RTX Corporation (RTX) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Raytheon fourth quarter earnings conference call. My name is Quentin, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I turn the call over to Todd Ernst, Vice President of Investor Relations. Please proceed, sir.

Thank you, Quentin. 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 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; Tom Kennedy, our Chief Operating 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.

Thank you, Todd. Good morning, everyone. Raytheon continued to perform well in the fourth quarter, as we did all year. I'm particularly pleased with our performance, given we operated under a government shutdown in October, sequestration and continuing resolutions at the start and end of the year. In the quarter, we delivered strong margins, earnings and cash flow, driven by solid execution. Bookings were good in the fourth quarter at $7.5 billion, which resulted in a book-to-bill of 1.28. For the year, our margins, EPS and cash flow were all up, while sales were down slightly. Said another way, we had good performance in a challenging environment. Looking forward, we're expecting solid performance in 2014, and Dave will walk you through our guidance in a moment. As expected, our international business continues to be a significant driver of our results. In the quarter, international sales were 29% of the total sales and 43% of total bookings. Notably, we booked several key international awards in the quarter: A ground-based air defense system for Oman, for $1.28 billion; $500 million for tactical radar systems for international customers; and $100 million for international classified cyber. For the full year, international sales represented 27% of total sales and grew by 3%. Our international bookings increased by 10%, a result of our strategic focus on global markets. In November, I visited several of our customers in the Mideast, and we continue to make considerable progress on some of the larger opportunities in the region. For example, Kuwait signed an LOA for Patriot in December. The U.S. Army now has it, and we expect to have a completed agreement by the end of February. We also made significant progress on Qatar Patriot, which is the first step in a multi-year, multi-billion dollar opportunity for the company. Qatar has the LOA, and we're expecting their leadership to sign an agreement for Patriot portion any day now. Then it will go to the Army for final approval, and we expect an award exceeding $2 billion in the first half of the year. We feel good about the bookings outlook in 2014 and expect total bookings of $23.5 billion, plus or minus $500 million. International bookings are expected to be in the 35% to 40% of total bookings. We expect international sales to be around 30% of total sales. Domestically, we continue to see strong interest in our portfolio of advanced technologies, and we received several notable awards in the quarter, including TPY-2 radar 12 and 2 competitive wins, the Global ASNT communications system and the Air and Missile Defense Radar or AMDR for short. We weren't immune to the effects of the Budget Control Act in 2013, but the good news is that in December, a budget deal was reached, which provides a stable budget for 2 years, giving the DoD and industry some much-needed clarity. Hopefully, there'll be no more continuing resolutions and shutdowns. After the close of the quarter, we received some more good news: Protests on 2 of our competitive wins, the Next Generation Jammer and AMDR, were favorably resolved. And as I noted on previous calls, these are important development programs that will provide long-term growth opportunities for the company and also reflect our strong position in future markets, both domestically and internationally. Looking back at 2013, I'm really proud of what the Raytheon team was able to accomplish. We continue to meet our customers' needs in a challenging environment. We successfully consolidated Raytheon's businesses from 6 to 4 and in record time, and we continued to reduce our costs. I'm also proud that Raytheon was the only AMD company recognized in the Civic 50 for the second consecutive year as one of America's most community-minded companies. The Civic 50 identifies and recognizes companies for their commitment to improve the quality of life in the communities where they do business. So in summary, as I look across the company, our performance continues to be solid, our strategy continues to create value, our culture is stronger than ever and the company is well-positioned and prepared for the future. I also want to take the time to thank the Raytheon team for its focus and dedication throughout the year. I would also like to thank our supply chain partners for their support. As you all know, I announced my intention to step down as Raytheon's CEO, and the board appointed Tom Kennedy to be CEO, and Tom is on the call with us today. We started the transition, and we're both excited for the company's future. Most of you know Tom and the excellent job he's done as COO, leading our business consolidation that enhances productivity, agility and affordability. His experience as a proven leader with a broad understanding of key technologies, a key -- keen customer focus and a deep knowledge of our business makes him the ideal CEO to take the company forward. I look forward to continuing to serve as Chairman of the Board and working with Tom to ensure a smooth transition. With that, let me turn it over to Dave.

Okay. Thanks, Bill. I have a few opening remarks, starting with the fourth quarter and full year results, then I'll discuss our outlook for 2014 and after that, we'll open up the call to questions. During my remarks, I'll be referring to the web slides that we issued earlier this morning, which are posted on our website. If everyone could please move to Page 3. We delivered solid results in both the quarter and the full year. Fourth quarter adjusted EPS was $1.58. For the full year, adjusted EPS of $6.38 was up 1.6%. Our sales for the quarter were $5.9 billion and $23.7 billion for the year, consistent with the guidance range we presented in October. We also generated strong operating cash flow of $1.1 billion for the quarter and $2.4 billion for the year. Our focus on cash cycle productivity continues to drive results. I'd like to point out that we made a discretionary contribution of $300 million in the fourth quarter of 2013. Even with this pension contribution, we still achieved the high end of our prior cash flow guidance. Additionally, during the quarter, the company repurchased 4.7 million shares of common stock for $400 million, bringing the full year 2013 repurchases to 15.2 million shares for about $1.1 billion. The company ended the year with a strong balance sheet and net debt of $437 million. As we previously disclosed in the fourth quarter 2013, our Board of Directors authorized the repurchase of up to an additional $2 billion of the company's outstanding common stock. Turning now to Page 4. Let me go through some of the details of our fourth quarter and full year results. We had solid bookings of $7.5 billion in the quarter and $22.1 billion for the full year, resulting in a year-end backlog of $33.7 billion. Our book-to-bill in the quarter was 1.28, and the company ended 2013 with a funded backlog of about $23 billion. For the quarter, international orders represented 43% of our total company bookings, and for the full year was 30% of total bookings. At the end of 2013, approximately 37% of our total backlog was international. In the fourth quarter, significant international awards included $1.3 billion at IDS on a ground-based air defense system and $566 million at SAS on tactical airborne system upgrades for international customers. Other significant bookings included $393 million at IDS for AMDR; $173 million for a TPY-2 radar for the Missile Defense Agency; and $585 million at IIS on a number of classified programs, including $100 million for international cyber. Missile Systems booked $189 million for the evolved Sea Sparrow missile and $177 million for the Phalanx Weapon Systems for the U.S. Navy and international customers. Missiles also booked $172 million for Paveway for the U.S. Air Force and international customers. If you'd move to Page 5, we had fourth quarter sales of $5.9 billion, down 9%. As I mentioned earlier, sales were consistent with our expectations. It's worth noting that fourth quarter sales reflect the impact from the timing of international awards, some of which were received late in the quarter. Looking at the businesses. Net sales at IDS were $1.6 billion in the quarter. Compared to last year's fourth quarter, the change was primarily due to an international Patriot program nearing completion and lower volume on a tactical radar program. IIS net sales of $1.5 billion in the quarter were down from the same period last year, primarily due to lower volume on training and some of our classified programs. Missile Systems had fourth quarter 2013 net sales of $1.6 billion, down compared to the fourth quarter of 2012. The change was primarily due to lower sales on U.S. Army sensor programs. And SAS had net sales of $1.6 billion in Q4, lower than the comparable period last year, primarily due to reduced volume on some of our ISR and classified programs. For the year, sales were $23.7 billion, down 2.9%. A decline in domestic sales was primarily -- was partially offset by a little more than 3% growth in our international sales. Moving ahead to Page 6. We delivered solid operational performance in the quarter and for the full year. Looking at business margins in the quarter, all were essentially in line or better than last year, as the IDS, IIS and SAS margins all exceeded the range that we have provided back in October. Missile Systems fourth quarter margin did come in below our expectations, driven by mix, a small loss on the disposal of a non-core manufacturing facility, as well as an investment in the development of a new wafer-level packaging technology. Overall, our adjusted margins were up 30 basis points in the quarter. As I stand back and look at full year 2013, we again delivered strong margins. Our adjusted margin increased 10 basis points, driven by solid execution, favorable mix and meaningful contribution from our ongoing productivity efforts, including the business consolidation and the successful implementation of Global Business Services. On Page 7, you'll see both the fourth quarter and full year adjusted EPS. In the fourth quarter 2013, our adjusted EPS was $1.58, and for the full year was $6.38 compared with $6.28 in 2012, an increase of 1.6%. The increase for the full year was driven by capital deployment actions, specifically share repurchases, and by strong execution, partially offset by lower volume. As I previously mentioned, the company generated strong operating cash flow of $2.4 billion in 2013. So moving ahead to our 2014 guidance, which you'll find on Page 8. We see sales in the range of between $22.5 billion and $23 billion, down 3% to 5% from 2013, driven by our domestic business, which is partially offset by the growth in our international business. As for pension, we see the FAS/CAS adjustment at a positive $346 million, which reflects our investment returns in 2013 of over 15% on our U.S. pension assets and the December 31 discount rate of 5.1%. We expect net interest expense to be between $200 million and $210 million. We see our average diluted shares outstanding to be between 312 million and 314 million on a full year basis, a 3% year-over-year reduction at the midpoint of the range. As for our effective tax rate, we expect it to be approximately 28.5%. Our 2014 effective tax rate guidance is lower than 2013 due to an international cash management initiative, which was executed in January, bringing cash back to the United States. This action impacted the full year tax rate by just under 3 percentage points and is worth approximately $0.26 per share. I should also point out that we haven't included the possible extension of the R&D tax credit in 2014 guidance. If the legislation passes, it would favorably impact the effective tax rate by about 100 basis points and our EPS by about $0.10. In 2014, we see our adjusted EPS to be in the range of $5.76 to $5.91. In addition to the FAS/CAS adjustment, this also excludes the $0.26 impact that I just mentioned. We see 2014 EPS to be in the range of $6.74 to $6.89. Our operating cash flow guidance is between $2.3 billion and $2.5 billion. Moving ahead to Page 9. Here, we provided our initial 2014 guidance by business. We expect 2014 adjusted margins to continue to be solid and in the 12.6% to 12.8% range. This includes 20 basis points of expected cost to support productivity and efficiency initiatives, including real estate utilization improvements through facility consolidations, as well as investments to support the continuing evolution of our advanced technologies to maintain our competitive edge, which has been a focus area in the past and will continue to be so in the future. Further, our margins for 2014 will be impacted by a change in program mix, both from an international and domestic perspective. We're continuing to focus on reducing our cost structure. In 2013, we consolidated several facilities, reducing our square footage by about 3% or approximately 1 million square feet. Looking forward, we're targeting a square footage reduction of approximately 10% over the next 3 to 4 years, which should yield considerable efficiencies and further support our customers' affordability objectives. If you'd now turn to Page 10, we provided you with our 2014 outlook by quarter. You'll notice that sales ramp up throughout the year. In the first half of 2014, sales are expected to be down in the mid- to high-single digits on a tough comp. You may recall that in the first half of last year, we received some quick-turned book-and-bill business. The back half sales for 2014 are expected to be in line to slightly up when you're comparing to the same period in 2013. And if you compare second half sales to first half sales, we expect to see mid-single-digit growth. The improvement in the back half was driven by the timing of international awards, which we received in late 2013 and expect in the first half of 2014. It's worth noting that the sales cadence in 2014 is consistent with what the company saw in 2011 and 2012. Finally, on Page 11. As we've done in the past, we've provided a summary of the financial impact from pensions in 2013, as well as the projected impact for 2014 through '16, holding all assumptions constant. Let me conclude by saying that in 2013, Raytheon delivered solid operating performance. By focusing on program execution and structural cost improvements, our margins, earnings and operating cash flow were all ahead of expectations. Our international business continues to grow. We have a strong balance sheet and net debt of less than $450 million. This gives us real flexibility and options to continue to drive shareholder value. We continue to find new ways to apply our world-class technologies to deliver meaningful and differentiated value to our customers, improve efficiency and drive productivity. Before concluding, I'd like to offer my personal thanks to Bill. Your leadership has transformed this company, and you are handing off a strong, well-managed organization. I know I speak for the rest of the employees by saying thank you for your leadership, vision and all the contributions you've made over your 42 years of service to help make this company a success for our customers, our employees and our shareholders. I look forward to continuing to work with you in your role as Chairman. I would also like to personally congratulate Tom. I've had the pleasure of working closely with Tom over the past 8 years, and especially, since he became COO this past spring. With his 30 years of experience, Tom knows this company from top to bottom and has demonstrated strong leadership throughout his career. So Tom, I, and the rest of the team, are looking forward to working with you and building on our strong foundation under your leadership. So with that, we'll open the call up to questions.

[Operator Instructions] And our first question comes from the line of Sam Pearlstein of Wells Fargo.

Bill, we're not going to ask about succession today.

Well, you can go ahead now.

I can probably give you a definitive answer now.

I'm sure. Well, congratulations. Can I just ask a question? If I just take some of the numbers you gave us for the domestic and international, it would seem to imply that domestic is probably down 8% this year and international gets 6% growth. And given that first half, second half dynamic you just talked about, should that growth continue into next year? I mean, is the midpoint of this year where you feel like we start to hit bottom in a cycle?

So Sam, why don't I start with that, and maybe Bill or Tom want to add a little bit of color. So we expect domestic on a full year basis to be down in the mid-single-digit range. And we see our international business, again for the year, growing in the low- to mid-single-digit range. And to use a phrase that Bill has used in the past, '14 does look a lot like '13 from a sales profile standpoint.

Yes. And I would add that I think we've always said that we look at '14 in part of '15 being a transition year. And if you look at '16 and look at the numbers, there's actually -- it ticks up even under sequestration. So for us, this feels like what we've been talking about and the international awards that I highlighted and some of the ones we're expecting to come in really are a nice transition for us as we go through this change in budget, if that helps.

And Dave, if I can just follow up, is there a cash effect from this tax benefit in the first quarter? Because just looking at the quarterly run rate, it did look like it was heavy in the EPS, which I guess is the tax benefit. But is there a cash effect as well?

Yes, there is. It's about $75 million or $80 million.

The next question comes from the line of Myles Walton of Deutsche Bank.

Bill, you've come a long way from -- since the NCS problem programs. It's a much more pleasant call these days.

That was about 10 years ago, and I remember it vividly.

Yes, me too. Can you highlight how much of that second half growth is dependent on signing the international contracts in this first half of the year? Obviously, they have a tendency of slipping a little bit, so I just want to make sure we're not counting on too much.

Yes. So we feel confident in how we have guided for the year, both first half and second half. You'll recall that a number of these larger programs we started talking about mid last year. Bill just put a lot color around where the more significant ones stand. So from our perspective, I would say that it wouldn't be a stretch to say that we're highly confident with our second half performance relative to what I just said in my formal remarks.

Yes. And I would just add a little color. The Oman program has started from the point of having a contract. Kuwait, I mentioned, it's all -- everything's done in country. It's back on this side of the pond now for us to take care of. And when you look at Qatar, clearly, that's been through all the processes and just waiting for the final signature over there. So I think Dave said it well. We're confident what the front-end looks like. And once a few more stages are taking place, we might even spend some of our own money to get an early jump on this to make sure we get it nailed correctly.

Yes. You should also keep in mind that we factor these pretty heavily when we talk about the bookings outlook for the year, and that's certainly taken into account here. So if you look at what had actually taken place in the fourth quarter with a book-to-bill of just under 1.3, we also see strength in the first half of the year. I'll repeat what I just said, on a full year basis, we have a lot of confidence in the guidance and certainly, in the second half.

Got it. Okay. And then just one cleanup one was on SAS, anything in particular in terms of timing in the quarter? And was it just a push out into '14 in terms of the sales for the fourth quarter?

Okay. From a sales standpoint for SAS, we do see 2014 declining in the mid-single digits, which is driven by lower funding levels on some of the various classified programs, as well as some of the airborne radar and EW systems. You also know that -- and we talked about this in the past, it was scheduled completion on some of the international tactical airborne radars. Now with all of that said, we do see a ramp in the second half of SAS similar to what I just said about the company as a whole. And we continue to have a lot of confidence in that business. It's probably worth mentioning as well, the margin performance in Q4 for SAS was very strong. They were able to pull some productivity initiatives forward into the fourth quarter that we had initially anticipated in the first half of 2014.

And I would add just a little bit, Dave, they can now start on Next Generation Jammer. We were delayed for about 6 months there because of the protests, and RACR will be starting up, so that will give them a nice ramp-up here.

The next question comes from Ron Epstein of Bank of America Merrill Lynch.

So congratulations, Bill, and everybody.

Thank you.

So at a high level, I mean, I guess there was a lot of concern with maybe some of the changing political perceptions in the Middle East that you guys, in particular, would see some pressure on international sales in the region. So I guess my question is, if we back up, have you seen a changing dynamic in the competitive landscape in international markets, maybe particularly in the Middle East, but just more broadly speaking? As kind of everybody has been trying to dive into international markets and it's been a focus for -- your competitors are putting together international units and that sort of thing so.

Yes. I mean, what I would do is remind everybody back to about 8 or 9 years ago when, I guess, we were talking about international. It's not something you can flip a switch and turn on a light and have it instantaneously happen. So I appreciate people starting organizations and putting things in place, but it takes a while to establish your credibility internationally. And our customers really count on the fact that, I mean, we've been in the Mideast 50 years, Japan 50 years, Taiwan 50 years, Korea. I mean, these are the sort of things we've done for a long time, and your performance over that period really helps you capture new business. And it's, to me, it's all about relationships and trust, and that does not happen overnight. To your question in the Mideast, clearly, the region needs the kind of products and services that we as a company have in our portfolio, and I was over there in December and Tom was over there just recently. I think both of us would say the same thing, that there hasn't been any kind of turndown whatsoever in what we're doing in the region. In fact, we find the opposite is true that they're counting on us to do more to help them as they worry about their own national security. So I know what's written in the papers, but to me, first-hand knowledge is really important, and that's why we go over there to interface with people that we've been doing work with for a long, long time.

All right, that's good to know.

If that helps.

Yes, for sure. And just a follow-on. When we think about where maybe some of the next emerging opportunities are for Raytheon internationally, where would that be?

Well, for us, the Mideast is still strong. I mean, we have 2 new customers in Oman and Qatar that haven't been in our portfolio before. Those programs took a few years to get over the goal line, and we intend to do more with them and we can offer more to help provide for the security of their countries. So the Mideast is strong. Asia is still strong, whether it's South Korea, Taiwan or Japan or that part of the region. Clearly, Australia and Europe, in my opinion, not now, but in the future, 2, 3 years from now, Europe is going to have to upgrade what they have. They haven't spent money. They've kind of made things do and in my opinion, they're going to have to upgrade what they have, and we'll see that as an opportunity because we've been there for a number of years. As a company, we sell in 80 countries around the world. And one of the things I'm proud of when I travel, and I know Tom feels the same way, is that we never have to talk about our performance, it's a given. So we start really with more what capabilities can we help you with as we go in there.

The next question comes from the line of Joe Nadol of JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Bill, it's been wonderful working with you and wish you all the best.

Thank you, Joe. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Well, onto the business. I thought I heard you guys imply earlier that you're looking at 2014 and 2015 both as transition years or -- I interpreted that as down years for domestic, with then potentially growth reemerging in '16. Is that a fair characterization of the way you're looking at this?

Yes, Joe, I would say it is. When you look at the budget process, even with sequestration and the Budget Control Act, '16 was always the year that there was an uptick where it started to come back again. And even when you look at it '17 and on, the budgets start to increase. The other thing is, as the economy gets going, that'll take part of the pressure off too. But we've always viewed that as the transition. You got it right. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just on the international front. I heard what you said so far, and we can do the math on the 2 deals that you're waiting for here near term. But when you look at the $8.8 billion that you're expecting this year in bookings, roughly internationally, what are the other key deals that we can kind of hone in on as we look in -- particularly into the second half of the year?

Yes, we feel good about it with that. Let me turn it over to Tom. He just came back from a trip, so he can add some color.

Yes, I just made – just back from the Middle East, I did have the opportunity to do the ceremony signing for the Oman deal. And as Bill mentioned before, Oman is a new country for us, and we see additional opportunities in Oman over the next 5 years. Also, the big one Bill mentioned was Qatar. It turns out there will also be a second award towards the end of the year from Qatar. This is for air defense operating center. We also -- Bill did mention the Patriot Kuwait fire units. That is very close to being awarded by the U.S. Army. We're expecting that towards the end of February, beginning of March. There's other Patriot activities between $1 billion to $2 billion coming up more towards the back end of the year. We also have a big opportunity relative to TOW international, and this is for the next -- this year. It's about between $600 million and $700 million. And overall, there's another overall missile, it's about $1.2 billion throughout the year. And then the other major activities, is coming out of SAS is tactical airborne radars and electronic warfare, approximately $600 million. And then we have, as you know, a significant training in O&M activities internationally, and that's about $700 million. And then there's a miscellaneous of about another $1.5 billion, and that's across our special mission aircraft, battlefield radars, air-traffic control, ground sensor systems and also airborne ISR, that kind of wraps it up.

It comes from the line of Robert Stallard of Royal.

Bill, maybe for the last time, I was wondering if you could give us maybe your thoughts on maybe the general defense industry. Now that we have some stability in the U.S. defense budget for the next couple of years, do you think we'll see some pickup in M&A and would you, Raytheon, be interested in getting involved?

I think right now, the mid and lower tiers are facing some pressure. I think some companies are having to decide what they're going to do if they can continue on the path they're on, which if they decide to do something different, will it involve M&A, and I think some are going to have to do it. I think from our standpoint, Dave said it best, I mean, we've got a balance sheet that's -- I like to say as pristine with a lot of firepower. So if there's opportunities for us to add to our portfolio that make sense, not just to buy something for revenue's sake, that never works, but where it fits in, especially in where we see future growth, then that would be the case. But I don't expect the company to be doing anything totally different from what we've done in the past. One of the things we tried to be -- somebody mentioned back to the 10 programs, 10 or 11 years ago, we tried to be transparent in what we do, and I don't expect that to change at all. Since you asked me to reflect, one thing that I would say that I am concerned about as we go through this budget process, we seem to be protecting personnel and readiness, which is okay. Those can be bought back very quickly, and I'm going to be working hard to make sure that on the R&D side that we don't take a lot of cuts in the budget there because, being an engineer, I know how long it takes for R&D to come to fruition. And we're always a country that has invested in our capability, in war-fighting capability. I know Raytheon, even in the tough times when we had $13 billion in debt, we still invested, and that's paying off in some of our wins as we look today, and we'll continue to invest as a company. But I think as a nation, as we look at the -- our investments, we've got to make sure that R&D is not sacrificed because you can't buy back that time that you lose.

And maybe just a quick one for Dave, of course, on pension and...

Of course, Rob. I was waiting, yes.

Maybe it's quite a simple question, but you showed the gross funding requirement for the next 3 years. Wouldn't it make more sense to use some of this cash on the balance sheet available today to kind of bring those future contributions down?

I'm sorry, Rob, I couldn't -- you were breaking up a little bit. Can you just repeat the question?

Yes, sorry. It was -- I asked if it would make more financial sense to use some of the cash on the balance sheet today rather than these gross funding requirements in the future.

To use some of the cash on the balance sheet today -- yes, yes. We made a discretionary – a small discretionary contribution in the fourth quarter. There's a number of considerations with the cash that we currently have on the balance sheet. And as we go forward in '14, I've already suggested that we'll once again have a very strong cash flow performance here of upwards of $2.5 billion. It's something we continue to consider. Historically, the discretionary contributions have been very good investments for the company at any way that you would want to analyze those investments. So it's certainly something we'd look at going forward. I want to be clear, none of that is contemplated as we sit here today. But if we do decide to go in that direction, we will certainly make that public in advance of what we're going to execute. There's different areas that we're thinking about investing in. Bill suggested that we are going to continue to look hard at M&A opportunities that are value-add to the company, both in the near and long term. We'll continue to look at the dividend, and we've said this publicly before. We believe that increasing the dividend over time is a very important economic signal to the investors relative to how we see our cash flow performance. The repurchase plan back in the fourth quarter, our Board of Directors approved a $2 billion authorization, which is not time-sensitive. In other words, we can use that over any period of time we would like. And I just suggested that the diluted share count for 2014 will be down about 3%, so we continue to see that as a value-creation opportunity for investors. So we're cognizant of our cash position. We feel good about the flexibility, and we have a lot of confidence that we'll be able to effectively drive value for our shareholders over time.

The next question comes from the line of Howard Rubel of Jefferies.

I was thinking, since you're a short-timer, maybe all my questions should go to Tom and Dave anyhow.

Take your best shot, Howard.

There's no water in this one, Bill. First, something that goes back a little while, and I think you've talked about resolving it, was the British border authority. Where do you stand with that? And how close do you think you are to getting what you need back?

On e-Borders, we expect a decision in the first half of 2014. All the hearings were concluded late last year, and that's about the best color I can give right now, Howard, because I don't know any more than that.

All right, that's fine. You spent a lot of time and effort on Patriot upgrades and some other things you've been doing. Tom, maybe for a moment you could talk a little bit more of how you've enhanced the system and sort of what does that leave in terms of -- I mean, at some point, it has to go back in and help the Army in a meaningful way, I would think.

So I think the big upgrade on Patriot came out of the U.A.E. program and was about over $400 million in nonrecurring, and nonrecurring is the dollars we use for development. Those changes are now in the Patriot system. They've been through complete testing with the U.S. Army. And so right now, in all our new offerings in the Middle East, we are providing this upgraded Patriot system and it's getting a lot of traction. The other area here is, there's 12 nations that have Patriot today. And so all those nations are now looking at upgrading their systems with all the capabilities that were added via the U.A.E. contract that we had.

And then, last, Dave, if you I look at the math on the share repurchase, it appears as if you're going to scale it back a little bit relative to last year. Is that a pretty fair assumption?

That's a fair assumption, Howard, and I believe I mentioned that on either the second quarter or third quarter call last year. So it is scaled back somewhat, but it's still an important part of the overall capital deployment plan.

So it does sort of indicate that you're looking at finding other ways to -- or just more balance, I guess, might be a way of thinking about it going forward for growth.

That's a fair comment. We are balancing out the way we're looking at the various levers from a capital deployment standpoint. And we still believe that roughly a 3% reduction is -- will be viewed favorably. We still see Raytheon as a good investment or we wouldn't be repurchasing our shares. But again, there are a number of different areas to consider as we go forward in '14.

The next question comes from the line of George Shapiro of Shapiro Research.

Congratulations again, Bill. A job well done over the years. It's always been fun.

Thank you, George. I'd like to say I'm really going to miss this. You know what I'm going to do? I'm going to be listening in on the calls so it probably will be a lot more fun.

Okay, my question is that, Dave, given that you've missed the book-to-bill for the year, I mean, it came in at 0.93 versus the nearer 1 you were expecting. Was that the reason why the sales guidance for this year is down 3% to 5% versus what you said on the third quarter call that it would be relatively similar?

Okay. So you are right, as bookings have moved to the right, that clearly impacts sales in the near term. I want to repeat something that I said earlier. 2014 is very similar to the way 2013 looked from a sales standpoint, both domestically and internationally. Now we did have some larger programs move into the first half of 2014. We continue to see a very healthy book-to-bill in -- particularly in the first half of 2014. So if you take that 3-quarter period, the fourth quarter of '13 and the first half of '14, that bodes very well for the sales outlook for the back half of '14. From an overall standpoint, it impacted the sales guidance somewhat, but it's not overly meaningful, is the best way for me to say it.

And I think I should have mentioned that when I gave the $23.5 billion, plus or minus $500 million guidance on bookings, we expect a book-to-bill between 1.0 and 1.05. So we're expecting a strong year.

Okay. But I mean, when you said similar sales in the third quarter comment, I'm just trying to figure out exactly how much the lower bookings might have impacted the sales guidance for this year. I mean, was it 1%, 2%?

Yes, it's not a lot, George. I'm not going to get overly specific on the arithmetic, but it didn't -- I would say the bookends of what we just went out with, it hasn't changed as a result of some of these orders moving to the right. It's less than a 1% impact.

Okay. And then just...

That's why we go out with a range, George. That's why we have a range.

Okay. And then just one quick one. You did well on the margins, but the space area, you particularly beat your guidance as set out in the third quarter. So was there something unique in this fourth quarter for space that you didn't anticipate? Or what caused you to beat it by that much?

Yes. No, that's...

I mean, you're 70 basis points higher than what your highest guidance was at the third quarter.

Yes. So the SAS business did see strong fourth quarter margins, and they were slightly above the prior year's fourth quarter. It's primarily due to the productivity improvements in our airborne radar program area. We had a couple of things going on and we were able to pull, and I mentioned this earlier, pull some productivity actions that we had anticipated in the first half of '14 into the fourth quarter.

Okay, very good. Congratulations again, Bill.

Thanks, George. I will miss you.

The next question comes from the line of Jason Gursky of Citi.

It's Jon Raviv on for Jason. Congratulations to Bill and Tom. Just kind of curious what you're looking out for in the FY '15 budget process from a domestic perspective, where you see risks and opportunities around hitting the top end or bottom end of your guidance for this year?

DoD is going to submit the budget in the March timeframe. It'll be the first budget that's submitted within the caps. So for us, it'll allow DoD to make the tradeoffs that they see fit under these -- the new budget process. Beyond that, it's really hard to speculate what we think they may be doing in that regard. But clearly for us, the areas that we're focused in, in missile defense and in cyber and so forth, fit with what we believe the priorities will be in that case as we go forward.

And then just in terms of thinking about the high and low end of guidance for this year?

Yes. So from a guidance standpoint, we range virtually all of our financial performance measures. I think a good way to think about it would be starting at the midpoint. We have opportunities and we also have some risks. But on balance, I would suggest the midpoint of the range is the way to start thinking about it.

The next question, apologies for pronunciation, comes from the line of Cai Von Rumohr of Cowen and Company.

Bill, again, congratulations on job extremely well done.

Thank you, Cai, appreciate it.

So well done that my only real question is one for Dave. So you laid out this very attractive profile through 2016 of cash recovery and your discretion -- and your contributions, at least the gross funding contributions. And if you don't make any discretionary contributions, it looks like every year, you get another couple hundred million of cash flow benefit.

That's right.

As you look at that, what could make the cash -- or how locked in is the cash recovery? And I assume the gross funding essentially -- what could change the gross funding other than your discretionary contributions?

Well, there's a lot of variables involved in this from a discount rate standpoint, from an asset return standpoint, from a demographic standpoint. All of these have various impacts on the accounting, obviously, on the recovery and on the contributions under the Pension Protection Act. With all of that said, I wouldn't -- I would look at what we have in the web slide deck as -- with pretty high confidence. I don't see that changing dramatically going forward. It holds all assumptions constant relative to the discount rate and the asset returns at 8.75%. The demographics can sometimes change these numbers somewhat, but not meaningfully. So I would say that I would look at those numbers from an investor perspective and have a fair amount of confidence in what we put out there.

[Operator Instructions]

Right, Quentin, I think that's it. So thank you, everyone, for joining us this morning. We look forward to speaking with you again on our first quarter conference call in April.

And Todd, thank you, and I want to thank everybody. It's been a nice ride. Thanks, everybody. Quentin?

Ladies and gentlemen, thank you for joining today's call, and I conclude. You may now disconnect. Thank you for joining.