RTX Corporation (RTX) Q4 2015 Earnings Report, Transcript and Summary

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

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

Thank you, Todd. Good morning everyone. I am very pleased with both our fourth quarter and full year 2015 results, and I'd like to begin by touching on a few highlights. Our total book-to-bill ratio for the year was 1.09. This reflects strong global demand for our Advanced Solutions, and positions us well going into 2016. We finished the full year with top line growth of 2%, driven by our growth in our international business, which more than offset a slight decline in domestic. Company segment margins in 2015 were as expected, at 13.1%, as the team delivered solid operating performance. Cash flow was also solid, providing us the opportunity to return the majority of our cash flow to shareholders, while also funding our pension plans and investing in our future growth. So all in all, the company is performing very well, and we are confident in our future. As you can see from our 2015 results and the 2016 outlook, the global threat environment continues to drive demand for Raytheon solutions. I would also add that, in my conversations with our global customers, it is clear that short term shifts in economic growth factors have taken a back seat to ensuring the sovereignty and security of the nations that face these security threats. In particular, let me highlight what we are seeing in three regions. In the Middle East, demand signals increased last year, despite the decline in oil prices. Tensions within the region are driving demand for missile defense, long range radars, modernized command and control systems, sensors, cyber security and precision munitions; areas that align with our core strengths. I have been asked many times if oil prices have impacted demand. From our viewpoint, we have not seen a negative impact, and here is one of many examples why. Over the past year alone, Patriot has intercepted more than a dozen ballistic missiles fired in the region. Missiles that otherwise could have caused significant casualties and damage to critical infrastructure and defense sites. In the Asia-Pacific region, customers are also updating their missile defense systems, sensors and other capabilities in light of recent developments there. Increased tensions related to territorial disputes and evolving economic interests are motivating allies in this region, to invest more heavily in deterrent capabilities, to protect their national interest. As you may recall, South Korea awarded us a significant upgrade to its Patriot systems in 2015. Looking forward in 2016, we see opportunities across the region in tactical radars, ship-based radars, missiles, force protection systems and precision munitions. And in Europe, we are seeing renewed and increased interest from a number of countries, in acquiring integrated air and missile defense solutions, providing additional opportunities for Patriot and NASAMs. Domestically, we were pleased to see the passage of the Bipartisan Budget Act, which adjusted the defense budget caps higher for fiscal year 2016 and fiscal year 2017, including a 15% increased in modernization funding in fiscal year 2016. These changes provided much needed funding for our armed forces, while also improving visibility and predictability for the defense industry. This will yield a positive impact on our results beginning in 2016, and then continuing into 2017. Even as we emerge from several years of declining U.S. Defense budgets are now beginning to see growth, the environment remains competitive. To ensure Raytheon's long term competitive advantage, we have increased our independent research and development, capital expenditures, and other investments to fund the development of the advanced game changing technologies of the future. Ranging from hypersonics and cyber security to directed energy. As expected, IR&D reached 3% of our sales in 2015, a similar level is expected in 2016. Now let me give you some more details about our 2015 results; strong demand from global customers drove bookings of $25.2 billion for the full year; a 5% increase over 2014. Domestic bookings were strong, with a full year book-to-bill ratio of 1.04. This sets up a better than originally expected domestic revenue growth outlook for 2016, which I will discuss more in a moment. International comprised 34% of our total bookings in 2015, and our international book-to-bill ratio was a very robust 1.19 for the year. Total backlog at the end of 2015 was $34.7 billion, an increase of $1.1 billion over 2014. Again, providing a solid foundation, as we move into 2016. International ended the year at 43% of total backlog, compared to 40% at year end 2014. Successful execution of our growth strategy and increasing demand from our global customers resulted in return of growth in 2015, a year earlier than we had originally expected. Our full year 2015 international sales increased 9% over 2014, reaching 21% of our total annual sales, a new company record. In addition, for the second consecutive year, we saw good growth in classified sales, which increased about 6% in the year. In this environment, we are also continuously looking for more ways to lower our costs, enhance our competitiveness and improve affordability for our customers. A few examples include, executing our strategic sourcing strategy to reduce costs in our supply chain; leveraging our centralized global business services organization to more efficiently provide back office support to their businesses, and reducing our footprint, taking out a gross total of 1.9 million square feet in 2015. In addition, we have kicked off a new complexity reduction initiative to reduce costs and simplify business processes across the company. Looking forward to 2016, we expect to see continued strong demand, that should ultimately drive our bookings to the $25 billion to $26 billion range for the year. This would translate into a book-to-bill ratio of approximately 1.05. Key bookings for the year include Qatar early warning radar, the EMD phase as a next generation jammer, and SM3. More than ever before, demand from our global customers is broad-based and diversified. Along with the strong bookings we experienced in 2015, this continued strength should position us well to deliver revenue growth of between 3% to 5% in 2016, which is better than what we had mentioned when we provided our initial outlook during the Q3 earnings call. I would add that this includes an expectation of 2% to 4% growth from domestic customers. This would be the first time we have seen growth in our domestic business since 2009. Further, cash flow from operations is expected to increase significantly in 2016, from solid 2015 levels. The strong fundamental performance provides a foundation for the continuation of our balanced capital deployment strategy, with the objective of creating shareholder value. Our number one priority remains executing our growth strategy and investing it ourselves. Beyond this, we remain committed to providing a competitive dividend. We also continue to see value in our stock and expect to continue the share buyback at the 2015s robust levels. Part of our growth strategy is bringing our advanced cyber security capabilities to government and commercial customers around the world. In 2015, in support of this strategy, we increased our presence in the commercial cyber security market in a meaningful way, with the formation of Raytheon Websense. And earlier this month, we changed its name to Forcepoint to more effectively brand and position our broad cyber security capabilities in the market. We further strengthened Forcepoint by completing the acquisition of Stonesoft at the close of the fourth quarter. The small acquisition, which is consistent with our M&A strategy that we have articulated over the past several calls, provides next generation firewall technology that fills an important technology gap and broadens our cyber security capabilities. The Stonesoft acquisition will become part of the Forcepoint business segment. We are excited about the breadth and depth of the product offerings at Forcepoint, that places us in a strong competitive position. I'd like to close by thanking the Raytheon team for a great year, and for the dedication and all the efforts that went into returning the company to growth ahead of schedule, while continuing to deliver for our global customers. With that, let me turn it over to Toby.

Okay. Thanks Tom. I have a few opening remarks, starting with the fourth quarter and full year results. Then I will discuss our outlook for 2016. After that, we will open up the call for questions. During my remarks, I will be referring to the web slides that we issued earlier this morning, which are posted on our web site. Okay, would everyone please move to page 3? We are pleased with the solid performance the team delivered in both the fourth quarter and the full year, with bookings, sales, EPS and operating cash flow all consistent with or better than our expectations. We had strong bookings in the fourth quarter, at $7.9 billion, resulting in a book-to-bill ratio of 1.24, and for the year, we had bookings of $25.2 billion, resulting in a book-to-bill ratio of 1.09. This sets the stage for continued growth in 2016, which I will discuss in more detail in just a few minutes. Sales were $6.3 billion in the quarter, up 3%, led by our missiles, IDS and Forcepoint businesses. International sales grew 16% in the fourth quarter, and for the year, sales were up 2%, ending at $23.2 billion. Our EPS from continuing operations was $1.85 for the quarter, and $6.75 for the full year, which I will give a little more color on, in a few minutes. We also generated strong operating cash flow of $813 million for the quarter and $2.3 billion for the year, after a $200 million pre-tax discretionary pension contribution, which was not in our prior guidance. Additionally, during the quarter, the company repurchased 2 million shares of common stock for $250 million, bringing the full year 2015 repurchases to 9 million shares for about $1 billion. As we have previously disclosed in the fourth quarter of 2015, our Board of Directors authorized the repurchase of up to an additional $2 billion of the company's outstanding common stock. The company ended the year with a solid balance sheet and net debt of approximately $2.1 billion. Turning now to page 4, let me go through some of the details of our fourth quarter and full year results. As I mentioned earlier, we had strong bookings of $7.9 billion in the quarter and $25.2 billion for the full year, resulting in a year end backlog of $34.7 billion. The company ended 2015 with a funded backlog of $25.1 billion, an increase of $2 billion from year end 2014. Its worth noting that both IDS and Missile Systems had outstanding bookings performance for the full year 2015. For the quarter, international orders represented 27% of our total company bookings, and for the full year was 34% of total bookings. And as Tom mentioned earlier, at the end of 2015, approximately 43% of our total backlog was international. Turning now to page 5; we had fourth quarter sales of $6.3 billion, up 3% over the same period in 2014. This was at the high end of the guidance range we had set in October. So looking now at the businesses; IDS had net sales of $1.7 billion in the quarter, and they were up 5% from the same period last year. Primarily due to higher sales on certain international Patriot programs and on the Air Warfare Destroyer program. Net sales at IIS were $1.4 billion in the quarter, down from the same period last year, primarily due to lower sales on an international classified program. Missile Systems had fourth quarter 2015 net sales of $1.9 billion, up 9% compared to the fourth quarter of 2014. The increase was primarily due to higher sales on Paveway. SAS had net sales of $1.6 billion in Q4, the change was spread across numerous programs, with no one significant driver. And for Forcepoint, the increase was primarily due to the acquisition of Websense, which we completed in the second quarter of 2015. As a reminder, fourth quarter 2014 included the results for Raytheon cyber products only. For the full year, sales were $23.2 billion, up approximately 2% over full year 2014 consistent with expectations. International sales growth more than offset the slight decline in domestic sales. Moving ahead to page 6; we delivered solid operational performance in the quarter and the full year. Looking at business margins in the quarter, as expected, in the fourth quarter of 2015, IDS received a contract modification to restructure the AWD program, essentially separating our incentive fees from the shipyard's performance. This resulted in a favorable $53 million adjustment in the fourth quarter of 2015 for IDS. Missile Systems and SAS margins both exceeded the guidance range that we provided back in October, while both IIS and Forcepoint met our guidance. Turning to page 7, we had solid operating margin performance for the year. Segment margins were 13.1%, which was consistent with our expectations, and as a reminder, this included $181 million for the eBorder settlement earlier in the year at IIS, worth about 80 basis points. On page 8, you will see both the fourth quarter and full year EPS. In the fourth quarter 2015, our EPS was $1.85 and for the full year was $6.75. EPS for the quarter was strong and above the guidance we provided you in October; even after accounting for the extension of the R&D tax credit. As a reminder, the R&D tax credit was worth about $0.11 and was not in our prior guidance. Moving on to our 2016 guidance on page 9; we see sales in the range of between $24 billion and $24.5 billion, up 3% to 5% from 2015. The increase is driven by growth in both our domestic and international business. Our 2016 outlook for the deferred revenue adjustment is $67 million, and for the amortization of acquired intangibles is $121 million. Its important to note, that effective January 1, 2016, we reclassify amortization of acquired intangibles and the deferred revenue adjustment. This change affects all businesses other than Forcepoint, which had already been reporting that way. These non-cash items will no longer be reported within the business segments. Instead, these will be reported in separate deferred revenue adjustment and amortization of acquired intangibles lines, that we have provided for you here. A reconciliation that walks you from the prior method to the current one is in Attachment G to the press release. As for pension, we see the 2016 FAS/CAS adjustment at a positive $428 million, which I will discuss in just a minute. We expect net interest expense to be between $220 million and $230 million. We see our average diluted shares outstanding to be between $296 million and $298 million on a full year basis, a reduction of approximately 2% to 3%, driven by the continuation of our share repurchase program, which we expect at levels comparable to 2015. We expect our effective tax rate to be approximately 30%. Our 2016 tax rate is higher than 2015, primarily due to the $0.29 per share favorable tax settlement we received in 2015. Its important to note that our 2016 tax rate includes the R&D tax credit, which was permanently extended at the end of 2015. In 2016, we see our EPS to be in the range of $6.80 to $7. Our operating cash flow for continuing operations for 2016 is expected to be between $2.7 billion and $3 billion, compared to $2.3 billion in 2015. As we sit here today, we do not anticipate making a discretionary contribution to our pension plans in 2016. As we previously mentioned, we did make a $200 million discretionary contribution in 2015. Before moving on to page 10, I want to mention that we expect our 2016 bookings to be between $25 billion and $26 billion, driven by demand from a broad base of domestic and international customers, and we expect stronger bookings in the second half of the year, similar to the last several years. Continuing on to page 10, before I cover the 2016 guidance by business, its important to note that effective January 1, 2016, we reorganized the IDS and IIS business segments to move certain air traffic systems, border and critical infrastructure protection, and highway tolling programs from IDS to IIS. We did this to more efficiently leverage our capabilities within the businesses. To assist you with your modeling, you will find the recast segment data in the attachments provided at the end of the earnings release. Now moving to our initial 2016 guidance by business; at the midpoint of the sales range, we expect to see growth in all of our businesses in 2016. With respect to segment margins, consistent with our prior comments, we expect 2016 margins to continue to be solid in the 12.4% to 12.6% range, which is in line to slightly up when you compare to 2015 excluding the eBorders settlement. And similar to 2015, our 2016 segment margin outlook assumes that IR&D is approximately 3% of sales. I would also like to point out, that when it makes sense, we have and will continue to make opportunistic investments in specific next generation U.S. programs to better position the company for longer term organic growth. Investments which we believe will create value for our shareholders. At IDS, we see margins in the 15.9% to 16.1% range. I want to point out, that our full year 2016 guidance includes operating income at IDS related to an expected exit from certain business ventures later in 2016, which you can think of in the $100 million to $125 million range. Excluding this, the change from 2015 is driven by mix, most notably, we are continuing to ramp up on several new programs, including on a couple of Patriot awards that we received in early 2015 from South Korea and Saudi Arabia. As you know, we typically see lower margins at the inception of longer duration programs, which can increase over time, as we retire risk and drive operational efficiencies. We expect IIS margins of 7.4% to 7.6%. This is in line year-over-year when you adjust for the 2015 eBorders settlement. We see missiles margins in the 13% to 13.2% range, consistent with 2015. SAS margins are expected to be in the 12.9% to 13.1% range, down from 2015, driven by mix as a result of completing some international programs, as well as from higher business investments in 2016. And at Forcepoint, we expect margins to be in the 11.5% to 12.5% range, this includes the impact from the Stonesoft acquisition that Tom discussed earlier. Without this impact, margins would be approximately 15%. If you now turn to page 11, we have provided you with our 2016 outlook by quarter. You notice that sales ramp up throughout the year, and on page 12, as we have done in the past, we have provided a summary of the financial impact from pensions in 2015, as well as the projected impact for 2016 through 2018, holding all assumptions constant. As I mentioned earlier, we see the FAS/CAS adjustment in 2016 at a positive $428 million, which reflects our investment returns in 2015 on our U.S. pension assets, which were flat, and the December 31 discount rate of 4.5%. The discount rate is up 40 basis points from last year. Looking beyond 2016, keep in mind, each 25 basis point change in the discount rate drives a $70 million to $80 million change in FAS/CAS. And finally on page 13, we have provided an updated three-year outlook of the acquisition accounting adjustments, to help you with your long term modeling. Please note that you will see a significant decline in the deferred revenue adjustment over the period, and the amortization of acquired intangible assets will begin to decline more significantly, after 2018. Before concluding, as we have discussed on past earning calls, with regard to our capital deployment strategy, we expect to continue to generate strong free cash flow and maintain a strong balance sheet at our current credit rating going forward. We remain focused on deploying capital to create value for our shareholders and customers. This includes internal investments to support our growth plans, as well as returning capital to shareholders through share buybacks and dividends, making smaller targeted acquisitions that fit our technology and global growth needs, and from time-to-time, making discretionary contributions to our pension plans. Let me conclude by saying that in 2015, Raytheon again delivered solid operating performance, with bookings, sales, earnings and operating cash flow, on or ahead of expectations. Book-to-bill was strong, and our international business grew significantly. We have a strong balance sheet, which gives us flexibility and options to continue to drive shareholder value, and we are well positioned to grow in 2016 and beyond, both in our international and domestic business. So with that, we will open up the call for questions.

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

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

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

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

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

Okay. Thank you very much.

Sure.

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

Yes, good morning.

Good morning Doug.

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

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

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

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

Okay, very good. Thank you.

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

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

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

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

For the company?

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

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

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

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

Okay. Thanks very much.

Okay, George.

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

Thanks so much. Good morning.

Good morning Rob.

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

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

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

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

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

Great. Thank you.

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

Good morning.

Good morning Sam.

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

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

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

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

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

Thanks.

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

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

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

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

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

Thank you, Tom.

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

Hi. Thanks for the time. I appreciate it.

Good morning Hunter.

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

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

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

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

Thanks a lot.

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

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

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

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

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

Terrific. Thank you very much.

Sure.

Thank you.

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

Yes. Good morning Tom and Toby.

Good morning Peter.

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

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

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

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

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

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

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

Good to hear.

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