RTX Corporation

We continue to see strong global demand for innovative solutions, illustrated 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 RaceBeyond's key milestones across our company during the year. First, I'd 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 in 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's core markets, including cyber and space. IIS's 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 pool 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 complete program in 2020 and 2021. We continue to see the total Raytheon Romania Patriot opportunity to be around $2 billion. For a Poland Patriot opportunity, our Phase II 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. And missiles, in addition to the new classified programs, we also won a new missile franchise, the Naval Strike Missile for the U.S. Navy. versus 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, Eacer, 3Dealer, 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 3 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 SM-3 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 SM-3 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 multi-year awards for SM-3 Block 1B and SM-6, which will provide production visibility until at least 2026. Many of our innovative solutions, including the SM-3 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 of the investments we've 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.

Okay. Thanks, Tom. I have a few opening remarks, starting with the fourth quarter and full year results. Then I'll discuss our outlook for 2019. 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 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'll discuss in more detail in just a few minutes. Sales were $7.4 billion in the quarter, up 8.5 percent 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 percent and 33 percent, respectively, over the prior year. And all of our businesses had a book-to-bill ratio over one in 2018. International orders represented 31 percent of our total company bookings for both the quarter and the full year. At the end of 2018, approximately 40 percent 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 continue 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 of 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 force point, 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'll 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 9, we see sales in the range of between $28.6 and $29.1 billion, up 6 to 8 percent 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 and $158 million in line with 2018. We see our average diluted shares outstanding to be between $279 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 percent. Our estimated tax rate in 2019 is higher than 2018, primarily due to the increase in pre-tax 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 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 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'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 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 percent range. This is up about 20 basis points over 2018 at the midpoint. At IDS, we see margins in the 16 to 16.2 percent 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 percent in line with 2018. We see missiles margins in the 12.1 to 12.3 percent range up 50 basis points at the midpoint versus 2018. SAS margins are expected to be in the 12.9 to 13.1 percent range in line with 2018. At force point, we expect margins to be in the 3 to 5 percent range. For 2019, at a total company level, our margins are expected to be in the 16.5 to 16.7 percent range. If you now turn to page 11, we've provided you with our outlook for the first quarter of 2019. Please note, the first quarter of 2019 has one less workday than the first quarter of 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've 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 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've done in the past, we've provided a summary of the financial impact from pension in 2018, as well as the projected impact for the next five years, holding all assumptions constant. You'll note that this year we have provided you with two additional years of pension outlook to help you with your modeling. 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 in non-operating at $726 million, which reflects our investment returns in 2018 of minus 4% on our U.S. pension assets, the December 31st 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'll open up the call for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touch-tone telephone. If your question has been answered or you wish to move yourself in the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. In the interest of time and to allow for broader participation, you are asked to limit yourself to one question. The first question will come from Joseph Donardi of Stiefel. Your line is now open.