Operator: Good day, ladies and gentlemen, and welcome to the Raytheon First Quarter 2013 Earnings Conference Call. My name is Chantele, and I'll be your facilitator for today call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. Todd Ernst, Vice President of Investor Relations, and you have the floor, sir.
Todd Ernst - VP, IR: Thank you, Chantele. Good morning, everyone. Thank you for joining us today on our first quarter conference call. The results that we announced this morning, the audio feed of the call, and the slides we'll reference are available on our website at raytheon.com. Following this morning's call, an archive of both the audio replay and a printable version of the slides will be available in the Investor Relations section of our website.
With me today are Bill Swanson, our Chairman and Chief Executive Officer and Dave Wajsgras, our Chief Financial Officer. We'll start with some brief remarks by Bill and Dave, and then move on to questions.
Before I turn the call over to Bill, 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 Bill.
William H. Swanson - Chairman and CEO: Thank you, Todd. Good morning, everyone. Before I discuss our first quarter results I wanted to say a few words about last week's tragedy at the Boston Marathon. Monday April 15 wasn’t just the day of the Marathon, it was the day we celebrated Patriot's Day in Massachusetts. A holiday commemorating the first battles of the American Revolution in 1775 and made famous by the ride of Paul Revere. It’s a day of immense civic pride in community and spirit and energy that pervade is many annual events are a unique part of what it is to be from Boston and Massachusetts.
Raytheon's been part of this community here since our founding over 90 years ago. While our offices and operations were not impacted. We have more than 12,000 employees in the state, including some who participated in the Boston Marathon as runners, volunteers and spectators. In fact, one of our local employees was at the finish line and seriously injured in the attack. So, for us, this hit very close to home. Our thoughts and prayers are with all the victims and their families and all of those who were affected. I would like to thank the first responders for their swift and heroic efforts that saved many lives. I also want to thank our hospitals and medical professionals for their truly amazing work. The Boston area is blessed with some of the world's best hospitals and this has never been more evident in the past few days. We are proud of Boston's Mayor Menino, Governor Patrick, local and state officials as well as Federal Government for their leadership and efforts in the aftermath of this incident.
The events of last week had a profound impact on our state. But they brought out the best in our community, from our local leadership to our first responders from the hundreds of volunteers to the thousands of people who have donated funding to the victims. We've never been prouder to call Massachusetts home.
Now turning to our first quarter performance; I'm pleased to report that Raytheon had another good quarter, with sales, margin, EPS and cash flow all above our expectations. The Raytheon team delivered solid results during the quarter, continuing to lower our cost and improve our agility, as well as providing affordable solutions for our customers.
International continues to be a key differentiator for the Company. In the first quarter, our international business represented 26% of our total sales. And after the close of the quarter, we announced that the Republic of Korea selected Raytheon Advanced Combat Radar, or RACR, to modernize its fleet of F-16s. We expect a booking in the last half of this year. This is a key competitive win and a meaningful validation of our international strategy, as well as a confirmation of our leadership in AESA technology. Importantly, this win opens new opportunities domestically and international for our AESA products.
Our portfolio of international opportunities remains robust and includes Kuwait Patriot, the Oman ground-based air defense system, the (GATR) air defense system, air traffic management, as well as radars and missiles. We're making considerable progress on these opportunities. With the evolving threat environment and our customers’ desire to acquire the most advanced technologies in the world, we remain confident that international will continue to be strong for Raytheon.
The domestic market continues to evolve as well. We were encouraged by the passage of the fiscal '13 defense budget, as it averted a potentially harmful year-long CR and afforded our customers more flexibility. New starts, such as Space Fence and Air and Missile Defense Radar, AMDR, for example, are important new opportunities for the Company and will provide more advanced capabilities for our customers.
On April 10, the fiscal year '14 defense budget request was released. While it did not comply with sequestration and is likely to undergo modification over the coming months, it was a clear statement of DoD’s priorities. The focus continues to be on rebalancing to the Asia-Pacific region and our key mission areas, such as missile defense, EW and cyber which play to our strengths.
In addition, as a technology company with a broad program base, we benefit considerably from funding areas, such as science and technology portion of the budget, and this area fared well in the fiscal year '14 budget request.
We focused on growing small science and technology awards into substantial capabilities for our customers over time. This is another important strength of the company. In a couple of minutes Dave will talk about our updated guidance that now includes the effect of sequestration, which is consistent with the 1% to 2% impact on sales that we discussed on the January call.
Importantly, we've raised both our earnings per share and our cash flow outlook for the year. Over the past 10 years we've been on a clear path to implement world class processes and continuously improve our operation.
We're pressing forward with a number of initiatives. In January we established our Global Business Services Group. GBS has given us the ability to more quickly integrate and streamline our processes and procedures across the company.
Additionally, GBS is leveraging our innovative approach to common systems that enhance our working capital and operating profit performance. They are on track to deliver planned productivity savings for 2013.
I'd like to take a moment and mention our March 25th announcement regarding consolidation.
The move is just another step on our path of continuous improvement. While our businesses have always collaborated to provide the best solutions for the customer, now we're aligned even better with our needs in future markets. It provides greater synergy within our products and services, and most of all, increases our speed in responding to our customers' future needs. For example, we're moving the command-and-control business to IDS.
While we've seen more of our international customers wanting an integrated solution, and given IDS' strong international presence, it's a natural fit.
In addition, we are moving our commercial product lines – excuse me, our communications product lines to SAS, which has considerable expertise in the RF spectrum with its suite of radars. For those of us who work in this area, our advanced radars have the ability to handle multiple functions, such as EW, radar and communications. We see the day when an AESA radar is just a multifunctional sensor.
Regarding our land combat systems we're moving our ground based EO/IR sensors to our missile business. This will allow us to maximize integration at the ground sensor with the missile. This combination consolidates the two capabilities and allows us to offer integrated solutions to our customers rather than individual products. Lastly, we combined IIS and RTSC to leverage the synergies they share in providing services to our customers. This new business has structured to perform in a more competitive environment and better serve our customers going forward.
To help implement and manage these initiatives along with the day-to-day operating activities, we've established a new position; Chief Operating Officer and named Tom Kennedy to that position which was effective April 1. Many of you know Tom from his most recent position as President of Raytheon's Integrated Defense Systems where he delivered outstanding operating results. Tom's leadership skills and deep understanding of our technologies, our customers and our global markets make him well qualified to fill this new important role.
Before concluding, I'd like to point out that during the first quarter, we announced a 10% increase in our dividend per share. This marks the ninth consecutive year we've raised the dividend. It remains an important component of our balanced capital deployment strategy and a reflection of the confidence in the financial strength and outlook for the company.
In conclusion, I want to say how proud I am of the Raytheon team. In a challenging environment, their dedication and hard work have made it possible for the Company to deliver these solid results and provide for the continued success of our customers.
With that, let me turn it over to Dave.
David C. Wajsgras - SVP and CFO: Okay, thanks Bill. I have a few opening remarks starting with the first quarter highlights and then we'll move on to questions. During my remarks, I will be referring to the web slides that we issued earlier this morning. So, if everyone would please turn to Page 3, we're pleased with the solid performance the team delivered in the first quarter. Our adjusted EPS of $1.56 was up 5% and EPS from continuing operations of $1.49 was up 12%.
Adjusted operating margin was 13.2%, up 10 basis points compared to last year's first quarter. Sales of $5.9 billion were roughly in line with last year's first quarter, and exceeded the high-end of our expectations, which I'll discuss further in just a moment.
Operating cash flow from continuing operations of $422 million was also better than our prior guidance, the result of working capital. During the quarter, the Company repurchased 4.2 million shares of common stock for $225 million. We have updated our full year 2013 guidance, which I'll discuss in more detail in a few minutes.
As previously announced, effective April 1, 2013, the Company structure was consolidated from six businesses before. The Company will report its financial results consistent with the new structure in the second quarter.
Turning now to Page 4 let me start by providing some color on our first quarter results. Our total company bookings for the quarter were $3.6 billion in line with our internal plans. As you may recall, we had strong bookings in the back half of 2012 so on a trailing four quarter basis the book-to-bill was about 1.02.
As I mentioned on the January call we continue to see the order book back and loaded for 2013 ramping up in midyear similar to 2012. From a cadence standpoint we expect the book-to-bill ratio to expand as we move through the year.
Notable bookings in the first quarter included $208 million at IDS to provide Patriot air missile defense capability for an international customer and $160 million to provide Patriot Engineering Services for the U.S. and international customers.
Missile systems, booked $156 million for the production of Rolling Airframe Missiles for the German Navy and $85 million on MALD, a decoy program for the U.S. Air Force. NCS booked $126 million on the wide area augmentation system program for the FAA.
Space and airborne systems booked $90 million for the production of AESA radars for the U.S. Air Force. Technical services, booked $135 million for foreign training and $64 million for domestic training in support of the Warfighter FOCUS program. In addition, IIS and SAS book $266 million and $184 million respectively on a number of classified contracts.
Backlog at the end of the first quarter was $33.5 billion, compared to $36.2 billion at the end of 2012. It's worth noting that approximately 36% of our backlog is comprised of international programs.
If you'd now move to Page 5 sales were essentially flat compared to the first quarter of 2012 and ahead of our first quarter guidance that we set in January.
As a reminder, the first quarter 2013 had one less work day than the first quarter of 2012, and this equates to about a $100 million in sales. Our domestic business declined by about 2%, partially offset by our international business, which grew approximately 2%.
Looking at sales by business, all of our businesses had net sales that were at or above our expectations. IDS had first quarter 2013 net sales of $1.3 billion, an increase of 4% on a year-over-year basis. The increase was primarily due to higher sales on a TPY-2 radar program for an international customer.
Missile Systems had first quarter 2013 net sales of $1.5 billion, up 8% from the comparable period last year. The increase from prior year was primarily due to higher sales on the SM-3 and Rolling Airframe Missile programs. IIS had net sales of $743 million and SAS at net sales of $1.2 billion, both slightly lower than the same period last year, primarily due to the timing of classified programs.
NCS had first quarter 2013 net sales of $931 million. The expected decline in net sales was primarily driven by U.S. Army production programs. And Technical Services had net sales of $755 million, down from the comparable period a year ago as a result of completing the Polar contract in the first quarter of last year.
Now moving ahead to Page 6, we're pleased by our overall Company margins, once again showing a year-over-year increase driven by operational performance. Our adjusted margin was up 10 basis points to 13.2%. Our focus on execution, productivity and efficiency continues to be reflected in our financial results.
So, looking at the business margins IDS and SAS margins were up in the quarter compared with the same period last year. Solid overall program performance drove improvement at both businesses, as well as favorable mix. 13.3% margin at our missile's business was in line with last year's first quarter.
At NCS, the change in operating margin in the first quarter of 2013 compared to the first quarter of 2012 was driven by higher volume and net production efficiencies last year, primarily on U.S. Army programs, and IIS and Technical Services were down slightly compared to the same period last year.
I'd like to take a moment to highlight our ongoing cost reduction initiatives in a little more detail. We continue to move forward with a number of initiatives that are designed to improve efficiencies, streamline our operations and lower our costs. One of the earlier initiatives which I have spoken about on prior call is strategic sourcing across our supply chain. About half of our spend is on materials and subcontracting, and since implementing this strategy, we've generated hundreds of millions of dollars in savings, much of which we've passed along to our customers.
Additionally, over the last two years, we've driven well in excess of $500 million of indirect cost out of the business, including efficiencies and indirect labor, reduced travel, lower IT spending and reduced outside services. We have also been aggressive with our core facility consolidation effort from 2009 to 2012, we have reduced our total core square footage before acquisitions by approximately 1.5 million square feet.
Looking ahead, we are targeting an additional 5% to 10% reduction in our existing floor space over a three to five year period.
More recently on January 17 we announced the formation of Global Business Services where we consolidated our shared services functions across the company. This is also expected to drive significant efficiencies over the next several years, and the next step in our ongoing effort to further optimize our operations is to finalize the consolidation of our six businesses to four.
These are not isolated actions, rather they are part of a comprehensive plan to drive productivity across the company and we're not done. These efforts are all working to drive increased affordability for our customers and importantly, they benefit our shareholders as well by increasing our competitiveness and protecting or enhancing our financial returns.
If you move to Page 7. First quarter 2013 adjusted EPS was $1.56, up 5%. Although the increase was primarily driven by capital deployment actions specifically share repurchases. We continue to drive strong operating performance, which is reflected in our improved margins quarter-over-quarter. And EPS from continuing operations of $1.49 was up 12%, which includes the benefit of the full year 2012 R&D tax credit, as well as the first quarter impact of the 2013 credit.
If you'll turn to Page 8 I'd like to briefly comment on our updated outlook for 2013, which now reflects our solid first quarter results as well as our current expectations for the impact of sequestration.
Although not on the page in January we mentioned our bookings outlook for 2013 was in the range of $24 billion plus or minus $500 million and now with sequestration we see the outlook for the year in the range of $23.5 billion plus or minus $500 million. We now see full year 2013 net sales to be in the range of between $23.2 billion and $23.7 billion. The change on our sales outlook is consistent with the additional 1% to 2% estimated impact from sequestration that we discussed on the last earnings call in January. We have raised our full year 2013 EPS guidance by $0.10 to a range of between $5.26 and $5.41, and on an adjusted basis to a range of between $5.75 and $5.90.
I'd like to point now that the impact from lower expected sales volume for the balance of the year due to sequestration is more than offset by the solid results we achieved in the first quarter. We repurchased 4.2 million shares of common stock for $225 million in the quarter. We continued to see our diluted share count to be in the range of between 324 million and 327 million shares for 2013.
As I mentioned earlier, we generated strong operating cash flow in the quarter. As a result, we've increased our 2013 guidance for operating cash flow from continuing operations by $100 million and is now between $2.1 billion and $2.3 billion. As you can see on Page 9, we've included the change in our guidance by business. The increase in margin guidance reflects the results from our continued efforts on productivity and efficiency initiatives, as well as from our strong overall program execution. Importantly, we continue to pass back substantial savings to our customers.
On Page 10, we provided some directional guidance on how we currently see the quarterly cadence for sales, EPS and our operating cash flow from continuing operations for the balance of this year. In summary, we saw good performance in the first quarter, compared to both Q1 2012 and also the initial outlook for Q1 2013 that we provided in January. While the environment remains challenging, we continue to execute well driving solid operating performance. We're in a good financial position with net debt of just over $700 million, we raised our dividend 10% in the first quarter and are raising our EPS and cash flow guidance for 2013.
We remain well positioned with our domestic customer's priority areas and are well aligned with the evolving priorities of our global customers, and we'll continue to drive the business to maximize value for all of our customers and our shareholders.
With that, Bill and I will take questions.
Todd Ernst - VP, IR: Chantilly, would you please remind everyone how to enter the queue for questions.
Operator: Joseph Nadol, JPMorgan.
Joseph Nadol - JPMorgan: I like it to drill down into the bookings a little bit and really focus on domestic, of course the international always bounce around and are usually strong at the end of the year. But, and then just looking at the last five years data at least, I don't see a quarter with below $5 billion of total bookings. Obviously, you are well below that level, and I heard what you said about the ramp-up throughout the year. I guess, really the question is what gives you confidence, given the sequester just happened that you are going to see that sequential ramp on the domestic side?
David C. Wajsgras - SVP and CFO: Joe, bookings were always planned to ramp up throughout the year, and Q1 actually played out a little bit better than what we were expecting. We discussed on the January call that we had about $1 billion come into last year's fourth quarter. Particularly in missiles and our missile defense businesses. As I just said a moment ago we do expect a cadence of both domestic and international bookings to increase throughout the year. If you look at the last six months given some of this timing our quarterly bookings averaged about $5.7 billion and over the trailing four quarter basis it was about 1.02. The cadence for this year is not dramatically different from what we saw last year. I think with that Bill may want to add a couple of things.
William H. Swanson - Chairman and CEO: I think the easiest way is to go through our businesses and IDS expects about half of their business to be international and those will be dominated by the Patriot awards we've got Kuwait that's finished all the military reviews and has gone over to their Parliament for final signature. So we kind of see that in maybe the latter half of Q2 or early part of Q3, we can touch it's not an issue, little over $500 million decision in Turkey probably in Q2 award latter half of this year. (GATR), also late this year, and that could be a couple of billion. We see Oman, Oman has turned out nice for us. They've already placed an order for AMRAM. So we see that tying together all the air defense work there. And domestically for them, they've got naval radars, some Aegis work and Zumwalt, and then missile defense work, and of course, as I mentioned, AMDR and space defense. If we go over to IIS, we don't see any composition change in their bookings our customers shifted from yearly funding to quarterly funding now to monthly funding. So that's kind of reflected in how we look at things and half of their awards are all driven by classified. Missiles' expects international bookings probably here in the second quarter on AMRAAM and Oman will be part of that. Of course, we see strong interest in RAM and Evolved SeaSparrow. Paveway, Mid-East I think, you're aware and others are aware that Secretary Hagel is over talking packages with those countries. So, we expect missiles to be in good shape. Referring to NCS, over a third of their bookings were in international and on the domestic side a number of opportunities. In fact this morning the wire just announced that we won D-RAPCON, which is a Mobile Air Traffic Control system. Initial award $252 million, we'll get a $50 million development contract. So that was planned probably in the first quarter, it happens in the second quarter. We all know bookings are lumpy, but we look at them on a total basis and Dave kind of gave you some insights there. SAS sees about a third of their bookings, international the biggest piece related. Our tactical airborne radars in South Korea gives us a good start on that one. Finally, our Technical Services, we see the range of training, logistics programs, about 25% of that is international. So that's a quick rundown in my mind going through the businesses. I got to remind everybody that 30% of our – 30 of our contracts represent a quarter of our business, 128 contracts represented the 50%, and then if you look, the last half of our sales are driven by 15,000 contracts that represent $1.5 million to $2 million worth of business, and that's this company and that's what makes it so strong, because we convert the smaller programs into bigger programs later on in time, and hopefully that answers your question.
Joseph Nadol - JPMorgan: That's very helpful. Just one more number. Of the 23.5 half this year, how much of that do you expect to be international, please?
William H. Swanson - Chairman and CEO: About 29% to31%. Of course, that could be bigger.
Operator: Carter Copeland, Barclays.
Carter Copeland - Barclays Capital: Bill, I wondered if you could speak briefly on the Hagel strategic review, and your views on – I know it's tough to call likely findings, but when we look at the recent change and posture in the pivot to the Pacific, we've got a sort of recently redone defense strategy. When you take that in mind and say what is it that Secretary Hagel is going to end up concluding, what do you think the focus of that review will be on? Does it – is it more related to that strategy or is it more related to the realities of the budget and how we're going to prioritize spending? Any color you could provide would be really helpful.
William H. Swanson - Chairman and CEO: Okay, let me take a shot, I'm not in charge of the building, so remember that when I give you my opinion. I think having recently heard Deputy Secretary, Dr. Ash Carter speak. Clearly, the department is trying to make sure that they are leaner, they are more flexible, they are agile, they are going to be smaller, and they are going to have to be able to adapt, and there is a focus on the Asia-Pacific region. There has been 60 years of peace there, and the United States wants to make sure our allies and our friends over there continue to enjoy another 60 years of peace. That doesn't mean from a standpoint that the threat is China, as some people predict, but it's more of how do we make sure that North Korea and others don't threaten the well-being of our friends and allies over there. So I think part of the strategy is how do we do that, probably more of a focus on naval. It will be a repositioning of personnel probably in places they haven't been before, but that's because they've been fighting a battle in Iraq or Afghanistan. So from my standpoint, I think Special Ops are going to get more attention. They are quicker. I think companies are going to have to have technology and things they can put on the table rather than view graphs, which appeals to us. I also see a real attention to cyber and I break the cyber down into three areas. Those areas would be the network, they would be in cyber weapons, and they'd be in infrastructure. That's where part of the focus is going to be there, and of course you all know that that's what we've been doing for the last four or five years here getting ready for what we thought was coming. So I think there will be a strategy, and then you tie your funds to your strategy no different than what you do in a company, and I expect them to do that in a thoughtful way.
Carter Copeland - Barclays Capital: One for Dave, just quickly. Dave, can you clarify what the difference in year-over-year the contribution from net EAC cum catches was?
David C. Wajsgras - SVP and CFO: On a net basis it was essentially flat. It's around $140 million last year's first quarter and roughly $140 million this year.
Operator: Sam Pearlstein, Wells Fargo.
Sam Pearlstein - Wells Fargo: I was wondering if you could talk a little bit more about the reorganization, and I guess in terms of what the savings are and when do you net them, because I am assuming there's some costs you are planning in 2013 to actually get those savings. Then when I project going forward, how are we going to actually see some of those savings? Just because – if I look at your selling and administrative costs, or is it in cost of sales, because selling and administrative costs seem to have been stuck around 6.5% of sales or so for quite a while.
William H. Swanson - Chairman and CEO: So, Sam, the savings are being driven primarily by the reduction in personnel costs as we go through the consolidation from six to four. And we streamlined – this is primarily around streamlining the leadership teams. As we noted in the press release, we expect the action to affect about 200 employees. So it's important to note that the impact to 2014 and 2015, frankly from a financial perspective, is de minimis, because most of the savings are priced into our contracts and passed along to our customers. In 2013, you have to account for the cost to implement the program, the relocation, the severance and so forth, and that offsets the current year savings. So fundamentally the restructuring is weighted more so than you may realize toward business leadership teams. But again, the driver here is primarily to more efficiently manage the operation and the business and serve the customer going forward. Now with that said, we will continue to drive efficiencies through supply chain actions and through indirect or overhead cost reductions. I articulated some of that earlier during my comments.
Sam Pearlstein - Wells Fargo: Dave, one more if I can add in is, your capital spending was pretty light this quarter. Do you still think you are going to be up close to flat year-over-year?
David C. Wajsgras - SVP and CFO: We will be flat to slightly down year-over-year. We have a lot of focus on all the areas of spending, and capital expenditures are not outside of the realm of what we're looking at.
Operator: Robert Spingarn, Credit Suisse.
Robert Spingarn - Credit Suisse: Dave, question on NCS understanding that as a segment we won't necessarily see this play out this way, but you were down 7% in revs on the quarter and attributed that to the Army softness, but the guidance, for the segment which you've provided, suggests this is really the trough quarter. One is that correct, and two, does that imply that we don't see pressure in Army going forward here rest of the year?
David C. Wajsgras - SVP and CFO: Rob, that's a good observation. The full year 2013 does include – already includes lower business with the U.S. Army particularly around the sensor production programs. This is offset and we have talked about this in the past and apparently you recall, this is offset by growth on the international side particularly in the C4I areas where we have substantial development work. NCS as a business I would say Q1 could be viewed as the trough, it’s a fair way to look at it as we move through the year. We see those businesses by and large expanding and I think equally important we see expansion from a margin standpoint as well.
Robert Spingarn - Credit Suisse: And then the other thing I wanted to ask you is just, you talked about the buyback in the quarter and the share count that you're anticipating. I don't know exactly how you ended the quarter and what the creep would be, but given the range you might be close to the high end of that share count. Right, so we shouldn't infer from that, that you are done buying back stock.
David C. Wajsgras - SVP and CFO: Well first of all I wouldn't infer that we would end the year at the high end of the range, but let me address that in just a second. We do have a strong balance sheet and we continue to pursue a balanced capital deployment strategy and this guides our thinking about how we're returning value to shareholders we're continuing to invest in the business. We're paying a strong dividend, we're pursuing targeted M&A and as you noted, we're continuing to buy back shares. We mentioned earlier that we raised the dividend 10% this year and we did raise it as a reminder, 16% last year. So importantly we do remain cognizant of what's in the best interest of our shareholders when it comes to capital deployment in general and our share repurchase plans more specifically and just to be clear will continually review these plans.
Operator: Doug Harned, Sanford Bernstein.
Doug Harned - Sanford Bernstein: I'm interested in the reorganization. You've been in this segment structure for quite some time, about 10 years. I'm curious, what was the catalyst that made you decide to make this change at this point?
William H. Swanson - Chairman and CEO: I think, Doug, you know as we have a strategy, we've stuck to it. We've tweaked a little bit here and there. And as you look to the future, clearly, at least my take is that companies have to be more agile going forward. The environment has changed, our customers need the ability to sit down with us at the table and work through things. We were most recently in the Pentagon. We went through – some of us our programs, so I can tell you I really felt good having that meeting. Our programs are doing extremely well if you look at our performance on cost and schedule indices. It looks like a 12 gauge shotgun with the choke. It's right around the sweet spot. I can't say everybody else is in the same position, but I'm sure was thankful at Raytheon's. So, when you look at the organization, it's how do we respond quicker, how do we respond with affordable solutions and how do we continue to have the productivity gains that we've had on a year-over-year basis. We elected to make some changes and that was worked on by the senior leadership of the Company, we probably spent the better part of nine months going through that to make sure we got it right. Tom's on Board watching it. I can tell you, it has gone extremely quick, extremely well beyond my expectations, and you know me, I've set some pretty high standards. So, we're seeing things click and work in a way that is just what we want, and especially internationally, you've got to be able to go in and offer solutions, selling products just doesn't work, and I think this new organization is going to help us do that. And by the way, sometimes change for change sake is healthy.
Doug Harned - Sanford Bernstein: Then one competitive question. MEADS has new life, it appears. Do you see this is having any potential impact on the Patriot outlook?
William H. Swanson - Chairman and CEO: Well, let me start by saying, MEADS is not a Raytheon program. The U.S. Army has decided not to procure MEADS. It made that decision sometime ago and continues to state that decision. The continued performance of Patriot contrasted with MEADS long-standing cost overruns and schedule delays were the primary reason most members of Congress thought the program should be terminated early. However, the Pentagon has told them, they face cancellation fees. So, the funds have been put in for to cancel for the finish the program, so they don't have that particular thing. So, I guess way to answer your question is, Patriot has a long installed base. It has numerous international customers and I don't lose any sleep at night whatsoever over the other program.
Operator: Noah Poponak, Goldman Sachs.
Noah Poponak - Goldman Sachs: Bill or Dave, I wanted to ask about margins long-term. On one hand, you are doing a lot internally on the cost side, that’s proving successful on the other hand presumably those cum catch numbers you talked about earlier don't sustain we are seeing better buying power version 2.0 coming out of the Pentagon. It's unclear exactly what that means. How sustainable are current margins two, three years out. Are there any segments specifically that look much different two, three years out?
David C. Wajsgras - SVP and CFO: We've discussed this in the past. Frankly I've been here seven and half years and I think I've discussed this for 7.5 years. We have continued to perform well, we execute I would say best-in-class we continue to satisfy all customer requirements, both domestically and internationally. We talked about our focus on productivity and cost efficiency and that continuing to put us in a very good position from a competitive standpoint. I mentioned earlier, we have about 36% of our backlog with international customers and we continue to see that expanding over time. The financial returns from an international perspective as a result of the risk associated with international business it's typically higher than domestic business. So I would say as we look forward we're continuing to see sustainability from a margin standpoint and I would say there would be upward pressure at some level from an overall margin profile.
Noah Poponak - Goldman Sachs: If I could just ask about one other item, the Technical Services segment, just bigger picture. I mean this had three or four years in a row of double-digit and a few well in excess of 10% organic revenue growth years towards the end of the defense spending upturn. It's been fairly resilient as spending has started to come down, a little weaker this quarter. Can you remind us or update us on what the handful of largest drivers are in that segment right now and how do you think about when that one bottoms out?
William H. Swanson - Chairman and CEO: It's – first of all, our Technical Services business really leads in the, what I'll call, the virtual live and constructive training. They do that in a way that really leverages from our commercial side of the business there and many people don't realize that we provide the training for GM and Chrysler and Opel. If you dealt with the automobile industry you know that they are continually looking for price and value and so for us we find a way to do compression in education or training. So we can basically take a program, and compression means that we can take 20% or 30% out and increase the retention and deliver better results. We've taken that and got it into our army training. That training gets propagated into other areas. It's expanding internationally, but what we've all got to realize is that with sequestration you've got the Secretary and the Deputy, they've got to worry about the budgets and how to make everything fit. So from my standpoint, I think about it in a way that they look at personnel, which is off-limits. The President has decided that that's not going to be touched. They are going to take care of mandatory things like nuclear deterrence and security concerns. They are going to make sure they protect new programs that they want to go through, and finally you get to people. So, that department is going through some hard choices now with furloughs. I think they've decided that it's going to be around 13 days in the next three or four week. They got to decide if they are going to implement that or not. And then you finally get to O&M, and O&M specially if you are on the service side provides quick savings to the building and they are not cancelling programs, so it put the focus there. We think we've factored that correctly into our services business and as you point out its resilient. It's resilient because they deliver good value and they are constantly realizing that we have to come up with savings to help our customers fit their budget. So, from our standpoint, we're going over a speed bump right now that we think we've forecasted correctly and then as we go forward, we'll see where things go. It's unlikely, there is going to be any change in sequester in the next few months. We assume it's going to take the full year, the fiscal year '14 budget, give some Congress and the administration a chance for maybe a grand bargain. We'll find out what happens here, but we continue to work with our customers to help them prepare what's in front of them. I hope that helps.
Operator: Myles Walton, Deutsche Bank.
Myles Walton - Deutsche Bank: I'll stick to just one. It sounded like the bookings target for the year was lowered by about $500 million, the sales for this year is lowered by about $400 million. So the yearend backlog projection really doesn't move very much, and I guess what I'm struggling with is, where does sequestration actually hits you for '14 if it doesn't hit you in your yearend backlog?
David C. Wajsgras - SVP and CFO: So as we go through this year, and I'm not sure we addressed this earlier, but it's primarily in our services businesses that backlog is impacted as a result of sequestration. It's primarily IIS, RTSC, as well as some of the classified business in SAS. By and large, it's our quick turn type business. We've talked about the back half of the year being weighted from a booking cadence standpoint, it's also heavily weighted to international. So just to give you some additional perspective. From a first half standpoint, we expect to see a book-to-bill of under 1, say roughly about 0.9. As you go to the back half of the year, we see about 1.15, and as we close out the year we see it just around 1 overall. From international standpoint, we see the book-to-bill at about 1.05 to about 1.15. So you can see how the cadence sort of is back end weighted and the cadence is also weighted toward international.
Myles Walton - Deutsche Bank: I was just going to say, am I right that your yearend projected backlog though doesn’t move with sequestration?
David C. Wajsgras - SVP and CFO: The backlog is just about flat, even including sequestration, that's about right. I mean, it's – yes, that's the math.
William H. Swanson - Chairman and CEO: What people also have to remember, some people expected the world to end with sequestration. It happens over time, it's a slow buildup. For me, the world has changed and the area you worry about or you focus on is where you don't deliver a product is the easiest place to go get money or its fungible, so where you have programs or products – or international, which will continue anyway. So you really worry about, what I'll call, the seats or positions you have on the service side. And we've looked through that and we've got some strong programs, and we think we've taken that into account, as Dave pointed out.
Operator: Howard Rubel, Jefferies.
Howard Rubel - Jefferies & Company: Just to go back for a moment and talk about outlook and sort of your forecast. If we look at the FY '13 budget and how it was constructed, and then we look at the language that was appropriated, it seems that in a number of cases you got awards and program funding that will be far in excess of where the original proposals were. Could you sort of touch on that? It looks like it's in radar. It looks like it's in ballistic missile defense. Then I just have a follow-up related to that.
William H. Swanson - Chairman and CEO: Howard, you are right. Part of our philosophy here, the Company, or the strategy is that our products or our services have got to both be forward looking, but they've also got to be backward compatible. So we look at what we do, and in this world, I think some of what we have is going to have to last longer. So when you think about an F-16 aircraft, and you can put a new AMRAAM-D on it and you can put an AESA radar on it, you have made that really a potent platform. The other thing we see on the Naval side, our Zumwalt program, what we've been able to do there with the 11 or 12 new technologies that we put there. We've been able to go backward, fit those, and now given the shipbuilding performance, the integration and where we see that going, it really reaffirms to people that you can go both directions here. So, I think you've seen our existing product lines continue to grow, and the thing we feel excited about and that's something I talk to Dr. Carter about, is that the department is really going to worry about new starts. The thing you have with – you know this as well as I do, old programs have many fathers and mothers; new programs are like plants with shallow root structure that people can pull up. But what leadership has to worry about is that those development programs are really the future, and I see the building trying to protect those programs going forward, which I think bodes well for kind of work we do, if that helps.
Howard Rubel - Jefferies & Company: Absolutely, and that's sort of the follow-up is that there are three big new starts that I can point to domestically, AMDR, whatever happens with AESA radar and well actually Space Fence and four if I count the jammers as well. How you thought about factoring those? And, so if you win half of them, do you end up in fact exceeding your bookings forecast?
William H. Swanson - Chairman and CEO: I think if we won half or more it would be good for the home team and of course Tom Kennedy is looking at me telling me it'd be very good for the home team. So it's one of those where we don’t play would or could or should. And what that is, is when we submit our proposals. We give it our best shot and take into account everything we know and what we realize is don't buy technology for technology sake. They are really looking at what's the best value and the best value includes a lot of different things. Now, one is energy consumption and when I started in this business. Nobody cared about energy consumption, and so now when you look at some of these big radars or these systems is how much do you consume and how is that evaluated besides reliability, maintainability, and the rest of the ilities. So we feel good about where we're going and, even in the technology arena for us there are not big jobs, million dollars. We’re worried about hybrid dish, where you can go out in the field and have a sterling engine to be able to generate energy to use 50% less power. Those are kinds of things this company works on, and they come in here, we look at them, we get excited, and then the teams go off and I could talk about others. We have a program that BBN's doing, which is developing a script independent technology where we can transcribe handwritten documents. We're the only ones in the country working on that from DARPA point of view. I could go on all morning about some of the neat things we're working on, but that that's how we see it, but the answer to your question. Yeah, it would be a good thing to win more than half of them.
Operator: George Shapiro, Shapiro Research.
George Shapiro - Shapiro Research: Bill, I want to generalize a little bit here. I mean, if you look at the procurement and investment accounts for 2013, they're down about 15% from 2012. So I really want to push, I mean, history would show that somebody as big as Raytheon, even with the international exposure that you might be able to do somewhat better than that 15% decline. So it's hard to believe to that you'd be able to have a backlog flat at the end of the year with this year. So I just wanted to push you a little bit more on that?
William H. Swanson - Chairman and CEO: Well, can I push back?
George Shapiro - Shapiro Research: Sure.
William H. Swanson - Chairman and CEO: Well, George, I think that thing of it is you have to look at Raytheon's portfolio, extremely strong internationally and so that's growth, that's not a decrease. And then you look at, as I mentioned, 15,000 contracts make up half of our sales, those are $1.5 million to $2 million and that's a real strength of what we do and we're a technology Company and we believe we can compete with anybody in the world in that area. And then you have to look at the budget that's going down. There's always – those are the cold spots. You have to be able to look at the hotspots. So for us, from a standpoint we think we're in the hotspots, that's what we try to be. We didn't go into Fed IT. We talked about cyber before anybody could spell it. So part of what we have to do is make sure that we're at the fore front of that area. And so that's why we think we can be as you say book-to-bill of 1 which means you'd be flat on backlog. By the way if the international comes in stronger, that's even better.
George Shapiro - Shapiro Research: I don't doubt that you can do better. I just question whether you could do that much better and I would argue that 15,000 programs are negative in the sense that in aggregate that's got to be subject to what's going on in the budget. They all can't be separate from what going.
William H. Swanson - Chairman and CEO: Well that's a part of the debate George, and I guess we've given you our best guidance and I've been around here for a long time and I think Raytheon has been pretty accurate at least in my last 10 years about predicting where things were going to go. And what you got to realize is we model all our 18,000 contracts and our 8,000 program. So, we have a little bit of an advantage over you.
George Shapiro - Shapiro Research: Well, I guess let's see whether…
William H. Swanson - Chairman and CEO: That's okay. We've been doing this for a long time. So, it's a healthy debate, but I think what's really key here is, you can detect no apprehension on what I'm telling you.
George Shapiro - Shapiro Research: One for you Dave, you continue to do better in the margins that I figure. But in NCS, anything unique in the first quarter where it was 9.6 and you are still guiding for the year to average up 200 bps from that?
David C. Wajsgras - SVP and CFO: The decrease in the margin is due to the timing and the extent of the program improvement last year. The mix of business and I may not have mentioned this earlier, but it's important we made a significant acquisition at the end of last year and the acquisition costs associated with integrating that encryption technology business costs about 60 basis points in the first quarter and about 50 basis points on the year. Now the mix does become more favorable as you go to the back half of the year and the timing of the efficiency improvements is also weighted to the second through fourth quarter in that business.
George Shapiro - Shapiro Research: Well, that 60 bps especially makes it more feasible.
David C. Wajsgras - SVP and CFO: Yeah. Thank you for joining us this morning. We look forward to speaking with you again on our second quarter conference call in July. Chantele.
Operator: Thank you for your participation in today's conference. This concludes the presentation you may now disconnect. Have a wonderful day.