Todd Ernst - VP, Investor Relations Thomas Kennedy - Chairman and CEO Toby O’Brien - CFO

Howard Rubel - Jefferies & Company, Inc. Robert Stallard - Royal Bank of Canada Cai von Rumohr - SG Cowen Securities Inc. Carter Copeland - Barclays Robert Spingarn - Credit Suisse Hunter Keay - Wolfe Research Sam Pearlstein - Wells Fargo Peter Arment - Sterne Agee Pete Skibitski - Drexel Hamilton Doug Harned - Sanford Bernstein

Good day, ladies and gentlemen, and welcome to the Raytheon First Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference call 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, sir.

Thank you, Chantilly. Good morning, everyone. Thank you for joining us this morning 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 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. Before we get started, I’d like to welcome Toby O’Brien to his first earnings conference call as CFO, a role which he officially assumed on March 2nd. Toby will walk you through additional details regarding our first quarter financial results in just a moment. I’m pleased to report that the company delivered solid operating results in the quarter with sales, EPS and cash flow that were all either in line or ahead of our expectations. Our international business continues to grow in the quarter and represent a 28% of total revenue. International also represented 34% of our total bookings in the quarter. And our international backlog was 41% of total backlog at quarter’s end. This backlog percentage will go higher with the $2 billion international Patriot award we announced last week, which was from the Kingdom of Saudi Arabia. I will note that we continue to see strong demand signals beyond our recent bookings activity for our solutions from our global customers. In the quarter and the weeks immediately following, you will see important parts of our global growth strategy play out. We’ve announced significant recent bookings across our portfolio, particularly in the international Patriot that position the company for future growth. And we announced the strategic investment and partnership to harness rapid growth in the global cybersecurity market. Overall, we’ve made a considerable progress on these weak [ph] fronts and continue to move forward with our growth strategy. During the quarter, we always raised our dividend by 10.7%, the 11th consecutive annual increase, and will remain on track to reduce our shares outstanding for the year. This reflects our long term trend of returning cash to shareholders, something we will continue to do in line with our balanced capital deployment strategy. We’ve come out of the gate strong after the close of the first quarter with approximately $3 billion in bookings within the initial weeks of the second quarter, including the $2 billion Patriot booking from Saudi Arabia and a $507 million booking to upgrade the evolved Sea Sparrow Missile, a premier ship defense missile for the U.S. Navy and international customers. I’d like to take a moment to talk about our Patriot Integrated Air and Missile Defense franchise. Over the past 15 months, we have received nearly $7 billion in bookings for Patriot production and support services from a range of customers. This includes the recent Saudi $2 billion award as well as the Kuwait, Qatar, South Korea, and the U.S. Army. This provides the company with years of production work and backlog, and predictability to the manufacturing outlook and the opportunity to achieve higher production efficiencies. Looking forward, we continue to see significant opportunities for Patriot. Earlier this week, we were notified that the Patriot was selected by Poland for their medium range Integrated Air and Missile Defense system. We’ll be working with our Polish customer on the final offering and anticipate receiving a booking in 2016. Additionally, we’re in the final down select process in Germany. If selected, we anticipate that this will also translate into a booking opportunity in 2016. Patriot continues to evolve, ensuring that it will be capable of meeting next generation threats. Over the next few years, you’ll see us in collaboration with our current and future customers and new capabilities, including a 360-degree AESA radar capability and other enhancements. These capabilities will position Patriot to be the leading Integrated Air and Missile Defense solution for the next several decades. But as you know, Raytheon is much more than just Patriot. And to that point, we’ve seen considerable recent order activity domestically and internationally across a wide range of our systems and products, particularly in our missiles business. Demand for missiles is being driven by the evolving threats as well as our incorporation of technological advances into our products. One example of this is AMRAAM where we received a $539 million award in the first quarter for the latest version of the missile. We received a similar size award in December of last year. So within the past six months alone, we have received more than $1 billion in orders for AMRAAM. We continue to make important progress on many other key programs that will drive future growth. For example, on Small Diameter Bomb II, a premier precision weapon for both current and next generation platforms, we completed systems verification review in early April. This sets the stage for Milestone C which will be complete, the development phase, allowing the program to move into low rates initial production. Our Next Generation Jammer program remains a significant part of our electronic warfare initiative. The program continues to execute on or ahead of schedule and cost, and also completed key testing milestones in the quarter. Turning to a broader market perspective, domestically, I’m encouraged by recent developments on the fiscal year ‘16 defense budget process that both the administration and Congress have presented initial budget proposals that could exceed previously established budget caps. Many of our leaders agree that the cap levels are not sufficient to contend with today’s dynamic threat environment and are therefore seeking ways to add more resources. Well, we won’t speculate on what the final funding level for DoD will be in 2016. Even if the budget control caps are not raised at all, the DoD base budget funding will be several billion dollars higher in 2016 than 2015. Bottom line is the trajectory of the DoD base budget is finally starting to trend upward. Late in the first quarter, we announced the settlement with the U.K. Home Office relating to Raytheon Systems Limited eBorders contract. Under the settlement, we received a cash payment equal to approximately $226 million in exchange for the resolution of all claims and counter claims of both parties. Toby will walk you through the details in his remarks. As we announced earlier this week, consistent with our strategy to position Raytheon for global growth, we are now entering into a partnership with Vista Equity Partners, combining their premier commercial cybersecurity business, Websense, with Raytheon’s cyber products to form a new company. This new company will provide a broad set of integrated defense grade cybersecurity products and services to the global marketplace. We are very excited about this opportunity. We see significant revenue synergies and look forward to closing sometime late in the second quarter. In conclusion, I’m pleased with our performance in the first quarter, the progress in setting the foundation for future global growth. And I’d like to thank our employees for their hard work and dedication for this great start to the year. With that, let me turn it over to Toby. Toby O’Brien: Okay. Thanks, Tom. 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. If everyone would turn to Page 3. We are pleased with the solid performance the team delivered in the first quarter. All app [ph] are better than our expectations. It’s a good start to the year and we’re positioned well for achieving our full-year outlook. Our EPS from continuing operations was $1.78. And on an adjusted basis, EPS was $1.26. I’ll discuss this in more detail in just a moment. Operating margin was solid at 15.9% and included the previously announced eBorders settlement with the U.K. Home Office. And on an adjusted basis, our operating margin was 11.5%. Sales of $5.3 billion were slightly higher than our guidance. During the quarter, the company bought back 2.8 million shares of common stock under the share repurchase program for $300 million. And we announced last month that we increased our dividend by 10.7%. We have now raised our annual dividend every year for the past 11 years. I also want to point out that we’re raising the guidance that we’ve provided in January to include the eBorders settlement. I’ll discuss guidance 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 first quarter were $4.5 billion. International awards represented 34% of the total. And on a trailing four-quarter basis, the book-to-bill ratio is 1.07. A couple of key bookings in the first quarter included a $769 million award for Patriot from the Republic of Korea and a $539 million award for AMRAAM for the U.S. Air Force, U.S. Navy and international customers. And as Todd mentioned a few minutes ago, just after the end of the first quarter, we received significant orders from both domestic and international customers. We’re off to a strong start in the second quarter and the year-to-date bookings will help drive our second half performance. Backlog at the end of the first quarter was $32.5 billion and on a funded basis was $23.7 billion, an increase of almost $1 billion compared to the first quarter of 2014. It’s worth noting that we ended the first quarter of 2015 with approximately 41% of our backlog now comprised of international programs. If you’d now move to Page 5. As I just mentioned, for the first quarter of 2015, sales were slightly higher than the guidance we set in January. As a reminder, the first quarter of 2015 had one less work day than the first quarter of 2014 and this equates to about $100 million in sales overall. As we said in January, we expected the first quarter to be the most challenging. We still expect sales to ramp up throughout the year. Looking now at sales by business. IDS at first quarter of 2015 net sales of $1.4 billion. The change from Q1 2014 was primarily due to the plan completion of certain production phases on international Patriot programs. We expect IDS sales to increase as we move through the year as the recently awarded Patriot international programs begin to ramp up. In the first quarter of 2015, IIS had net sales of $1.4 billion. Compared with the same quarter last year, the change is primarily due to our training programs. Missile systems at first quarter of 2015 net sales of $1.5 billion. The change from the first quarter of 2014 was primarily due to both the Tomahawk and SM-3 programs. And SAS had net sales of $1.4 billion. Secure communication systems programs contributed to the change versus last year. Moving ahead to Page 6, we were pleased by our overall company margins. Our operating margin was 15.9% and on an adjusted basis was 11.5%. As a reminder, our first quarter of 2015 adjusted margin excludes both the favorable FAS/CAS adjustment which was worth 90 basis points or $0.10 per share and 340 basis points or $0.42 per share for the eBorders settlement. And as we discussed on the last earnings call in January, compared to 2014, we expect our margins for 2015 will be impacted by a change in program mix as well as higher R&D [ph] and program investments. We continue to invest in ourselves with the objective of positioning the company for future growth. So looking at the business margins, the change in margin at IDS was primarily driven by a change in program mix on international Patriot programs nearing completion. IES margin in the first quarter 2015 benefited from the eBorders settlement that I previously discussed which contributed $181 million to operating income. Without the settlement, IES margins would be 7.5% or in line with our expectations. Missiles margin was up in the quarter compared to the same period last year. This year’s first quarter benefited from a $25 million or approximately 170 basis point favorable resolution of a contractual issue which was previously expected later in the year. And SAS margin of 12.7% was down compared to the same period last year, primarily driven by higher net program efficiencies in the first quarter of 2014. Overall, the company continues to perform well. Turning now to Page 7. First quarter 2015 EPS was $1.78 and on an adjusted basis was $1.26. EPS for the first quarter of 2015 was better than expected, primarily due to the eBorders settlement and from timing at Missiles. On Page 8, we are updating the company’s financial outlook for 2015 which now includes the impact of the eBorders settlement. As Tom mentioned, earlier in the week we announced the Websense transaction. We expect this transaction to close late in the second quarter and we will update our financial guidance subsequent to the closing. We still expect our full-year 2015 net sales to be in the range of between $22.3 billion and $22.8 billion. We have raised our full-year 2015 EPS which is now expected to be in a range of between $6.67 and $6.82. We expect adjusted EPS to be within a range of between $5.49 and $5.64 which is unchanged from our prior guidance. As a reminder, we have not included the possible extension of the R&D tax credit in our 2015 guidance. If the legislation passes, it would favorably impact the effective tax rate by about 110 basis points and our EPS by about $0.10. As I mentioned earlier, we re-purchased 2.8 million shares of common stock for $300 million in the quarter and continue to see our diluted share count in the range of between 305 million and 307 million shares for 2015, a 2% reduction at the midpoint of the range. Operating cash flow in the quarter was in line with our prior guidance. As a result of the eBorders settlement, we now see our 2015 guidance for operating cash flow to be between $2.4 billion and $2.7 billion. We received the settlement payment in the second quarter. And as you can see on Page 9, we’ve included guidance by business which is unchanged from our prior outlook except for IIS and total company margin, which now include the eBorders settlement. On Page 10, we provided some directional guidance on how we currently see the quarterly cadence for sales, EPS and operating cash flow for the balance of 2015. As we discussed on the call in January, sales are expected to ramp up throughout the year. In the first half of 2015, we still expect sales to be down on a percentage basis. Sales in the back half of the year are expected to be in line to slightly up versus 2014. And if you compare second half sales to first half sales, we expect to see mid single-digit growth. As you may recall, our 2014 bookings finished strong, particularly with respect to international. This, taken together with the combined first quarter and early second quarter 2015 bookings, are all key drivers of our second half sales expectations. And as we discussed on the January call, our effective tax rate in the second quarter is expected to be impacted by a favorable non-cash tax settlement of $88 million or $0.29 per diluted share. Before concluding, I’d like to spend a minute to talk about our capital deployment strategy. We expect to continue to generate strong free cash flow and maintain a strong balance sheet going forward. We will remain focused on deploying capital to create value for our shareholders, including internal investments to support our growth plans as well as share buybacks and dividend increases that are subject to board approval. And as we sit here today, possibly smaller targeted acquisitions that fit our technology and global growth needs. In summary, we saw a good performance in the first quarter. We continue to execute well. Our bookings were ahead of last year’s first quarter and sales EPS and operating cash flow from operations were all in line or higher than the guidance we set in January. We remain well positioned with our domestic customers’ priority areas and continue to be aligned with the evolving priorities of our international customers. Our objective is to drive the business, to maximize value for our customers and shareholders. With that, Tom and I will now open up the call for questions.

[Operator Instructions] Your first question comes from the line of Howard Rubel of Jefferies. Please proceed.

Good morning, gentlemen. Thank you.

Good morning, Howard.

Toby, just as an observation first, I was thinking with this 20% margin now that Dave is not here to respond to it, thinking about maybe - if you know where I’m going - setting that as his incentive target goals for the balance of the year. Toby O’Brien: That’s good input, Howard. We’ll definitely take that into consideration.

But in all seriousness, I asked sort of as a collection of businesses that have some interesting opportunities. And when we looked at the growth profile, it seems to be challenged relative to the overall environment. Can you explain and elaborate a little bit upon, not only what Websense is going to do, but where your initiatives are there to enhance that business?

Yes, hey, Howard, this is Tom. Let me take that. Number one, one of the strategies that IAS is actually executing very well is to expand its cyber capabilities in core competencies into both the international and now the commercial market space. And as we discussed on prior calls, we have had some significant wins on the international marketplace. And so we’re showing that we’re globally competitive in the cyber arena. And so we’re seeing expansion in that area. We’re also seeing them expand in their training worldwide. And some of it is under the Warfighter FOCUS program. But we’re also expanding into other areas of training into international markets. We’re direct with international governments. So that’s another big area that they’re moving out on. The other play is essentially upgrading a lot of the systems that are out there in terms of adding in information assurance capability taking the knowledge that they’ve gained from the GPS OCX program and leveraging that into other programs. And then the last one is - hopefully you’ve been watching and noticing that they’ve been winning quite a few programs out there. And for example, they won the LISC program. They’ve also just recently won the NISSC program. So they’ve been winning more than their fair shares of programs. And we’re very, I would say, upbeat relative to IAS in their ability to continue to grow and exceed the industry in their area in terms of growth.

And then just one other follow-up question in a slightly different area. You’ve also expanded missile systems beyond just Patriot. And for a moment, could you just address how the NASAMS offerings are? I think you still have some opportunities there in Poland and elsewhere.

Yes, it’s a great question. And a lot of people - the NASAM system or sometimes called SL-AMRAAM, gets overshadowed by the Patriot. But our last big win on the NASAMS was in Oman. That was back in 2013. And that was about $1.3 billion for the system itself and then there was another $300 million worth of AMRAAM activities [indiscernible] FMS contract for a total deal of $1.6 billion. That system is deployed now or being deployed in six countries. I’ll tell you, it’s a very great system. And the other area that we are pursuing right now and we should learn in 2017 is a pursuit in Poland. This is a - we already got selected for the Patriot system for their, I would call, their medium integrated air and missile system. This is the lower tier missile defense system below Patriot. And we’re in a competition for that. Again, 2017 they’re going to make their selection.

Thank you very much for your time.

Yes.

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

Thanks so much. Good morning.

Hey, Rob. Good morning.

Tom, first one, you mentioned OCD, the Poland decision, but also that Germany is moving towards the DAMs. So like do you think this is a sign that European defense spending might finally be stabilizing? And do you see other opportunities in the region?

Number one, we do see other opportunities in the region. It is being driven by the geopolitics that are going on right now especially in the Eastern Europe. Poland is building up their defenses and making a major play in that area, again, under the auspices of a strong defense is a strong deterrence. And we’re also seeing that in other Eastern European countries also. Germany is in need to upgrade their systems. So I think you’re right. There is a little bit of maybe sense of urgency. But this was in their plan to do this upgrade for several years.

Okay. And just a quick follow-up on Websense. I don’t think you mentioned it on the call the other day. When do you expect it to actually be accretive on a GAAP EPS basis?

I’ll turn that over to Toby. Toby O'Brien: Yes. So on a GAAP basis, Rob, we’re probably looking about three to four years down the road before it would be accretive. And that’s due really to the amortization of two non-cash items. One would be the intangibles associated with the transaction. Then also we’d be amortizing some deferred revenue. They have a subscription model where the revenues are recognized ratably over the life of the contract. But the payments are all upfront. And we’re going to fair value that. And that amortization tells a lot, a bit shorter, that’s about a two to three years. Whereas the intangibles will go out over seven years. That said, we do think the best way to look at this business is more akin to a cash basis. And adjusting the results for the impacts of these two items, the deferred revenue and the amortization of the intangibles. And on that basis, it would be immediately accretive to earnings.

Okay. Thanks, Toby.

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

Yes. Thank you very much. So the competition claims that Germany wants to have 360-degree capability. In open architecture, neither of which Patriot provides. And yet you guys are the incumbent. Tell us about the factors you think are going to be important to Germany’s decision and when they might reach it.

Well, I don’t know exactly how they’re going to make their decision. I do know that they will be making the decision in the next year. And what they are looking for is they need a strong system to provide deterrence. And so we believe Patriot provides that, number one. And two is we believe the system that we can get in their hands the soonest. In other words, we’re in production. We can deliver right out of the factory and [indiscernible] the quickest time possible. The other element is the fact that they have a lot of their already trained on using the Patriot. And so even though we’ve upgraded the Patriot, put in modern man stations, a lot of the maintenance and training is already behind them. So they already have that in place. So we think the Patriot provides the most economical but yet strongest deterrence capability for them moving forward.

Okay, terrific. And then your R&D was up from 2% of sales to 2.7% of sales. Could you tell us where did you spend it, what did you spend it on and how much of that is covered by IR&D?

Okay. So that is all IR&D, number one, I’ll answer that. But we’re continuing to invest in technologies. That’s been crucial to our recent competitive success. I’ll give you an example. On the GaN technology, we started investing in 10 years ago when folks thought you couldn’t make GaN work. And we continued to invest in over the years and essentially we proved them wrong, that it can work and it can provide a great capability. And that put us in a great position on multiple wins, AMDR, Next Generation Jammer, 3DELRR. And there’s actually a few radar competitions coming out now. So we do invest to essentially establish discriminators for us to go win in the future. And that’s where we’re putting our efforts moving forward. And areas - and this is actually part of our strategy is to invest in what we call new emerging areas. So we are investing in next generation radars, high energy lasers, hypersonics. In fact, we just recently won a major hypersonics contract from DARPA. It’s called the Tactical Boost Glide program. That was for the development and demonstration of technologies to enable air-launched, tactical range hypersonic boost glide systems. And so we’ve been investing in that area. And that gave us the technologies to go win this advanced DARPA program. We also were investing in undersea capabilities. We believe the undersea offers a lot of significant opportunities moving forward based on the arena of anti-access/area denial. EW, that’s part of our strategy to continue to invest in EW and grow our business in that area. That’s kind of a few of the areas that we’re investing in. We believe we have already or establishing discriminators in each of those areas and based on where the roadmap is for our customers. We believe that these are right places for us to invest in. Toby O’Brien: Yes. And Cai, this is Toby. I would just add to the level of spend of the 2.7%. That’s pretty much in line with what we talked about in the January call of 2.7%, 2.8% of revenue this year for the reasons Tom just described.

Great. Thank you and congrats on the Patriot wins.

Well, thank you.

Your next question comes from the line of Carter Copeland of Barclays. Please proceed.

Hi. Yes. Hi, good morning, guys.

Good morning, Carter. How are you doing today?

Doing great. Great, thanks, Tom. So just a question. I wondered if you might expand a little bit more specifically on GaN and some of the prior comments about upgrades. And really, when you look at the approval of the exportability of that technology, can you talk to specifically what sort of upgrade opportunities that may enable and what sort of kind of size we should be thinking about those or timing? What does that mean for that franchise longer term?

Well, I’ll start with the AMDR. We are working with the navy to ensure that the AMDR will be exportable to our coalition partners who use those types of radars for their ships. We are also - the 3DELRR program was a model program for OSD for exportability. And so we won that program. It is in protest right now but that program uses GaN. So that’s number two. We are also, and I mentioned in my script, that we are working on a 360 AESA radar for the Patriot. And that is a GaN based radar. And we are working to ensure that that is exportable also. So in terms of who would buy these systems, with Poland coming onboard, there are now 14 countries that have the Patriot system. And you said if you had to go off and you wanted to have an opportunity to replace those radars, the existing radars on those, it would be 200-plus radars. And that would be up for grabs to replace to more with these 360 AESA radars, our AESAs for Patriot. And this is, I think, a great opportunity for us taking forth these new advanced radar systems to both our domestic and international customers. But we see significant opportunities in the future for taking this GaN technology into the radars and into the international marketplace.

How do you think about the timeline and the timing of those kinds of opportunities as you look across the base of Patriot customers? And when they get around to that kind of upgrade, is this a three- to five-year kind of opportunity for the market, the 200 radars? How do you think about that?

I’ll only answer one. On the Patriot, we have customers knocking on our door today. So it’s a matter of getting to a development and then transition to production and then putting it forward. And we’re also working with our U.S. customer on that timing to ensure that we have essentially all the licenses and everything else to be able to do that. So I think bottom line, there is pent up demand for those AESA radars. And we’re looking to fill that demand.

And just another one to switch gears quickly, I think at one point we were expecting a recompete of Warfighter FOCUS. Where does that stand these days in terms of an RFP on that and maybe just remind us of what to expect on that front?

Well, right now, for those who don’t know, the Warfighter FOCUS is an IDIQ program that Raytheon runs for the United States Army. That is a program that we are actively engaging today. It’s running very well. And I think it’s serving the army and also the international customers very well. So I think they’re very pleased with it. We believe that that program will continue. The army is looking at some acquisition changes in terms of what’s the follow-on to Warfighter FOCUS. That has gone through several changes recently. And I don’t think right now has settled down in terms of what the final arrangements will be.

Okay, so just stay tuned.

I think stay tuned and - but in - and from Raytheon’s perspective, it’s met more stable work relative to Warfighter FOCUS since that change has not occurred.

Great. Congrats on a big leap, guys.

Yes, thank you. Toby O’Brien: Thanks, Carter.

Your next question comes from the line of Robert Spingarn of Credit Suisse. Please proceed.

Good morning.

Good morning, Rob.

Hi, guys. Couple of questions, two different topics. The first is on the - Toby, on your sales guidance, which is essentially down 2% to flat at the ends - the range there, what are the relative growth rates you now see for domestic versus international within that? Toby O’Brien: Yes, so for the total year, what we’d be looking at for domestic is to be down in the low single-digits. And for international, up in the low to mid single-digits.

Okay. And it sounds like the international again may be a little backend weighted given the recent awards. Toby O’Brien: Yes, definitely --

Or the growth accelerates? Toby O’Brien: Yes, you got that exactly right. I mean, I think if you want to think about the cadence throughout the year, and obviously with international growing versus domestic declining, we’d see second quarter sales flat to up from Q1 from a sequential point of view and then sequentially growth in the back half of the year. And it’s exactly as you said, Rob. It’s driven by the new awards from the end of 2014 plus what we’re seeing here in the first three-plus months of this year and their natural ramp as they start up.

Okay. And then just with respect to the comment on European demands stabilizing and growing here, is there any currency impact on margins that we should start to contemplate?

So that question came up on a prior call. I’ll give you what we’re seeing. Number one is most of our business is tied to the U.S. dollar. For example, all the FMS contracts we had, the Foreign Military Sales contracts are all in U.S. dollars. And then a lot of our customers, especially in the Middle East, their currency is pegged to the U.S. dollar. So even on direct commercial sales there we don’t have any impact. And we do have two landed companies. We have Raytheon Australia and Raytheon Systems Limited. They tend to work with their own working capital and essentially our sales in British pound sterling and then the Raytheon Australia it’s the Australian dollar. They tend to work --

I was going to say, I understand that it’s conducted in U.S. dollars but to the extent that these guys are based for example in euros, the European guys, they’ve got to translate. So does that maybe adjust their demand, their pricing appetite?

Toby is going to give you the exact numbers, right. Toby, why don’t you just give them the numbers? Toby O’Brien: Yes, so I think from a - the two type of potential exposures we have is around where we - if we have a mismatch between U.S. dollar and a different denominated currency. As Tom said, that’s very minimal because most of our contracts are matched to the dollar. In the cases when we have that, we hedge it using foreign exchange contracts. And that’s the little to no - minimal exposure there. And in the cases where we have these foreign entities like in the U.K. and Australia where they do operate in a non-U.S. dollar functional currency, again, they’re generally getting paid in that same currency. So in Australia, they operate in the Aussie dollar. They get paid from their customer in the Aussie dollar. And we do have some translation risk, right, when we convert those foreign denominated financial results back to U.S. dollars. But again, historically, that has been pretty minimal.

Okay, thank you. I’ll jump back in.

Okay.

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

Thanks, everybody. I appreciate it. A little bit more on IRAD, a follow-up maybe to Cai’s question, a little bit of a different angle, though. You guys said the long term IRAD should still be in the high 2% range of sales. If global defense budgets continue to improve, does that go higher or does it go lower? I mean, my gut would say it will go lower but threats are very dynamic. The competitive environment is still very difficult. So I would think there’d be some level of sort of elevated investment on an ongoing basis that may be needed. But assuming the backdrop of better defense spending on a global basis, where should that long term IRAD go?

Only to kind of back you up into - and tying this to our strategy, so we go - often we look at our strategy, we look at what the demand needs are from the customers and then we go look at what gas we have in terms of technology that’s required to go fulfill them over a period of a three-year window, a five-year window and then a 10-year window. And then based on that, we look at what technologies need to be developed and then what we will look at in terms of funding those technologies and to be ready at the time that they need to be ready at for us to be competitive in the marketplace. And it’s all driven by the strategy and by what we - the capability needs of the customer. It’s not driven by sales and some exact percentage of sales. That’s just how we do it. Essentially, it’s a bottoms-up buildup based on the demand cycle from the customer and also what our technology gaps are. Toby O’Brien: And I’d just throw in there, and it plays exactly into what Tom was saying. When we make these decisions on how to invest, where and what level, it’s all with an eye towards returning value to shareholders, increasing value to shareholders, driving growth, profitable growth. So it’s a little difficult to generalize looking forward whether that relationship, that percentage would go up or down for all the previous reasons.

Okay, great. Thanks a lot for that. And let’s talk about Next Gen Jammer for a minute, if you would. Can you help us understand how it’s going to kind of slew [ph] up over the long term and give us an idea how to think of some of the follow-on increments? What are some of the pacing items for those? What’s sort of the competitive set and maybe help us think about, in a best case scenario, the potential opportunity for you guys longer term? Thanks a lot.

Yes. So, our Next Generation Jammer, for those who don’t know, that’s a electronic warfare - essentially, it’s a self-contained pod, generates its own power. That gets converted into electrical energy to drive jammers within the pod. There’s two of those pods per Growler. That’s the F-18G which is the electronic warfare platform for the United States Navy. And so we won a major contract for that a couple years back. And it actually uses a GaN technology. So there is a technology that we had invested in 10 years ago that helped us win that program. And we see that program having quite long legs. Number one, we’re going into the development phase now and then they’ll eventually get into transition to production and then enter production. As I mentioned, it’s on schedule. It’s on cost and it’s hitting all of its milestones. And we think that’s going to be a very successful franchise program for Raytheon in the future.

Thank you.

Thank you.

Your next question comes from the line of Sam Pearlstein of Wells Fargo. Please proceed.

Good morning.

Good morning, Sam. How are you doing?

Okay. Couple little questions. First is, why is cash flow from operations up only about $100 million when I thought the eBorders settlement was GBP150 million?

Yes, so the eBorders settlement, you got the number right, it’s about $226 million. But the payment came in on the first day of the second quarter.

Right. But I’m just saying, for the full-year outlook, you’re only increasing $100 million.

Yes, not - yes, sure, Sam. So fist I’ll start and, as you said, we increased the year by $100 million. We’re also going up $100 million in the second quarter as part of that. It is attributable to the eBorders settlement. But it has been partially offset - this is getting at the crux of your question - by some changes in program milestone collections as a result of some later timing on awards within the year. So the cash isn’t gone. It’s just - it’s a timing issue for that $100 million, if you will, between 2015 and in ‘16. We do have a range of $300 million in our outlook or our guidance there. So our expectations are to be within this range. Overall, we continue to see strong operating cash flow in 2015. The range now expected to be between $2.4 billion and $2.7 billion. We do see still the majority of the cash flow being weighted in the second half of the year really driven by the timing of significant program milestones.

Okay. That’s great. And then can you talk a little bit about the IDS segment, just looking at the margins this quarter and how do you get them to 50% this year? Are there other certain milestone of contractual resolutions or some of it is the direct foreign sale of the recent award, what is it that drives that margin up?

Yes, sure. So in Q1, as you pointed out, right, the margins were down. That was as expected. And consistent with what we said in January, that was driven by the mix due to - unfavorable mix due to the plan ramp-down on certain of our international Patriot programs. So looking forward, clearly, we see the margins at IDS improving primarily in the second half of the year. That overall business mix will improve just as you said, as these new international programs from the end of 2014 and the awards here in the early part of 2015 start to ramp up and move through the production cycle so that the mix gets more favorable, but not until the second half of the year.

Okay. And if I can add one more. I just want to summarize in terms of some of the commentary about the acquisitions. Is it fair to say that we’ll see more balanced after the deployment in that $1 billion plus type of acquisitions from here on out now that Websense has been announced?

As we sit today, and we’ll continue to look for valuated target acquisitions that do position the company for future growth. But we don’t see as I sit here today a large acquisition of the size of Websense. But there could potentially be some smaller acquisitions to fit some technology areas that we need to be successful in that market space.

That’s great. Thank you.

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

Yes, good morning, Tom and Toby.

Good morning.

A question on - I guess a clarification back to Rob’s comment on kind of domestic versus international. Clarification, Toby, on you said the domestic being down a little bit, low single-digit, international, up. Does that continue at that same pace in the ’16 or do we see domestic improve kind of given Tom’s comments about the ’16 budget? Toby O’Brien: Yes. So let me answer it this way. Clearly, with the awards that we’ve seen, again, coming out of the end of last year and into ’14, we’d expect to see strong performance into ’16 on the international front. On the domestic side of it, Todd, back to the comments that Tom made earlier relative to where the domestic budgets are going, we’d probably see our domestic profile start to flatten out towards the end of the year. And we could start to see some improvement going forward.

Okay. That’s helpful. And then just lastly - and congratulations on all these Patriot wins. Tom, you mentioned kind of 14 countries that now they’re deployed. I mean how do we think about that long-term? I mean we ask this I think every quarter about what inning are we in in terms of missile defense orders out in the Middle East and Asia but how do we think about the opportunity longer term outside of kind of you just mentioned, Poland, Germany, et cetera?

So outside of the bringing on a whole brand new country like we’ve done with Poland, we hope to do with Germany, that we did do with Qatar, there are also the upgrade capabilities with each of the partner countries that have the Patriot system. And right now we’ve been doing something called Configuration-3 plus. You may have heard us talk about them on some of the calls. That’s a major upgrade to the Patriot system that we’re off and working with the Archon. And as of today, there is 72 fire units that are still there for upgrade potential. And we are working with those customers to upgrade those systems. And then I also mentioned previously the upgrade for the 360 AESA radar. That will be a new upgrade for all the Patriot systems. And there’s over 200 of those radars to be upgraded. So I think the way of looking at it is that these 14 countries are a market of surrounded around Patriot. And so we are working with those customers to continually to upgrade those systems to counter the evolving threat. So there’s a base program that the software upgrades and other things as the threat changes. And that we work across those countries. And then also as new technology comes on board to improve the capability of the system, we then insert that technology across those 14 countries’ Patriot systems. So essentially, it’s a market on its own that we look to continually to upgrade and provide a support activity. So it’s a great franchise business. And it also does, for the customers, it allows them to share in the cost for any software upgrades for the evolving threat and then also to share in the cost of the development of new technology. So it’s a great win-win situation for both sides.

That’s great color. Thanks, Tom. Toby O’Brien: Thank you.

Your next question comes from the line of Pete Skibitski of Drexel Hamilton. Please proceed.

Good morning, guys. Nice quarter.

Good morning, Pete. How are you doing?

Good, good. Hey, on Poland Patriots, I was wondering if you could give us some more color on maybe ballpark some of the characteristics of the contract. There’s a lot of numbers falling out there. Some of them are talking about more than $5 billion. Can you give us a sense of how many batteries it’s going to be maybe ballpark the size and length and then when you talk about the 2016 booking, are you talking early in the year or later in the year?

So just real quick. So right as of today, actually Tuesday, we were down - we were selected by Poland to provide the Patriot solution for their integrated air and missile defense system. And then as part of that activity, we have provided various, I would call it options, for the Polish government, variants of Patriot and quantities of fire units and how to set them up in their country. So we have been working with them. But now some additional work is required to move forward to definitize what that exact configuration will be for the Polish government. As part of that effort, we also have been working with Polish industry. We have 25 plus agreements with Polish industry in terms of doing coproduction and potential codevelopment activities all in support of the Patriot system. So the bottom line is we’ll be in negotiations with the Polish government to act to define exactly what this configuration is. And as we get that information and get more clarity on that, we’ll be providing that to you guys to ensure you understand where that program is going. Toby O’Brien: And I think, Pete, given all that Tom said, while we can’t exactly predict when the award would come, think back out of 2016 because there is some work to be done to work through all those steps.

Okay. I got it. I got it. And then just on the streak [ph] you guys on with Patriot, is it fair to say that the IDS being your highest margin business that that maybe has the best kind of midrange growth outlook for the firm?

I’ll take it out first and then I’ll let Toby come in and he can put some numbers on some things. But the bottom line is in IDS, with all these Patriots coming in, in some cases bumper-to-bumper and some case coming in on top of each other. What that’s doing and that’s allowing us to stack all this up in the factory to gain significant, I would call, production efficiencies and getting IDS margins back to what we’ve traditionally have had in that business. So essentially, it’s replenishing the backlog for that factory and allowing us to gain those efficiencies as you move forward. That’s a good news on IDS. But don’t forget, IDS is also once a major program. For example, the air and missile defense radar program that they have that are off and running. They also won the 3DELRR, which is in protest. So in addition to the Patriot franchise getting reinvented to a certain extent and all the upgrade potential for it, they also have some brand new franchises that are on the horizon that they have in hand. And that the AMDR is in development. That’s going to be transitioning into production. That’s going to go into both the U.S. domestic and also international coalition partners. And then we have the 3DELRR which is in protest right now. But when that comes out of protest, assuming Raytheon is on the right side of that, that is another program that has a significant, actually was set up by OST to be an international program on day one. So a brand new franchise for them there. So bottom line is IDS is much more than just Patriot moving forward. And I have that same - I can give you that same play for each of the other businesses. All the businesses are coming up with I would call it new franchises. And they’re also reinventing their existing franchises. We talked about AMRAAM. AMRAAM has gone through a whole new upgrade program. It’s called the AIM-120D. It’s a brand new missile. Great capabilities. And so it’s essentially been reinvented. And just in the last year, over a $1 billion worth of AMRAAM orders. So this is going on all throughout the company across all our product lines and across all our pursuits. Toby O’Brien: And I would - Pete, I’d just add that specific to IDS when we talk about mix, that’s probably the one business within the company that can have the biggest swing or the most impact because of mix, in part, given the nature of the beast with the large $1 billion plus contracts that drive that within IDS. So that combined with loading up the factory here, does give us confidence that we will be seeing improvement over time in the IDS margin as we had previously talked about.

That’s great. Thanks, guys.

Thank you.

All right. Chantilly, we have time for one more question, please.

Okay. Your final question comes from the line of Doug Harned of Sanford Bernstein. Please proceed.

Good morning. Thank you.

Good morning, Doug. How are you doing today?

Good, good. I wanted to ask on IDS because if we go back historically, the business could be doing 16%, even 17% type margins. So I know today, on the positive side, you’ve got more international work, higher percentage of that there, which should be good. And the negative side in the near-term, a lot of new programs, which you probably are looking at lower margin. When you talk about what the percentage of international is and then can we expect this to go back over time to those 16%, 17% type margin levels that we used to see?

So, Doug, you’re asking a very interesting question to two individuals who used to actually run that business. I don’t know if you remember that or not. But we have a deep domain understanding of what it takes to drive the margins in that business. So Toby is going to walk you through this. And you couldn’t have asked the two people that are more familiar with our business. Toby O’Brien: So IDS does have the largest international content of our four businesses. It has been running close to about 50%, 50-50 domestic-international. And obviously that mix in and of itself, putting time in the side, does help to drive the margin profile. As you pointed out, we have run going back last year 16%; in 2013, a little over 17%. And depending upon the timing of some of these other programs that you alluded to, which they are development programs, they are being booked at lower margins, things like AMDR. Tom mentioned 3DELRR. As those move ultimately through production, they’ll help lift the margin. But it is possible to see margins start overtime. But it will take a couple of years once this backlog really gets into kind of full steam on this international Patriot awards before we would potentially see them climbing back up to those past historical levels.

I think, Doug, one thing that really has - two guys that run that business, very excited about what we’re seeing is the, I would call it the bumper-to-bumper work, and we mentioned just over the last 18 months close to $7 billion worth of new bookings. And that doesn’t include Poland. And if you lay in or layer in Poland on top of these others, that you have essentially a full factory going up almost to 2022. So that allows us to really work the efficiencies, productivity, really allows us to work with our suppliers across the board, gives us levers that you don’t have when you just have one contract. And so we’re very upbeat about IDS here over the next several year. Both and I will be definitely probing to ensure that they meet our expectations. Having run the business, we know which levers they are. And if they don’t have their hands on those levers, we’ll make sure those hands get on those levers very quickly.

And then shifting gears a little bit. Two technologies that have become an increasingly high priority in the Pentagon have been directed energy weapons and rail guns, two things that you all have been working on for quite a few years. Could you talk about the outlook for those technologies? Are these something that you see - and what timeframe contributing materially to your revenues?

Well, number one is we’re - you’re absolutely correct. We have been investing in these technologies for many years, especially the high energy laser. We see that as core to our business. We have great domain expertise in that area. We believe we have a great new technology in that area that will allow us to gain market share. We are working with the U.S. government on several programs relative to high energy lasers. I think the bottom line is going to be, Doug, is when is the U.S. government ready to move forward into a major EMD program on one of these systems. The power levels have to get up to be something that you’d actually want to, I would call it, put into service. And the technology that we have allows us to get to those power levels. But again, you do need in this marketplace, you need essentially a customer sponsor who’s willing to work with you and take you into EMD program and then transition the production also to go through all the testing required to get one of these systems into the hands of our war fighters. But I think we’re in the cost of moving in that direction.

But it sounds like it’s a few years off. Is that --

Yes, a few years off I would say. But we’re not talking decades.

Okay. Thank you.

Okay.

All right. We’re going to have to leave it there. Thank you for joining us this morning. We look forward to speak with you again on our second quarter conference call on July. Chantilly.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.