Good day, ladies and gentlemen and welcome to the Raytheon fourth quarter 2018 earnings conference call. My name is Sonia and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Kelsey DeBriyn, Vice President of Investor Relations. Please proceed.

Thank you Sonia. 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 will 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 will start with some brief remarks by Tom and Toby and then move on to questions. Before I turn the call over to Tom, I would 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 will turn the call over to Tom.

Thank you Kelsey. Good morning everyone. Raytheon had a very successful year in 2018 and our growth strategy continued to deliver results for our shareholders and customers. There were many highlights in 2018 for Raytheon. Let me start by touching on some of our financial results. We continue to see strong global demand for our innovative solutions, demonstrated by our book-to-bill ratio of almost 1.2 for the full-year. And for the third time, in 2018 we achieved record backlog which rose to $42.4 billion at the end of the year. This drove an increase in backlog of more than $4 billion year-over-year and positions us for a strong 2019. Sales were up 8.5% in the fourth quarter and 6.7% for the full-year. And in 2018, we accelerated our sales growth for the fourth time since 2015. This resulted in a new company record for annual sales of $27 billion. Cash flow was better than we expected and we achieved a new company record for operating cash flow for the full-year. Toby will review additional details about the fourth quarter and our 2019 guidance in a few minutes. Given the success we saw in 2018, I wanted to take a few minutes to share some of the Raytheon's key milestones across our company during the year. First, I would like to highlight the strength of our classified business. In 2018, we had record classified bookings that were up over 45% year-over-year. Classified bookings for the full-year were almost $7 billion and we saw strong classified bookings across the businesses including $2.6 billion at IIS, $2.4 billion at SAS and $1.6 billion at missiles. Raytheon also had record classified sales which grew 19% versus 2017 and represented 19% of company sales. Classified bookings and sales exceeded our plans for the year. Our strength in classified is driven in large part by the need of our domestic customers to address advanced threats as outlined in the National Defense Strategy. As a reminder, classified business is crucial for Raytheon's growth and success. It funds next-generation technology development that is integral to the long-term growth of our future franchises and production awards. Second, we saw strong growth at many of our businesses in 2018, including at our IIS business which grew 9%. Although we expect to see the Warfighter FOCUS program ramp down in 2019, we continue to see meaningful expansion in IIS' core markets including cyber and space. IIS' innovative solutions are well-aligned with our customers' current mission needs and long-term strategy. We saw this in 2018 with cyber and space programs at IIS achieving double digit growth. Next, I wanted to highlight the progress we made in 2018 on one of our existing franchises, our advanced Patriot Air and Missile Defense system. In December, we were awarded nearly $700 million for Sweden Patriot. And during 2018, we booked four major production awards for our Patriot system totaling almost $4 billion in bookings. Three of the four major Patriot awards were from new countries, Romania, Poland and Sweden. And we now have 16 nations that depend on Patriot to protect their citizens and armed forces. All of these countries pull money to fund sustainment, support and new development of Patriot which keeps our system ready for the evolving threat for years to come. And with our current Patriot backlog, we have production visibility until at least 2023. In terms of future Patriot awards, we still expect our next booking of $500 million for Romania Patriot in 2019 with additional follow-on awards to the complete the program in 2020 and 2021. We continue to see the total Raytheon Romania Patriot opportunity to be around $2 billion. For our Poland Patriot opportunity, our Phase 2 booking is still expected in 2020 with the total Raytheon Poland Patriot opportunity to be around $5 billion. There is also the potential for additional Patriot production awards including the possibility of adding yet another new European country to the Patriot partnership. Another 2018 highlight was the new franchises Raytheon won across our businesses. At missiles, in addition to the new classified programs we also won a new missile franchise, the Naval Strike Missile for the U.S. Navy. The missile was offered by Raytheon in partnership with Kongsberg. And because it's already a proven operational system, NSM saves the U.S. billions of dollars in developmental costs. Our goal with NSM is to replace the existing domestic and international inventory of harpoon and other international surface-to-surface missiles making this another multibillion franchise opportunity for the company. New franchises we won at SAS during the year include a classified work as well as our selection to develop and deliver the next generation Distributed Aperture System or DAS for the F-35. Our DAS system enhances capability and reliability versus to the prior system. And we have been developing this technology over the past few years which will be applicable to other aircraft including the rotorcraft market. We look forward to some of our new franchises that we have won over the last few years transitioning from the development to full rate production. These franchises include AMDR, EASR, 3DELRR, Next Generation Jammer, FAB-T and StormBreaker. During 2018 we also achieved testing milestones on some of our programs such as the next-generation Standard Missile-Three Block IIA. This interceptor defeats missile threats outside the earth's atmosphere and is being developed and produced in cooperation with Japan. A test in December marked three significant achievements for the SM3 Block IIA missile including intercept from a land-based launch, intercept of an intermediate-range ballistic missile target and intercept using tracking data from remote sensors. Additionally, this test supports a critical initial production acquisition milestone. Our SM3 missiles are the only ballistic missile interceptors that can be launched both at sea and on land and have achieved over 30 intercepts in space. And we continue to see opportunities across our standard missile family of products including the potential for multiyear awards for SM3 Block 1B and SM6 which will provide production visibility until at least 2026. Many of our innovative solutions including the SM3 Block 2A interceptor were noted as critical products outlined in the Missile Defense Review which was released earlier this month. We are encouraged by the MDR and how closely our customers' needs in these critical areas align with the capabilities we are developing including interceptors, space-based sensors, high-energy lasers, hypersonics and counter-hypersonics. As we start 2019, we feel very optimistic about the future and our ability to continue to grow, both domestically and internationally. It's worth noting that we started the government fiscal year 2019 with the Department of Defense budget already in place avoiding a continuing resolution for the first time in a decade. This timely bill passage is providing valuable stability and predictability which is beneficial for both our customers and our shareholders. In closing, our very successful 2018 would not have been possible without the strong commitment and performance of our 67,000 employees around the world. I want to thank them for all they did for our customers, company and shareholders during the year. We look forward to 2019 being another successful year for Raytheon and it has certainly started on the right note. Earlier this month, Fortune magazine ranked Raytheon first for innovation within the aerospace and defense sector on their Most Admired companies list. That's great recognition on the investments we have made and the talent we have to drive our future success. We are clearly ready to take this great company to new heights in the year ahead and beyond. Now let me turn the call over to Toby. Toby O'Brien: Okay. Thanks Tom. I have a few opening remarks starting with the fourth quarter and full-year results. Then I will discuss our outlook for 2019. After that, we will open up the call for questions. During my remarks, I will be referring to the web slides that we issued earlier this morning which are posted on our website. Would everyone please move to page three. We are pleased with the strong performance the team delivered in both the fourth quarter and the full-year. Bookings, sales, EPS and operating cash flow all met or exceeded our expectations. We had strong bookings in the fourth quarter at $8.4 billion resulting in a book-to-bill ratio of 1.15. And for the year, we had record bookings of $32.2 billion resulting in a book-to-bill ratio of 1.19. This sets the stage for continued growth in 2019 which I will discuss in more detail in just a few minutes. Sales were $7.4 billion in the quarter, up 8.5% from the same period last year. We saw strong growth across all of our businesses. For the year, sales were up 6.7% reaching a new company record of $27.1 billion. Our EPS from continuing operations was $2.93 for the quarter and $10.15 for the full-year. I will give a little more color on EPS in a few minutes. We also generated strong operating cash flow of $2.4 billion for the quarter and $3.4 billion for the full-year. It's worth noting that we exceeded our operating cash flow guidance by approximately $600 million at the midpoint and achieved a new company record for operating cash flow. The increase was driven by operations and improved working capital. And as a reminder, we made a $1.25 billion pretax discretionary pension contribution in the third quarter of 2018. Additionally, during the quarter the company repurchased approximately 2.3 million shares of common stock for $400 million bringing the full-year 2018 repurchases to 6.7 million shares for about $1.3 billion. We reduced our share count in 2018 and we continue to see value in our share price. The company ended the year with a solid balance sheet and net debt of approximately $1.4 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 $8.4 billion in the quarter and $32.2 billion for the full-year resulting in a record backlog of $42.4 billion. This is an increase to backlog of $4.2 billion over year-end 2017 and provides us with a strong foundation for 2019. It's worth noting that both IDS and SAS had strong bookings performance for the full-year 2018, up 76% and 33% respectively over the prior year. And all of our businesses had a book-to-bill ratio over one in 2018. International orders represented 31% of our total company bookings for both the quarter and the full-year. At the end of 2018, approximately 40% of our total backlog was international. Turning now to page five. We had fourth quarter sales of $7.4 billion, an increase of 8.5% compared with the fourth quarter of 2017 and in line with our expectations. International sales continued to be strong representing 30% of our total sales for both the fourth quarter and full-year of 2018. So looking at the businesses. IDS had net sales of $1.7 billion in the quarter, up 8% from the same period last year primarily due to higher net sales on two international Patriot programs awarded in 2018. IIS had net sales of $1.7 billion in Q4. The 9% increase compared with Q4 2017 was primarily due to higher net sales on cyber and space classified programs and on the DOMino cyber program. Net sales at missile systems in the fourth quarter were $2.3 billion, up 6% compared with the same period last year. The increase was primarily driven by higher net sales on classified programs. In the fourth quarter 2018, SAS had net sales of $1.9 billion. The 13% increase from the fourth quarter 2017 was primarily driven by higher net sales on classified programs. And at Forcepoint, we saw 10% sales growth in the quarter. For the full-year, total company sales were $27.1 billion, up 6.7% over full-year 2017. Moving ahead to page six. Our operating margin in the quarter was 16.5% for the total company and 12% on a business segment basis and lower than last year's fourth quarter primarily due to mix. Overall, the company continues to perform well. Turning to page seven. We had solid operating margin performance for the year. Our operating margin was 16.8% for the total company and 12% on a business segment basis. On page eight, you will see both the fourth quarter and full-year EPS. In the fourth quarter 2018, our EPS was $2.93 and for the full-year was $10.15. Both the quarter and full-year were higher than the comparable periods in 2017, primarily driven by operational improvements from higher sales volume and lower taxes that were primarily associated with tax reform. Overall, we had strong operating performance for both the quarter and full-year. Now looking at our 2019 guidance on page nine. We see sales in the range of between $28.6 billion and $29.1 billion, up 6% to 8% from 2018 which is consistent with our initial outlook that we provided in October. The increase is driven by growth in both our domestic and international businesses. As for pension, we see the 2019 FAS/CAS operating adjustment at approximately $1.5 billion of income and the retirement benefits non-service expense and non-operating at $726 million. We expect net interest expense to be between $153 million and $158 million, in line with 2018. We see our average diluted shares outstanding to be between 279 million and 281 million on a full-year basis, driven by the continuation of our share repurchase program. We expect our effective tax rate to be between 17% and 17.5%. Our estimated tax rate in 2019 is higher than 2018 primarily due to the increase in pretax income and the absence of benefits recorded in 2018 for the discretionary pension contribution and certain tax planning initiatives. In 2019, we see our EPS to be in the range of $11.40 to $11.60, up year-over-year. Our operating cash flow from continuing operations for 2019 is expected to be between $3.9 billion and $4.1 billion. I will discuss operating cash flow more in a few minutes. Before moving on to page 10, I would like to mention that we expect our 2019 bookings to be between $29.5 billion and 30.5 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 2019 guidance by business. We expect to see growth in all our businesses in 2019. At the midpoint of the sales range, we expect IIS sales in 2019 to be up slightly over 2018. As we have 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 high single digit range, driven by mission support and the DOMino program as well as classified programs primarily in cyber and space. With respect to segment margins, we expect 2019 margins to continue to be solid in the 12.1% to 12.3% range. This is up about 20 basis points over 2018 at the midpoint. At IDS, we see margins in the 16% to 16.2% range. And as we have discussed previously, this is driven by a change in program mix as we ramp up on some recently awarded programs. We traditionally see lower margins in the early phases of programs until we retire certain risks. We also expect lower volume year-over-year on some higher margin production programs that are nearing completion. We expect IIS margins of 7.8% to 8%, in line with 2018. We see missiles margins in the 12.1% to 12.3% range, up 50 basis points at the midpoint versus 2018. SAS margins are expected to be in the 12.9% to 13.1% range, in line with 2018. At Forcepoint, we expect margins to be in the 3% to 5% range. For 2019, at a total company level, our margins are expected to be in the 16.5% to 16.7% range. If you now turn to page 11, we provided you with our outlook for the first quarter of 2019. Please note, the first quarter of 2019 has one last work day than the first quarter 2018 and this equates to about $100 million in sales overall. We expect the cadence for the balance of 2019 to play out similar to 2018 with sales, EPS and operating cash flow ramping up in the second half of the year, as usual. Turning to page 12. We have provided you with an updated view of how we see our operating cash flow outlook over the next few years. We are pleased with our strong cash flow going forward which is better than our prior expectations. As I mentioned earlier, in 2018 we had record operating cash flow that was $600 million better than our prior guidance at the midpoint driven by operations and working capital improvements. As a reminder, we made a $1.25 billion pretax discretionary pension contribution in the third quarter of 2018. As we sit here today, no discretionary pension contributions are contemplated in our 2019 guidance. For 2019, we brought our operating cash flow guidance up to a range of $3.9 billion to $4.1 billion. Also it's important to point out that we expect to pay approximately $900 million more in cash taxes in 2019 which is $200 million higher than our prior outlook. Also on page 12, we provided operating cash flow guidance for 2020 of around $4.6 billion. And on page 13, as we have done in the past, we have provided a summary of the financial impact from pensions in 2018 as well as the projected impact for the next five years, holding all assumptions constant. You will note that this year we have provided you with two additional years of pension outlook to help you with your model. As I mentioned earlier, we see the 2019 FAS/CAS operating adjustment at approximately $1.5 billion of income and the retirement benefits non-service expense and non-operating at $726 million which reflects our investment returns in 2018 of minus 4% on our U.S. pension assets, the December 31 discount rate of 4.3% and a long-term return on asset assumption of 7.5%. Before concluding, I wanted to touch on our capital deployment strategy. As I just mentioned, we expect to continue to generate strong cash flow and maintain a strong balance sheet that provides us with 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 from time to time. Let me conclude by saying that 2018 was a very successful year for Raytheon where we once again delivered strong financial results. We set many new company records in 2018, including record operating cash flow, backlog and bookings and both sales and bookings in the classified and international areas. 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 2019 and beyond. So with that, we will open up the call for questions.

[Operator Instructions]. The first question will come from Joseph DeNardi of Stifel. Your line is now open.

Yes. Thanks very much. I am wondering if you could just speak kind of longer-term to the demand signals that you are seeing just broadly for missile defense in the Middle East, Asia and maybe how that's evolved over the past 12 months, just given kind of changes in the threat environment? Thank you.

Yes. Good to hear from you, Joe. And I will cover that. I think two elements, initially I will talk about missile defense in the Middle East. We still see strong demand signals from multiple countries. The major concern there is Iran. And so we are seeing continued demand. We saw, for example the LOA signing of the THAAD system for the Kingdom of Saudi Arabia that occurred last year. Raytheon has a major part of that procurement based on our TPY-2 radars. We are also continuing to see demand signal in the Asia-Pacific region, especially relative to Japan. I think a big note here on Japan is in 2018, the Abe cabinet did approve their five-year plan which was 10% increase over the prior tenure five-year plan. So in that plan there is a significant effort relative to missile defense. I did mention in my script that we are working with Japan in the development of the SM3 Block 2A and that is a key weapon system that's in their procurement horizon. So we feel very happy about the Asia-Pacific region. And then back home, late last year the missile defense actually came out earlier this year on the Missile Defense Review. And if you go through the Missile Defense Review, we are very encouraged here at Raytheon because many of our systems are called out. The Missile Defense Review will be increasing existing capabilities such as the ground-based interceptors, more of those which has our EKV, Exoatmospheric Kill Vehicle, on top of that. They are also more working on area of homeland defense but in terms of improvements that the Missile Defense Review called out, significant support for our replacement kill vehicle. So additional funding for that. I also called out the use of the SPY-6, what we call the AMDR radar, for the Navy. And also the use of the SM3 Block 2A as an important element of the Missile Defense Review. And beyond that, we are left to launch, it did call out the use of advanced sensors on the F-35 and I mentioned in my script that last year one of major franchises that we won was the EODAS, Distributed Aperture System, that will go on the F-35 which provides significant sensor capability here. So we all around, I think the Missile Defense Review was great for us and then also the international demand signals all the away from the Asia-Pacific region, Middle East. And then I mentioned closing several deals in Europe here just last year and then also the significant opportunity here for some more deals here coming in 2019. So we are very optimistic, especially in the area of integrated air missile defense.

Thank you. And our next question comes from Jon Raviv of Citi. Your line is now open.

Hi. Good morning everyone.

Good morning.

Good morning.

Sorry to sort of go in this direction a little bit, but just can you talk a little bit about the idea of cushion in the guidance? And just specifically really to IDS and MS this year? We certainly appreciate there are always a lot of moving pieces and complexities with new stuff ramping. But missile systems seems to have missed again and it was a lowered bar through 2018 and IDS also seemed to miss some margins. So I don't want to focus too much on the past, but just as you layout the 12.1% to 12.3% segment margin guidance for 2019, how much cushion is in there and how do we get over the idea that things can change and perhaps underperform through the year? Thank you. Toby O'Brien: Yes. Jon, let me start maybe high level right at the company level around the guidance and then give you a little color on both of the businesses, missiles and IDS that you talked about. So we are very comfortable and we are pleased with the guidance that we put out there. At the topline, it's showing 6% to 8% growth. If you just take the midpoint, it would be the fifth year in a row of accelerating growth for the company. The other thing to keep in mind and I alluded to, but I quantified in my opening remarks and I will quantify it now, not new news but the headwinds that IIS, they are still growing and we expect them to still grow in 2019. But they do have about $0.5 billion headwind from the ramp down which we knew about of the Warfighter FOCUS program. Normalize for that, you would add about 200 basis points to the range and would be looking at 8% to 10% growth at the company level. We think the guidance we provided at this point, when you look up and down the metrics, is balanced. We are starting the year out. We always look whether it be this year or into the future for ways to improve and do better. And that hasn't changed. I would point out on the operating cash flow, we had exceptional year in 2018. As I mentioned, we beat our expectations by $600 million at the midpoint. And it wasn't just timing, right. We didn't drop 2019 by $600 million. We actually increased it by $100 million which was $300 million operationally offset by a $200 million in additional cash taxes, right. So over that period, very strong performance. So we are very comfortable with it. We are pleased with it. And as usual, we will always look to do better. Now for the two businesses that you referred to and in particular their margin. So from an IDS point of view, I think first and foremost, if I step back, I will look at the total year. They generated really strong margin, 16.6% for the total year. They were up 50 basis points over 2017 and we continue to see their margins in 2019 in that 16% range. Now in the fourth quarter, there were two things that went on at IDS, right. There were some higher levels of investments in the business from an R&D point of view. Think, next-generation advanced radar technology. And we did see on a couple of development programs some cost growth that net net resulted in a little bit lower net productivity compared to what we were expecting. But overall, we are pleased with where IDS' performance is. If I think about 2019 for IDS and again it's a little bit repetitive to what I said earlier, they are performing well. They have got some mature production programs that are ramping down that have already been through the risk retirement phase, if you well. And Tom alluded to in his comments the strong bookings for Patriot with three new countries, four new major Patriot awards for roughly $4 billion last year. Those are just in the early stages. Patriot's closer to a five-year program compared to maybe the company on average is three. So we have kind of got a mix almost within production programs, even within international production programs at IDS because it will be a couple of years before those programs ramp up and retire the risk. But I think we are very pleased with IDS' performance and the track that they are on. From a missiles point of view, I think that there is a couple of things to the point out there. Through last year, we have been talking about the increased level of development work, primarily classified development work, that we have been getting. Three of our businesses have significant new orders this year. Missiles kept exceeding our expectations, right, relative to the increase in classified work that they were getting. And even at a company level, if I take it back to the start of the year and our original revenue guidance and I think at the midpoint of that compared to where we ended up, we were about 170 basis points higher. That was effectively all classified work, right. And as we have talked about, it's a margin headwind in the near-term but over the long-term, it's positive because it does generate those new franchises and margin expansion opportunities when programs move into production. So I think specifically for missiles, we do expect them to improve their margins versus 2018 and 2019, as I said, to a range of 12.1% to 12.3%, They clearly have been hit with the higher level of development in classified programs. Their bookings in that area grew 50%, from $1 billion to $1.5 billion. That's probably rough numbers, close to about 30 basis points impact that they are dealing with. And we are continuing to focus on margin expansion there. They did in the quarter, in addition, have an impact in the quarter from a negative adjustment on an early stage production program that impacted their margin. But there, going forward we feel we have significantly reduced the risk profile on that program in the missiles business going forward.

Thank you. And our next question comes from Robert Spingarn of Credit Suisse. Your line is now open.

Good morning. I wanted to ask a question to Tom and then clarification from Toby. So Tom, your book-to-bill has been excellent last year, almost 1.2. It was good the couple of years before. But it does outpace the sales growth. And I am just wondering if there is a rule of thumb or a curve here that we should be using to model the conversion of bookings to sales? Something like, I don't know, 40% year one, 20% year two, that kind of thing? Or is there an average duration we should be assigning to bookings? Or is this a trend DoD simply locking in money in an accommodating political environment and then spreading the spending? And then for Toby, I just wanted you to clarify your cash deployment comments, given that you guys have the lowest net leverage among peers. Thanks.

Hi Rob. Some good questions there. Let me tackle the ones you gave me. Our business has the kind of two cycle periods, three years and five years. So for example, in our missile business if you are going to go buy some AMRAAM, it's about a three. We get a contract that spreads out over three years, ramping up the first year, doing at least over probably closer to 40% of the work the second year and then ramping down on the third year. And then you get into some of our five-year business which would be like a Patriot system. The Patriot contract to go deliver fire units probably works out to about a five-year program. There obviously is a ramp up and then the ramp down on delivery and then the three years are kind of constant between those ramps. And that's essentially our business. And then we model it that way. It's executed that way. We don't have a lot of above book and turn type business in one year, outside of IIS. The IIS business, those have contracts where they can book and complete in one year. But outside of that, the rest of the company is really based on this three-year and five-year cycle. Toby O'Brien: And I will just add on a little bit to what Tom said there and I will give you a comment on the balance sheet and the capital deployment. That's a general rule of thumb, not to get to down in the weeds on this. Obviously, it matters when programs start within a year, right. I mean a program on January 1 versus September 1, you are going to get a different answer in that curve over the three to five years gets pushed out accordingly. Just to reinforce, if you think about it, we grew 6.7% last year, 6% to 8% this year. Just real simplistically, right. And every year is a little different, right. But that's between the two years, 7%, 7% round numbers, it's starting to get close to the levels of the increase that we saw are in the 2018 and the 2019 spending. That gets then converted to sales over roughly three year, maybe a little bit longer on some of the IDS programs. On the balance sheet and our leverage here, we continue to believe our philosophy and approach of utilizing the balance capital deployment strategy. It makes sense. To reiterate, our first priority is investing in ourselves to support growth. The way to think of that this year, we expect our R&D investment expenditures to be about 3% of revenue, where they have been for the last couple of years, obviously a little bit higher in dollars given the higher revenue. We have talked about last year how we ramped up a bit on our CapEx expenditures really to support programs both through demonstration hardware, facilities and infrastructure capability. I think we said back in October, think that of that as around 4% of our revenue and we are in that ballpark there. But that is significant step up over the last couple of years as to where we have been before. But we are doing it because we do believe we align very well with our customers' needs, with our existing and future capabilities and it ties all back to the NDS. Beyond that, we are committed to returning, as a target, 80% of free cash flow to shareholders. I mentioned the philosophy around a competitive and sustainable dividend. The continuation of the buyback program, we do think there is incremental value in the share price. And we do also look to augment that growth with key acquisitions that help with technology and growth. But again those are more the smaller size type of deals. And lastly, we will consider pension contributions on a discretionary basis as we go through the year and look at what's happening in the market and our overall cash flow as well. I think the last point there, just as a reminder and I think everybody knows this, the balanced approach is the philosophy but we obviously have the ability to flex up and down across the elements of that balanced approach if we feel it's going to do more good and create more value to allocate capital a little bit differently than kind of how I just described.

And just one last element as far as your question is. So we do not see any evidence of the department parking money on contracts that won't be used. So we have not seen any evidence of that.

Thank you. Our next question comes from Cai von Rumohr of Cowen & Co. Your line is now open.

Yes. Thank you. Two questions. So your R&D was up 48% in the fourth quarter. Is that one of the reasons that the margins were light that you basically got paid for that but you didn't have as much margin? And secondly, you have the tantalizing number on cash flow in 2020 which is up but NAs in terms of the factors. Maybe you could give us some color as to how you get to that very strong number? Thank you. Toby O'Brien: Sure. Cai, let me start with the question on R&D. So the answer is in part, right. And in particular, at IDS it was one of the reasons that I mentioned where their margins were impacted and it was in the fourth quarter and it was related to investments in next-generation radar and radar related technology. So certainly in part relative to the R&D it was. I think on the cash flow for 2020, the $4.6 billion, I think the way to think of that is growth in operating cash during that period will be driven by operations including some international collections. The cash taxes may be slightly lower in 2020, partially offset by some lower net pension. So really it's some puts and takes outside of operations. And I think given the significant size of some of our international programs, the payment terms where often times more often than not, we will get an advance, we will kind of work that off and then we will have milestones or deliveries where we collect the balance of the cash. That's what you are seeing play out in support of the 2020 cash outlook.

Thank you. And our next question comes from Doug Harned of Bernstein. Your line is now open.

Yes. Thank you. Good morning.

Good morning Doug. Toby O'Brien: Good morning Doug.

I would like to turn back to missiles because I look at what's going on right now in the world with to missiles. But then you, Lockheed, MBDA, everyone has very strong demand and has rising backlogs. But if I think of those, if I split them into two types, some are production just being flat-out on producing on certain programs and certainly I would say Paveway is probably one of those for you. And others are development. And so I am trying to understand is, how much of what you are doing sort of on the production side could almost be maybe a build to inventory in a sense as opposed to the development side which you are explaining that related to margins which is something that may have a longer-term growth rate associated with it. So could you give us a sense what is the mix sort of on a percentage basis in missiles between production and development? And if I can throw one more thing in there, have you done anything with respect to concerns about possible Saudi sanctions when you look at that outlook? Toby O'Brien: Yes. Doug, hopefully, well, I can't hit all those points there. I will start off and then I will let Tom jump in. So your first question about the mix between production and development work. I will kind of put it in absolute terms but then also contrast it back a couple years. So for 2019, think of it rough numbers about 70% production and 30% development. But if you were to go back a couple of years, it would have been more in that 80%, 20% range, okay. So there has been a pretty significant shift at missiles specifically heavily weighted towards the development and it ties into the classified business we are seeing. And on top of that, you made the point but I will quantify it, our missiles business grew 8% in 2016, 10% in 2017, 7% last year and another in 7% to 10% for 2019. So you are seeing that higher mix towards development but on a much higher base as well. As far as the production goes, from time to time we will build to inventory when we think it makes economic sense, not just in missiles but in other of our businesses. But it's not something that we do as a general rule of thumb across all of our programs. And then lastly, from my perspective, on Saudi Arabia I think here is how you should think about it, right. So last call in October, we talked about just under around 5% of our revenue from Saudi. That's where 2018 ended up. It was 5%. 2019 is the same. It's about 5% of revenue. But when you peel that back in and you look at it in two buckets, the component that's related to offensive weapon sales versus defensive, it splits about 50-50. And to this point, relative to the defensive weapon sales, we see no indication, if anything just the opposite of continued support for defensive sales to Saudi Arabia. And I won't repeat it. Tom alluded to the THAAD LOA and the TPY-2 component of that for the Saudi that was signed at the end of last year and we expect to be under contract for this year. So we have only got 2.5% of the company revenue tied to that. We continue to monitor the situation and working with all parties involved and we are optimistic that over time we will get to a point here where things move forward. And again I the 2.5%, it's another feature shows you again the breadth of our portfolio at the company level, how balanced it is. No one country, no one program necessarily is 205, 30% contributor to the company's results.

Thank you. And our next question comes from the line Seth Seifman of JPMorgan. Your is now open.

Great. Thanks very much and good morning.

Good morning Seth.

Tom, I wonder if you could talk a little bit about the preparation that you guys are making for the lower tier A&D competition and how the Army's efforts in that area are evolving and what's coming up for this year as you focus on trying to keep that business?

So we are working with the U.S. Army to develop these advanced capabilities which one of those capabilities for Patriot is an advanced radar capability, 360-degree capability utilizing our advanced technologies. Later this year, there is going to be, what they call, a sense-off. Raytheon will be participating in that. We have made investments over the years to provide a capability that we think is capability that the U.S. Army needs and wants. We will get an opportunity to demonstrate that capability to the United States Army during the sense-off which is expected toward the end of the second quarter of this year. Again, we have been developing this technology over many years. It's a key technology to help us win the AMDR, the EASR and several other radar programs including the 3DELRR for the Air Force. So we feel very well-positioned to provide this new capability to the U.S. Army but also to all our international customers. As I mentioned during my script, we have now a cadre of 16 countries that are Patriot members that are either buying Patriot or have Patriot and in some cases have been spares, buying support and contributing to the overall continued evolution of the Patriot system. This will be in another element to bring into the 16 countries and to future countries that would like to enhance their Patriot systems and then also obviously to the U.S. Department of Defense and the Army in buying those systems. Bottom line is, we feel very well-positioned for the competition. We are taking it seriously. We love radars. It's a major capability of the company. And we have got the whole company focused on winning this.

Thank you. And our next question comes from Myles Walton of UBS. Your line is open.

Thanks. Good morning. Maybe Toby first, beyond 2019, in Doug's question you talked about margin mix dynamics from 2019. But beyond 2019, could you comment on margin profiles beyond there, if that's possible? And then maybe for Tom, do expect real direct budget fall through on the back of the Missile Defense Review in 2020 plan? Or is this something more that kicks off studies versus real programs with real money? Thanks. Toby O'Brien: So beyond 2019 margins, obviously we are not going to give a specific number. But we are confident that we have the opportunities to continue to improve the margin beyond 2019. I think because of the mix of business, we would see incremental, I will thank of it that way, the opportunity for incremental improvements on a year-over-year basis, not necessarily step functions. And the reason I say that are kind of two or three fold, right. One, maybe not so much with the more recent classified work but some of the development programs that we had won a few years like AMDR, EASR at IDS, Next-Gen Jammer at SAS, et cetera. As those transitioned out of development into low rate, full rate production, all else equal, that provides margin opportunity as we move from cost type to fixed-price type of work. And we are also as a company, we are always looking for other areas to drive margin improvement and offset the headwinds from things like mix, right. So we have talked a lot about the automation investments we have made, working to lean out our factories, trying to enhance more the scope of work that's in our global business or shared services organization to get the benefits of scale there. We are always looking at our indirect cost, both at the corporate level and across the businesses to drive those down and so on and so forth. Supply chain is another big area. So I am confident that the opportunities are there and we will be able to incrementally improve on our segment margins going forward.

And let take your question relative to whether the Missile Defense Review will just wind up with study contracts? Are there real development type program effort that's going to occur? And then also will there be an increase on production contracts? And the answer is really the latter. There will be development programs that will be funded and there will be production elements. For example, break down in three major areas. The one is essentially to increase what they have today and that's an area of the ground-based interceptors. We provide to kill vehicle for those ground-based interceptors. So they will be production type contracts. They also want to improve what they have today. And on the improvement, we are already involved in that. It's called the replacement kill vehicle or RKV. So that will be an increase in the development program relative to the replacement kill vehicle which will eventually then go into production. And also bring in new more advanced radars like the AMDR SPY-6 on the naval ships and utilizing those. And then also our a SM3 Block 2A which is now ready for production and is going into production. So we will be buying more of those production assets there. And then in terms of some new technology, we are on board for the new technology. It actually calls out using the F-35 for boost-phase intercept capabilities and the new sensor that we won on that, the EODAS, Distributed Aperture System, will be a key element of that. That's a little bit of a development program but geared for production. We also talked about high-energy lasers. We are heavily involved in that. So we see more money going into development for the high-energy lasers. It also calls out some something called the space sensor layer. There will be initially studies to do architectures for that but that will eventually go into a major development program. And then there is a whole area, a big area, an area that we are heavily involved in is hypersonic defense. In fact, we believe the hypersonic defense market is larger than the hypersonic market which we also significantly participate in. And the reason for being larger, the hypersonic defense market also includes the sensors and the trackers to be able to track these the hypersonic threats but then also being able to go off and defeat them. So it's a very important market for Raytheon. We are heavily engaged in it. And we know that there is real money going into that.

Sonia, we have time for one more question, please.

Thank you. And our last question comes from Robert Stallard of Vertical Research. Your line is now open.

Thanks so much. Good morning.

Hi Rob.

Toby, I hate to do this at the last question but I was going to ask about pension. Slide 13, if I am reading this right, you have a big step up in your cash pension contribution in 2021 on a net basis. Do you see other opportunities within the business, maybe working capital or other things to offset that headwind as get to 2021? Toby O'Brien: Yes. So Rob, I will take you back to I guess at slide 12, right. And I know it doesn't go out to 2021, but our cash outlook, the three-year cash outlook here and we are one year into when we provided this three-year look going back to this time last year. We have already compared to what we had said originally pushed things up, however you want to look at it, at least $0.5 billion, if not more towards the high-end of that three-year window. And I think we have got opportunity to continue to have that happen going forward. So we are confident in our ability to continue to generate strong cash flow to offset headwinds including specifically the pension there. Obviously, a lot can happen between now and then, whether it be related to the pension, specifically around asset returns, discount rates, discretionary contributions, et cetera. And then operationally, as I mentioned I think it was Cai's question, these large international programs, right, they present great opportunity for us to drive cash flow and you got some puts and takes on those too, right, when you are working off advances. So things can get lumpy at a point in time and as we get closer to 2021, things will be clearer. But sitting here today, I would say we would have the ability to offset that pension headwind.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Ms. Kelsey DeBriyn for any closing remark. A - Kelsey DeBriyn: Thank you for joining us this morning. We look forward to speaking with you again on our first quarter conference call in April.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.