an international level for customers.9

Northrop Grumman Another large competitor in the aerospace and defense industry that is traded publicly in the United States. Northrop Grumman yields a market capitalization of over $49 billion dollars and focuses on three main business segments: Aerospace Systems, Mission Systems, and Technology Services.10

Company Overview and Business Description

Raytheon Corporation is an international aerospace and defense company and a technology and innovation leader specializing in defense, civil government and cybersecurity solutions. Raytheon was founded in 1922, and provides state-of-the-art electronics, mission systems integration, C5I products and services, sensing, effects and mission support services. They are headquartered in Waltham, Massachusetts, and serve customers in 80 countries. Their four business segments work together to find solutions for a variety of government and commercial customers.11

Products and Markets

Raytheon is the world's largest supplier of guided missile systems. Although guided missiles are Raytheon’s dominant product, they also produce several other products including radars and satellite sensors, communication systems that can be found in the cockpits of an aviation vehicles, radioactive materials and detection systems, and semiconductors. Raytheon’s three main market segments include: Integrated Defense Systems, Intelligence, Information & Services, and Guided Missile Systems.11

Company Analysis

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Integrated Defense Systems

Raytheon’s Integrated Defense Systems specialize in air and missile defense, land and sea radars, systems for managing command, control, communications, computers, cyber, intelligence, surveillance, and reconnaissance. IDS also produce sonars, torpedoes and electronic systems for ships.11 Integrated Defense Systems provide solutions primarily to the U.S. Department of Defense (DoD), and the U.S. Intelligence Community. Raytheon yields more than eighty international customers which constitute for approximately half of all revenues generated from the Integrated Defense Systems business.3

Intelligence, Information and Services

Raytheon’s intelligence, information and services include cybersecurity products and services to consumers. These services offer a wide range of training, space, logistics, and engineering solutions for both government and civilian customers.11 Product lines within Raytheon’s intelligence, information, and services include cybersecurity and special missions, Global Training Solutions, Navigation and Environmental Solutions, Global Intelligence Solutions, Mission Support and Modernization, and Transportation and Support Services.3 Raytheon’s Global Business Services provides internal innovative technology services to Raytheon’s functional organizations. This takes place in the corporate headquarters and improves the core of Raytheon’s business structure.

Guided Missile Systems

Raytheon is the world’s premier missile maker. They provide defensive and offensive weapons for air, land, sea, and space. These missiles include interceptors for U.S. ballistic missile defense systems. Raytheon also constructs net-enabled battlefield sensors including Raytheon UK. Raytheon had an income of over seven billion dollars in missile systems in the year 2017 and expect their missile systems program to continue to be their largest segment of revenues and growth.11

Market for Raytheon’s Products

The major market areas for Raytheon’s products are in defense and government electronics, space, information technology, and technical services and support markets.3 In addition to competing for military contracts, Raytheon also participates in the commercial cybersecurity market. The cybersecurity market is subject to rapid changes in

technology, products, customer specifications, and industry standards every year.3

The figure below represents Raytheon’s revenue exposure in developed and emerging markets. The majority of Raytheon’s consumers come from economies that are already developed. This makes the markets much more competitive as most aerospace and defense companies like Lockheed Martin and Northrop Grumman will occupy positions in the same developed markets.

Source: Factset

Marketing Strategy and Customer Support

In a recent statement from Raytheon’s executive team, they stated: “Our future success depends on our ability to develop new offerings and technologies for our current and future markets.”3 Since Raytheon competes directly with other large aerospace and defense companies for government contracts, Raytheon has to continue to innovate and succeed in niche product markets. Broad elements of Raytheon’s market strategy include:

● Build upon areas of strength within key mission areas. The biggest area being Raytheon’s guided missile program.

● Focus additional resources on emerging market opportunities within the international markets and the Department of Defense.

● Extend Raytheon’s advanced cyber solutions beyond the United States government into both international and commercial markets.

Customer focus is a key component of Raytheon’s market strategy. Raytheon strives to build strong relationships with their customers by categorizing them as partners. Through this strategy, Raytheon allows their customers to work closely in the product development phase in order to produce the proper modifications of consumer demand.3

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Significant customers

The primary consumer of Raytheon products is the United States government. In particular, the Department of Defense, and the United States Intelligence Community Agencies (NASA and FAA). In 2017, the United States government accounted for nearly 67% of Raytheon’s net sales. In the figure below, you can see that an additional 13% of net sales were accounted for foreign military sales through the United States government.

Sales to the U.S. Government

(In millions, except percentages)

2017 2016 2015

Sales to the U.S. Government 16860 16083 15788

Sales to the U.S. Government as a Percentage of Total Net Sales 67% 67% 68%

Foreign military sales through the U.S. Government 3311 2899 2812

Foreign military sales through the U.S. Government as a Percentage

of Total Net Sales 13% 12% 12%

Source: Raytheon 2017 10-K

Since the United States government makes up such a large part of Raytheon sales, it is important to maintain a flawless relationship with them by ensuring quality in products and services that Raytheon provides. On November 9th, 2018, the Department of Defense awarded Raytheon an additional $75 million-dollar missile contract for modifications to current missiles Raytheon has been working to produce.12 International Sales are conducted through Raytheon Company and certain international subsidiaries. For example, Raytheon Systems Limited (RSL) is a U.K. subsidiary that provides products and services to government customers in the United Kingdom.3

Production

Raytheon has an extremely complex manufacturing process for their numerous types of products and services. Many of the products go through multi-million dollar testing and simulations before it can be mass produced. It is not uncommon for Raytheon to spend massive amounts of cash to ensure that their products can pass global restrictions and regulations. Automation has really changed the production process for Raytheon as it has become more affordable. Raytheon was the first company to use 3D printing in a large-scale manufacturing process.13 The largest supplier of Raytheon is Mercury Systems, Inc. This company is an electronic technology company based in the United States. Mercury Systems makes up for 19% of Raytheon’s revenues in raw materials. The following figure depicts the amount of raw materials that are purchased from each industry. The electronic and technology industry makes up for the majority of Raytheon’s raw materials.

Source: Factset

Other large suppliers for Raytheon include Aerojet Rocketdyne Holdings, Inc. which is also an electronic technology company headquartered in the United States. Aerojet Rocketdyne makes up for about 17% of Raytheon’s raw materials. Currently, Raytheon has nearly 98 suppliers for their different product lines. Other large suppliers include Ducommun Incorporated at 13.5% of Raytheon’s raw materials. The image below shows that the majority of suppliers that Raytheon utilizes come from the United States.14

Source: Factset

The pie chart below depicts that 68% of sales are located in the United States dominated by the military. Raytheon is starting to see emerging markets for their products in the Middle East. Over the past year, Raytheon has seen more growth in sales in the Middle East and Africa over the America’s in the past year.

Source: Factset

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Distribution

Raytheon supports the Distributed Common Ground System (DCGS) to distribute products around the world. DCGS is designed to meet intelligence and surveillance, and is accomplished through a modular, scalable, and open architecture system. It enables the collection, processing, dissemination of intelligence, and allows for real time data management. Raytheon has decades of experience and the distribution network permits easy integration of products. 3

Competition

Raytheon competes in a very competitive industry and must focus on development, technology, and cyber security. Most of the competition that Raytheon faces is for direct contracts from the United States government. Some of its major suppliers are also key competitors in the same market, including Lockheed Martin. In the past, Raytheon and Lockheed Martin have partnered together to build a joint venture in Javelin in order to win niche product contracts demanded by United States government. Raytheon’s top aerospace and defense competitors are BAE Systems, Boeing, General Dynamics, Lockheed Martin, and Northrop Grumman.

Comparative analysis of competition Raytheon is one of the larger players in the aerospace and defense industry. Particularly, Raytheon is very competitive in the technology and innovation in specializing defenses, government electronics, reputation, technical superiority, price, and the cybersecurity market, which is subject to rapid change in customer specifications, products, and technology.3

SWOT Analysis

Strengths Raytheon is a leading company within the industrials industry, and has numerous strengths that help it thrive in the market. Having reliable suppliers of raw materials allows them to overcome any supply chain bottlenecks. They also have a strong distribution network, which they have been building over the past 96 years. This has allowed them to reach a large potential emerging market, expanding into 80 countries. With their expertise in entering new markets, this creates new revenue streams and diversifies the company. Raytheon has built such a relationship with their dealers, where the distributors now promote their products. Due to extensive training, Raytheon also has very highly skilled workforce. They invest

advanced resources in training and development, which allow employees to be highly skilled and motivated.15

Weaknesses As part of the aerospace and defense sector, Raytheon needs to invest in newer technologies in order to survive. With the rate of expansion into different geographic locations, they need to spend more money on technology to match the vision of the company. In addition, the company needs to improve their financial planning as their profitability ratio and net contribution ratio are below industry average. Financial results are highly dependent on the U.S. government contracts, which are subject to uncertain levels of funding and timing. This can be affected by performance delays, cost overruns, product failures or divinization delays in connection with these contracts.3

Opportunities In order to remain competitive in the market, Raytheon needs to invest new financial resources to develop and improve technology. New technologies will enable the company to maintain current customers, while gaining attention from new customers and emerging markets. In effort to gain new customers, Raytheon has also launched an online channel that will increase sales, allowing the company to use data analytics to better serve their customers.3

Threats As a U.S. government contractor, Raytheon is subject to following numerous laws and regulations. Changes in these laws, regulations, and business practices can negatively affect the current programs within the business and cost Raytheon millions. As an international business, they are also affected by geopolitical and economic factors, regulatory requirements, increasing competition, and other risks associated with doing business in foreign countries. This could lower their profits and revenue. Raytheon’s business is sensitive to these changes and this is a threat to the success of the business.3

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Valuation Summary

In order to find the intrinsic value of one share of Raytheon stock, our analysts took advantage of several models including Discounted Cash Flows, Economic Profit, Dividend Discount Model, and Relative Valuation models using Price- Earnings ratios. We developed several assumptions that were key to the relevance of these models. Below are some of the assumptions our analysts made for our valuation models.

Revenue Decomposition

In our revenue decomposition, our analysts estimated a total sales growth at an expected 4.5% per year until the year 2019, and then decreased the sales growth to 4% for years 2020 until 2024. We estimated this percentage by analyzing the past five years of historical data and mixing it with the analyst projections for the future four years. We also arrived at this growth percentage by understanding the different segmented revenues of Raytheon including their Integrated Defense Systems, Missile systems, and Intelligence, Information, and Services.

Raytheon has the largest revenue growth in their missile system products. Raytheon was recently awarded a $615 million-dollar contract from the United States military for modifications to the PZ0001 missile that Raytheon has been constructing.16 Raytheon is the world’s largest producer of guided missiles and they expect to continue this dominance. Additionally, Raytheon executives have high expectations for growth in their missile systems program.3

Due to this information, our analysts exemplified a high growth rate in our model in the beginning years of the missile systems starting at 11% and then decreasing overtime to 5.5% in the year 2024 to represent the current contracts.

Source: Factset

The figure above shows segmentation of Raytheon’s revenues within their products such as their missile program and different services. In addition to the missile programs, Raytheon has incremental growth in their intelligence, information and services segment. We assumed a conservative estimated growth rate of about 4% for all other products and services that Raytheon produces in accordance with analyst and company projections. We ended revenues in Network Centric Systems and Technical Services as the Raytheon is no longer pursuing these product lines.

Key Assumptions

CV Growth In order to estimate our CV growth, we looked at the projections for real GDP and our analysts concluded that a conservative CV growth rate moving forward would be close to 1.42% for Raytheon. The aerospace industry is likely to have an estimated CV growth closer to 4.1% at year-end of 2018. This value more than doubled the CV growth rate for 2017.17 The majority of this increase in growth is due to a large increase in commercial airfare traffic and not an increase in missile and defense sales. Since this is the case, our analysts felt confident in continuing with a modest 1.42% CV growth value.

Cost of Goods Sold as a Percentage of Sales Our analysts projected values for Cost of Goods Sold by using 74.5% of forecast sales and then removing depreciation and amortization costs. We used 74.5% of sales for the years 2018 and 2019. We decided to use this percentage by taking an average of past COGS (as of percentage of sales), with other analyst forecasts for the future. Raytheon management expect their production expenses to decrease in the future which would therefore lower their COGS over-time.3 Our analysts adjusted for reduction in future years of the COGS with an reduction in percentage of sales to 74% in the year 2022 and an estimated 73% of sales in the years 2023 and 2024.

General and Administrative Expenses When projecting general and administrative expenses, our analysts used a constant 11.3% of sales in correspondence with the historical and projected averages. We grew the expense to 12% in the years 2020 and 2021 then 12.5% in future years. We raised general and administrative expenses slightly due to an historical growth rate for this expense. Although it is a popular trend in the industry to lower these expenses, Raytheon did not make an

Valuation Analysis

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announcement on any decreases to the expense. Our analysts did not have a large percentage spike in general and administrative expense for Raytheon since the company has matured as a whole. Raytheon management has not mentioned any plans during their recent earnings report that would suggest an increased growth in general and administrative expense.

Marginal Tax Rate The United States government recently made a large, historic cut to the effective corporate tax rate from 35% to 21% moving forward. In the past, our Raytheon paid close to a 39% tax rate. With the new tax rate in effect, our analysts believe that Raytheon will be paying closer to a 24% after reducing for foreign tax deductions and adding back SALT (state and local taxes).

Capital Expenditures With high growth in cyber security and other defense technologies, Raytheon recently stated that they would be increasing capital expenditures by nearly fifty percent over the coming years to invest in these products. In order to represent this in our model, our analysts included a calculated 10% growth rate in capital expenditures until 2024. Although that accounts for more than 50%, our analysts believe that they will continue to increase capital expenditures as new technologies are demanded in the aerospace and defense market.

Weighted Average Cost of Capital (WACC)

We forecasted a Weighted Average Cost of Capital for Raytheon of 5.62% using the firm’s capital structure of 66.7% equity and 33.3% debt. We have forecasted and assumed that Raytheon will continue with this capital structure moving forward into the future. In order to calculate the WACC, we computed Cost of Equity and Cost of Debt. The process we used in order to arrive at these factors can be found below.

Cost of Equity We used the Capital Asset Pricing Model (CAPM) to calculate the cost of equity for Raytheon to be 6.98%. The variables used in the CAPM calculation are as follows:

● Risk-Free Rate: 3.20%

● Equity Risk Premium: 5.32%

● Beta: 0.710

The risk-free rate represents the current 10-year U.S. treasury yield. Although every investment has some sort of risk associated with it, we used the U.S. Treasury yield

because it has the lowest risk of all investments that could be made today. This could change in the future. The equity risk premium is derived from Damodaran’s calculation of implied ERP as of November 1, 2018. We believe that this model provides a realistic calculation of ERP because Damodaran’s model has proven historically accurate. Beta was calculated as an average of 5-year monthly, 2-year weekly, 3-year weekly, 4-year weekly, and 5-year weekly betas. The beta calculated for Raytheon lies in close proximity to some of their competitors including Lockheed Martin’s beta of 0.78, and Northrop Grumman’s beta of 0.70.

Cost of Debt To calculate the cost of debt, we found the yield-to- maturity of bonds issued by Raytheon. Raytheon’s 10-year bond currently yields 3.026%. We then accounted for the tax benefit of debt using the future marginal tax rate of 24%. After adjusting for tax, our after-tax cost of debt was calculated to be 2.89%.

Valuation Models

Discounted Cash Flow and Economic Profit Models Between each of the models used in this valuation, the Discounted Cash Flow model and the Economic Profit model are very accurate estimates for intrinsic value for the Raytheon’s stock. By using both models, we reached a price of $213.53. The two key value drivers used in both of these models are net operating profit less adjusted taxes (NOPLAT) and invested capital (IC). The DCF model uses these drivers to calculate free cash flow, and the EP model uses the drivers to calculate economic profit. Both calculations are discounted by the WACC to arrive at value of operating assets. To calculate the intrinsic value, we divided the value of equity by the number of shares outstanding. We believe that the DCF and EP models provide the best results that align with the assumptions and projections of our company, and we gave Raytheon a Buy Rating.

Discounted Dividend Model The dividend discount model calculates an intrinsic value for a share of Raytheon stock of $164.76. The main value drivers used by this model are annual dividend assumptions and the final year calculation of EPS. Dividends have been increasing, and from 2014 to 2017, Raytheon increased their dividend by roughly $0.25 each year. We then discounted these values using the cost of equity to arrive at the intrinsic value. We do not believe that the dividend discount model is as accurate of a depiction of Raytheon’s

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value. The current dividend yield of 3.19% is above average for the industrials sector of 2.22%. We do not believe that this dividend yield is significant enough to produce an accurate valuation of the company.

Relative Valuation Model Finally, we do not believe that the relative valuation model is an accurate depiction of Raytheon’s intrinsic value. Many of Raytheon’s main competitors, such as Boeing, Lockheed Martin, United Technologies, Northrop Grumman, and General Dynamics cannot be directly compared to Raytheon. Using P/E ratios of the remaining competitors presented in Raytheon’s FY17 10K, the relative valuation model calculates an intrinsic value for Raytheon of $181.72. This value is lower than the company’s current stock price of $182.03 and we do not believe that this is an accurate representation of future growth for Raytheon.

Sensitivity Analysis

Beta vs. Equity Risk Premium

Comparing the Beta and Equity Risk Premium is an important sensitivity analysis to our model because they directly impact on Raytheon’s weighted average cost of capital value. Our model’s beta was based on the raw beta calculation found through Bloomberg and our model’s equity risk premium calculation was found on Damodaran’s TTM implied ERP model. The comparison showed that changes in the equity risk premium caused more volatility in the intrinsic value than small changes in the beta.

WACC vs. CV Growth

We compared the continuing value growth rate to the weighted average cost of capital and found that both metrics affected Raytheon’s intrinsic value slightly. The changes in the CV growth caused a higher volatility in the stock price than with changes in WACC but both impacted Raytheon’s share price slightly.

Marginal Tax Rate vs. Pre-tax Cost of Debt

We decided to test the marginal tax rate to portray the effect the new federal income tax rate has on Raytheon’s intrinsic value. We found that changing the tax rate by increments of one percentage caused the share price to be impacted by small amount. In addition, we compared the tax rate to the pre-tax cost of debt to see how a change in our corporate bond yields would impact our model. Changes of 0.10% caused even smaller volatility in price in comparison to the tax rates affect.

COGS vs. Selling, General & Administrative Expenses

When forecasting COGS vs SG&A, both calculated as a percentage of sales, we found that the intrinsic stock price is moderately volatile with both metrics. Based on the past five years of historical data, and an average of future forecasts, COGS is on average, 64.6% of sales, and SG&A makes up nearly 11.3% of sales. Both of these metrics affect the NOPLAT calculation and moderately influence the target stock price.

Beta vs. Risk-Free Rate

In comparing these two metrics, we wanted to analyze the effect of changes in beta and the risk-free rate, which are both key metrics in the calculation of WACC. Our model’s beta was based on the average raw beta calculation from 5 year monthly, 2 year weekly, 3 year weekly, 4 year weekly, and 5 year weekly, found through Bloomberg. The risk-free rate in our model is 3.2% from a 10-year treasury yield. The risk-free rate does not have a large effect on the intrinsic value of the stock, but it is volatile to changes in beta.

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Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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16 Kyzer, Lindy. “Raytheon Missile Systems Awarded Standard Missile Contract - DoD Daily Contracts.” ClearanceJobs, 28 Aug. 2017, news.clearancejobs.com/2017/08/28/raytheon- missile-systems-awarded-standard-missile- contract-dod-daily-contracts/.

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Raytheon Co. Revenue Decomposition

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024ETotal Net SalesIntegrated Defense Systems 5148 5525 5470 4958 6492 6489 6085 5848 5529 5804 6357 6643 6909 7185 7473 7772 8083Intelligence, Information and Services 3132 3204 2757 3015 6335 6045 5984 6137 6169 6177 6357 6643 6909 7185 7473 7772 8083Missile Systems 5408 5561 5732 5590 6639 6599 6309 6569 7096 7787 8211 8581 8924 9281 9652 10039 10440Network Centric Systems 4510 4822 4918 4497 0 0 0 0 0 0 0 0 0 0 0 0 0Space and Airborne Systems 4280 4582 4830 5255 6823 6371 6072 5814 6182 6430 6622 6920 7197 7485 7784 8096 8419Technical Services 2601 3161 3472 3353 0 0 0 0 0 0 0 0 0 0 0 0 0Forcepoint 0 0 0 0 0 0 0 344 586 608 530 554 576 599 623 648 674Eliminations -1905 -1974 -1996 -1811 -1875 -1798 -1624 -1330 -1361 -1423 -1589 -1661 -1727 -1796 -1868 -1943 -2021

Total Business Segment Sales 23174 24881 25183 24857 24414 23706 22826 23382 24201 25383 26489 27681 28788 29939 31137 32382 33678

Acquisition Accounting Adjustments 0 0 0 -61 -77 -35 0 0 0 0 0 0 0Total 23,174$ 24,881$ 25,183$ 24,857$ 24,414$ 23,706$ 22,826$ 23,321$ 24,124$ 25,348$ 26489 27681 28788 29939 31137 32382 33678Intersegment SalesIntegrated Defense Systems 162 126 88 68 91 107 107 64 69 64 64 66 69 72 75 78 81Intelligence, Information and Services 22 19 14 13 784 817 829 624 657 666 747 781 812 844 878 913 950Missile Systems 26 57 94 61 161 163 140 143 122 132 143 149 155 162 168 175 182Network Centric Systems 379 481 502 461 0 0 0 0 0 0 0 0 0 0 0 0 0Space and Airborne Systems 595 611 586 510 839 711 548 484 493 540 604 631 656 683 710 738 768Technical Services 700 710 739 763 0 0 0 0 0 0 0 0 0 0 0 0 0Forcepoint 0 0 0 0 0 0 0 15 20 21 16 17 17 18 19 19 20Total 1,884$ 2,004$ 2,023$ 1,876$ 1,875$ 1,798$ 1,624$ 1,330$ 1,361$ 1,423$ 1589 1661 1727 1796 1868 1943 2021Operating Income Integrated Defense Systems 870 847 870 836 1047 1115 974 859 971 935 1053 1101 1088 1132 1177 1315 1367Intelligence, Information and Services 253 252 -157 159 536 510 508 648 467 455 527 550 544 566 588 657 684Missile Systems 584 599 650 693 861 830 800 877 921 1010 113 118 117 121 126 141 146Network Centric Systems 575 663 692 667 0 0 0 0 0 0 0 0 0 0 0 0 0Space and Airborne Systems 569 635 676 717 988 920 846 851 808 862 978 1022 1010 1051 1093 1221 1270Technical Services 174 212 297 312 0 0 0 0 0 0 0 0 0 0 0 0 0Forcepoint 0 0 0 0 0 0 0 56 90 33 38 39 39 40 42 47 49Eliminations -282 -246 -234 -190 -188 -188 -235 -140 -142 -148 -150 -157 -155 -162 -168 -188 -195Total Business Segment Operating Income 2743 2962 2794 3194 3244 3187 2893 3151 3115 3147 2558 2673 2643 2748 2858 3193 3321Acquisition Accounting Adjustments 0 0 0 0 0 0 0 -168 -198 -160 -188 -197 -194 -202 -210 -235 -244FAS/CAS Adjustment -123 80 -187 -337 -255 -249 286 185 435 390 451 472 466 485 504 563 586Corporate 0 0 0 0 0 0 0 -101 -57 -59 -75 -79 -78 -81 -84 -94 -98Total 2,620$ 3,042$ 2,607$ 2,857$ 2,989$ 2,938$ 3,179$ 3,067$ 3,295$ 3,318$ 3761 3931 3886 4042 4203 4695 4883Intersegment Operating IncomeIntegrated Defense Systems 9 8 6 5 8 9 8 2 4 5 5 5 5 5 6 6 7Intelligence, Information and Services 4 2 1 1 72 72 83 68 65 64 73 76 75 78 81 91 94Missile Systems 2 7 14 8 24 17 14 15 12 13 15 16 16 16 17 19 20Network Centric Systems 31 41 43 46 0 0 0 0 0 0 0 0 0 0 0 0 0Space and Airborne Systems 56 52 56 47 73 62 52 47 46 51 58 60 59 62 64 72 75Technical Services 64 63 69 70 0 0 0 0 0 0 0 0 0 0 0 0 0Forcepoint 0 0 0 0 0 0 0 8 15 15 17 18 17 18 19 21 22Total 166$ 173$ 189$ 177$ 177$ 160$ 157$ 140$ 142$ 148$ 169 177 175 182 189 211 220Capital Expenditures Integrated Defense Systems 63 52 61 80 67 69 99 124 135 200 208 229 252 277 304 335 368Intelligence, Information and Services 24 23 50 27 34 28 41 87 59 22 19 21 24 26 29 31 35Missile Systems 52 49 41 63 66 55 56 62 135 221 227 250 275 303 333 366 403Network Centric Systems 85 64 67 50 0 0 0 0 0 0 0 0 0 0 0 0 0Space and Airborne Systems 58 60 78 77 132 117 117 131 149 158 162 179 197 216 238 262 288Technical Services 12 5 11 24 0 0 0 0 0 0 0 0 0 0 0 0 0Forcepoint 0 0 0 0 0 0 0 10 19 14 13 14 16 17 19 21 23Corporate 10 27 11 19 40 11 13 11 29 19 19 21 24 26 29 31 35Total 304$ 280$ 319$ 340$ 339$ 280$ 326$ 425$ 526$ 634$ 650 715 786 865 951 1046 1151Depreciation and AmortizationIntegrated Defense Systems 65 68 75 78 101 96 95 86 88 98 101 105 110 117 126 137 148Intelligence, Information and Services 45 43 45 47 65 62 57 48 65 50 50 52 55 59 63 68 74Missile Systems 52 55 53 55 68 76 76 74 69 84 84 87 92 98 105 114 124Network Centric Systems 68 77 85 84 0 0 0 0 0 0 0 0 0 0 0 0 0Space and Airborne Systems 81 82 84 109 161 158 168 131 122 132 135 140 147 156 168 182 198Forcepoint 0 0 0 0 0 0 0 8 15 17 17 17 18 20 21 23 25Technical Services 18 17 16 16 0 0 0 0 0 0 0 0 0 0 0 0 0

Acquisition Accounting Adjustments 0 0 0 0 0 0 0 107 121 125 129 134 141 150 161 174 190Corporate 61 60 62 58 60 53 43 35 35 44 45 47 49 52 56 61 66Total $ 390 $ 402 $ 420 $ 447 $ 455 $ 445 $ 439 $ 489 $ 515 $ 550 561 581 612 652 701 759 825Total Assets Integrated Defense Systems 1858 1943 1849 1909 3710 3897 4128 4357 4573 4679 4629 4783 4940 5129 5396 5705 6031Intelligence, Information and Services 2293 2391 2374 2442 3827 3772 4243 4155 4315 4230 4320 4465 4611 4787 5036 5325 5629Missile Systems 4824 4858 4921 5214 6319 6316 6223 6561 6970 7338 7406 7654 7904 8207 8634 9128 9649Network Centric Systems 3769 4199 4409 4242 0 0 0 0 0 0 0 0 0 0 0 0 0Space and Airborne Systems 4259 4236 4232 4700 6470 6399 6414 6416 6564 6696 6788 7016 7246 7523 7914 8368 8845Forcepoint 0 0 0 0 0 0 0 2486 2548 2543 2469 2551 2635 2736 2878 3043 3216Technical Services 1358 1340 1376 1399 0 0 0 0 0 0 0 0 0 0 0 0 0Corporate 4773 4640 5261 5948 6360 5583 6892 5306 5268 5374 4629 4783 4940 5129 5396 5705 6031Total 23,134$ 23,607$ 24,422$ 25,854$ 26,686$ 25,967$ 27,900$ 29,281$ 30,238$ 30,860$ 30857 31890 32935 34196 35975 38035 40205

Raytheon Co. Income Statement

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024ENet Sales Products - 21761 21386 20786 20380 19855 19126 19443 20166 21416 22635 23653 24599 25583 26607 27671 28778Services - 3120 3797 4071 4034 3851 3700 3804 3903 3932 3854 4028 4189 4356 4530 4712 4900Total net sales 23174 24881 25183 24857 24414 23706 22826 23247 24069 25348 26489 27681 28788 29939 31137 32382 33678Operating Expenses Cost of Goods Sold (COGS) 18123 19349 19848 19241 18638 18090 16851 17266 17590 18526 19173 20041 20835 21653 22340 22881 23760Depreciation and Amortization 390 402 420 447 455 445 439 489 515 550 561 581 612 652 701 759 825General & administrative expenses 2065 2092 2273 2303 2333 2236 2352 2660 2882 2954 2993 3128 3455 3593 3892 4048 4210Total operating expenses 20578 21839 22576 22000 21425 20768 19647 20234 20829 22030 22727 23750 24902 25898 26933 27687 28794Operating income (loss) 2596 3042 2607 2857 2989 2938 3179 3013 3240 3318 3761 3931 3886 4042 4203 4695 4883Non-Operating Income Expense, Net Interest expense 129 123 126 172 201 210 213 233 232 205 215 222 222 231 243 257 271Interest income 64 14 16 17 9 12 10 11 16 21 14 28 29 30 31 32 34Other income (expense) -33 -3 -65 -12 -18 17 7 -4 6 -21 0 0 0 0 0 0 0Total non-operating income (expense), net -98 -112 -175 -167 -210 -181 -196 -226 -210 -205 -201 -195 -194 -201 -212 -224 -238Income (loss) from continuing operations before taxes 2498 2930 2432 2690 2779 2757 2983 2787 3030 3113 3560 3736 3693 3841 3992 4471 4646Federal & foreign income taxes (benefit) 824 953 589 793 878 808 790 733 857 1114 1424 1195 1108 1152 1198 1341 1394Income from continuing operations 1674 1977 1843 1897 1901 1949 2193 2054 2173 1999 2136 2540 2585 2689 2794 3130 3252Income (loss) from discontinued operations, net of tax -2 -1 36 -1 -1 64 65 13 1 2 0 0 0 0 0 0 0Net income (loss) 1672 1976 1879 1896 1900 2013 2258 2067 2174 2001 2136 2540 2585 2689 2794 3130 3252Less: net income attributable to noncontrolling interests in subsidiaries - -41 -39 -30 -12 -17 -14 7 37 23 0 0 0 0 0 0 0Net income attributable to Ratheon Company - 1935 1840 1866 1888 1996 2244 2074 2211 2024 2136 2540 2585 2689 2794 3130 3252Amounts Attributable to Raytheon Company common stockholders:Income from continuing operations 1674 1977 1843 1897 1901 1949 2193 2054 2173 1999 2136 2540 2585 2689 2794 3130 3252Income (loss) from discontinued operations, net of tax -2 -1 36 -1 -1 64 65 13 1 2 0 0 0 0 0 0 0Net earnings (loss) per share - basic 1672 1976 1879 1896 1900 2013 2258 2067 2174 2001 2136 2540 2585 2689 2794 3130 3252EPS (recurring) 3.95 4.88 4.89 5.28 5.64 6.23 7.27 6.44 7.45 6.95 7.54 9.11 9.41 9.93 10.46 11.86 12.48Dividends per share 1.12 1.24 1.5 1.72 2 2.2 2.42 2.68 2.93 3.19 3.45 3.65 3.87 4.10 4.35 4.61 4.89Shares Outstanding 400 378 359 339 328 315 307 299 293 288 283 279 275 271 267 264 261

Raytheon Co. Balance Sheet

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024ECurrent Assets Cash & cash equivalents 2259 2642 3638 4000 3188 3296 3222 2328 3303 3103 2656 3168 3691 4322 5386 6675 8016Short-term investments 0 0 0 0 856 1001 1497 872 100 297 339 339 339 339 339 339 339Accounts receivable, net 4339 4493 4414 4526 4543 4870 4985 5564 6202 6571 6622 6920 7197 7485 7784 8096 8419Inventories 325 344 363 336 381 363 414 635 659 594 662 692 720 748 778 810 842Prepaid expenses & other current as 99 116 141 226 182 262 174 413 414 761 530 471 403 389 405 421 438Total current assets 7417 7868 8822 9309 9246 9816 10292 9812 10678 11326 10809 11590 12350 13283 14692 16340 18054Non Current Assets Property, plant & equipment, net 2024 2001 2003 2006 1986 1937 1935 2005 2166 2439 2528 2661 2835 3048 3298 3586 3912Goodwill 11662 11922 12045 12544 12756 12764 13061 14731 14788 14871 14871 14871 14871 14871 14871 14871 14871Other assets, net 1402 1269 1446 1338 1331 1384 2612 2733 2420 2224 2649 2768 2879 2994 3114 3238 3368Total assets 23296 23607 24422 25854 26686 25967 27900 29281 30052 30860 30857 31890 32935 34196 35975 38035 40205Current Liabilities Accounts payable 1201 1397 1538 1507 1348 1178 1250 1402 1520 1519 1510 1578 1641 1707 1775 1846 1920Accrued employee compensation 913 868 901 941 1014 1068 1059 1154 1234 1342 1377 1439 1589 1653 1790 1862 1936Other current liabilities 3035 3258 3521 3682 3540 3564 3621 3570 3673 4487 4450 4650 4836 5030 5231 5440 5658Total current liabilities 5149 5523 5960 6130 5902 5810 5930 6126 6427 7348 7337 7667 8066 8389 8796 9148 9514Non Current Liabilities Accrued retiree benefits & other long 6488 5793 4815 6774 7854 3903 6919 7495 8224 8799 8476 8360 8348 8383 8718 9067 9430Long-term debt 2309 2329 3610 4605 4731 4734 5330 5330 5335 4750 4783 4943 4940 5129 5396 5705 6031Total Liabilities 13946 13645 14385 17509 18487 14447 18179 18951 19986 20897 20596 20969 21355 21901 22911 23920 24974Raytheon Company Stockholders' Equity Common Stock & APIC 10877 10995 11410 11679 2931 1975 1312 401 3 3 3 3 3 3 3 3 3Accumulated other comprehensive in -5182 -4824 -5146 -7001 -7788 -5113 -7458 -7176 -7411 -7935 -7935 -7935 -7935 -7935 -7935 -7935 -7935Retained earnings 7646 9102 10390 11656 12883 14173 15671 16903 17474 17895 18193 18852 19512 20226 20996 22047 23162Total Raytheon Company stockholde 9087 9827 9754 8181 8026 11035 9525 10128 10066 9963 10261 10920 11580 12294 13064 14115 15230Noncontrolling interests in subsidiarie 0 112 136 159 164 162 196 202 0 0 0 0 0 0 0 0 0Total equity 0 9939 9890 8340 8190 11197 9721 10330 10066 9963 10261 10920 11580 12294 13064 14115 15230Total Liabilities, Redeemable Nonc 13946 23584 24275 25849 26677 25644 27900 29281 30052 30860 30857 31890 32935 34196 35975 38035 40205

Raytheon Co. Cash Flow Statement

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Net income (loss) 1672 1976 1879 1896 1900 2013 2258 2067 2174 2001Less: (income) loss from discontinued operations, net of tax 2 1 -36 1 1 -64 -65 -13 -1 -2Income from continuing operations 1674 1977 1843 1897 1901 1949 2193 2054 2173 1999Adjustments to reconcile to net cash provided by (used in) operating activities from continuing operations, net of the effect of acquisitions and diverstituresDepreciation & amortization 390 402 420 447 455 445 439 489 515 550Stock based compensation - 127 128 102 122 129 148 140 151 173Gain on sale of equity method investment - - - - - - - - -158 -Loss on repayment of long-term debt - - - - - - - - - 39Deferred income taxes 574 269 345 376 94 68 -60 -56 109 252Tax benefit from stock-based awards -53 -13 -21 -14 -13 -16 -47 -47 - -Changes in assets and liabilities Receivables, net - - - - - - - - - -157Contract assets & contract liabilities - - - - - - - - - 88Inventories 62 -6 -10 36 -37 18 -50 -223 -23 14Prepaid expenses & other current assets 60 -36 -25 -81 44 -27 50 -28 181 204Income taxes receivable / payable - - 419 -49 -219 197 -33 -181 -185 -193Accounts payable -24 198 139 -41 -159 -171 54 107 152 -94Accrued employee compensation -9 -56 27 18 75 53 -20 72 77 111Other current liabilities - - - - - - - 58 -6 106Accrued retiree benefits - - - - - - - 637 419 -250Other adjustments, net - - - 39 35 -40 -31 -39 40 -95Net cash flows from operating activities from continuing operations 2036 2745 1931 2156 1951 2382 2064 -2346 2852 2747Net cash flows from operating activities from discontinued operations -21 -20 11 -49 6 -4 120 13 0 -2Net cash flows from operating activities 2015 2725 1942 2107 1957 2378 2184 2359 2852 2745Cash Flows from Investing Activities Capital Expenditures -378 -347 -386 -437 -415 -329 -380 -457 -625 -611Proceeds from sales of property, plant & equipment 14 1 4 32 46 2 9 59 34 46Purchase of short-term investments - - - - -1505 -1241 -2914 -1392 -472 -696Sales of short-term investments - - - - 150 325 882 209 - -Maturities of short-term investments - - - - 505 779 1523 1793 1184 517Payment for purchases of acquired companies, net of cash received -54 -334 -152 -645 -301 -9 -427 -1954 -57 -93Other, net - - - - - - - -2 -11 20Net cash flows from investing activities -417 -692 -535 -1051 -1523 -473 -1322 -1744 53 -817Cash Flows from Financing Activities Dividends paid -460 -473 -536 -588 -643 -694 -735 -797 -850 -910Net borrowings (payments) on commercial paper - - - - - - - - - 300Repayments of long-term debt - -474 -678 - -970 - - - - -591Loss on repayment of long-term debt - - - - - - - - - -38Acquisition of noncontrolling interest in RCCS LLC - - - - - - - - -90 -Contribution from noncontrolling interest in Forcepoint - - - - - - - - 11 8Tax benefit from stock-based awards 53 13 21 14 13 16 47 47 - -Sale of noncontrolling interest in Forcepoint - - - - - - - 343 - -Other financing activities, net - -13 -15 -7 -7 -20 -2 -3 -5 0Net cash flows from financing activities -1994 -1650 -411 -694 -1246 -1797 -936 -1509 -1930 -2116Net increase (decrease) in cash & cash equivalents -396 383 996 362 -812 108 -74 -894 975 -188Cash & cash equivalents at beginning of year 2655 2259 2642 3638 4000 3188 3296 3222 2328 3303Cash & cash equivalents at end of year 2259 2642 3638 4000 3188 3296 3222 2328 3303 3115Share Repurchase Program Cash Flows from Financing Activities Repurchases of common stock under share repurchase programs - - - - - - -750 -1000 -900 -800Satisfy Tax Withholding Cash Flows from Financing Activities Repurchases of common stock to satisfy tax withholding obligations - - - - - - -90 -99 -96 -85

Raytheon Co. Cash Flow Statement

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024ENet income (loss) 2136 2540 2585 2689 2794 3130 3252Less: (income) loss from discontinued operations, net of tax 0 0 0 0 0 0 0Income from continuing operations 2136 2540 2585 2689 2794 3130 3252Adjustments to reconcile to net cash provided by (used in) operating activities from continuing operations, net of the effect of acquisitions and diverstituresDepreciation & amortization 561 581 612 652 701 759 825Changes in assets and liabilities Inventories -68 -30 -28 -29 -30 -31 -32Prepaid expenses & other current assets 231 59 68 14 -16 -16 -17Income taxes receivable / payable -51 -298 -277 -288 -299 -311 -324Accounts payable -9 68 63 66 68 71 74Accrued employee compensation 35 62 150 64 138 72 74Other current liabilities -37 200 186 193 201 209 218Net cash flows from operating activities 2798 3183 3359 3361 3558 3881 4070Cash Flows from Investing Activities Capital Expenditures -650 -715 -786 -865 -951 -1046 -1151Purchase of short-term investments -42 0 0 0 0 0 0Other, net -425 -119 -111 -115 -120 -125 -130Net cash flows from investing activities -1117 -834 -897 -980 -1071 -1171 -1281Cash Flows from Financing Activities Dividends paid -976 -1018 -1063 -1111 -1162 -1216 -1274Change in long-term debt 33 160 -3 189 267 309 325Change in retirement liabilities -323 -117 -11 35 335 349 363Change in common stock 0 0 0 0 0 0 0Repurchases of common stock under share repurchase programs -863 -863 -863 -863 -863 -863 -863Net cash flows from financing activities -2128 -1837 -1940 -1750 -1423 -1421 -1448Net increase (decrease) in cash & cash equivalents -447 512 523 631 1064 1290 1341Cash & cash equivalents at beginning of year 3103 2656 3168 3691 4322 5386 6675Cash & cash equivalents at end of year 2656 3168 3691 4322 5386 6675 8016Share Repurchase Program Satisfy Tax Withholding Cash Flows from Financing Activities Repurchases of common stock to satisfy tax withholding obligations -93 -93 -93 -93 -93 -93 -93

Raytheon Co. Common Size Income Statement

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024ENet Sales Products 0.87 0.85 0.84 0.83 0.84 0.84 0.84 0.84 0.84 0.85 0.85 0.85 0.85 0.85 0.85 0.85Services 0.13 0.15 0.16 0.17 0.16 0.16 0.16 0.16 0.16 0.15 0.15 0.15 0.15 0.15 0.15 0.15Total net sales 23174 24881 25183 24857 24414 23706 22826 23247 24069 25348 26489 27681 28788 29939 31137 32382 33678Operating Expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Cost of sales - products 0.87 0.85 0.84 0.83 0.84 0.84 0.84 0.84 0.84 0.85 0.85 0.85 0.85 0.85 0.85 0.85Cost of sales - services 0.13 0.15 0.16 0.17 0.16 0.16 0.16 0.16 0.16 0.15 0.15 0.15 0.15 0.15 0.15 0.15General & administrative expenses 0.09 0.08 0.09 0.09 0.10 0.09 0.10 0.11 0.12 0.12 0.11 0.11 0.12 0.12 0.13 0.13 0.13Total operating expenses 0.89 0.88 0.90 0.89 0.88 0.88 0.86 0.87 0.87 0.87 0.86 0.86 0.87 0.87 0.87 0.86 0.86Operating income (loss) 0.11 0.12 0.10 0.11 0.12 0.12 0.14 0.13 0.13 0.13 0.14 0.14 0.14 0.14 0.14 0.15 0.15Non-Operating Income Expense, Net 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Interest expense 0.01 0.00 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01Interest income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Other income (expense) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Total non-operating income (expense), net 0.00 0.00 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01Income (loss) from continuing operations before taxes 0.11 0.12 0.10 0.11 0.11 0.12 0.13 0.12 0.13 0.12 0.13 0.13 0.13 0.13 0.13 0.14 0.14Federal & foreign income taxes (benefit) 0.04 0.04 0.02 0.03 0.04 0.03 0.03 0.03 0.04 0.04 0.05 0.04 0.04 0.04 0.04 0.04 0.04Income from continuing operations 0.07 0.08 0.07 0.08 0.08 0.08 0.10 0.09 0.09 0.08 0.08 0.09 0.09 0.09 0.09 0.10 0.10Income (loss) from discontinued operations, net of tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Net income (loss) 0.07 0.08 0.07 0.08 0.08 0.08 0.10 0.09 0.09 0.08 0.08 0.09 0.09 0.09 0.09 0.10 0.10Less: net income attributable to noncontrolling interests in subsidiaries 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Net income attributable to Ratheon Company 0.08 0.07 0.08 0.08 0.08 0.10 0.09 0.09 0.08 0.08 0.09 0.09 0.09 0.09 0.10 0.10Diluted Earnings Per Share Attributable to Raytheon Company common stockholder Earnings (loss) per share from continuing operations - dilutedEarnings (loss) per share from discontinued operations - dilutedNet earningsAmounts Attributable to Raytheon Company common stockholders: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Income from continuing operations 0.07 0.08 0.07 0.08 0.08 0.08 0.10 0.09 0.09 0.08 0.08 0.09 0.09 0.09 0.09 0.10 0.10Income (loss) from discontinued operations, net of tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Net earnings (loss) per share - basic 0.07 0.08 0.07 0.08 0.08 0.08 0.10 0.09 0.09 0.08 0.08 0.09 0.09 0.09 0.09 0.10 0.10Dividends per share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Raytheon Co. Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024ECurrent Assets Cash & cash equivalents 0.10 0.11 0.14 0.16 0.13 0.14 0.14 0.10 0.14 0.12 0.10 0.11 0.13 0.14 0.17 0.21 0.24Short-term investments 0.00 0.00 0.00 0.00 0.04 0.04 0.07 0.04 0.00 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01Accounts receivable, net 0.19 0.18 0.18 0.18 0.19 0.21 0.22 0.24 0.26 0.26 0.25 0.25 0.25 0.25 0.25 0.25 0.25Inventories 0.01 0.01 0.01 0.01 0.02 0.02 0.02 0.03 0.03 0.02 0.03 0.03 0.03 0.03 0.03 0.03 0.03Prepaid expenses & other current assets 0.00 0.00 0.01 0.01 0.01 0.01 0.01 0.02 0.02 0.03 0.02 0.02 0.01 0.01 0.01 0.01 0.01Total current assets 0.32 0.32 0.35 0.37 0.38 0.41 0.45 0.42 0.44 0.45 0.41 0.42 0.43 0.44 0.47 0.50 0.54Non Current Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Property, plant & equipment, net 0.09 0.08 0.08 0.08 0.08 0.08 0.08 0.09 0.09 0.10 0.10 0.10 0.10 0.10 0.11 0.11 0.12Goodwill 0.50 0.48 0.48 0.50 0.52 0.54 0.57 0.63 0.61 0.59 0.56 0.54 0.52 0.50 0.48 0.46 0.44Other assets, net 0.06 0.05 0.06 0.05 0.05 0.06 0.11 0.12 0.10 0.09 0.10 0.10 0.10 0.10 0.10 0.10 0.10Total assets 1.01 0.95 0.97 1.04 1.09 1.10 1.22 1.26 1.25 1.22 1.16 1.15 1.14 1.14 1.16 1.17 1.19Current Liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Accounts payable 0.05 0.06 0.06 0.06 0.06 0.05 0.05 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06Accrued employee compensation 0.04 0.03 0.04 0.04 0.04 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.06 0.06 0.06 0.06 0.06Other current liabilities 0.13 0.13 0.14 0.15 0.14 0.15 0.16 0.15 0.15 0.18 0.17 0.17 0.17 0.17 0.17 0.17 0.17Total current liabilities 0.22 0.22 0.24 0.25 0.24 0.25 0.26 0.26 0.27 0.29 0.28 0.28 0.28 0.28 0.28 0.28 0.28Non Current Liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Accrued retiree benefits & other long-term liabilities 0.28 0.23 0.19 0.27 0.32 0.16 0.30 0.32 0.34 0.35 0.32 0.30 0.29 0.28 0.28 0.28 0.28Long-term debt 0.10 0.09 0.14 0.19 0.19 0.20 0.23 0.23 0.22 0.19 0.18 0.18 0.17 0.17 0.17 0.18 0.18Redeemable noncontrolling interestTotal Liabilities 0.60 0.55 0.57 0.70 0.76 0.61 0.80 0.82 0.83 0.82 0.78 0.76 0.74 0.73 0.74 0.74 0.74Raytheon Company Stockholders' Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Common stockAdditional paid-in capital 0.47 0.44 0.45 0.47 0.12 0.08 0.06 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Accumulated other comprehensive income (loss) -0.22 -0.19 -0.20 -0.28 -0.32 -0.22 -0.33 -0.31 -0.31 -0.31 -0.30 -0.29 -0.28 -0.27 -0.25 -0.25 -0.24Retained earnings 0.33 0.37 0.41 0.47 0.53 0.60 0.69 0.73 0.73 0.71 0.69 0.68 0.68 0.68 0.67 0.68 0.69Total Raytheon Company stockholders' equity 0.39 0.39 0.39 0.33 0.33 0.47 0.42 0.44 0.42 0.39 0.39 0.39 0.40 0.41 0.42 0.44 0.45Noncontrolling interests in subsidiaries 0.00 0.00 0.01 0.01 0.01 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Total equity 0.00 0.40 0.39 0.34 0.34 0.47 0.43 0.44 0.42 0.39 0.39 0.39 0.40 0.41 0.42 0.44 0.45Total Liabilities, Redeemable Noncontrolling Interest and Equity 0.60 0.95 0.96 1.04 1.09 1.08 1.22 1.26 1.25 1.22 1.16 1.15 1.14 1.14 1.16 1.17 1.19

Raytheon Co. Value Driver Estimation

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024EOperating Revenues 23174 24881 25183 24857 24414 23706 22826 23247 24069 25348 26489 27681 28788 29939 31137 32382 33678COGS 18123 19349 19848 19241 18638 18090 16851 17266 17590 18526 19173 20041 20835 21653 22340 22881 23760SG&A 2065 2092 2273 2303 2333 2236 2352 2660 2882 2954 2993 3128 3455 3593 3892 4048 4210Depreciation and Amortization 390.00 402.00 420.00 447.00 455.00 445.00 439.00 489.00 515.00 550.00 560.97 581 612 652 701 759 825

Add: Implied interest on operating leases 110.25 134.23 167.43 166.28 125.21 131.60 129.55 156.67 184.81 129.76 129.76 129.76 129.76 129.76 129.76 129.76 129.76EBITA 2706.25 3172.23 2809.43 3032.28 3113.21 3066.60 3313.55 2988.67 3266.81 3447.76 3891.15 4060.41 4016.13 4171.58 4333.25 4825.22 5013.03

Pretax income 2498.00 2930.00 2432.00 2690.00 2779.00 2757.00 2983.00 2787.00 3030.00 3113.00 3560.24 3735.90 3692.84 3840.94 3991.80 4471.10 4645.57Marginal Tax Rate 0.37 0.36 0.37 0.37 0.37 0.37 0.38 0.38 0.37 0.39 0.24 0.24 0.24 0.24 0.24 0.24 0.23

Federal 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.21 0.21 0.21 0.21 0.21 0.21 0.21State 0.02 0.01 0.02 0.02 0.01 0.01 0.00 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02Foreign 0.00 0.00 0.00 0.00 0.01 0.01 0.03 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Income Tax Expense 824.00 953.00 589.00 793.00 878.00 808.00 790.00 733.00 857.00 1114.00 1424.10 1195.49 1107.85 1152.28 1197.54 1341.33 1393.67Plus Tax shield on interest expense 47.42 43.68 46.12 63.14 74.26 78.15 81.05 87.65 86.48 79.19 52.03 53.44 53.49 55.26 57.87 60.40 63.59Less tax on interest income 23.53 4.97 5.86 6.24 3.32 4.47 3.81 4.14 5.96 8.11 3.40 6.65 6.93 7.17 7.42 7.62 7.89Less tax on other income (expense) -12.13 -1.07 -23.79 -4.41 -6.65 6.33 2.66 -1.50 2.24 -8.11 0.00 0.00 0.00 0.00 0.00 0.00 0.00Total Adjusted Taxes 860.03 992.77 653.06 854.31 955.58 875.35 864.58 818.02 935.28 1193.19 1472.72 1242.28 1154.41 1200.38 1247.99 1394.11 1449.37

Deferred Taxes 574 269 345 376 94 68 -60 -56 109 252 155 155 155 155 155 155 155

NOPLAT 2420.23 2448.46 2501.37 2553.98 2251.62 2259.24 2388.97 2114.65 2440.53 2506.57 2573.43 2973.14 3016.71 3126.20 3240.27 3586.10 3718.66

Total current assets 7417 7868 8822 9309 9246 9816 10292 9812 10678 11326 10809 11590 12350 13283 14692 16340 18054Less:

Investment in Marketable Securities 0.00 0.00 0.00 0.00 856.00 1001.00 1497.00 872.00 100.00 297.00 339.00 339.00 339.00 339.00 339.00 339.00 339.00Excess Cash 0.00 216.60 1183.16 1576.94 808.12 985.14 996.92 61.88 956.76 632.08 755.76 755.76 755.76 755.76 755.76 755.76 755.76

Operating Current Assets 7417.00 7651.40 7638.84 7732.06 7581.88 7829.86 7798.08 8878.12 9621.24 10396.92 9714.39 10495.02 11254.90 12188.36 13597.26 15245.50 16959.29Total current liabilities 5149.00 5523.00 5960.00 6130.00 5902.00 5810.00 5930.00 6126.00 6427.00 7348.00 7336.83 7666.99 8066.36 8389.02 8796.19 9148.04 9513.96Less:

Notes Payable 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Operating Current liabilities 5149.00 5523.00 5960.00 6130.00 5902.00 5810.00 5930.00 6126.00 6427.00 7348.00 7336.83 7666.99 8066.36 8389.02 8796.19 9148.04 9513.96Operating Working Capital 2268.00 2128.40 1678.84 1602.06 1679.88 2019.86 1868.08 2752.12 3194.24 3048.92 2377.56 2828.03 3188.54 3799.34 4801.06 6097.46 7445.32Net PPE 2024.00 2001.00 2003.00 2006.00 1986.00 1937.00 1935.00 2005.00 2166.00 2439.00 2527.73 2661.02 2835.12 3047.80 3298.03 3585.83 3912.07

Net intangible assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00PV of operating leases 867.75 911.77 1048.57 1024.72 836.79 854.40 817.45 993.33 1107.19 911.24 924.00 936.93 950.05 963.35 976.84 990.51 1004.38Other assets 1402.00 1269.00 1446.00 1338.00 1331.00 1384.00 2612.00 2733.00 2420.00 2224.00 2648.87 2768.06 2878.79 2993.94 3113.70 3238.24 3367.77Other L-T Operating Assets 2269.75 2180.77 2494.57 2362.72 2167.79 2238.40 3429.45 3726.33 3527.19 3135.24 3572.86 3705.00 3828.84 3957.29 4090.53 4228.76 4372.15

Invested Capital 6561.75 6310.17 6176.41 5970.78 5833.67 6195.26 7232.53 8483.45 8887.43 8623.16 8478.15 9194.05 9852.50 10804.43 12189.62 13912.05 15729.55Change in Invested Capital -251.58 -133.76 -205.63 -137.11 361.59 1037.26 1250.92 403.98 -264.27 -145.01 715.89 658.45 951.93 1385.20 1722.42 1817.50

Free Cash Flow 2700.04 2635.13 2759.60 2388.73 1897.65 1351.71 863.73 2036.55 2770.84 2718.44 2257.24 2358.26 2174.27 1855.07 1863.68 1901.16Return on Invested Capital 0.37 0.40 0.41 0.38 0.39 0.39 0.29 0.29 0.28 0.30 0.35 0.33 0.32 0.30 0.29 0.27EP 2079.64 2146.70 2206.82 1916.03 1931.35 2040.76 1708.13 1963.70 2007.04 2088.75 2496.61 2499.94 2572.43 2632.98 2900.96 2936.71

Raytheon Co. Weighted Average Cost of Capital (WACC) Estimation

Risk Free 3.20%Risk Premium 5.32%Beta 0.710Cost of Equity 6.98%

Debt Rating A-Pre-tax Cost of Debt 3.808%Tax Rate 24%After-Tax Cost of Debt 2.89%

MV Weight of Equity 66.7%MV Weight of Debt 33.3%

Forward WACC 5.62%

Raytheon Co. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 1.4% CV ROIC 27% WACC 5.62% Cost of Equity 6.98%

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E

DCF ModelNOPLAT 2573 2973 3017 3126 3240 3586 3719Change in Invested Capital -145 716 658 952 1385 1722 1818FCF 2718 2257 2358 2174 1855 1864 1901ROIC 30% 35% 33% 32% 30% 29% 27%Continuing Value 83822

CF to Discount 2718 2257 2358 2174 1855 1864 83822Discount Periods 1 2 3 4 5 6 6PV of Cash Flows 2574 2023 2001 1747 1411 1342 60376

Value of Operating Assets 71475Less: Debt 5113Less: PV of Operating Leases 834 Retirement 8476Value of Equity 57052Shares Outstanding 283Intrinsic Value (per share) 213.53

EP ModelEconomic Profit to Discount 2089 2497 2500 2572 2633 2901 2937Continuing Value (CV) 69910Discount Periods 1 2 3 4 5 6 6PV of FCF Discounted by WACC 1978 2238 2122 2067 2003 2090 50355

PV (EP) 62852Plus Beginning Invested Capital 8623Value of Operating Assets 71475Less: Debt 5113Less: PV of Operating Leases 834 Retirement 8476Value of Equity 57052Shares Outstanding 283Intrinsic Value (per share) 213.53

Raytheon Co. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E 2023E 2024EEPS 7.54$ 9.11$ 9.41$ 9.93$ 10.46$ 11.86$ 12.48$

Key Assumptions CV growth 1.42% CV ROE 21.4% Cost of Equity 6.98%

Future Cash Flows P/E Multiple (CV Year) 16.8 EPS (CV Year) 12.48$ Future Stock Price 209.48$ Dividends Per Share 3.45 3.65 3.87 4.10 4.35 4.61 4.89 Future Cash Flows 3.45 3.65 3.87 4.10 4.35 4.61 209.48$

1 2 3 4 5 6 6 Discounted Cash Flows 3.22 3.19 3.16 3.13 3.10 3.08 139.75

Intrinsic Value 164.76$

Raytheon Co. Relative Valuation Models

EPS EPSTicker Company Price 2018E 2019E P/E 18 P/E 19BA Boeing $345.81 $15.03 $18.23 23.01 18.97 LTM Lockheed Martin $292.88 $17.51 $19.55 16.73 14.98 UTX United Technologies $123.60 $7.27 $7.84 17.00 15.77 NOC Northrop Grumman $262.93 $18.52 $18.29 14.20 14.38 GD General Dynamics $171.26 $11.14 $12.19 15.37 14.05

Average 18.03 16.57

RTN Raytheon Co. $182.03 $10.08 $11.84 18.1 15.4

Implied Relative Value: P/E (EPS18) $ 181.72 P/E (EPS19) 196.21$

Raytheon Co. Key Management Ratios

Fiscal Years Ending 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Liquidity RatiosCash & Cash Equivalents 2,259$ 2,642$ 3,638$ 4,000$ 3,188$ 3,296$ 3,222$ 2,328$ 3,303$ 3,103$ 2,656$ 3,168$ 3,691$ 4,322$ 5,386$ 6,675$ 8,016$ AR 4,339$ 4,493$ 4,414$ 4,526$ 5,399$ 5,871$ 6,482$ 6,436$ 6,302$ 6,868$ 6,961$ 7,259$ 7,536$ 7,824$ 8,123$ 8,435$ 8,758$ Current Liabilities 5,149$ 5,523$ 5,960$ 6,130$ 5,902$ 5,810$ 5,930$ 6,126$ 6,427$ 7,348$ 7,337$ 7,667$ 8,066$ 8,389$ 8,796$ 9,148$ 9,514$ Current Ratio 1.28$ 1.29$ 1.35$ 1.39$ 1.45$ 1.58$ 1.64$ 1.43$ 1.49$ 1.36$ 1.31$ 1.36$ 1.39$ 1.45$ 1.54$ 1.65$ 1.76$

Activity or Asset-Management RatiosSales 23174 24881 25183 24857 24414 23706 22826 23247 24069 25348 26489 27681 28788 29939 31137 32382 33678Total Average Assets 7,643$ 8,345$ 9,066$ 9,278$ 9,531$ 10,054$ 10,052$ 10,245$ 11,002$ 11,068$ 11,199$ 11,970$ 12,816$ 13,988$ 15,516$ 17,197$ Asset Turnover Ratio 3.26 3.02 2.74 2.63 2.49 2.27 2.31 2.35 2.30 2.39 2.47 2.41 2.34 2.23 2.09 1.96

Financial Leverage RatiosTotal Liabilities 13,946$ 13,645$ 14,385$ 17,509$ 18,487$ 14,447$ 18,179$ 18,951$ 19,986$ 20,897$ 20,596$ 20,969$ 21,355$ 21,901$ 22,911$ 23,920$ 24,974$ Total Equity -$ 9,939$ 9,890$ 8,340$ 8,190$ 11,197$ 9,721$ 10,330$ 10,066$ 9,963$ 10,261$ 10,920$ 11,580$ 12,294$ 13,064$ 14,115$ 15,230$ D/E Ratio 0 1.37 1.45 2.10 2.26 1.29 1.87 1.83 1.99 2.10 2.01 1.92 1.84 1.78 1.75 1.69 1.64

Profitability RatiosNet Income 1,672$ 1,976$ 1,879$ 1,896$ 1,900$ 2,013$ 2,258$ 2,067$ 2,174$ 2,001$ 2,136$ 2,540$ 2,585$ 2,689$ 2,794$ 3,130$ 3,252$ Shareholders equity -$ 9,939$ 9,890$ 8,340$ 8,190$ 11,197$ 9,721$ 10,330$ 10,066$ 9,963$ 10,261$ 10,920$ 11,580$ 12,294$ 13,064$ 14,115$ 15,230$ ROE 0 20% 19% 23% 23% 18% 23% 20% 22% 20% 21% 23% 22% 22% 21% 22% 21%

Payout Policy RatiosDividend per share 1.12$ 1.24$ 1.50$ 1.72$ 2.00$ 2.20$ 2.42$ 2.68$ 2.93$ 3.19$ 3.45$ 3.65$ 3.87$ 4.10$ 4.35$ 4.61$ 4.89$ EPS 3.95$ 4.88$ 4.89$ 5.28$ 5.64$ 6.23$ 7.27$ 6.44$ 7.45$ 6.95$ 7.54$ 9.11$ 9.41$ 9.93$ 10.46$ 11.86$ 12.48$ Divident Payout Ratio 0.28 0.25 0.31 0.33 0.35 0.35 0.33 0.42 0.39 0.46 0.46 0.40 0.41 0.41 0.42 0.39 0.39

Net Income 1,672$ 1,976$ 1,879$ 1,896$ 1,900$ 2,013$ 2,258$ 2,067$ 2,174$ 2,001$ 2,136$ 2,540$ 2,585$ 2,689$ 2,794$ 3,130$ 3,252$ Total Assets 23,296$ 23,607$ 24,422$ 25,854$ 26,686$ 25,967$ 27,900$ 29,281$ 30,052$ 30,860$ 30,857$ 31,890$ 32,935$ 34,196$ 35,975$ 38,035$ 40,205$ ROA 7.18% 8.37% 7.69% 7.33% 7.12% 7.75% 8.09% 7.06% 7.23% 6.48% 6.92% 7.97% 7.85% 7.86% 7.77% 8.23% 8.09%

Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 215.708820564944 Leases2018 229 2017 226 2016 2202019 188 2018 196 2017 1902020 150 2019 160 2018 1622021 119 2020 132 2019 1242022 93 2021 133 2020 102Thereafter 262 Thereafter 445 Thereafter 352Total Minimum Payments 1041 Total Minimum Payments 1292 Total Minimum Payments 1150Less: Interest 130 Less: Interest 185 Less: Interest 157PV of Minimum Payments 911 PV of Minimum Payments 1107 PV of Minimum Payments 993

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.81% Pre-Tax Cost of Debt 3.81% Pre-Tax Cost of Debt 3.81%Number Years Implied by Year 6 Payment 2.8 Number Years Implied by Year 6 Payment 3.3 Number Years Implied by Year 6 Payment 3.5

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 229 220.6 1 226 217.7 1 220 211.92 188 174.5 2 196 181.9 2 190 176.33 150 134.1 3 160 143.0 3 162 144.84 119 102.5 4 132 113.7 4 124 106.85 93 77.1 5 133 110.3 5 102 84.66 & beyond 93 202.5 6 & beyond 133 340.6 6 & beyond 102 268.9PV of Minimum Payments 911.2 PV of Minimum Payments 1107.2 PV of Minimum Payments 993.3

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 0Average Time to Maturity (years): 0.00Expected Annual Number of Options Exercised: 0

Current Average Strike Price: -$ Cost of Equity: 6.98%Current Stock Price: $182.03

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EIncrease in Shares Outstanding: 0 0 0 0 0 0 0 0 0 0Average Strike Price: -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ Increase in Common Stock Account: - - - - - - - - - -

Change in Treasury Stock 863 863 863 863 863 863 863 0 0 0Expected Price of Repurchased Shares: 182.03$ 194.73$ 208.33$ 222.87$ 238.42$ 255.06$ 272.86$ 291.91$ 312.28$ 334.07$ Number of Shares Repurchased: 4.74 4.43 4.14 3.87 3.62 3.38 3.16 - - -

Shares Outstanding (beginning of the year) 288.00 283.26 278.83 274.69 270.82 267.20 263.82 261 261 261Plus: Shares Issued Through ESOP 0.00 - - - - - - 0 0 0Less: Shares Repurchased in Treasury 4.74 4.43 4.14 3.87 3.62 3.38 3.16 - - - Shares Outstanding (end of the year) 283.26 278.83 274.69 270.82 267.20 263.82 260.66 261 261 261