Todd Ernst - Vice President of Investor Relations Tom Kennedy - Chairman and Chief Executive Officer Toby O'Brien - Chief Financial Officer

Sheila Kahyaoglu - Jefferies Cai von Rumohr - Cowen and Company Robert Spingarn - Credit Suisse Doug Harned - Bernstein Richard Safran - Buckingham Research Carter Copemann - Millius Research Pete Skibitski - Drexel Hamilton Sam Pearlstein - Wells Fargo Securities Robert Stallard - Vertical Research George Shapiro - Shapiro Research Peter Arment - Baird

Good day, ladies and gentlemen. And welcome to the Raytheon Q4 2017 Earnings Conference Call. My name is Joyce, and I will be the moderator 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 proposes. I would now like to turn the conference over to your host for today, Mr. Todd Ernst, Vice President of Investor Relations. Please proceed.

Thank you, Joyce. 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 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. Raytheon had another great year of performance in 2017, and our growth strategy continue to deliver results for our shareholders and customers. Sales were up 8% in the fourth quarter and 5.1% for the full year, and we set a new company record for annual sales of $25.3 billion. We continue to see strong global demand for our innovative solutions, illustrated by our book to bill ratio of 1.26 in the fourth quarter and 1.09 in the year. This drove an increase in backlog of $1.5 billion year-over-year and positions us for a strong 2018. EPS exceeded our expectations in the fourth quarter and for the full year after adjusting for the impact of tax reform and our discretionary pension contributions. We continue to drive strong cash flow and I was pleased with our better than expected cash in the quarter and full year. This allow us to make a significant discretionary contribution to the pension of $1 billion. Toby will review additional details about the fourth quarter and 2018 guidance in a few minutes. Our international business continue to be strong. 2017 marked the 14 consecutive year of international sales growth for the company with sales up 8.4% in the fourth quarter and 6.2% for the full year. In fact, Raytheon achieve record international sales of over $8 billion for the full year, which represents approximately 32% of sales. Our differentiated international strategy is working, and we are encouraged by the broad based demand we are seeing across Europe, Asia Pacific and MENA for our advance capabilities. In Europe, we are pleased to see the commitment or plans in place for NATO countries to meet their obligation to spend 2% of their GDP on defense. Also, in early November, Sweden announced that it selected our combat proven Patriot Air and missile defense system capability. Sweden is expected to sign an LOA in mid 2018, which is an approximate $1 billion opportunity. And in late November Romania signed an LOA with the U. S. government to purchase Patriot, which paves the way for the U. S. government to begin contract negotiations with Raytheon. We would expect the booking in 2018, making Romania the 14th country to depend on Patriot to protect its citizens and armed forces. And we continue to make progress with Poland and another European country on their acquisition of Patriot capabilities. We also continue to see strong Patriot demand from existing customers. After the quarter, in early January, we booked a new direct commercial contract for Patriot capabilities worth over $1.5 billion. In the Asia-Pacific, Japan is set to expand its ballistic missile defense capabilities. On December 19th, Prime Minister Abe Cabinet approved the procurement of two land based Aegis Ashore missile defense systems, and a budget is up for approval that includes funding for standard missile family, including SM2, SM3 Block 1B, SM3 Block 2A and SM6. The budget also includes funding for AMRAAM and AIM-9X missiles. Turning to the Middle East. In December, I was in the United Arab Emirates to help Raytheon mark its 30th anniversary of our partnership with the nation. At that time, we announced the formation of a new wholly-owned subsidiary, called Raytheon Emirates, which is incorporated and headquartered in Abu Dhabi. Through this agreement Raytheon is committed to helping the UAE achieve its economic goals, while providing trusted innovative solutions that support the nation's defense and security requirements. Also last year, Raytheon announced a similar agreement in Saudi Arabia where we have been doing business for over 50 years. Although, both of these subsidiaries are in the early stages, they demonstrate Raytheon's differentiated international strategy. Turning to our domestic business. We saw an acceleration in growth in 2017. Domestic sales were up 7.9% in the fourth quarter and 4.6% for the full year. And we expect our domestic growth to continue to be strong in the future as our domestic book to bill ratio in 2017 was 1.11. Our IIS segment, which has the highest percentage of domestic business, grew its backlog almost 15% in 2017. For the Company, key domestic bookings in the quarter were for AMRAAM, Tomahawk, Warfighter FOCUS, Domino and a classified program at missiles. Looking to 2018 and beyond, we see continued growth and strong demand signals in the areas of counter-insurgency, counter-terrorism, Deterrence and response to peer nation threats. While we touched on this areas on past calls, I'd like to spend a few minutes today discussing trends we are seeing in each area and the ways in which these trends continue to positively impact our growth. First, the counter-insurgency counter-terrorism area, is driving a significant demand for precision weapons in ISR assets across the globe. A good example of that demand can be seen in our missile business, which grew bookings in the fourth quarter 23% year-over-year, mainly driven by an increase in precision weapon contracts. In 2018, we expect this demand to continue across a number of our missile franchises. The second area with strong demand signals is Deterrence, where our customers are focused on deploying technologies and solutions that can deter a threat from taking action. This area continues to drive strong demand for integrated air and missile defense capabilities. We've seen Deterrence demand grow in Europe where nations are concerned about protecting their sovereignty and are looking to our Patriot Air and missile defense system to provide advanced Deterrence s capabilities. And as I mentioned, in 2017, we saw demand for Patriot from Sweden, Romania, Poland and another European country. Beyond Europe, Deterrence is also getting additional growth opportunities for our systems in Japan and the Middle-East. Lastly, countering pure nation threats with advanced technologies is a rapidly developing growth area for Raytheon, especially in our classified business. Peer nations are working to close the gap with U.S. capabilities, which is driving strong demand from our U.S. customers. Demand that resulted and a new company record for classified sales in 2017. Looking ahead, our next generation solutions and technologies, such as the Long Range Standoff, the Long-Range Precision Fires, high energy lasers and hypersonics will continue to fuel growth in this area as he U.S. looks to maintain its operational and technical dominance. Turning to Washington. Last week, Secretary of Defense, Mattis, released a national defense strategy. The strategy is subtitled, sharpening the American militaries competitive edge summarizes his intent clearly. Secretary Mattis calls for urgent change, a significant scale to content with the high end threats that are directly characterized as essential challenge to U.S. prosperity and security. Investment priorities are clearly articulated as is the need for accelerating defense exports to improve interoperability between U.S. and allie forces. Providing sophisticated capabilities to our customers is essential to the growth strategy Raytheon has been executing. Our current capabilities and investments are aligned with secretary Mattis’ modernization priorities and we look forward to helping the defense department execute its strategy at the speed of relevance as secretary Mattis says. For the U.S. defense budget, we continue to see strong congregational backing for missile defense, cyber and other areas where Raytheon has a leadership position. And we remain optimistic that congress will pass a fiscal year '18 budget that provides our military the resources, technology and training necessary to protect United States and support our allies. This strong growth environment creates the benefit of a strong jobs environment. And in 2017, we added over 1,000 new jobs to our payroll. These are noble jobs, rewarding, good paying jobs that allow our employees to buy homes, raise families and save for retirement, all while serving a lager purpose of helping to make the world a safer place. The demand signals we see in our key growth areas, combined with the implementation of tax reform making us more globally competitive, creates a positive environment for continued business and jobs growth, going forward. In summary, 2017 was another great year for Raytheon. For that, I want to thank all of the members of the Raytheon team worldwide. They keep raising the bar on our performance and they are passionate about engineering a safer world with the innovative solutions we provide for our customers. I couldn’t ask for a better team. And let me turn the call over to Toby. Toby O'Brien: Thanks, Tom. I have a few opening remarks, starting with the fourth quarter and full year results. Then I'll discuss our outlook for 2018. After that, we’ll open up the call for questions. During my remarks, I'll be referring to the Web slides that we issued earlier this morning, which are posted on our Web site. Okay, would everyone please turn to page three? We are pleased with the strong performance the team delivered in both the fourth quarter and the full year. We have strong bookings in the fourth quarter at $8.5 billion, resulting in a book to bill ratio of 1.26. And for the year, we had bookings of $27.7 billion, with backlog up 4%. This sets the stage for continued growth in 2018, which I’ll discuss in more detail in just a few minutes. Sales were $6.8 billion in the quarter, up 8% from the same period last year. We saw growth across all of our businesses. For the year, sales were up 5.1%, reaching a new company record of $25.3 billion. Our EPS from continuing operations was $1.35 for the quarter and $6.94 for the full year. I will give a little more color on EPS in a few minutes, including the impact from both tax reform and the discretionary pension contribution. We also generated strong operating cash flow of $1.6 billion for the quarter and $2.7 billion for the year, which included the $1 billion pre-tax discretionary pension contribution that was not in our prior guidance. It’s worth noting that excluding this discretionary pension contribution, we exceeded our operating cash flow guidance by approximately $800 million at the midpoint and achieved a new company record for operating cash flow. Additionally, during the quarter, the Company repurchased approximately 540,000 shares of common stock for a $100 million, bringing the full year 2017 repurchase to 4.9 million shares for about $800 million. We reduced our share count in 2017 by 2%. Also, as we previously announced in November 2017, our Board of Directors authorized the repurchase of up to an additional $2 billion of the Company’s outstanding stock. The Company ended the year with a solid balance sheet and net debt of approximately $1.7 billion, which provides us financial flexibility for the future. Turning now to page four. 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 $8.5 billion in the quarter and $27.7 billion for the full year, resulting in the year-end backlog of $38.2 billion. This is an increase of $1.5 billion over year-end 2016 and provides us with the solid foundation for 2018. Worth noting that both Missile Systems and IIS had outstanding bookings performance for the full year 2017, up 23% and 19% respectively. For the quarter, international orders represented 40% of our total company bookings and for the full year, were 31% of total bookings. At the end of 2017, approximately 40% of our backlog was international. Turning now to page five. We had fourth quarter sales of $6.8 billion, an increase of 8% compared with 2016’s fourth quarter and in line with our prior expectations. As Tom just mentioned, international sales continue to be strong, representing 32% of our total sales for both the fourth quarter and full year of 2017. So looking at the businesses, IDS had net sales of $1.6 billion in the quarter, up 6% from the same period last year, primarily due to higher net sales on an international early warning radar program. IIS had net sales of $1.6 billion in Q4. The increase was primarily driven by higher net sales on a U. S. Air Force program and classified programs. Net sales at missile systems in the fourth quarter were $2.2 billion, up 15% compared with the same period last year. This increase was primarily driven by higher net sales on AMRAAM, SM-3 and Paveway. As I said net sales of $1.7 billion in Q4, the increase was primarily driven by higher net sales on airborne radar programs. And at Forcepoint, we saw 9% growth. For the full year, total company sales were $25.3 billion, up 5.1% over full year 2016, both our international and domestic businesses contributed to the sales growth. Moving ahead to page six. We delivered solid operational performance in the quarter. And as expected. at the total company segment level, margins in the fourth quarter were impacted by the timing of productivity improvements we recognized earlier in the year and program mix. Turning to page seven. We had strong solid operating margin performance for the year. Total company segment margins were 12.4%. It's worth noting that the impact of the gain from the TRS transaction in 2016 that we’ve discussed in the past was worth about 70 basis points at the company level. Excluding this gain, our margins in 2017 were slightly higher year-over-year. On page eight, you'll see both the fourth quarter and full year EPS. In the fourth quarter 2017, our EPS was $1.35 and for the full year, it was $6.94. We had solid operating performance from both the quarter and full year. Both were impacted by a couple of notable items that I wanted to spend a minute talking about. First, the enactment of the Tax Cuts and Jobs Act of 2017 had an unfavorable $171 million or $0.59 provisional tax related impact. This related to the re-measurement of our net deferred tax assets, as well as a one-time transition tax on foreign earnings. This resulted in a 550 basis point increase to our full year 2017 tax rate. Note this is a preliminary estimate and we will finalize the number by the end of 2018. And second, as a result of the $1 billion pre-tax discretionary pension plan contribution that we made in the fourth quarter of 2017, there was an unfavorable tax related impact of $0.09 because the contribution lowered the benefit of our domestic manufacturing tax deduction. This lowered EPS and was not included in our prior guidance. Turning now to page nine. Before moving on to our 2018 guidance, it's important to note as we discussed on our third quarter call that effective January 1, 2018, we adopted a new retirement benefit standard, ASU 2017-07, which moves all components of the FAS pension and post retirement benefit expense except for FAS service cost from operating to non-operating income. The adoption of the new standard has no impact on our net sales, EPS or operating cash flow. It affects our reported operating income as you'll see in the recaps numbers. To assist you with your modeling and for comparison purposes, we provided the recast data for 2016 and 2017 and the attachments at the end of the earnings release. Now looking at our 2018 guidance on page nine. We see sales in the range of between $26.4 billion and $26.9 billion, up 4% to 6% from 2017, which is better than our initial outlook that we provided in October. The increase is driven by growth in both our domestic and international businesses. Our 2018 outlook for the defered revenue adjustment is $10 million and for the amortization of acquired intangibles, is $118 million. As for pension, we see the 2018 FAS/CAS operating adjustment at approximately $1.4 billion of income and the other pension expense, which has now reported in the non-operating, at $958 million. We expect net interest expense to be between $180 million and the $185 million in line with 2017. We see our average diluted shares outstanding to be between $287 million and $289 million on a full-year basis, driven by the continuation of our share repurchase program. We expect our effective tax rate to be approximately 19%. Our estimated tax rate in 2018 is lower than 2017, primarily due to enactment of Tax Cuts and Jobs Act of 2017. In 2018, we see our EPS to be in the range of $9.55 to $9.75. Our operating cash flow from continuing operations for 2018 is expected to be between $3.6 billion and $4 billion. This compares to $2.7 billion in 2017, which as we previously mentioned, included $1 billion discretionary pension contribution. Before moving on to page 10, I would like to mention that we expect our 2018 bookings to be between $27.5 billion and $28.5 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 prior years. So if you move to page 10, here we have provided our initial 2018 guidance by business. We expect to see growth in our IDS Missile systems, SAS and Forcepoint businesses in 2018. At the midpoint of the sales range, we expect IIS sales in 2018 to be in line with 2017. As we've discussed before, this is driven by the planned ramp down on the Warfighter FOCUS program. Excluding Warfighter FOCUS , we expect IIS to grow in the low to mid-single digit range, driven by domestic cyber security and classified programs. With respect to segment margins, consistent with our prior comments, we expect 2018 margins to continue to be solid in the 12.5% to 12.7% range. This is up about 20 basis points over 2017 at the midpoint. At IDS, we see margins in the 16.4% to 16.6% range, which is also up from 2017. This change is driven by favorable program mix as we ramp on some recently awarded programs and increased productivity, driven by efficiencies from our investments and factory automation and equipment upgrades. We expect IIS margins of 7.6% to 7.8%, which is up 30 basis points over 2017 at the point. We see missile’s margins in the 13.1% to 13.3% range, up versus 2017. SAS margins are expected to be in the 12.3% to 12.5% range. And as I mentioned on the October call, down year-over-year primarily due to program mix. And at Forcepoint, we expect margins in the 6% to 8% range. It’s worth noting under the new retirement benefit standard, our margins at a total company level recast for 2017, are 16.7%. For 2018 at a total company level, our margins are expected to be in the 17.1% to 17.3% range. This increase is driven primarily by both the improvement at the business segment level and a higher expected FAS/CAS operating adjustment. We now turn to page 11. We’ve provided you with our outlook for the first quarter of 2018. Excluding the impact of tax reform in Q4 2017, we expect the cadence for the balance of 2018 to play out similar to 2017 with sales, EPS and operating cash flow ramping up in the second half of the year. Turning to page 12. Given tax reform and to help you with your modeling, we provided you with a long-term view of how we see our cash flow outlook over the next three years. We are pleased with our strong cash flow going forward, which is better than our prior expectations. We see our cumulative operating cash flows to be approximately $11 billion to 412 billion from 2018 through 2020. And on page 13, as we have done in the past, we’ve provided the summary of the financial impact from pensions in 2017, as well as the projected impact for 2018 through 2020, holding all assumptions constant. For comparison purposes, we’ve provided you with the pension tables under both the old and new retirement benefi standards. As I mentioned earlier, we see the 2018 FAS/CAS operating adjustment at approximately $1.4 billion of income and the other pension expense in non-operating at $958 million, which reflects our investment returns in 2018 of 15% on our U. S. pension assets, the December 31st discount rate of 3.7% and a long-term return on asset assumption of 7.5%. And finally, on page 14, we have provided an updated three year outlook of the acquisition accounting adjustments to help you with your long-term modeling. Before concluding, I wanted to touch on our capital deployment strategy, especially in light of tax reform. As I just mentioned, we expect to continue to generate strong cash flow and maintain a strong balance sheet that provides us the financial flexibility. We remain focused on deploying capital in ways that create value for our shareholders and customers. This includes internal investments to support our growth, paying a sustainable and competitive dividend, reducing our share count, making targeted acquisitions that fit our technology and global growth needs and making discretionary contributions to the pension. Let me conclude by saying that in 2017 Raytheon again delivered strong operating performance. Sales grew 5.1%, and our backlog was up 4%. We have a solid balance sheet, which gives us flexibility and options to continue to drive shareholder value and a strong outlook for cash. We are well positioned to grow in 2018 and beyond. Before moving on to Q&A, I'd like to welcome Kelsey DeBriyn, who recently joined the Investor Relations team as a Senior Director. As Todd transitions to his new role as Vice President of Corporate Development, please feel free to reach out to Kelsey with follow-up questions after the call. So with that, we'll open up the call for questions.

[Operator Instructions] The first question comes from the line of Sheila Kahyaoglu, please proceed.

Just I guess on margins for missile systems going forward, maybe if you could elaborate on that a little bit. Given your signal pick up in our short type of business with precision weapons and strong bookings, maybe can you talk about the mix impact there? Toby O'Brien: So we do expect to see higher productivity and operational efficiencies at missiles this year. But as you mentioned, given their portfolio and their mix, it’s important to keep in mind that that is a broad portfolio. We've seen considerable growth in both development and classified programs that can and are impacting the margin a bit, particularly early on so that's a bit of a headwind right now. But overall, we're very pleased with the portfolio, the mix of programs and it really supports and bodes well for the continued ability for the missiles business to grow going forward.

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

So you've given us a lot of detail on the Tax Act impact, the P&L and those items. Could you maybe walk us through the impact on 2018 cash flow, I mean breaking out items of the repatriation, the lower tax rate any other items that are relevant. Thank you. Toby O'Brien: So I'll start with the repatriation right. So that doesn't have any impact on our cash flow. That was cash that was already on the books. What that does do, it gives us some flexibility to bring cash back over to the U. S. to deal with some ebbs and flows of needs domestically versus internationally. I think beyond that, what I would say is within our cash outlook for 2018, we’ve got a little over $400 million as it relates to tax reform overall as a benefit compared to our prior expectations. We have that offset a little bit maybe about $150 million $200 million related to some tax initiatives that we got the benefit of from a cash tax point of view in 2017 that we don’t see repeating in 2018. But overall, we’re pleased with tax reform. As Tom mentioned in this comments, it provides us the benefit to be more competitive and it does provide some additional financial flexibility for us.

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

A follow-up or clarification type question on Missiles, well really revenue question Tom on SM-3 and SM-6. Wondering if you could see the air force and the navy doing combined buy there, may be a multiyear. And then the second question is just the Forcepoint margin. What's going on there?

Yes, let me start off with missiles. We are working with the department to -- and looking at multiyears for the standard missile family, and combining SM-3 and SM-6. So there is activity looking at that. I can tell you that the demand signals for the SM-6 and SM-3 are at an all time high. So we feel very strongly about those two franchises and actually SM-3 had multiple franchises within it, both domestic and international. Moving over to Forcepoint, we said that this year at Forcepoint would be a rebuilding year. We did there do a major change and its back office and also a major change, and it's a sales force. The area here is what we’re trying to drive, is a move from the sneeze, small to medium size enterprises into the large enterprises and very large enterprises. And then also there was couple of acquisitions that have worked out very well for us, and putting them in the place. But we really looked at the 2017 as a rebuilding year for Forcepoint and essentially structuring it as the $600 million year revenue business that it is. Toby O'Brien: And Rob, maybe I'll just add a little bit to Tom’s comments on Forcepoint. So they did fall short of our expectations in the quarter. They didn’t end where we want them to be. That said, following on what Tom said, we have made the appropriate investments in the business. And what we're seeing is they’re just taken a bit longer to play out and translate into both sales growth and margin expansion, and we still believe that's attainable. The outlook, the guidance we provided for '18 reflects the outcome we saw in 2017 and again, the latter timing of the pay off of our investments. I’ll reinforce on the positive side, we are seeing a growing and stronger pipeline. Tom talked about acquisitions are proving to be beneficial. And we do have solved and demonstrate the capabilities and solutions in the business. I'll also point out for '18 at Forcepoint specifically, we do expect a stronger back half of the year compared to the first half. And because of that, we would expect an operating loss at Forcepoint in the first couple of quarters similar to what we saw in Q4 with volume building into the second half along with the profitability and higher margins. Beyond ’18, we still expect the business to be able to deliver double-digit growth in margins. Just real tactically on Q4 '17, the margin was just impacted by lower volume. To put in perspective, it was about $12 million of sales that moved into '18 from '17 as Tom mentioned really just longer gestation period on deals with large and very large enterprises, it was about four, five deals ranging from $1 million to $4 million that move that caused the sales and margin shortfall in Q4.

The next question comes from the line of Doug Harned with Bernstein. Please proceed.

You’ve been having a lot of success with Patriot lately, and I’d like to understand a couple of things on it. One is, when you look at the outlook for Patriot, how do you see the outlook for the Missiles used. In other words, perhaps you could say a little bit about the SkyCeptor program. And I would add into that, when you go to 360 degree radar, what do you expect this will do in terms of affecting the market and the demand for the system?

So let me take that, Doug. First of all, I think what’s key about Patriot for folks to understand is that there is multiple countries that own and utilize the Patriot system. With the addition of Romania that will be 14 countries. And then with Poland, that will make it 15 and then with Sweden, that will make it 16. So relative for example to the 360 radar, there is a market of these 16 countries for an upgrade to their Patriot systems. So it’s actually provides the built-in market for the Patriot capabilities. We had seen some significant demand for our GEM-T missiles in the Middle East that this system is being used quite a bit by both the Emirates and then also by Saudi Arabia, to essentially knock down scuds that are being fired out in Yemen, so high demand signal there for GEM-Ts and then very successful in that region. I think the bottom line is that Patriot has a lot of upside potentially here over the next several years. The main area here is a concept that Deterrence that I talked about, that nations want. This capability protects their sovereignty and we’re seeing that big demand pulls in actually three regions in Europe, in the MENA region and also in the Asia Pacific region. So I think Patriot is going to a solid franchise here definitely for at least the next 10 years then with the refresh of the 360s radar that takes out another 20 years.

The next question comes from the line of Richard Safran of Buckingham Research. Please proceed.

Tom, on the subject of franchise, because I thought I would ask you about two. I was reading and I wanted to ask you about the hypersonic comments in your opening remarks. I was reading that there could be an award this year possibly in March for a hypersonic weapon. So wanted to know, you’ve been talking about this for some time, one pillar of your strategy. Are you being considered the prime on the program? Do you think there isn’t award that could be made this year? If possible, can you talk about the size of the opportunity? And on the second part here, Harpoon replacement, so you’ve had Lockheed and Boeing trucked out. We’ve talked about this. Are we going to get that contract signed as soon as the CRs end and we have an FY 2018 spending bill? And if you could discuss how quickly that program might ramp?

Rich, first of all back on hypersonic. We’ve been on the hypersonic path here for many years. In fact, you’re right. It’s in our second pillar of our four pillar strategy. We actually say that we’re heavily investing and working in the hypersonic area. We have already gotten multiple hypersonic contracts with the Department of Defense. So one of the larger ones is a program called Hawk, which is with DARPA and it is -- essentially it’s a sensory hypersonic missile and we are the prime. There are several other, I would call, pursuit activities relative to hypersonic. So we are engaged in those hypersonic missile pursuits and as a prime across the board. So we do believe that hypersonics is the next wave of technology related to advanced missile systems, and that's our significant opportunities out there and we've positioned ourselves year over multiple years to be ready to go capture those opportunities. And we felt very positive about that. On your other question relative to naval strike missile, you're absolutely correct. We are heavily engaged in that pursuit. There is press out there that does say that both Boeing and Lockheed have dropped out. We are pursuing this in a competitive way despite that. And you also are right it does take the CR to be removed for us to be awarded the contract here. Number one reason is the fact that they can't award a new start under a CR. So we're very, I’d say, motivated to see the CR finally resolved here in the February time frame.

The next question comes from the line of Carter Copemann with Millius Research. Please proceed.

Tom, a couple for you, one on the Forcepoint commentary, and the performance relative to your expectations. I mean there's clearly a trust element in the plan and the performance improvement you expect there, but there's also a decision at some point in the future about whether or not you want to keep that asset or not. Is there a period of time that you're considering or you think we should consider is reasonable to expect that performance improvement to show up that we should wait and see or not. And then secondly on the commentary Toby you made around tax reform, and wanting to be balanced. Is there any -- and clearly there's an incentive. But is there any opportunity for internal investment that you can identify or even just areas of investment that you guys might want to put incremental capital to work, especially given the share repurchases for you and a lot of the other peers in the space have come off a little bit from where they were. Help us think through if there's really anything material there. Thanks guys.

So let me take the Forcepoint first. And the bottom line is that the team is focused on executing its growth strategies. And Forcepoint is all about growth. One of the other elements we haven't talked about is how Forcepoint fits into our overall cyber strategy at the company level, and the synergies that we get, especially in international market and working with other governments in terms of being able to leverage the technologies out of Forcepoint, which has helped us essentially grow our entire cyber security capability within the company. We are, again, this year was a rebuilding year. We're going to be, I would call it, next year is a transient year coming off the rebuilding year and into what we consider to be a year to be able to drive and meet our expectations moving forward. So I think this year 2017 was the rebuild year, 2018 is a transient year, ramping up into where we expecting to be with the double digit growth and also double digit margins in 2019. That's essentially how we are looking at it. And in meantime, we are leveraging Forcepoint in all of our international pursuits relative to cyber security with industrial partners and then also with governments around the world. Toby O'Brien: And then Carter, I'll maybe go little bit broader and try to answer your question on the -- around capital deployment. So I won't repeat what I said in the script about how we're thinking of it from a high level point of view. But I will reinforce that we continue to target 80% of our free cash been return to shareholders. And sitting here today, we still see that is the case in that 80% range plus or minus. But one thing that we have done, you mentioned capital investments in ourselves to continue to grow. So last year our CapEx and software spending was $611 million. In 2018, we expect it to be in the range of $910 million to $950 million, so more than a 50% increase. And what we're doing there, where we're making those increases, we're looking to invest in infrastructure or high technology production facilities demonstration capabilities, more factory automation. The combination of which helps position us better to grow and drive productivity improvements. IR&D as well, we’re looking at about 3% of IRAD at sales here in '18, and given or take, would expect that to continue ongoing forward. I would say that the tick-up in capital, think of that as kind of a one-time step-up. And going forward in '19 and beyond, the way to think of thing is more give or take 3% of revenue. And then last thing that I would mention, obviously, we made the $1 billion discretionary contribution to the plan in '17. And given tax reform, we continue to evaluate potentially making an additional contribution before September 15th and will provide more details on that later in the year.

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

I was just hoping to get a little more clarity on Patriot, on a couple of items. The recent greater than $1.5 billion Patriot sale. Was that a new customer with just modernization program or brand new fire units? And I was wondering if you could maybe at least give the regional location of the customer. And then separate from that, Tom, it sounds like there is maybe an additional customer in Europe that's new beyond Poland or maybe in Sweden. I was wondering if you could maybe give us sense of the size and timing there.

So the bottom line is on this $1.5 billion Patriot order we received in the first week of January of this year that was an existing customers acquiring more fire units. And so we are seeing, again this is the across Europe and across MENA region and across Asia Pacific region, it’s a significant demand for the capability of the Patriot system from new customers, as we mentioned and then also from existing, who already have fire units. And so the bottom line is the system is performing and these nations are recognizing that. And there is a demand signal and demand signal is based on these the concern of these countries in protecting their sovereignty. And this fits into the bucket of Deterrence that I talked about. In terms of the next country, in Europe, I'm afraid I can't disclose it, except to say that it's in Europe.

The next question comes from the line of Sam Pearlstein with Wells Fargo Securities. SamPearlstein : I guess, just a couple of questions if I can put them all together. But missile systems, I know you’ve talked productivity improvements and things of that where it came earlier in the year. But just overall, the year ended below what you originally planned. So I guess, I was wondering if you could just talk about what might have come in, whether that’s the mix, whether it’s performance, anything of that sort. And then separately, what changed from October when you talked about 3% to 5% growth, it’s now 4% to 6%. What got better? Toby O'Brien: Relative to missiles and the end to the year, the lower margin is really primarily due to two things; little lower program improvements than we were expecting; and a change in program mix as well. So it was combination of those two things. We don’t look at the lower productivities as any trend or anything, just the timing related to the recognition of the improvements. And as we talked about, we see their margins improving in 2018. As far as the overall top line growth going up to the 4% to 6%, really two things. As we talked about, it’s our normal process. We work it up through the end of the year. But we also exceeded our expectations in 2017 on the high end relative to bookings, and combine that with we’re off to a quick start with the $1.5 billion Patriot order that Tom just talked about. They were really the two big drivers that led to the increase.

The next question comes from the line of Robert Stallard with Vertical Research. Please proceed.

I am looking at slide 12 in the pack, Tony or Tom. If you achieve the top end of your operating cash guidance for 2018, this would imply that you’re not going to have any cash flow growth in 2019 and 2020. I was wondering if you could maybe explain that situation given the strength of the bookings and the revenue outlook. And whether there is any weirdness in terms of cash consumption or advances or things like that? Thank you. Toby O'Brien: So there is obviously a bunch of things that affect cash flow, including the revenue growth and the flow through on the profitability. But keep in mind, including what drove some of the strong performance in 2017 compared to our expectations we do from time-to-time get some significant advances. We were favorably impacted in ‘17. So you have the program activity that plays into it. But the other thing I would mention, taking a look, especially 2018 versus 2019 that in 2018, the 2018 cash is the tax benefit of the 2017 discretionary contribution that we made, that we’ve talked about. And if you were to exclude that benefit in ‘18, we’d expect 2019 cash to be more in line to maybe slightly up with ‘18. So that’s a big driver along with some of the timing of the program activity.

The next question comes from the line of Gregory Shapiro with Shapiro Research. Please proceed.

I’ve been called a lot of things, but Gregory is not one of them.

We certainly missed your name, sorry about that.

One, Toby my usual one, but looking at it for the year, the bookings were 2.37 above the sales and the backlog is up $1.5 billion, so a sizable disconnect there you might spell out what caused the difference. And then the second one, Tom, this kind of just gets to another question on Forcepoint. But the reality is this business is disappointed from when you initially got it. So my question is at what point do you really worry that your strategy is not working out the way you think and then what actions do you take. Toby O'Brien: George, I'll address the first one. And as we talk about in the past, we do have backlog adjustments, particularly as we under run cost side programs. And we did see a couple hundred million in Q4 and around $900 million for the year. I will say we do work with our customers in these cases to bring in new work, new scope, when we do under-run on current programs, which obviously result potentially in new bookings. And as you saw throughout the year, we did increase our guidance every quarter. So overall, we're pleased with our bookings performance and the resulting backlog. Again, our backlog grew 4% year-over-year and 2018 bookings outlook for the year of $27.5 billion to $28.5 billion set the stage real well for continued sales growth.

George, let me hit your Forcepoint question. So back to what the goal, the goal was in establishing a commercial cyber security business as part of Raytheon. And the main reason for that was to unlock the value of our cyber security capabilities and provide them to the commercial marketplace. So we have done that. We have created several commercial products. They are being integrated into the Forcepoint set of product solutions and we are getting some significant demand for those products. Those demands for those products are in the large enterprise and very large enterprise area. And that is why we are restructuring the sales force of Forcepoint from the SME sales force, which had heavy reliance on VARs, value added resellers, to more of an internal sales force and structure. So I think we are on plan. Relative to where we want to go in the big scheme of things, I agree with you. We're disappointed. We're not getting there as fast, but we are seeing the signs that show that the strategy can work, will work. One point I would like to make and we haven’t really made that a lot about Forcepoint is the synergy for Forcepoint with the rest of our cyber security pursuits. We had a significant book-to-bill ratio in the cyber security area this past year 1.4 book-to-bill. And one of the main reasons for this is the customers are recognizing that we have the entire, from the beginning all the way to the end relative to cyber, essentially we cover and this is one of our themes that we cover all sides of cyber, all sides of cyber security, all the way from supporting governments, all the way from supporting industrials, and now even into the commercial marketplace. And this gives us significant credentials. When I go, for example, to the Middle East and I meet with the heads of state there, one of the questions they have about cyber is; how do we have all these capabilities; how do we have the ability to support governments; how do we have the ability to support the industry verticals. And the reason is because we have all these, these capabilities within the company, including commercial capability. So it does help us in our overall sales force of cyber all around. You are right. It's going slower than we expected. There're some things that we learned along the way. And one of the big areas is that lot of the products that we can leverage into Forcepoint are really fit in the domain of the large enterprises, and the top 500 companies in the world. And that's the companies that we're focusing on, but we do need to build the sales force to be able to continue to grow our capability with them.

The next question comes from the line of Peter Arment with Baird.

Tom, just a bigger picture question on missile systems, I mean it continues to be a great story with all the growth. I mean, when you look at all the franchises there, I mean how are we viewing in terms of the long-term growth? I mean, you look at a lot of these franchises. Do you expect it to level off that when we've had this big step up the last few years, or just maybe give us some color on that? Thanks.

We’re very excited about the missile company and its future. And you are right, we do have quite a bit of franchises. So I think one of the things that we've done is we haven't just let those franchises stay idle, we've continued to make significant investments in those franchises over the year. So they are relevant, relevant relative to the mission, relevant relative to the technology that is incorporated in those franchises. But we are not just standing still on those franchises. We're pursuing next generation systems. And also, next generation systems that may actually make some of those franchises -- put those franchises out of business, likes for example in the area of hypersonics. We won some significant programs in hypersonics. We're seeing an uptick and demand signals for hypersonics, back in line with our area of calling the been able to address peer threats, also we saw that in the new and national defense strategy out of secretary Mattis relative to addressing those threats. And so we’re going to see increased demand in the area of hypersonics. So whole new growth area for the missile company that wasn’t there before. In addition to the existing franchise demands, we just talked a little bit about and was brought up on the on one of the questions relative to navel strike missile. This is a program that replaces the Harpoon system. The last run of Harpoon was called the Harpoon 2. It was over 7,000 harpoons built, and it's a global weapon. So that has international lag, so this will be a brand new franchise out of the gate potential $8 billion opportunity over 10 year period, and it has international legs. So a brand new one entering and it's -- and the way we've developed this system in partnership with Kongsberg. This system is not going to go through a 10 year development cycle, it already exists and it's ready to enter production almost immediately upon award of the contract. So lot of great news for the missile company and we’re very excited about it. The demand signals are there. We happen to have the technologies. We made the right investments at the right place. And always see as upside potential moving forward. Todd Ernst : Okay, we’ll 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. Joyce?

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Thank you for joining.