RTX Corporation (RTX) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Raytheon Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Todd Ernst, Vice President of Investor Relations. You may begin.

Thank you, Frances. Good morning, everybody. Thank you for joining us today on our third 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 website 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 website. With me today are Bill Swanson, our Chairman and Chief Executive Officer; and Dave Wajsgras, our Chief Financial Officer. We'll start with some brief remarks by Bill and Dave and then move on to questions. Before I turn the call over to Bill, 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 Bill. Bill?

Thank you, Todd. Good morning, everyone. Let me start off first by congratulating the Red Sox and the organization on their win last night. Some of us were up a little bit late. But I'm pleased to report that Raytheon delivered solid operating performance in the third quarter. Our sales, margins, EPS and cash flow were all ahead of expectation. As the business continues to execute well in the quarter and going forward, further, our productivity initiatives continue to gain traction and deliver results, driving improved affordability for our customers. Bookings were $5.7 billion, and we ended the quarter with a book-to-bill just under 1. As we look to the end of the year, we have a number of large domestic and international opportunities that we're targeting, and we continue to see solid demand from the global market for our broad portfolio of advanced solutions. Before we get into more details regarding the quarter, I'd like to talk about the realities of the budget environment. As you know, the U.S. government was shut down for 16 days this month, and we're operating under a sequestration and yet another CR. To call this a very challenging environment would be an understatement. Clearly, this is not the way we'd prefer the budget process to operate. No one wants to have to manage their strategic business plans under such circumstances. But by working closely with our customers and focusing on performance, we continue to deliver the solutions our customers need. That said, we weren't completely unaffected by the shutdown. A number of our employees were impacted. This was largely related to our non-DOD or civil business, which provides direct support to our customers. In particular, the area of the company most affected was our Federal Aviation Administration training programs. Financially, the shutdown impact was minimal and has been captured in our updated financial guidance. But personally, the situation was hard on the individuals and the government and the industry who devoted their entire careers to supporting our nation. And while a larger company such as Raytheon have the ability to mitigate the impact to our workforces, our industry supply base does not. These companies are often small and minority owned, don't have the same resources or flexibility to weather these ongoing budget storms. So while we're pleased that the Congress and the administration have resolved the most recent budget stalemate, we continue to call on them to put an end to the budget paralysis in Washington. We need to reach a lasting bipartisan solution to ensure our nation's long-term fiscal stability without requiring shutdowns, CRs and sequestration. Without a long-term solution, we face continued workforce uncertainty. In the meantime, it's incumbent upon us at Raytheon to effectively manage our company in this environment. This means continuing to focus on the fundamentals and executing our differentiated strategy. It's what we do. And once again, this focus is yielding results that are evident in our operating performance. As noted in our earnings release this morning, we're raising our guidance for sales, EPS and cash flow for the year. This kind of performance doesn't just happen, rather, it's a function of a dedicated team working every day to find new ways to improve, to lower our cost and to respond more quickly to our customers' needs. As most of you know, when we're faced with competition, we embrace it and strive to deliver world-class technology at an affordable price. A good example of this is our gallium nitride or GaN technology, a long-term investment we made years ago that is now helping us win key programs like the Next Generation Jammer. And earlier this month, we were notified by the Navy that we turned in an outstanding proposal and we're selected for the new Air and Missile Defense Radar or AMDR. AMDR is the radar system for the next generation of destroyers for the U.S. Navy, which will provide greatly improved missile defense capability compared to today's systems. Our competitive wins on AMDR and Next Jammer -- the Next Generation Jammer are credit to the Raytheon team and to our strategic vision, which is driving the investment, technology and operational decisions today that will support our competitiveness in the future. I probably should mention that both of these competition -- competitive awards are currently under protest, but that seems to be the new normal. Moving on, we're also successful executing our international strategy that is providing significant long-term growth potential. Our international sales this quarter grew by 6% compared to the third quarter of 2012. International represents 27% of our total revenue in the quarter. And for the year, we expect international to be in the 27% to 29% of total sales. The growth we are experiencing in our international business partially offsets the decline we're seeing in our domestic business as a result of sequestration and CRs. We expect strong international bookings for the year, and we have several large awards remaining that have well-defined milestone past the completion. With my more than 40 years of experience in the international market, I've learned that the timing of these binary awards is more often an art than it is a science. It's just the nature of doing business with international customers. While a shift in a milestone of a few weeks can impact timing award, it doesn't change our confidence in the award occurring. One encouraging sign that could have a positive impact on international business is the recent change in how the government views export regulation. Transitioning oversight from certain defense-related products from the Department of State to Department of Commerce should shorten the timeframe in which we're able to provide solutions to international partners. As a result, over time, this should allow the U.S. industry to compete more effectively and do business more efficiently in the highly competitive and expansive [ph] global marketplace. We also see our DOD customers leaning forward to help more on international sales. For many of you who have followed Raytheon over the years, you know us as a company that has historically adapted our strategy and leveraged our technology in order to maximize value for our customers and shareholders. Looking ahead, we continue to evolve our strategy and are building upon these successes. We're managing through the challenges of today's environment and we remain focused on the opportunities of tomorrow. We have a proven strategy, best-in-class capabilities and an outstanding team to meet our customers' needs. I'd like to thank the entire Raytheon team for helping drive these solid results and for maintaining its focus on our customer during the time of continued challenge and change. With that, let me turn it over to Dave.

Okay. Thanks, Bill, and good morning, everyone. I have a few opening remarks, starting with the third quarter highlights, and then we'll move on to questions. During my remarks, I'll be referring to the web slide that we issued earlier this morning. Everyone would please move to Page 3. We are pleased with the solid performance the team delivered in the third quarter. For the quarter, our sales, EPS and operating cash flow from continuing operations all came in higher than the guidance we provided you back in July. EPS and adjusted EPS for the third quarter were consistent with last year's third quarter and on a year-to-date basis, are running ahead of last year's comparable period. Adjusted operating margin was 13.7%, reflecting continued strong performance for the company and year-to-date, up 10 basis points to 13.6%. We slightly exceeded the high end of our prior guidance on sales of $5.8 billion, down 3% compared with last year's third quarter. On a year-to-date basis, sales were down less than 1%. Operating cash flow from continuing operations was approximately $895 million, which also exceeded our prior guidance due to strong collections, a portion of which was timing from Q4. And on a year-to-date basis, operating cash flow from continuing operations is over $300 million higher than the comparable period last year. We're increasing our full year sales, EPS and operating cash flow guidance, which I'll address further in a few minutes, along with other updates to our 2013 outlook. During the quarter, the company repurchased 2.9 million shares of common stock for $225 million, bringing our year-to-date share repurchases to 10.5 million shares for $675 million, and we ended the quarter with net debt of just over $800 million. Turning now to Page 4. Let me start by providing some detail on our third quarter results. Our total company bookings for the quarter were $5.7 billion and on a year-to-date basis, were $14.6 billion. As we've mentioned on prior calls, bookings are weighted to the latter part of the year. We continue to expect strong fourth quarter awards, driven in large part by international opportunities. For the quarter, international was 15% of our total company bookings and on a year-to-date basis, was 23%. For the year, we expect international to be in the range of 30% to 32% of total bookings. Notable awards in the quarter included $312 million at Missile Systems for SM-3 for Missile Defense Agency; $232 million for AIM-9X Sidewinder short-range air-to-air missiles for the U.S. Navy, U.S. Air Force and international customers; $222 million for Standard Missile-6 for the U.S. Navy; and $177 million for Phalanx Weapon Systems for the U.S. Navy and international customers. Integrated Defense Systems booked $353 million on the Aegis weapons system for the U.S. Navy and $84 million on an international radar contract. IIS booked $253 million to design, develop and deliver technical training for a commercial customer and $162 million on a contract to provide intelligence, surveillance and reconnaissance support to the U.S. Air Force. IIS also booked $145 million on domestic training programs and $85 million on foreign training programs in support of Warfighter FOCUS activities and $87 million for a ground control system program for the U.S. Air Force. And Space and Airborne Systems booked $271 million to develop the Next Generation Jammer for the U.S. Navy and $170 million on the Joint Polar Satellite System program for NASA. In addition, IIS and SAS booked $417 million and $164 million, respectively, on a number of classified programs. Okay. If you'd now move to Page 5, our sales performance in the quarter was ahead of guidance, driven by strong international performance. International sales increased approximately 6% in the quarter and were approximately 27% of total sales. Our domestic business declined by about 6%, and total company sales were down 3% in the quarter. Looking at the businesses. Each of the 4 either met or exceeded our expectations. IDS had third quarter 2013 net sales of $1.6 billion, in line with the same period last year. IIS net sales, $1.5 billion, were down slightly from the same period last year, primarily due to lower volume on classified and training programs. Missile Systems had third quarter 2013 net sales of $1.6 billion, also down slightly on a year-over-year basis. The change was primarily due to lower sales on U.S. Army sensor programs. And SAS had net sales of $1.6 billion, lower than the comparable period last year, primarily due to reduced volume on some of our ISR and classified programs. Moving ahead to Page 6. We're pleased by the strength of our overall company margins. Our adjusted margin was 13.7%. And on a year-to-date basis, our adjusted margin was 13.6%, up 10 basis points over the comparable period in 2012. The strength in our underlying margin in the quarter was due to a combination of our broad business base, particularly international, the timing of performance improvements and our overall execution. Over the past several quarters, we've provided you with updates on our cost efficiency and productivity initiatives, including supply chain optimization and the business unit consolidation. These initiatives are ongoing. The business unit consolidation efforts remained ahead of plan, and in the third quarter, we took the next steps by consolidating a number of our product lines within the new organizational structure. The cost savings that result from these efforts help drive our competitiveness, an important factor in our recent wins. So looking at business margins, all were in line or better than our expectations. IDS, IIS and SAS margins were all up in the quarter compared with the same period last year. Solid operational performance and favorable mix drove the improvements. At missiles, the margin was essentially in line with our expectations, but lower than the same period last year, primarily due to a change in contract mix. Overall, the company continues to perform well. If you'd move to Page 7, third quarter 2013 adjusted EPS was $1.60, and on a year-to-date basis, adjusted EPS was $4.80, up 3% from the same period last year. The year-to-date increase was driven by capital deployment actions, more specifically, share repurchases. On Page 8, I'd like to briefly comment on our updated outlook for 2013. Based on our performance through the third quarter, we are increasing our sales guidance by $100 million. We now expect full year 2013 net sales to be in the range of between $23.6 billion and $23.8 billion. Our guidance includes impacts from sequestration, a continuing resolution from the recent government shutdown. And as we've done in prior years, during the third quarter, we updated our actuarial estimates related to our pension plans. As a result of the update, FAS/CAS pension expense for the year decreased by $31 million from $286 million to $255 million. We increased our adjusted EPS guidance for the year by $0.10 to reflect the strong performance through the end of the third quarter. We see adjusted EPS of between $6.10 and $6.20. You should note that we also increased our 2013 guidance for GAAP EPS to between $5.67 and $5.77, which includes both the expected margin improvement for the year, as well as the impact of the updated full year FAS/CAS pension expense. As I mentioned earlier, we generated strong operating cash flow in the quarter. As a result, we have increased our 2013 guidance for operating cash flow from continuing operations by $100 million, and it's now between $2.2 billion and $2.4 billion. And although not on the page, it's worth noting that we continue to see our bookings outlook for the year at about $23.5 billion, plus or minus $500 million. This outlook remains unchanged from our prior estimates. However, given sequestration and the shutdown, we are now biased toward the lower end of the estimate. On Page 9, we've included our guidance by business. We increased the sales range by $100 million for missiles, reflecting stronger-than-expected performance through the first 3 quarters of this year. The increase in margin guidance reflects our strong overall program execution and productivity initiatives to date, again, including the business consolidation. So if you could please move to Page 10. We've provided a FAS/CAS pension adjustment matrix for 2014, the same as we've done in prior years. Now just to be clear, the discount rate and the actual asset returns won't be known until we close out 2013. It is worth noting that given the current interest rate environment, we expect to see improvement to the FAS/CAS expense in 2014 compared to 2013 and to our prior outlook for 2014. Before we open it up for Q&A, let me summarize. The company continues to perform well in a tough and uncertain environment. We saw solid operating performance in the quarter and exceeded the sales, EPS and operating cash flow guidance we provided back in July. We continue to have a strong balance sheet with net debt of just over $800 million, which gives us considerable flexibility to operate effectively in the current environment. We are raising our sales, EPS and cash flow guidance for 2013. We remain well positioned with our domestic customers' priority areas and continue to be aligned with the evolving priorities of our global customers. Our overall execution, productivity initiatives and our focus on customer missions allow us to remain confident going forward. With that, Bill and I will open up the call for questions.

[Operator Instructions] Your first question is from the line of Joe Nadol from JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: So just on the bookings that you're expecting for Q4, Bill, if you wouldn't mind reminding us of what -- you mentioned a few times there are some milestones that you [ph] put sanitized. It is an art, not a science, but what are you looking for to come through? And obviously, let's focus, in particular, on IDS?

Sounds good. As I said in my opening remarks, we do expect strong bookings for the year, particularly international, and there's several significant awards that we anticipate in the quarter. As I mentioned, every one of them has got a milestone plan that's associated with them. They're reviewed daily or weekly, depending on the business or the program. And I'm glad you mentioned more of an art than a science, and so I'll take you through the businesses because I think it's a better way to look at it, and I'll start with IDS since you mentioned it. IDS makes up about half of our expected Q4 bookings. I'll give you a range of about $4 billion or $5 billion worth of programs we're tracking. 2/3 of their bookings are international, really driven by a few large air and missile defense awards. Kuwait, I would start as the first one, a couple of fire [ph] units. It's currently moving through the parliament. It's been approved by the Ministry of Defense. And from our standpoint, everything is lined up for that to happen. They go through a process of reviewing it. Once they're done with that, the paperwork will come back to the U.S. and it will be signed and will be off and moving. In Oman, we're currently in negotiations for ground-based portion of the system. As you'll recall, Oman ordered AMRAAM missiles for their system in the second quarter, and we're working through the final details with them on that. Qatar is procuring a comprehensive missile defense system in phases, with Patriot and C2 being in the first phase. The CN was approved through Congress, and the LOA was delivered in August of this year. So we're working with them and the U.S. government, and the details of the LOA are working towards an award by the end of this year. And then domestically, the other balance, of course, I mentioned AMDR, but we're also expecting another, let me say, $400 million to $500 million worth of domestic missile defense awards. So that kind of makes up the $4 billion to $5 billion in IDS. If we look at IIS, the fourth quarter bookings should be about $1.5 billion, plus or minus. These are really driven by about $650 million in classified awards. Included in there is an international award that we'll announce, and the balance is really driven by training in space and engineering service programs. Missiles expect about $1.5 billion in Q4, plus or minus. We see bookings there for RAM, Paveway, SM and a potential TOW award. And on the domestic side, we expect orders for Standard Missile-3 in our core programs, including Phalanx, RAM and JSOW. And finally, SAS, about $2 billion, plus or minus. 30% of those will be in internationally, primarily driven by tactical airborne radars, about 20% in classified and CRAD areas and the remainder spread across our Air Force and Navy awards, attributable to tactical airborne systems, ISR and communications. That should give you a pretty good handle of the -- what we see in front of us finishing out the year. And hopefully, we won't get any more roadblocks thrown in front of us. The shutdown really took about 0.5 month out of everything and delayed everything, but we're moving forward and got a good pipeline. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay, very helpful. I just had one quick one for Dave. IIS margins, looking a little perky. And maybe that's the...

That's [indiscernible] Joseph B. Nadol - JP Morgan Chase & Co, Research Division: It's a good word, right?

You haven't gotten that one before. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Yes. Well, you popped your head out with it. A 9% -- up over the 9% level there. So is this sustainable or is this recovery of some of your restructuring cost? Because of course, that's where most of the restructuring took place. How should we think about that?

Yes. So Lynn Dugle continues to do an excellent job managing that business and the consolidation. The third quarter margins were driven by improved program efficiencies across the business, and that supported the increase in the full year margin guidance. We do see the margins in Q4 not quite as perky. They moderate somewhat. And this is primarily due to the timing of the performance improvements that we had previously expected in the fourth quarter with -- shifted into the third, essentially, and that was specifically in the area of the domestic training programs. Also, we begin to ramp up and transition on a new commercial training program that I referred to at around $160 million or so in the third quarter.

Your next question is from the line of Carter Copeland from Barclays.

Just a brief sort of high-level question. It's that time of the year that business planning process has come together, and I know you're not giving 2014 guidance until next quarter. But if you were to pick in sort of broad brush strokes about how you're looking at next year in whatever framework, whether it's existing versus new business, domestic versus international, any color you could kind of provide us for how you're thinking about the world? I realized it's tough to have a crystal ball in this environment. But any color you can provide us on how you're thinking about next year would be helpful.

Yes. Let me fly around about 40,000 feet, and Dave's giving me the sign to say I should be at 50,000 feet, so I'll go to 50,000 feet. We're not on virtual. You can see him sitting next to me here. But anyway, it's really hard to look at it. I mean, I would tell you, we're planning for sequestration to continue. I mean, that's the environment we're in. I'd like to think that this budget process is not working. I've grown up in an industry where we have appropriations bill. There was a sequence to what we're doing. You could see it, you could plan on it. Today, we operate under CRs. We have another one that goes to January 15. We have a House and Senate committee, they're reviewing -- hopefully, they'll take a stab at revenue and entitlement, and if successful, could lead to maybe a postponement of the gap and sequestration until people figure it out. But with all of that going on and the turmoil and planning for the BCA to continue, I would tell you that '14 feels a lot like '13. I don't know how else to describe it. Revenue should be down just slightly, driven by domestic. I think the margins should continue to be strong. And the company is expected to have strong cash generation. That's about 50,000 feet, and I could put some -- a lot of qualifiers on that, that you all know, but that's kind of how it feels now, and we'll see what comes out of Congress. And hopefully, we can get ourselves back to some stability and really focusing on doing even more for our customers and our shareholders.

Bill, when do you think we actually get a '15 budget request? Is that going to be delayed in your view?

It's really hard to say, I would tell you. From what I understand, our customers are planning 2 budgets. Which one gets submitted, I can't tell you. That's a product of somebody else making that decision. I just know that American industry really likes to have some finality in what we do. And if you give us a number, we know how to put our strategies and plans in place to make that happen. So I'd say, right now, it's a jump all, and we've got 2 budgets going on until we figure out what's going on. And we're all trying to make sure that this committee really does the hard job of getting to a decision here.

Your next question is from the line of Sam Pearlstein from Wells Fargo.

Can you talk a little bit more about the buyback? Just if I look at your updated guidance, you're now towards the higher end of the share count and I would have expected to see you have to increase the pace to get the shares down for the year. So how are you just thinking about buyback and why you might be doing a little bit less this year than you thought last quarter?

Okay. So I appreciate the question. We were in line from a dollar standpoint in Q3 with Q2 and also Q1. We made a conscious decision to maintain that level of repurchases as the prior 2 quarters. With that said, we continue to see the repurchase plan consistent with what I said on the last earnings call. So more specifically, we expect our share repurchases in the back half of this year in dollar terms to be modestly higher than the first half. So let me be clear, the fourth quarter, at this stage, the planning assumption is that we would be, in dollar terms, well in excess of where we were in Q3. So I hope that helps.

That does help. And Bill, if I can ask you a question, just looking at the Turkey decision, and price sounds like that was a big issue, can you just talk about whether price is becoming a bigger driver in some of these international discussions?

I think, clearly, Turkey as a country, made a decision, and they decided to do it based on price. In my experience, in price, when you buy that way, you don't get all the capabilities you want, and so they're going to have to deal with that. The second part of it is you have to integrate it into NATO, which is going to be difficult at best and will not happen as quick as people want it to happen. From our standpoint, they've started the negotiation process. We'll see what happens. But if Turkey runs into problems, we remain positioned and stand ready to help them with Patriot. To get to your overall question, clearly, I'm an engineer by training and a technologist, I'd like to think of myself that way. And people, when they look at U.S. systems, they are still state-of-the-art. What people don't realize is that life cycle costs really run into these decisions. And if you don't take that into account, you're going to be really sorry with some stuff you bought. And we know of systems around the world produced by other countries that aren't working and can't be [ph] manned. And you have to almost learn that lesson the hard way. So we'll see what happens here.

Your next question will come from the line of Doug Harned from Sanford Bernstein. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: I'd like to follow on that because we've seen a few things going on in the Middle East. There's been the Turkey decision. We've seen -- since Mandar [ph] made some rather provocative statements about looking outside of the U.S. relationship to acquire defense systems. U.A.E. is looking at Eurofighter. Are you seeing any shifts in the Middle East in terms of how people are thinking of the relationship with the U.S.? I think, certainly, we provide the highest quality systems, but it does seem as though there's at least a lot of rhetoric today about looking elsewhere.

It's a great question, Doug, and something I always think about, but I have a term we use here that -- it's the area under the curve. So if you draw it over time, that curve and the area under it, Raytheon has a long-standing, strong, enduring relationships, not just in the Mid East, but around the world. And due to our international experience, we continue to operate in the regions, or especially the Mid East, since you brought that up, over many decades and there's ebbs and flows in that relationship among governments. But I have always felt, when I've looked at it, our customers stay with us because they recognize that we consistently deliver value and equipment to them to be able to handle the threat environment that they're in. So you could take any slice of that curve over time and probably find something that isn't going well. But the area under the curve is one that really matters. And we still get a phone call now and then, or at least I do, that says, "Would you go do something?" And we'll go off and start based on a handshake. And I think that's what it's all about. But clearly, there's geopolitical things happening today that are getting everybody's attention, and we've got to work our way through that, and I'm hopeful that will happen. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: Well -- and then, separately, walking around AUSA this week, it felt somewhat like a wake, frankly. I mean, the Army budget is under a great deal of pressure. And when you think about Raytheon's exposure to the Army, how do you see your major programs in terms of the level of risk under potentially a bearish scenario as opposed to an opportunity under a more bullish scenario should we happen to see that?

I think, right now, you probably said it right. The Army is under the most pressure. They have the largest headcount of any of the services, and the hard choices are strategically, how do you handle the future, do you do it with a smaller service? Do you do it that's more mobile, more light, and how do you think through that? And when you come from very high numbers to a smaller number, it really makes it hard for them to do that, plus planning, do they have sequester, don't they have sequester? That's really tough on them. We're really trying to work with them in any way we can. But Dave and I would both tell you that, from our standpoint, planning for sequester, we know exactly in our minds what the Army will be doing and that's in our forecast as we look at things. And we're not centric around any one service. And from that standpoint, we could weather the storm and why our portfolio is probably in better shape than others. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: But do you see -- when you look at your Army exposure today and you look out the next couple of years, is this something where you would see an area of continuing downward pressure? In other words, perhaps, one of the weaker areas across the portfolio of the company?

No, no, I don't because we're not in the platform business or vehicle business or the areas where the armies happen to make those tough calls. So if you look at air and missile defense, clearly, they've done the Patriot upgrades just this month. We announced another Patriot order from the Army. They're going to protect our core systems. They're going to fund them. They're going to make their upgrades, and we'll do it that way. I mean -- and then eventually, what has to happen, which is our strength, is you've got to refresh. And I've always said, this is a speed bump. You slow down going into it, you go over the top, come down and then you speed up as quick as you can. And from our standpoint, we're making sure our technology and our capabilities are lined up for the Army of the future, not the Army of the past.

Your next question will come from the line of George Shapiro from Shapiro Research.

Dave, I want to push back a little bit on your comment that the book-to-bill would be close to 1. I mean, what it implies is that fourth quarter orders got to be up nearly 50% from the third quarter. For perspective, Q4 '12 bookings were 8% above Q3 and Q4 '11 was only 3% above Q3. So what makes this year so much different that you'd be up 50% relative to Q3 versus the prior 2 years?

So George, you're free to push back. Okay, that's part one.

[indiscernible] know about this.

George, I wouldn't expect anything less. So firstly, let me...

Glad you're laughing, George.

Yes. Let me start by stating the obvious that the bookings are always lumpy. They have been in the past. They will be going forward. From a cadence standpoint, for this year, the bookings profile hasn't changed meaningfully from what we were seeing back in April. So I think that's an important data point. There has been some shifts. And for example, Bill mentioned some of our opportunities in the Middle East. The Kuwait Patriot opportunity, which we now see being awarded in Q4, did shift from what we had earlier anticipated. And with that said, I'm not going to repeat all the details that Bill just went through, I believe, with a question earlier from Joe Nadol. But frankly, if we weren't confident with our fourth quarter bookings outlook, we wouldn't suggest that as the estimates. I also said, during my formal remarks earlier, George, that we are now biased toward the lower end of the range that we've been suggesting for a while now. And that's principally due to a couple of things shifting out, as well as the government shutdowns. So we see some of the process on a few smaller FMS potentials potentially moving into early next year.

But just -- Dave, I would think, and I don't remember exactly, that each of the last couple of years, there were always moving shifts. You're suggesting the shifts are greater this year than what we've seen in the past?

Well, yes, they have been. We are now in sequestration. So there has been some movement to the right, maybe more so than prior years. You'll also recall that last year's third quarter was nothing short of a banner quarter for the company. We were awarded some very large programs, particularly in our missiles business. So the comp to last year is also quite difficult. George, Bill went through a number of opportunities earlier, somewhere in the neighborhood of, I don't know, $8 billion to $10 billion of opportunity. We have thousands of programs. He just went through the more significant ones from a dollar standpoint. Again, we're quite confident in where we sit today and as we look into '14.

Your next question will come from the line of Robert Stallard from Royal Bank of Canada.

Bill, on the Next Generation Jammer and the AMDR, do you have any clarity on when these things might come off protest or when the protest might be resolved?

Yes, there's a pretty standard -- let me say, if you go by the standard dates, that's usually about 100 days, which Next Generation Jammer would be at the end of this month and AMDR would be in January. And so it's probably the best way for me to peg it for you. And they're pretty good at holding their timelines, unless an issue pops up that needs to be clarified.

Okay. And do all these -- do these constant protests have an impact on the customer relationship?

Yes, they do. I mean, you've got to be very careful when you protest that if you impugn your customer during the protest by inferring they don't know what they're doing, that's probably not something that I'd recommend in the process. If it's done on purely business reasons or on the process and you don't impugn somebody, you're probably okay. But somehow, sometimes, protests get personal or emotional, and we're trying to stay away from that, if that helps.

Okay. And Dave, just a quick one for you. On the pension, I was wondering if you could give us an update on what your returns are year-to-date and also, what you're using as your interest rate calculation at this point?

Sure. As of yesterday, because I was thinking ahead and I was quite sure that I get this question, the returns are in excess of 11% from the pension plan assets. So the team is doing a good job there. From an interest rate standpoint, today, we're at -- from a discount rate standpoint, today, we're at 4.15%. The -- as we go forward, that is reset on the last day of the year through a process we use with our outside actuaries, essentially modeling a hypothetical bond portfolio. Given everything that we're seeing, if we were to set it today, it would be roughly 50 basis points to 75 basis points higher. But again, I can't suggest that's where it's going to be on 12/31. We just have to wait and close out the year.

Your next question will come from the line of Robert Spingarn from Crédit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: Bill, I wanted to go out a little longer term on international missile defense and get a sense of your visibility into your future opportunities once we get through these 3 Mid East contracts that you mentioned earlier.

Yes, I think if you look at missile defense, it's one of the key areas going forward. The other part of missile defense is it never stands still from my standpoint, have been doing this a long time. When you realize you need missile defense, you put it in, then you go through the training to get your troops up to speed. But the threat keeps evolving and changing. And with that, most of our systems are open architecture or they're designed in a way that their software upgradable. But also, the interceptors have to change and their ability to be able to discriminate against targets that might have different spoofing mechanisms to try and overcome the systems that exist. So it's a process that keeps on going. And if you look at it, we've gone through iterations of Patriot to make it the most advanced in the world and of course, Standard Missile-3 is doing that, our TPY-2 radars are doing that. So you have a nice customer base, but also, other countries realize that they have to be able to prepare themselves for future missile defense. So to me, it's a nice market. It's a nice community of customers that realize that they've got to do this and may make the long term commitments to keep it ongoing, if that helps. Robert Spingarn - Crédit Suisse AG, Research Division: Would you say that there's a natural growth rate in the business that you use as a rule of thumb or a sustainment level for the upgrade that we could think about?

Yes, you probably could. It's -- we -- our term here that we use is P3I, pre-planned product improvements. And it's one of the things that our engineers and program leaders really always work on is that, "Okay, we're here today. Where do we have to be tomorrow, and where do we have to be beyond that?" And then our engineering leaders look at our gaps to figure out what we have to do. I mean, it's why we made a decision 10 years ago on GaN to be able to get higher efficiency to have our systems consume less power, be able to manage the bandwidth and be able to discriminate in a way that no one else can do and work constantly, pushing the envelope today and tomorrow and well into the future. So we look at it as a way, and it's an avenue that provides us some market entry point for our new technology once we've got the reliability and everything worked out. And by the way, these new technologies help reduce the cost or provide better affordability. But in my world, what I really enjoy is the systems are more reliable. They take less maintenance, less life cycle cost, fewer spares, and so customers really want to upgrade. It's much like if you think about the server marketplace that people are constantly upgrading servers, and they do that in a way they give more capable, more memory at a less price. They consume less energy. So you want to upgrade because you can reduce your overall cost going forward, while handling an advanced threat into the future, if that helps. Robert Spingarn - Crédit Suisse AG, Research Division: It does. And I just have a quick one for Dave. Dave, you've mentioned earlier, when you started your prepared remarks, that you, generally, across the board, outperformed your guidance water [ph]. But were there any specific areas of weakness that were maybe unexpected, embedded in there? And are these -- could you speak to any? And is there something that could carry into the fourth quarter?

Candidly, there's nothing that comes to mind that was a surprise from a downside or challenge standpoint. The businesses across the board performed well. Missiles was down a little bit. That was primarily driven by the runout of an international production program. The follow-on contract to that is ramping up in Q4. Cash across the board was strong. Bookings were inside of our expectations on Q3. So frankly, I didn't see any surprises to give any pause as we move ahead in the fourth quarter. Robert Spingarn - Crédit Suisse AG, Research Division: Would that also apply to SAS just where the sales growth was, I guess, the most negative? And I guess, there's a lot of classified in there, but anything there?

No. You'll recall back in April, when we sized up the impact of sequestration on some of the quick-turn business, some of our services and classified business for this year, we had anticipated essentially what played out at SAS.

Your next question will come from the line of Howard Rubel from Jefferies.

So there's really 2 things. One, on strategic, for a moment. I mean, you've been very deliberate in using R&D to go after market share that way. But are you -- is there anything that's changed in this environment? You talk about small contractors possibly struggling a bit. Did they need your help financially as well as operationally?

Yes, Howard. It's -- as a company, you've heard me talk about the supply base, and especially minority or small-owned businesses, they are the heartbeat of this country. And for some of them, they're really key to what we do. So we work with them and try and help them in any way. We send Six Sigma teams in to some of our suppliers to help them be more competitive, that's good for us and it's good for them. We've sent people in to help on technical issues. And financially, if they're in trouble, we'll sit down and work with them to figure out what we can do to be able to get through this. I mean, the shutdown was really hard. I mean, we spent time every day trying to figure out how to make sure that people were getting paid. How did we move, work around? I mean, one of the beauties in our company is with our common systems and processes. We were able to do things, and it identifies areas for us real quick. But it is an area that, as a person that's been in this industry my whole career, I worry what we're doing to that, into the business, as a country.

And then maybe just to talk about the fourth quarter for a moment. It's very unusual for IDS to be down versus the third quarter, both in terms of profitability -- or profits and profitability and volumes. And I'm sure some of it is attributable to push out of international business. But could you talk a little bit more, Dave, about some of the comparisons there and why that's evolved that way?

Sure. Let me talk about sales first, and I'll follow-up with a margin profile. So sales for IDS was up 3.3% year-to-date, but it didn't moderate, as you noted, in Q3, and it's down in Q4, primarily driven by shifts to the right with some of our domestic awards, including Space Fence, which is now anticipated early in 2014, as well as a naval radar program awarded in the last week of Q3. And I noted earlier with one of your colleagues that the Kuwait Patriot program is now expected in the fourth quarter. So from a margin standpoint, that business, IDS, continued strong performance in the third quarter, again, driven by favorable international air and missile defense contract mix, as well as some performance improvements that we had previously or earlier expected in the fourth quarter. You'll note here that we did raise the full year margin guidance by about 20 basis points. Now looking more specifically at the fourth quarter, margins are impacted by the timing of EAC adjustments as well as mix. Specifically, recall in the last call, Howard, in the last earnings call, we noted that the cadence of the performance improvements in this business was weighted to the first half of the year. So we also saw a continued strength from that in the third quarter. Now that, coupled with a change in contract mix, does impact and lower the margins that we now expect in the fourth quarter. And just lastly, and as you're aware, we typically see lower margins at the inception of some programs which can, and do in a lot of cases, improve over time as we retire risk and implement operating efficiencies.

Yes, I get that. I mean, it's a fairly -- I mean, theirs [ph] either was fairly substantial improvement for the -- this is a more normal level until you see some of this other business come home.

No, I would say that -- don't assume that the fourth quarter becomes the run rate for next year. I think you probably should look at it -- the trailing 12-month average and expect the ramp-up on the bookings in the fourth quarter to take place. I would say essentially in Q2, 3 and 4 of next year.

That question will come from the line of Jason Gursky from Citi.

Bill, a quick question for you and then one for David as well. Bill, you mentioned that there's some change in the regulatory environment that moves things from State over to Commerce. Is this the case that it's opening up new markets for you? And if so, what's the -- what are the size of those markets? Or does this just give you better competitive standing out there in the marketplace? And then, Dave, I think Bill mentioned the cash flow would be "robust" next year. If you could offer up some building blocks for us to get a sense of relative to this year, what are going to be the positives, what are going to be negatives as we look at cash flow next year?

Sure. I'll -- yes, let me take the cash flow question. So as we have done in the past, we continue to be very effective with respect to our overall cash cycle from a business standpoint. It's not just the finance group, it's the overall company. We've continued to see a healthy cash conversion from an earnings perspective and from a process perspective. We are in the process of setting up milestones and performance payments to the -- with respect to the awards that we see in Q4 and in the first half of next year, that should be healthy. We're looking at a continued improvement from an overall collections standpoint. I would say those are really the drivers as we move into next year. Internationally, more -- and more specifically, we do see the potential and the likelihood of some advances with respect to our international business. It's traditionally the way international business is affected. So I think taken together, Bill and I or -- and Tom Kennedy are in full agreement that we're continuing to see healthy cash flow as we move in to '14.

And thanks, Dave. I'll finish up here with the -- with your question on international. On some items, when they move from State to -- over to Commerce, there are items that allow the process to move a lot quicker. We sell in 82 countries around the world. We've sold over -- to over 115, I think, roughly over time, but we have 82 active. I don't really see it opening up to more countries. I just see it being more fit -- more efficient for us. We can be better at it. But I think what's more important that I mentioned in the last part of that is that we see our DOD consumer leaning forward for us. If you look at Dep Sec Def, Dr. Carter was over in India speaking to them about what we can to be -- open it up, make it easier for both countries to do business. That's one example. The other one is on the 15th of this month, 2 CMs went over on JSOW, notified the Congress. I didn't mention those in my remarks because that'll be early '14 items. That will be about $1 billion to $2 billion worth of that particular product line, and that's one where our customers are helping us. Because if you think about it, by having those in our factories, those help reduce the overheads, keep the lines hot and actually make the product more affordable for our domestic customers. So if there's one thing I'm really encouraged about and I feel good about is how we both are looking at why international is good for us domestically, as well as internationally. So I'm encouraged by the process. I'm -- with everything being thrown at us, it's -- I put that on the real positive side.

All right. Thank you for joining us this morning. We look forward to speaking with you again on our fourth quarter conference call in January. Frances?

Thank you. And ladies and gentlemen, this concludes our presentation. You may now disconnect. Enjoy your day.