Good day, ladies and gentlemen, and welcome to the Raytheon First Quarter 2014 Earnings Conference Call. My name is Taheesha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Todd Ernst, Vice President of Investor Relations. Please proceed.

Thank you, Taheesha. Good morning, everyone, and thank you for joining us today on our first 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 Tom Kennedy, our Chief Executive Officer; and Dave Wajsgras, our Chief Financial Officer. We'll start with some brief remarks by Tom and Dave and then move on to questions. Before I turn the call over to Tom, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance, constitute forward-looking statements. These statements are based on a wide range of assumptions that the company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release and are discussed in detail in our SEC filings. With that, I'll turn the call over to Tom. Tom?

Thank you, Todd. Good morning, everyone. Thank you for joining us. During the first quarter of 2014, Raytheon delivered solid operating results. Our margins, cash flow and EPS were all ahead of expectations, and our bookings and sales were in line with our plan. I'm proud of the team as they continue to deliver strong program performance in a challenging environment. As our results show, we continue to build upon a strong foundation that creates value for customers and shareholders. Further, we are continuously positioning the company for future growth and value creation. Our goal is to ensure the ongoing strong alignment of Raytheon's broad portfolio of capabilities with the needs of our global customers. To do this, we continue to prioritize our investments with a focus on enhancing our competitive advantage and leveraging our capabilities to grow globally in new markets, as we've done recently in Oman and we are going to do in Qatar. Furthermore, we continue to strengthen our "one company" collaboration to improve our performance in execution and growth. And we're attacking costs by leveraging commercial best practices to drive value and affordability. As many of you already know, Raytheon's international reach is a key element of our solid foundation and an important differentiator for the company. It's an area that holds great potential for our future. In the first quarter, international bookings were 39% of total bookings, and international now comprises 39% of our total backlog. I'd like to point out 2 key international bookings that we received in the quarter. We booked $515 million for an award to provide Kuwait 2 Patriot fire units. This adds to Kuwait's existing inventory of 5 fire units and reflects continued demand for our combat-proven integrated air and missile defense systems in the global marketplace. We also booked…

Okay, thanks, Tom. And good morning, everyone. I have a few opening remarks, starting with the first quarter highlights, and then we'll move on to questions. During my remarks, I'll be referring to the web slides that we issued earlier this morning. Okay, if everyone would turn to Page 3. We're pleased with the solid performance the team delivered in the first quarter, with sales, EPS, margins and operating cash flow all at or better than expectations. It's a good start to the year and positions us well for achieving our full year outlook. Our EPS from continuing operations was $1.87. On an adjusted basis, EPS was $1.43. I'll discuss this in more detail in just a moment. Operating margin was strong at 14.3%, and on an adjusted basis was 12.7%. And sales of $5.5 billion were at the high end of our sales guidance range. Operating cash flow of $659 million was better than our prior guidance, driven by the timing of collections that were previously expected in the second quarter. During the quarter, the company bought back 2.1 million shares of common stock under the share repurchase program for $200 million. I also want to point out that we're reaffirming the guidance that we provided in January, which I'll discuss further in just a few minutes. Turning now to Page 4, let me start by providing some detail on our first quarter results. Company bookings for the quarter were $4.3 billion, slightly ahead of our internal plans. International awards represented 39% of the total. As you may recall, we had strong bookings in the back half of 2013, so on a trailing 4-quarter basis, the book-to-bill is 0.98x. And as we mentioned on the January call, we expect our full year 2014 bookings to be $23.5 billion, plus…

[Operator Instructions] Your first question will come from the line of Joe Nadol from JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: First question is just on the IDS contract you guys mentioned. Any more color you can give on the growth in -- or how much that cost you in EBIT in the quarter? How big is the contract? The confidence in your new cost assumptions, et cetera?

The IDS contract, specifically, which one are you referring to, Joe? Joseph B. Nadol - JP Morgan Chase & Co, Research Division: The one I think you mentioned that impacted your margin in the quarter.

Are you talking Patriot for Kuwait? Joseph B. Nadol - JP Morgan Chase & Co, Research Division: No, I'm sorry. I thought you mentioned in your description of margins at IDS that there was a contract for which...

Joe, I'll take that real quick. That was a Patriot program we had and there was a refurbishment, and some of the refurbishment elements were required and initially anticipated, so we did book an upcharge on that. That is a profitable program, but it's requiring us to bring in some more additional material into it to complete the refurb.

I apologize, Joe. Yes, there's a -- it's a contract that's been in production for a while. There was a slight shift in the cadence of the material that's required. So there's a slight impact in the quarter. It shows up in the EAC adjustments, but the contract remains very profitable. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Understood, okay. And then, just secondly, I was interested in more on the cyber booking internationally. I don't know how much you can talk about it. It -- just from a high level, it always seemed to me that cyber is more difficult -- a more difficult line of business to transfer internationally, more of it is service-oriented than a lot of things you do, conceptually anyway. And so what's really the opportunity to do more of the same, more details you can give on it?

Yes, Joe. I think it's been a focus of ours for several years, to leverage our international channels to drive our cyber business globally. And I think, we were just -- we are seeing -- we saw it last -- late last year, we saw it this year that we're being successful in doing that. And I think the -- one of the main reasons is that we're very credible worldwide relative to our cyber capabilities, and we have a strong international brand relative to the Raytheon company itself. The combination of those 2 is that we're seeing significant opportunities across the globe for our -- essentially our cyber capabilities, our knowledge of cyber and also our cyber products. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. Just back on that first -- that contract we talked about first. Are you guys going to quantify the specific EAC adjustment or are you not going to do that?

Well, the EAC adjustments overall for the quarter ran at about 2.2% of revenue. The IDS -- the change for IDS was about $34 million, $35 million. And that one adjustment made up about half of it. That's the reason we wanted to point it out.

Your next question will come from the line of Yair Reiner from Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: First, a follow-up on Joe's question. You mentioned in your discussion of cyber that you'd like to do more on the commercial side. Can you give us a sense of how much of your cyber business today is commercial? And maybe where you'd like that to be in 4 or 5 years?

Yes. So it's an area that we have participated in for a while now. From a financial perspective, it's not significant at this point. We do offer a broad range of products and services and solutions across various customers. And I think equally important, across various information assurance domains. We've been talking about this and thinking about this from a strategic standpoint for quite a while. We do see ourselves expanding in that area. But at this stage, I don't think it would be prudent to get specific as to how significant that could become over the next 3 to 5 years. With that said, it is a key focus area for us both from a government standpoint and from a commercial standpoint. And we do consider it an important growth area. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it. And then, one more, if I could. You've had 2 significant new program wins here relatively recently with the Next Generation Jammer and AMDR. I'm hoping you can help us understand when those begin to hit the P&L? And what the margin profile of those are going to look like?

So let me take that, Yair. Obviously both of those wins were very important to the Raytheon Company. They're both franchise wins and essentially based on the investments that we have made in research and development over several years. And that essentially bore the fruits of that effort. As we move forward, right now we're in the development stages of the program. And so we will not be seeing the high production-type of margins out for about 4 years. But we do have healthy margins on both programs through the development phases. Yair Reiner - Oppenheimer & Co. Inc., Research Division: And then the cadence of the revenues?

Cadence of the revenues? It's a...

The cadence of the revenues, they ramp up throughout this year and become more significant as we get into '15.

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

Can you talk a little bit about just on -- on one of the slides on SAS, you called out the $68 million impact from intercompany sales. I don't remember you calling that out before. So is there something different for specific programs or is it just larger this quarter for some reason?

Well, the -- it's army-related. The end product is a battlefield radar that's sold out of our IDS division. The reason I pointed that out is because it's a significant intersegment change year-over-year of $65 million, $70 million. The other businesses have intersegment sales that are in line with last year. So just on a purely external basis, SAS was down a little over 8% and I just thought it was important to point it out.

Okay. And then, just when -- you mentioned the capital deployment question and I guess, I'm just thinking more broadly, which is, you have done a lot of work throughout the 2000, I guess to go from, call it, a BBB to an A rating. And just thinking about your credit profile. How important is that and in the context of what you would do with your capital structure and your cash?

So we are pleased with what we've been able to do from a balance sheet perspective, driven by the strong cash flow over the last number of years. We are essentially an A- rating across-the-board. And we feel that between BBB+ an A- is about the range that we are targeting and comfortable to stay within. From a capital deployment standpoint, I suggested in my opening remarks that we would continue a balanced approach. There is a likelihood that we will see more from an acquisition perspective going forward than we've done certainly in the last year or 2. Last year was pretty quiet on the acquisition front and you can see that when you look at our balance sheet. Going forward, I wouldn't expect wholesale changes from the way we're thinking about capital deployment or the way we're thinking about the rating.

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

Might as well carry on from where Sam was talking about, the balance sheet situation, but maybe from a different angle. I'm wondering if this shift towards 40% of sales being export also changes your thinking about where you expect the balance sheet to be or what sort of cash debt holding you should have going forward.

Yes. So international, as you know, typically has a slightly improved cash profile when compared to our domestic business. I think when you cut through the details, that simply gives us more opportunity with respect to our capital deployment priorities as we look ahead to 2015 and '16. I think that that's really the short version. We're going to continue to invest in ourselves as a priority, I think Tom mentioned that earlier, both from a cost efficiency standpoint -- for example, we have allocated about $100 million to facility utilization improvements this year. We're continuing to invest and increase the investment in R&D as we go forward. And there is some capital associated with that. I'll say this again because it's worth repeating, we fully intend to continue to return value to shareholders through both dividends and share repurchases. And like I said, we have an increasing focus on value-creating acquisitions. I do want to point out one last thing. The first quarter of this year, we posted the highest cash flow performance, operating cash flow performance in over a decade. So I think your question is the right one, and we'll continue to drive cash flow for the company in that regard.

Maybe a follow-up on your favorite topic of pension space. I was wondering if you could very simplistically explain why these mortality table changes aren't going to much have an impact.

Okay. So I think different companies use varying assumptions as they go forward and suggest outlooks and forecasts for pensions. Our assumptions are such that the new mortality tables that are in draft form and recently published wouldn't suggest a big change for us from a FAS/CAS standpoint, or -- and you didn't ask this, or from a cash flow standpoint. As a matter of fact, if you look over the 3-year period, 2014, '15, '16, it actually suggests a slight increase in the net funding cash flow performance for pensions.

Your next question will come from the line of Jason Gursky from Citigroup.

Dave, just a quick question for you. Can you just update us on e-Borders, in the case going on over there? And then, Tom, a bit broader question for you on the international side. I'm just wondering if you could talk a little bit about the competitive environment there, both from a price perspective, as well as a technology perspective, particularly in missile defense, looking at the Chinese products out there and the potential threat that MEADS might offer up as well. And then, just the pipeline itself, how far out that pipeline reaches and whether we ought to be expecting continued solid demand in growth potentially coming out of international markets to the rest of the [indiscernible].

Yes, so let me start by talking about the e-Borders situation. The arbitration proceedings in the e-Borders matter, as you know, were initiated in 2010. And hearings before the arbitration panel were concluded in 2013. We expect the decision from the panel sometime in the first half of 2014. That's our expectations, but it's behind closed doors and we'll see when we get a decision. That's all we have.

So Jason, on the international side, obviously, right now there's a significant threat across multiple regions. If you're fairly knowledgeable about the Middle East, you understand the concerns about Iran by several countries in that region. And for example, that's why we're seeing that uptick in Qatar and several other countries relative to the integrated air missile defense. Our brand in that region is very strong. We've been in the region for 50 years. We've delivered products, supported product, and have provided, we call it, solutions that were very well-matched to the customers' needs. So bottom line is, we have a great relationship with those Middle East countries in terms of future product upgrades, and then also future product solutions in -- not just the integrated air missile defense, but also C4I and several other technology areas in ISR. One other question you brought up is how does -- I think you're alluding is how does Patriot compete with MEADS and then how does Patriot compete with the Chinese? A significant change to Patriot occurred, we just completed it with the U.A.E., which was about a $500 million nonrecurring upgrade to the complete Patriot system, which has significantly improved not only its capabilities, but also its availability, reliability and maintainability. So right now it's the only system out there that has those capabilities that has been fielded. MEADS has not been fielded yet and has not been completely tested. So it has work to go before it gets to the availability levels and support levels that Patriot is already achieving today. Furthermore, we continue to make investments in Patriot, too, for future upgrades. And we look forward to them. If you look at the budget and the outlay for the DoD, there is money in there for some upgrades on Patriot. They may be competitive as we move forward. One of them is an AESA radar for Patriot, which obviously is in our -- straight and down center of our capability area and we will definitely be -- are pursuing that upgrade. So I think Patriot, overall, is very strong, not only internationally, but also domestically. And it's being funded very strongly in both areas.

How far up does your pipeline stretch of potential deals? Are you looking at things that will get fulfilled out into the '18 and '19 period?

We have a pretty healthy 5 year for integrated air missile defense. For example in '14, we're awaiting the Qatar Patriot award, and there's also Qatar Command and Control that's associated with that. And then when go into '15, there's upgrades in Korea and there's also a Poland competition that we are presently in. So there's an uptick there. And then, as you may know, once -- there is already 12 countries that have Patriot and there are continuous upgrades that occur across all those 12 countries. And with the Qatar addition, that will make it 13, and then when we win Poland, that will make it 14 countries. So a strong base, we're integrating our missile defense. Then we also have a -- our NASAM system, which we had a contract award last year with Oman. So we have not just the Patriot system, which is a higher end, but we also have the next level right below that for cruise missile defense and the airborne -- air breathing type of threats. So I think bottom line is the portfolio is strong, our customer pull is very strong over the 5 years.

Or next question comes from the line of Carter Copeland from Barclays.

Just a couple of quick ones. The first, Dave, if you could just quantify domestic versus international growth for the quarter? And then secondly, on this facility reduction, square footage reduction and the cost actions there. How much of that is sort of, to Tom's comment, continuous improvement versus kind of a new initiative? And what's sort of behind that? Is there any -- is it reactionary or proactive? Any color you can help us with on that? Is that a new effort? And if so, why?

Sure. So on the -- on your first question, on the -- in quarter 1 of this year, domestic sales were down about 7%. International was slightly off at about -- down at about 4% over last year. We did mention that 2 long-duration production programs in our air missile defense area were scaling down. And we expect a pretty meaningful ramp as we get to the back half for the year in that segment of the business. With respect to the facilities utilization improvement program that we have, we've been working on that for a while now. Last year, we took out about 3% of our overall square footage. We're now down to about 28.5 million square feet globally. I would say this is not at all reactionary, it's something that we have started focusing on a few years ago. We're continuing to focus on that area. We have a 10% overall targeted reduction in square footage over the next few years. This year, we -- I mentioned earlier, it's going to -- from the investment side, cost about $100 million; $40 million or $50 million in capital and $40 million or $50 million from an expense standpoint. So I repeat what I said back on the January call, from a margin profile, it impacts us in the near term, but in the long term, makes us much more competitive from a cost posture.

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

The question I have is, I'm trying to understand, defense investment outlays are going to go down double-digit second and third quarter. If the Green Book's light, even more, although I think that's too optimistic. This quarter, your sales were down 6%, investment outlays were down 5%. Why do we see an increasing disconnect between what you're suggesting for sales in the second and the third quarter versus what defense investment outlays are going to be?

Okay. So we understand the question. There's clearly a need to track these numbers at a macro level, and they do provide some insight into the broad trends. But keep in mind that our specific company performance is a function of our bookings and the related sales. Domestically, bookings and sales played out as we expected in Q1. And we're confident in our full year domestic sales guidance. Keep in mind that we're halfway through the government fiscal year, and we have the majority of our FY '14 government contracts in backlog, and the revenue profile of these contracts are relatively fixed. Now we are and remain confident in our program-by-program approach to setting guidance. And for that reason, we don't believe a change in the forecast is warranted simply based on Green Book forecasts or projections.

Okay. I guess, I'm still looking for the companies that are going to be impacted by this. But I guess I haven't found one yet. But we'll see. The other question...

And George, just back on that, real clear is that we're already halfway into fiscal year '14. And I just wanted to reiterate what Dave said relative to the fact that we have -- yes, the contracts are in place and the contracts do dictate the payment schedules. So that pretty well dictates what we're going to have for the rest of the year. [indiscernible] And we roll up -- when we roll up our estimates, it's based on the actual contracts that we have and what -- any sales we'll achieve out of those for the rest of the year. So it's pretty set.

No, it's a good answer. As I said, I'm just looking for the disconnect, I haven't found it yet.

All right. All right.

The other question I had, Dave, is in the first quarter cash flow, you had a $250 million advance, which I assume was probably from Kuwait or maybe Oman. How much of the free -- of the $2.3 billion to $2.5 billion cash that you have, how much more advances do you expect to get and...

Yes. So, George, I'm not going to get specific on the amount of advances because they are associated with a number of programs that are factored in the outlook. There is a portion of advances in the guidance. There is every year, certainly since I've been here. I think what you may be looking for is our confidence in the cash flow outlook. And we're highly confident in the $2.3 billion to $2.5 billion.

On the contrary, Dave, I would think your guidance is low because last year, you didn't have any real net advances. You're getting more CAS reimbursement this year, plus the advances.

Yes, George. I thought that might be where you were going with it. But let me just repeat, we're confident with our $2.3 billion to $2.5 billion. Cash -- to forecast cash flow, as you know, is difficult. There's always timing 1 quarter to the next with respect to both cash coming in and cash payments being made. So for now, I think the $2.3 billion to $2.5 billion is where we're comfortable guiding.

Your next question will come from the line of David Strauss from UBS.

Just wanted to ask about -- back on IDS margins. I know we're going through this transition here, margins have dipped down. But as we think about longer term for this business as the international profile continues to build, tom, what do you think of kind of a long-term sustainable margin is for IDS?

IDS is our business unit that has the highest percentage of international. It's over 50%. And so we do believe -- and a lot of those -- there's a mix between FMS, foreign military sales contracts, and also direct commercial sales, and a lot tend to be production oriented. And as you probably know, in our business, the production programs, they tend to have higher margins. So a combination of all those, I would say, the IDS will continue to be a strong margin business in the out years.

So let me just add one thing to that. We see margin improvement quarter-over-quarter, sequentially, as we move throughout 2014. And I would suggest that if you're thinking in the 16% plus range longer term, you would be in the neighborhood. I'm not guiding to that. I just want to be clear, but given the mix of business, that's where I would suggest is a good way to think about IDS.

Okay. That's helpful. I wanted to ask about classified, how it's doing. I know you can't say much there. But I just noticed in the -- in your 10-K that the classified bookings last year were down a fair amount. If you could comment on that? And then, last one, just talk about Tomahawk and the budget. It looked like it took a pretty big hit.

I'll take that. Our classified bookings were 19% of our total Q1 bookings. So volume was up about 51% from Q1 2013. Classified sales were 15% of total Q1 sales, and it was down about 6% from Q1 2013. So for the total year, we expect classified bookings to be about 12% to 14% of total, and sales to be in the range of 13% to 15% of total.

And then on the...

And then, on the Tomahawk, the Tomahawk was funded for FY '14 and also in the FY '15 budget. But the 5-year defense plan for FY '15 did show funding not occurring in '16, '17 and '18 for production, however, it does show an uptick in '19 for a recertification program. And we are working with the -- our customer to ensure that our production line continues in '16, '17 and '18 to be able to support the certification and working to restore those production numbers.

Your next question will come from the line of Douglas Harned from Sanford Bernstein. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: I'm curious. In 2013, you fell short of your goal of reaching the book-to-bill above 1. And we understood that, that was related to the timing of some orders that moved to the right. Then you look at Q1, the backlog fell again. Was this a surprise for you? What's the outlook for bookings over the course of this year?

Yes. So we talked a little bit about this earlier. We see strong bookings in the second quarter of north of $7 billion. We did meet our internal targets for Q1 at about $4.3 billion. We -- on a full year basis, we're seeing $23.5 billion, plus or minus $500 million. The international piece of that will be between 35% and 40%. So what I would say is, from our perspective, we vet our internal targets in the first quarter, and we feel good about the way the year is going to play out. I would suggest that there is a -- there's a -- when you close out the second quarter, based on what I'm saying, we would expect a change in the trajectory of the backlog. And we should be back to where we were when we closed out the end of last year, if not better. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: Then, when you talk about the 39% of the backlog now being international, if you took a very simplistic view, you might think that over the long term you would be moving towards something like 39% of sales being international. But can you describe how you expect that to play out? Or are some of the international awards longer-term contracts that might not lead you to that kind of a percentage?

There will be a higher proportion of international sales as we move forward into '15 and '16. With that said, you are right with your assumption that the international programs, in general, are longer in duration than the domestic programs. They can be on average, say, 4 to 5 years, where domestically, you may be looking at 3 years, plus or minus. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: And if I could just slip one last thing on the international. When you look at the tensions right now in Eastern Europe, I'm just interested, are you seeing anything specific either directly or indirectly through the budget that's affecting your business as you look as this in real time?

The time sequence for the budgets hasn't caught up to the activities, geopolitical activities we're seeing in Eastern Europe yet. However, we are seeing direct requests for, I will call it, solutions to help countries in the Eastern Bloc region. And the big one out there right now is Poland. And there is a Poland Patriot competition that is going on today. And that, I would see that as being pretty firm as we move forward due to the activities in the -- due to the Ukraine activities.

We have time for one more question.

Your last question will come from Peter Arment from Sterne Agee. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: I -- this is more of a, I guess, a bigger picture question. I'm just curious about kind of the -- with the international cyber bookings, I assume that this is a segment that's got a low percentage of international mix. But is this an opportunity, I think long-term, to see margins maybe trend higher? Or is that not going to happen until we see kind of trading volume bottom out?

I definitely think that increasing the international content for that business will drive its margins in the upward direction. So you're right in your assumptions moving forward. This has been an activity that we've been pushing heavily here for the last 2 years to essentially leverage our existing international market channels with our other solutions across the entire business. The cyber is just one example. We have other examples across the business where we're doing that. But again, kind of leverage the fact that on the international we -- our margin profiles are stronger. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Is there -- David, any clarification on how much is international today versus where you think it can get to?

No. I don't think we're ready to get into the mix of international versus domestic on the cyber business. And again, it's a business of products and services and overall solutions. We do see the proportion of international growing over time. But today, I just -- I don't think it's appropriate to get into that level of detail.

All right, well, before closing, I'd like to turn it over to Tom for some closing remarks.

Yes, before we close the call, this being the week of the Boston Marathon, I wanted to take a moment to recognize our employees who were impacted by last year's bombings. And on behalf of the entire Raytheon team, I want to thank all of those who made this year's marathon a safe and resounding success. Thank you.

Okay, thank you for joining us this morning. We look forward to speaking with you again in our second quarter conference call in July. Taheesha?

Ladies and gentlemen, that will conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.