Good day ladies and gentlemen, and welcome to the Raytheon Q4 2015 Earnings Conference Call. My name is Mark, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Todd Ernst, Vice President of Investor Relations. Please proceed sir.

All right. Thank you, Mark. Good morning everyone. Thank you for joining us today on our fourth quarter conference call. The results that we announced this morning, the audio feed of this call, and the slides that we'll reference are available on our web site at raytheon.com. Following this morning's call, an archive of both the audio replay and a printable version of the slides will be available in the Investor Relations section of our web site. With me today are Tom Kennedy, our Chairman and Chief Executive Officer; and Toby O'Brien, our Chief Financial Officer. We'll start with some brief remarks by Tom and Toby, and then we'll move on to questions. Before I turn the call over to Tom, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance constitute forward-looking statements. These statements are based on a wide range of assumptions that the company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release and are discussed in detail in our SEC filings. With that, I'll turn the call over to Tom. Tom?

Thank you, Todd. Good morning everyone. I am very pleased with both our fourth quarter and full year 2015 results, and I'd like to begin by touching on a few highlights. Our total book-to-bill ratio for the year was 1.09. This reflects strong global demand for our Advanced Solutions, and positions us well going into 2016. We finished the full year with top line growth of 2%, driven by our growth in our international business, which more than offset a slight decline in domestic. Company segment margins in 2015 were as expected, at 13.1%, as the team delivered solid operating performance. Cash flow was also solid, providing us the opportunity to return the majority of our cash flow to shareholders, while also funding our pension plans and investing in our future growth. So all in all, the company is performing very well, and we are confident in our future. As you can see from our 2015 results and the 2016 outlook, the global threat environment continues to drive demand for Raytheon solutions. I would also add that, in my conversations with our global customers, it is clear that short term shifts in economic growth factors have taken a back seat to ensuring the sovereignty and security of the nations that face these security threats. In particular, let me highlight what we are seeing in three regions. In the Middle East, demand signals increased last year, despite the decline in oil prices. Tensions within the region are driving demand for missile defense, long range radars, modernized command and control systems, sensors, cyber security and precision munitions; areas that align with our core strengths. I have been asked many times if oil prices have impacted demand. From our viewpoint, we have not seen a negative impact, and here is one of many…

Okay. Thanks Tom. I have a few opening remarks, starting with the fourth quarter and full year results. Then I will discuss our outlook for 2016. After that, we will open up the call for questions. During my remarks, I will be referring to the web slides that we issued earlier this morning, which are posted on our web site. Okay, would everyone please move to page 3? We are pleased with the solid performance the team delivered in both the fourth quarter and the full year, with bookings, sales, EPS and operating cash flow all consistent with or better than our expectations. We had strong bookings in the fourth quarter, at $7.9 billion, resulting in a book-to-bill ratio of 1.24, and for the year, we had bookings of $25.2 billion, resulting in a book-to-bill ratio of 1.09. This sets the stage for continued growth in 2016, which I will discuss in more detail in just a few minutes. Sales were $6.3 billion in the quarter, up 3%, led by our missiles, IDS and Forcepoint businesses. International sales grew 16% in the fourth quarter, and for the year, sales were up 2%, ending at $23.2 billion. Our EPS from continuing operations was $1.85 for the quarter, and $6.75 for the full year, which I will give a little more color on, in a few minutes. We also generated strong operating cash flow of $813 million for the quarter and $2.3 billion for the year, after a $200 million pre-tax discretionary pension contribution, which was not in our prior guidance. Additionally, during the quarter, the company repurchased 2 million shares of common stock for $250 million, bringing the full year 2015 repurchases to 9 million shares for about $1 billion. As we have previously disclosed in the fourth quarter of 2015,…

[Operator Instructions]. Your first question comes from Jason Gursky from Citi. Please proceed, sir.

Hey, good morning everyone. Thanks for taking the call here. I was wondering if you could just walk through the cadence for the year in a little bit more detail. Perhaps talking a little bit about opportunities and risks through the cadence for the year, what would cause things to come in a little earlier? What would cause things to get pushed out, and just kind of how you generally view the risks and opportunities for the cadence for the year, that would be great?

Hey Jason, it's Toby. So I think if we step back from this and look at a high level on the cadence, what you see from the revenue profile, it's not too dramatically different than last year. It's influenced by, as you would expect, the timing of awards, especially in 2015 and we had a strong back half to the year. So we see an influence to the ramp-up in the second half of the year, in part, driven by the growth and the timing of the awards we saw in late 2015. That flows through obviously to the EPS cadence, and the other thing I would add, the exit of business ventures at IDS that I talked, that's planned to be in the second half in Q3, which has an influence on the back half cadence from an EPS point of view as well.

And are you willing to offer a little bit more granularity on the businesses that you're exiting?

I think I'd put it this way; we constantly look at our portfolio. We talked on the call here about a couple of things, one which is just moving up some of the businesses from IDS to IIS, because we think its going to drive some more efficiencies, given how those products have matured, they are more of a service-support model. Where in the past, IIS had actually performed a lot of work on it. So we think we will get more efficiencies out of that. I can't get into too much detail right now, beyond what I said, for the exit of the business ventures at IDS, just because of the confidentiality around it. But we certainly can talk more about that, once that is concluded -- as we said here, we expect by the third quarter.

Okay. Thank you very much.

Sure.

Your next question comes from Doug Harned from Bernstein. Please proceed.

Yes, good morning.

Good morning Doug.

I am interested in IDS, because if we go back a year ago, when you were looking forward, you were expecting some margin expansion that you would see operating margins up in the 15% range. And it seemed, as the year went on, you looked at new awards coming in, that pushed out in time, that margin expansion. But now, as you look at 2016 and if you make adjustment for the exit from those businesses, it seems like you are still at a lower margin level than one might think and one might have expected. Can you talk about how you look at that IDS trajectory now? I know you mentioned a couple of the new programs, which may put some pressure on margins in the near term. But I am trying to understand, when we can expect to get, kind of the full margin advantage one might expect from a mature set of international programs?

Sure Doug. Let me kind of walk through that, and try to give you some more color on that. So as I mentioned and you alluded to, we do have $100 million to $125 million in the 2016 forecast for IDS related to the exit of a business venture. I will note at IDS in any given year, in part because of the nature of their programs and the size of them, we have had favorable profit adjustments, that were significant. Maybe about the half of the size of this, if you look back over time. So this pickup is a bit larger, but it does help to offset, 2016, some of the mix that we have been talking about that you just referred to, with the ramp up of these programs that are in the early stages. Further, as we have talked about at both IDS and across the company, we are investing more, particularly in strategic areas, where we do see significant growth opportunities. We also continue to execute on some lower margin programs at IDS, such as AMDR, the Qatar ADOC, the classified radar program that we won last year, and all this taken together is a key component of our growth story. But in the near term, it is impacting our IDS margins as well. At the end of the day, even with the IDS margin, we have been able to maintain a solid company margin position and deliver top line growth due to the strength of the portfolio, and we continue to be focused on driving down our costs, over head and other costs for the last several years, and as you know, we have seen significant improvements from a number of different initiatives there around facilities, reductions, factory automation, strategic sourcing, expanding our shared services, working on our organization structure when we have collapsed from six to four businesses, and as we have talked about, internationally, we changed our model on how we approach international business, and that is clearly paying off from a growth perspective overall and internationally. As we now are resuming growth, we will continue to drive costs down with an objective to improve and grow earnings through both top line and margin improvement. As far as the cadence of IDS margins going forward, I would think of it this way, as you said, if you were to adjust for the exit of the business venture, I think as we said in the past, we would expect year-over-year and continue to see IDS margins improve incrementally. Again, adjusting for the impact of the business venture, as these larger production programs that run five years, kind of get into the sweet spot into 2017 and 2018, which would drive that improved margin at IDS.

So if I have this right, then you are saying that you still expect with these attractive international contracts that you can get up to the margins, the sort of high 16s maybe margins we have seen in the past. But if this has just taken longer than you probably would have expected, six to 12 months ago.

So I am not going to give you beyond what we have put out there for 2016, margin expectation for IDS other than directional indication or cadence. But yes, we really haven't changed our thinking around this. You got to keep in mind, as we said; in the case of Patriot, these awards generally run five years, and a couple big ones that I mentioned in the prepared comments, those are -- we are only a year into those, and its usually into plus or minus the third year of those programs which will be starting in 2017, when we normally see the opportunity to retire risk, drive efficiencies. We also had, if you recall, at the end of 2014, a major award for Qatar. Again, that will kind of be hitting the sweet spot when we get into 2017. So I won't put a specific margin bogey out there, but we definitely would see improvement in 2017 and improvement over that in 2018, driven by these large programs.

Okay, very good. Thank you.

Your next question comes from the line of George Shapiro from Shapiro Research. Please proceed.

Yes. Toby, the cash flow, even if you add it back to $200 million, came kind of at the low end of your guidance, and then you have a bigger increase in 2016. Was some of that -- something was missing [indiscernible] or you just explained kind of the walk [ph] from the 2015 number of say 2.5, to get to the 2.7 to 3?

Yeah so, the way to think of it, George, you're right, we came in towards the low end, when you adjust for the discretionary pension contribution. When I look at the change year-over-year, its primarily driven by a combination of our net pension funding and lower cash taxes. From an operational or program level, we see things kind of in line with the cadence that we saw in 2015.

Okay. Then one quick one, what was the organic growth if we looked at Forcepoint and put it in the acquisition, so what would it have been year-over-year?

For the company?

For Forcepoint? I mean, if we put in the acquisition you made and we put in Websense for last year?

So if you'd normalize -- on a normalized basis for the full year, the topline would have been roughly flat, which is what we have been expecting. You are talking 2015, right?

I am talking 2015, then I was going to ask the 2016 comparison?

Sure. For 2015, for Forcepoint normalized on a full year basis, the revenue growth would have been flat. That would have been, higher sales of the new products, the Trident platform, offset by a decline in the legacy products on the web filtering, which is consistent with what we have been expecting. If you roll it forward to 2016, and exclude the acquisition that Tom talked about for the next-gen firewall, we'd be looking at high single digit growth on a normalized basis.

Okay. Thanks very much.

Okay, George.

Your next question comes from Robert Stallard from Royal Bank of Canada. Please proceed.

Thanks so much. Good morning.

Good morning Rob.

Tom, you mentioned you're getting quite a few questions about the potential impact of the oil price on your defense export sales. I was wondering if you could size the proportion of either your backlog or your sales of going into the Middle East? And whether you have seen any signs from those customers of any changing priorities or deferrals of orders or deliveries or anything in particular? And then secondly, do you think this is the peak as a percentage of exports in your backlog? Thank you.

That's an excellent question. Number one is, I just did come back from the Middle East visiting our key customers in multiple countries. So my statement in the script was really based on communications that I had directly with the leaders of these countries. And what I am seeing -- at least what I am hearing from these leaders is, their number one priority is to protect the sovereignty of their nation. And then words they use, I have mentioned this before and I heard it again just several weeks ago, is that a strong defense is a strong deterrence. And in fact, during my trip, we uncovered or told about several other opportunities in the region. So if anything, we are seeing a stronger demand than a slowdown, and that's my words were, that we are not seeing an impact relative to the price of oil at this time. I hope that gives you a complete answer, but that's what I am seeing directly from the leaders of these countries.

And just to follow-up on the backlog percentage, do you think this is about as high as you are going to get, at 43%?

Not based on any opportunities we are seeing out there. There is always opportunity to grow, and its just a matter of bringing those opportunities across the goal line.

Hey Rob, so I'd maybe just add a little bit on that, just to put a little context. We expect strong bookings internationally to continue into 2016, roughly 35% plus or minus of the bookings that we -- that the range that we gave you. We expect it would be international. Keep in mind, we are projecting 2% to 4% growth domestically, as a subset of the three to five at the company level. And would expect international sales to be roughly at the same level in 2016 as 2015. So we continue to see, as Tom said, momentum in that area.

Great. Thank you.

Your next question comes from Sam Pearlstein from Wells Fargo. Please proceed, sir.

Good morning.

Good morning Sam.

I was wondering if you could talk just philosophically about the decision you made to pull the amortization of intangibles or deferred revenue out of the segment? I am just wondering, when it comes to acquisition opportunities, doesn't that make the segments willing to pay a little higher price than they would have otherwise? How do you make sure that, now you have got the pricing right and the hurdle rates?

I will give you the answer, my view here in two parts, right. First of all, why we did it; if you recall back, April-May of last year, when we announced the Websense deal for that acquisition, we started with that convention, but only limited to that acquisition. And at the time, we contemplated doing it completely across the portfolio, but we didn't want to mess with the pure nature of the numbers around Websense. So we purposely deferred that to the end of the year, to have kind of a clean break going into 2016, and it obviously puts both of those elements on the same basis consistently across the company. So that's part one, why we did it. As far as the second part of your question, are we concerned about the businesses running or willing to pay more, even if that were to be the case, we have got a pretty disciplined process here at the company. We have got a core team and an acquisition review team, that all acquisitions have to go through. I am on that, Tom's on that, as you would imagine, a few others, and through that, we spend a lot of time around valuation, looking at it two three different ways. And I won't get into any stats, but I would tell you, there are plenty of deals in the past that we lost, because we wouldn't get higher. We lost on price, for a lack of a better way to say it. So I think we got the right controls and process in place within the company, to make sure that we continue to only bid and pay what is a fair value for any property.

And just to follow-up, the decisions on acquisitions are done at the corporate level, not at the business level.

Okay. Thanks. And if I could just follow-up Toby, if I just look at the first quarter, you have got the most working days, but clearly the lowest earnings. And I know you mentioned one of it was from the exit of those businesses later in the year. But how is it that earnings are so low that early in the year?

So you're right. There are more days, calendar days in Q1. That said, we still show growth in Q1 on a year-over-year basis. I think as you know, in any given quarter, some of our revenue depends upon, not just the number of days, but the timing of material, which is a significant portion of our cost base. We are guiding to 3% to 4% growth over last year's first quarter, and that puts our 2015 sales per day, roughly in line for the quarter. So we don't see anything abnormal about it, and part of it again, I think back to Jason's comment around the cadence, with the strong bookings we saw in the second half of the year, especially domestically, we'd see more of a ramp on that towards the back half of the year on our programs.

Thanks.

Your next question comes from the line of Howard Rubel from Jefferies. Please proceed.

Thank you very much. I want to talk maybe philosophically for a second also. I think I heard you or Tom say that you are willing to make some strategic investments in programs. And if I look at one of your competitors that has reported, they acknowledge taking a charge in LR/DR, and I also am aware that you have been challenged a little bit in a classified program at IIS. So could you talk a little bit about, what you are doing in terms of balancing growth opportunities, versus making sure you build a -- call it a wall of strategic advantage in your businesses, Tom?

So I think, number one is, we do invest inside the company relative to ensuring that we have the right discriminators and differentiators to compete across all our businesses, and not only just to compete, but obviously to win. So those investments come through the avenue of IRAD, some capital investments, also people bringing on the right talent, so that we can go and win those major competitions, because they are the future franchises for the company. And that has been our overall strategy over the years. We look at programs that are going to have runs for decades. You know, what's the next Patriot, one of the examples is Air and Missile Defense Radar, that's going to be our next major franchise coming to fruition here in the next several years, next generation jammer win, the [indiscernible] win, these are all franchise programs, and we made sure over the years, that we have been investing in the right IRAD and the right capital to support those projects, and then also in having the right talent onboard. And that's just something that we do as part of the company moving forward. And the good news is, we are seeing the results of those investments. And again, the results for these franchises that we won over the last couple of years, and that we intend to continue to win, as we move forward, and we see a lot of opportunity here in 2016, 2017 to 2018 already in terms of new franchise opportunities. And so Howard, I think the bottom line is, we are making the right investments and we are seeing the right results relative to these new franchises.

Maybe just to follow-up, I want to make sure that you are not seeing the business becoming so competitive or changed the costs to -- I will call it to sustain your growth or to improve your position is becoming more costly, or more risky?

I am not seeing it any different in the past. What I am seeing, which is nice, is I am seeing more opportunities in the last couple of years, than I saw in the prior years. So the bottom line is, there is a lot of opportunities out there, and we -- I would say, had a pretty good crystal ball, in making sure we made the right investments to be prepared to win those opportunities.

Thank you, Tom.

Your next question comes from the line of Hunter Keay from Wolfe Research. Please proceed.

Hi. Thanks for the time. I appreciate it.

Good morning Hunter.

Good morning. Maybe a little bit of a follow-up sort of contextually to Howard's question. But we saw the German [indiscernible] obviously over Patriot last year, and it sort of baked the question about your expectations for patriot over the next few years? And I was wondering if you could talk about that, maybe in the context of how much you have invested into things like facilities and R&D and headcount, in anticipation of Patriot win? And would it require you to maybe get a little more aggressive on price, in the event that you sort of need the volume to cover some of those investments that you have made, in anticipation of the awards, on Patriot specifically?

Well, I think on Patriot, I think the investments have come through contracts, and then the other capital investments that we have made, the normal investments we make to, essentially being able to operate our factory in a lean and efficient manner. So that's -- I'll put that in context, and let me put together, the opportunities for Patriot in context. There was just a recent announcement by the new Minister of Defense, Macierewicz in Poland, relative to his support of pursuing the Patriot program with the U.S. government. In fact he even kind of did a joint announcement with the U.S. Ambassador to Poland on that subject, with an objective to be able to get something going here this year. So that's a really good news for us, that's a very large potential program for Poland there. And just as I mentioned earlier, I just returned from the Middle East and there is strong demand for additional Patriot assets there. I mentioned in my script, a number of -- over 10 intercepts by Patriot against ballistic region, just in that region of the Middle East. So there is a strong demand across Eastern Europe and also the Middle East for additional Patriot assets, but also for upgrade. For example, there is -- just in the upgrade area alone, there is an opportunity to upgrade 72 fire units, just to configuration of 3+. So there is upgrade potentials, and then there is also the new potentials for countries like Poland, and adding additional fire units to other countries in the Middle East region. And I am sure you are reading the newspapers, the information that I am getting, especially of all the Asia-Pacific activities that are going on. In fact today, there was an article relative to Fed in Korea, where we also have just gotten an award on Patriot there too. So the bottom line is, there seems to be a significant demand out there across multiple areas, Eastern Europe, Asia-Pacific region and the Middle East for Missile Defense, and Patriot is the System that's proven, and is the system of choice for these nations. That's where it stands.

And maybe Tom if you could, since you mentioned, can you maybe help us size the market opportunity for some of the retrofit work, maybe for 360 degree radar. Any context you can give us to sort of help think about it?

Well you just [indiscernible] what I didn't mention, so that's part of the upgrade activities also. But there is definitely over $5 billion just on upgrades to configuration of 3 plus. There is opportunities on the radars that are -- its in the billions of dollars there, in terms of adding these 360 radars. By the way, that was one of the requests that I had in several of my meetings with key leaders in the Middle East. It was a desire to have our new lease, a 360 system added to their configurations. So I think that's getting out there. That capability is available, and we are hearing -- getting demand signals from customers on that. So the bottom line is, is Patriot is a franchise. We continue to evolve it, we continue to upgrade it and increase it's capabilities, add new technologies, and its -- we are seeing increased demand across those three major areas of the world. Again Eastern Europe, Asia Pacific, and also the Middle East.

Thanks a lot.

Your next question comes from the line of Cai von Rumohr from Cowen and Company. Please proceed.

Yes. Thank you very much. So Tom, I think you guys said you expect international to be 35% of bookings in 2016. That suggests that really if you do 25.5, you do about $9 billion up from what looks like 8.7. You have the Qatar award, but other than that, you don't seem to have as many identified large individual awards, as you did in 2015. Could you give us some more color of what would be driving that number that high?

Well, you mentioned one of them, which was the Qatar EWR. We also have international Patriot greater than $1 billion worth of bookings that are in play. We have other activities in Qatar which we are pursuing, and we believe are accessible this year. There is a whole FMS in the area of AEGIS, supporting Aegis Ashore, and also upgrades on some ships in the international marketplace. For those who don't know, we do the Aegis radar and all the components and the subsystems for that radar. That alone is, for example, over $300 million. And then in the whole area of missiles, both air-to-air and air-to-surface missiles, a significant demand of greater than $3 billion, across multiple missiles, so there are multiple contracts. There is no one contract and missiles that's going to do it, but that's our portfolio. We have a very diverse portfolio that allows us to add these systems. International ISRO is over $700 million; and then we have our normal airborne radars and ISR, EO/IR systems, that's probably pretty close to $1 billion. So I think what's different this year than others is, we are seeing demand signals across our whole portfolio on the international side, and you'd say, why is that? While we mentioned before, that we are changing our strategy. About two years ago, we went from a regional strategy, to a country strategy and into that country strategy, we focused not on the one or two customers we have had in the past 30 years, but we expanded that, and now we are seeing that. But these other customers are buying that in the order of $500 million to $1 billion programs, not just $2 billion program. So bottom line is, our portfolio which is diverse, is now the first in international marketplace, and that's -- these opportunities are coming across multiple of our products.

So Tom, you have said that it takes three years to hit the margin sweet spot on five year Patriot contracts. The turn time, I would assume is going to be shorter missile programs, and some of these other programs. So should we start to see this later in 2016, in your margins or 2017? The non-Patriot programs?

Cai, it's Toby. I will jump in on this one. I think you'd really want to think about that out in 2017, and the other thing to keep in mind, with our international missile programs, they are essentially FMS and not direct commercial sales. So while they -- relatively speaking, have some incremental margin compared to our domestic business, it is different than if it were a DCS type of sale.

Terrific. Thank you very much.

Sure.

Thank you.

Your next question comes from the line of Peter Arment from Sterne Agee. Please proceed.

Yes. Good morning Tom and Toby.

Good morning Peter.

Tom, I guess I have a question, kind of an up tempo. Its good to see your return to growth domestically in 2016, but we are also seeing a step-up in the op tempo in the Middle East, and Raytheon's position is good as any, in terms of a lot of the air-to-surface missiles, and the ground support missiles that are being utilized. I mean, how does that impact Raytheon in terms of a bookings perspective? Do you see, is it a big long lag effect, or do you actually start to have those conversations?

No. We just went through that, and the bottom line is, we expect a range next year, an increase in our international bookings. Its going to be $8.5 billion to $9 billion range next year, which is up from 2015. So we are seeing that increased demand, and its coming, again, across our whole portfolio, not just Patriot.

I guess, I was referring to the domestic activity, in terms of the Army and Air Force, spending a lot of, what is the activity in ISIS, etcetera?

You will start to see. That's part of the range growth we talked about on the domestic, 2% to 4%. Which is interesting, we mentioned, as we haven't grown domestically since 2009. In 2016, we will see 2% to 4% growth, and that's significant for us, and its coming because of the op tempo internationally, but also in the pent-up demand that the department has in refreshing a lot of their systems. Including, some new starts in the area of radars and other systems.

Okay. Thank you for the clarity on that. Thanks.

And Peter, I think the way you can see that translate through, if you look at the -- our missiles business, right, they had pretty good growth in 2015, as we started to see the effect of that, and even better growth that we are guiding to for 2016. So that's the start of the flowthrough, from a revenue point of view, of what Tom just talked about from a demand perspective.

Bottom line, growing internationally, we are growing domestically. And that's pretty good.

Good to hear.

Okay. I think we are going to have to leave it there. Thank you for joining us this morning. We look forward to speaking with you again on our first quarter conference call in April. Mark?