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Raytheon Co (RTN)
Q3Â 2018 Earnings Conference Call
Oct. 25, 2018, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Raytheon Third Quarter 2018 Earnings Conference Call. My name is Candice and I'll be your operator for today. As a remainder, this conference is being recorded for replay purposes.
I would now like to turn the call over Ms. Kelsey DeBriyn, Vice President of Investor Relations. Please proceed.
Kelsey DeBriyn -- Vice President of Investor Relations
Thank you, Candice. Good morning, everyone. Thank you for joining us today on our third quarter conference call. The results that we announced this morning, the audio feed of this call and the slides that we'll reference are available on our website at raytheon.com.
Following this morning's call, an archive of both the audio replay and a printable version of the slides will be available in the Investor Relations section of our website.
With me today are Tom Kennedy, our Chairman and Chief Executive Officer; and Toby O'Brien, our Chief Financial officer. We'll start with some brief remarks by Tom and Toby, and then move on to questions.
Before I turn the call over to Tom, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance constitute forward-looking statements. These statements are based on a wide range of assumptions that the company believes are reasonable but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release and are discussed in detail in our SEC filings.
With that, I'll turn the call over to Tom.
Thomas Kennedy -- Chairman and Chief Executive Officer
Thank you, Kelsey. Good morning, everyone. Raytheon once again delivered strong operating performance in the third quarter. Sales increased 8.3% and our bookings, sales, EPS and operating cash flow were all better than expected.
We continue to see strong global demand for our advanced solutions. Book-to-bill in the third quarter was 1.28 driven equally by international and domestic. And for the second time this year, we achieved record backlog which rose to $41.6 billion at the end of the quarter, an increase of nearly $5 billion year-over-year.
Given this and the opportunities we see in the fourth quarter, we are again increasing our bookings outlook for the year by another $1 billion. It's worth noting that since the beginning of this year, we have increased our bookings outlook by a total of $2 billion over our original expectation, and we now expect the full year book-to-bill ratio of over 1.1. We are pleased with our bookings performance this year, which positions us well for continued growth in 2019. Toby will discuss additional details about our initial 2019 outlook along with our third quarter performance and updates to guidance in a few minutes.
Given the growth of the DoD budget and upcoming competitions we see for advanced solutions, I'd like to spend a few minutes in discussing our strategy to continuously innovate and refresh the technology in our current franchises and to use that expertise to create new franchises.
We try to be the disruptors of our own technology and make investments in order to keep our franchises relevant, so they continue to be value generators for decades to come. We've demonstrated this in the innovative solutions we featured at AUSA earlier this month. First, we received positive feedback from our customer on the Lynx Infantry Fighting Vehicle. We are leveraging our strong international partnerships on Lynx, just as we have done with our Naval Strike Missile and the NASAMS System. For this, we are collaborating with Rheinmetall on the Lynx vehicle to meet the US Army's requirement for the next generation combat vehicle.
Our global industry team will offer the Lynx paired with Raytheon sensors, weapons, and systems integration expertise, to provide the army with a modern fighting vehicle that will keep US soldiers far ahead of battlefield threats for decades to come.
Next, we featured our TOW system, which is the premier long-range heavy-assault precision weapon system used throughout the world today. Raytheon and the US Army have consistently upgraded TOW, since it was first produced in 1970 to keep it relevant for today's flight, and help our soldiers preserve their over-match advantage on the battlefield. Earlier this year, we were awarded the contract by the US Army to develop a new propulsion system for the TOW missile. The improved system will increase range and deliver enhanced protections for ground troops, while providing them with more capability.
Also on display, an AUSA was our upgraded Excalibur precision guided projectile. This new variant Excalibur Shaped Trajectory or EST represents a major leap forward and capability for this already advanced guided munitions and enable soldiers to eliminate targets in a hard-to-reach locations by offering a new angle of attack. In addition to EST, Raytheon has developed a laser-guided version and a 5-inch sea-based variant of Excalibur.
The last product featured at AUSA, I'd like to highlight is our Stinger, Surface-to-Air Missile. This missile has provided superior short-range air defense since the 1970s and has had many capability enhancements over the years. This combat proven missile is deployed in more than 80 nations and with all the four US military services. The latest update, the new proximity fuse enables a lightweight self-contained air defense system to destroy a wider array of battlefield threats including unmanned aircraft systems.
As we think about our franchises, we not only refresh the technology, we take the franchise International to broaden our marketplace. This has been our strategy with our combat-proven Patriot franchise. During the quarter, we continue to make progress on international opportunities for Patriot. In August, Sweden signed the LOA with the US government to purchase the Patriot integrated air missile defense system. As a result, Sweden became the 16th nation to rely on Patriot. The LOA paves the way for the US government to begin contract negotiations with Raytheon for booking in 2019.
Sweden Patriot opportunity for Raytheon is still expected to be around $1 billion. And in September, we booked over $1.3 billion on our Phase I award with Poland to purchase Patriot. Under the Phase II award, Poland will purchase additional Patriot fire units and has expressed interest in our upgraded Gallium Nitride based 360 degree AESA radars. We still expect the Phase II booking for Poland Patriot in 2020 with the total Raytheon Poland Patriot opportunity to be around $5 billion.
For our Romania Patriot opportunity, our next booking is expected to be around $500 million in 2019. Additional follow on awards to complete the program are expected to be booked in 2020 and 2021. We continue to see the total Raytheon Romania Patriot opportunity to be around $2 billion.
As you can see, nations want to protect their sovereignty and the demand signal for defense systems like Patriot is strong in global. Collectively, these international Patriot bookings are worth around $8 billion. And in addition, we see a multi-billion dollar opportunity for Patriot to upgrade to the latest configuration and 360 degree AESA radar.
Turning to Cyber. This quarter we were awarded another multi-year contract with the new government customer in the MENA region to provide advanced cyber security solutions and operational support. This adds to the strong cyber security portfolio we have at IIS, which includes our DOMino program for the Department of Homeland Security.
In the space domain, in early October, we were selected as one of two companies to compete for the opportunity to provide the mission payload for the next generation overhead persistent infrared program. Next Gen OPIR is a new missile warning satellite system for the US Air Force, aimed at countering emerging global threats. As part of the competition, we will complete the critical design review phase of our proposed payload. Raytheon was selected based on its ability to meet stringent schedule, resiliency, and technical capability requirements. We see space is an important market over the next several years.
Turning to Washington. We are pleased with the successful passage of the fiscal year '19 appropriations bill for the Department of Defense, avoiding a continuing resolution for the first time in a decade. Modernization funding continued to be supported and aligned with Raytheon's core capabilities in areas such as radars, missiles, missile defense, and cyber security. The timely bill passage provides valuable stability and predictability which is beneficial for both our customers and our shareholders.
Let me close by thanking the members of the Raytheon team worldwide for another strong quarter. They are committed to providing the trusted innovative solutions our customers need and they are focused on the opportunities we have before us to finish the year strong and continue our growth into the years ahead.
With that, I'll turn the call over to Toby.
Anthony O'Brien -- Chief Financial officer
Thanks, Tom. I have a few opening remarks, starting with the third quarter highlights. And then we'll move on to questions. During my remarks, I'll be referring to the web slides that we issued earlier this morning. If everyone would please turn to page 3. We are pleased with the strong performance the team delivered in the third quarter, with bookings, sales, EPS and operating cash flow all better than our expectations. We had strong bookings in the third quarter of $8.7 billion, resulting in a book-to-bill ratio of 1.28.
Sales were $6.8 billion in the quarter, up 8.3% with growth across all of our businesses. Our EPS from continuing operations was $2.25, up 14.2%, which I'll give a little more color on in just a moment.
I'll discuss guidance further in a few minutes, but at a high level, we are updating our expected sales growth from the previous range of 5% to 7% to a range of 6.5% to 7.5% and we are raising our full year 2018 outlook for EPS, as well as making other updates. And as Tom mentioned earlier, we're raising our bookings outlook by $1 billion.
And although not on the slide, I want to point out that our operating cash flow in the third quarter was better than our prior expectations due to favorable collections on some of our larger contracts we previously expected in the fourth quarter. Operating cash flow was lower than last year's third quarter as expected, due to the previously announced $1.25 billion discretionary pension plan contribution we made in the third quarter 2018, prtially offset by lower net cash taxes. Also during the quarter, the company repurchased just over 630,000 shares of common stock for $125 million, bringing the year-to-date share repurchase to 4.5 million shares for $925 million.
Turning now to Page 4. Let me start by providing some detail on our third quarter results. Company bookings continue to be strong, for the third quarter bookings were $8.7 billion, which were approximately $1.7 billion or 25% higher than the same period last year. And on a year-to-date basis, bookings were $23.7 billion, which were $4.5 billion or 24% higher than the comparable period last year. As Tom mentioned, these strong bookings positioned the company well for continued growth in 2019. Backlog at the end of the third quarter was a record $41.6 billion, up $4.9 billion or 13.4% compared to last year's third quarter.
We now move to Page 5. Third quarter 2018 sales were higher than the guidance we set in July, primarily due to better than expected performance at our IIS business. Looking now at sales by business. IDS at third quarter 2018 net sales of $1.5 billion, up 7% compared with the same quarter last year. The increase from Q3 2017 was primarily driven by higher sales on an international Patriot program that was awarded in the first quarter of 2018. And the third quarter 2018 IIS had net sales of $1.7 billion, the 13% increase compared with Q3 2017, was primarily due to higher net sales on classified programs in both the cyber and space business areas. The DOMino Cyber program and the Warfighter FOCUS program.
Missile Systems had third quarter 2018 net sales of $2.1 billion. The 7% increase from the third quarter 2017 was primarily driven by higher net sales on classified programs. And the third quarter 2018 SAS had net sales of $1.7 billion, up 6% compared with the same quarter last year. The increase from Q3 2017 was primarily driven by higher sales on surveillance and targeting systems programs. Overall, we're pleased with our total company sales, which grew by over 8% in the quarter.
Moving ahead to Page 6. Our operating margin in the quarter was 17.4% for the total company and 12.4% on a business segment basis, and as expected lower than last year's third quarter, primarily due to mix and the timing of program improvements. Overall, the company continues to perform well.
So now looking at the business margins. IDS third quarter 2018 operating margin was strong at 16.1%, slightly lower than last year's third quarter, primarily due to higher productivity in Q3 2017. The increase in operating margin at IIS in the quarter compared with the same period last year was primarily driven by higher net program improvements in this year's third quarter. The decrease in margin at missiles in the quarter compared with the same period last year was primarily driven by higher productivity improvements in Q3 2017 and a change in program mix. As a reminder, missiles third quarter 2017 results included large favorable adjustments on a couple of international contracts.
SAS operating margin was largely in line with last year's third quarter. And Forcepoint had positive operating income of $18 million in the third quarter 2018, with operating margin of 10.4%. Additionally, I want to point out that our third quarter operating income was favorably impacted by $11 million for the actuarial update to our pension plans. I'll touch on this more in a minute.
Turning now to Page 7. Third quarter 2018 EPS was $2.25 better than expected, primarily driven by higher sales volume, the timing of productivity improvements and other non-operational improvements. Third quarter 2018 EPS was higher than last year's third quarter, primarily driven by operational improvements from higher sales volume and lower taxes primarily associated with tax reform. This was partially offset by the unfavorable $0.80 EPS impact of the previously announced pension plan annuity transaction.
On Page 8, as I mentioned earlier, we are updating the Company's financial outlook for 2018 to reflect the higher sales volume that we are seeing offset by a slight change in margin due to program mix that I'll discuss further in a few minutes. It's worth noting this is the third time we have increased our sales and EPS guidance since January. We have increased our full year 2018 net sales and narrowed the range. We are raising the low end by $300 million and the high end by a $100 million. And we now expect net sales to be between $27 billion and $27.3 billion, up 6.5% to 7.5% from 2017. The increase versus our prior guidance is driven primarily by IIS.
As I just mentioned, and as we have done in prior years, during the third quarter we updated our actuarial estimates related to our pension plans. As a result of this update, the FAS/CAS operating adjustment for the year improved by $14 million and the retirement benefits non-service expense for the year also improved by $14 million. Taken together, they had a favorable impact of approximately $0.08 per share with $25 million or $0.07 per share recorded in the third quarter 2018, and $3 million or $0.01 per share expected to be recorded in the fourth quarter 2018.
And as a reminder, the updated 2018 retirement benefits non-service expense includes the $288 million settlement charge for the third quarter pension plan annuity transaction. We are improving the range of our net interest expense by $15 million, which is worth about $0.03 to $0.04 to EPS compared to our prior guidance.
Turning the share count. We continue to see our average diluted shares outstanding at approximately 287 million shares for 2018, consistent with what we said in July. And we still see the effective tax rate for the full year to be approximately 10.5%. We've increased our full year 2018 EPS, raising the low end by $0.24 and the high end by $0.14 from our prior guidance. We now expect our EPS to be in the range of $10.01 to $10.11. We continue to see our 2018 operating cash flow outlook between $2.6 billion and $3 billion.
And on Page 9, we've included guidance by business. We've increased the full year sales outlook at IIS and for the total company. We've also increased the low end of the range at IDS and SAS to reflect the combination of stronger bookings performance to date and fourth quarter expectations. And at Missiles, we continue to see strong growth. We now see their full year 2018 sales growth in the 8% to 9 % range. We've updated the range due to the timing of international and domestic programs. Overall, we're pleased with the company's sales growth.
Turning to margins, both at the business segment and company level, we have updated margins to reflect the revised sales mix and related margin impact.
Before moving on to Page 10, as Tom mentioned earlier, given our year-to-date bookings strength and our expectation for a strong fourth quarter, we are now raising our full year 2018 bookings outlook by $1 billion to a range of between $29.5 billion to $30.5 billion. The increase is driven by strong demand from our global customers and positions us well for continued growth in 2019.
On Page 10, we have provided guidance on how we currently see the fourth quarter for sales, earnings per share, and operating cash flow from continuing operations. We expect our fourth quarter sales to be in a range of $7.3 billion to $7.6 billion and EPS from continuing operations is expected to be in a range of $2.78 to $2.88. For modeling the fourth quarter EPS, we expect the effective tax rate to be above 17%. We expect operating cash flow to be in a range of $1.6 billion to $2 billion.
Now turning to our initial outlook for 2019 on Page 11. As we sit here today, we currently see the book-to-bill ratio above 1, and strong sales growth for 2019 of 6% to 8 % over our 2018 outlook. We expect total business segment margin to be in line with 2018, our effective tax rate to be approximately 17% to 19 %, and our operating cash flow to continue to be strong in the range of $3.8 billion to $4 billion. This is our initial look at 2019, and as we have done in the past, we intend to provide detailed 2019 guidance on our fourth quarter earnings call in January.
So, if you could please move to Page 12. We have provided a pension matrix for 2019. This chart indicates a range of possible outcomes based upon different 2018 asset return rates and discount rates that will be determined at year end. Each box contains a possible outcome for the 2019 FAS/CAS operating adjustment on the top left and the 2019 retirement benefits non-service expense, non-operating on the bottom right.
As of September 30, 2018, the discount rate was around 4.25%, approximately 50 basis points higher than it was at the end of 2017, and our return on assets was roughly 2.5%. And just to be clear, the final discount rate and the actual asset returns won't be known until we close out 2018. We'll provide a more detailed pension outlook on our year-end call on January.
Before concluding, as we have discussed on past earnings calls with regard to our capital deployment strategy, we continue to expect to generate strong free cash flow for the year and remain focused on deploying capital in ways that create value for our shareholders and customers, while maintaining a strong balance sheet.
In summary, we had another strong quarter. Our bookings, sales, EPS and operating cash flow were all above our expectations. We remain well positioned with both our domestic and international customers' priority areas. We increased our full year 2018 outlook for bookings and EPS, increased the sales growth range to 6.5% to 7.5% and have a strong foundation for continued growth in 2019.
With that, Tom and I will open the call up for questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) And our first question comes from Jon Raviv of Citi. Your line is now open.
Jonathan Raviv -- Citigroup -- Analyst
Hey, good morning, everyone.
Thomas Kennedy -- Chairman and Chief Executive Officer
Good morning, Jon.
Anthony O'Brien -- Chief Financial officer
Hi, Jon.
Jonathan Raviv -- Citigroup -- Analyst
In January, you guys issued some cumulative cash flow targets that implied or that talked about $7 billion to $8 billion in '19 and '20. Can you talk about some of the building blocks going from this year to next given the operating cash flow guide in 2019? It just seems that since that January target was issued, sales are clearly better. So I'm just curious what some of the changes are? And then, could also mention CapEx in the next year as well, that would be helpful, too. Thank you.
Anthony O'Brien -- Chief Financial officer
Hi, Jon, it's Toby. Let me take a crack at that. So you're right, we had talked about a $7 billion to $8 billion range over the next couple of years. Since that time we made a discretionary pension contribution that we talked about, improving cash flow, all else equal, of about $1 billion over the 2019 to 2020 period. Our operating cash flow outlook for 2019, that I mentioned earlier in the $3.8 billion to $4 billion range is in line with that original range and additional pension benefits. So things are continuing to track as we would expect there. A little bit more color. We do expect to see some higher cash from operations in pension, as I just alluded to. But there is going to be a partial offset with higher cash taxes, if you want to think of it certainly compared to 2018. And then, from a CapEx perspective, think of it for 2018 maybe slightly increased as a percentage of sales 3% to 4 %, as we continue to invest in the business compared to in the roughly 3% range that we are seeing for 2018.
Operator
Thank you. And our next question comes from Robert Spingarn of Credit Suisse. Your line is now open.
Robert Spingarn -- Credit Suisse -- Analyst
Good morning.
Thomas Kennedy -- Chairman and Chief Executive Officer
Hi, Rob.
Robert Spingarn -- Credit Suisse -- Analyst
On the margins for next year, given the higher sales is there no opportunity for leverage there, if maybe you could talk about the upward and downward pressure on that. Or are you simply being conservative? Is it mix? Is it labor tightness or conservatism?
Anthony O'Brien -- Chief Financial officer
Yes, Rob, let me take a crack at that. So, as we said this is our initial look at '19. And we did say in line, margins in line next year with what we're seeing this year for the segment level. As we've discussed before, the margins can be impacted by the timing of risk retirements as well as mix especially as we start up new programs, including development programs at lower margins. We are continuously focused on margins and we'll continue to do so through the balance of this year and into '19. I think if you want a little bit of color on the mix side of things, right now for the current mix we see is roughly 60% from fixed price contracts. Again, we've talked a lot about the mix that we're seeing in development versus production costs type versus fixed price, higher classified and CRAD sales.
I just mentioned, and not new news, but when we start programs up, we start them off at a lower margin rate until we get to a point where we're comfortable that we can retire risk and move on the margins. That said, as I mentioned we're still in the planning process for '19, there are these factors that are influencing margins, we see improvements in some areas, right. So we've got some puts and takes, but overall we're pleased with the margin performance, we're early in our process and we're always focused on trying to improve our margins.
Operator
Thank you. And our next question comes from Doug Harned of Bernstein. Your line is now open.
Doug Harned -- Bernstein & Co -- Analyst
Good morning.
Thomas Kennedy -- Chairman and Chief Executive Officer
Good morning, Doug.
Doug Harned -- Bernstein & Co -- Analyst
On Missile systems, you've had a couple of years here where you've had very strong growth in backlog, you're continuing to get that. And can you talk a little bit about what's going on there. Obviously, you've had some wins, but you know we're looking at, if your guidance stands on revenues and on margins for Missile systems this year. What's the flow here, how should we look at this over the next year or so in terms of revenue and margins?
Anthony O'Brien -- Chief Financial officer
Yes, Doug, I'll start here, and maybe I'll give you a little bit of color on what we did here relative to the outlook for this year. As far as sales go, we did -- we see a couple of changes from our prior guidance, we had been expecting an international order for production program that would have had a favorable impact on sales by including by liquidating some inventory in the fourth quarter. The timing of that award is moved out of the year. We've also see a shift in the ramp up on a couple domestic backlog programs that's moved into '19.
Overall, we're still growing at 8% to 9 % and that's on top of 10% growth last year. So we're pleased with what Missiles is doing and how they're growing. Relative to the margin, when you look at their year-to-date performance and we've discussed this on prior calls, we are seeing an increase in new development programs, right? Higher CRAD, higher classified work. And they all bode well for the future, but they have impacted margins in the short term. And additionally the later timing of the International Program Award I just mentioned impacts the mix in Q4, which has also impacted their margins. We do expect margins at Missiles to improve in Q4 and in -- low-to-mid 13% close to 14% range, really driven by the timing of potential program efficiencies.
As far as '19, I'm not going to get into '19 at this point, but I will say, as we've said before, and as I just mentioned when Rob talked, we continue to focus on margins in the business, we continue to make capital investments to improve our productivity especially in the factories and always look for ways to be more efficient to try to offset the impacts of mix. So overall, we expect to deliver solid margins next year on good growth, and we'll be more specific as we get to January.
Thomas Kennedy -- Chairman and Chief Executive Officer
Hey, Doug, it's Tom, just one thing to add related to Missiles, which is I thing plus for us, as the fiscal year '19 budget. Had the funding in it for mult-years, we're not just one of their franchises but for two. So it was a multi-year -- five year multi-year for SM-6 and then also another five year multi-year for us SM-3. That's pretty clear for us, because it does give us insight into the factory and stability there for about eight years. So again, five years the last option awarded. We carry out three given us eight years of factory stability.
And the bottom line is, we will see missile is being a very healthy business for us here and out in the future.
Operator
Thank you. And our next question comes from Robert Stallard of Vertical Research. Your line is now open.
Robert Stallard -- Vertical Research -- Analyst
Thanks very much. Good morning.
Thomas Kennedy -- Chairman and Chief Executive Officer
Good morning, Rob.
Anthony O'Brien -- Chief Financial officer
Hi, Rob.
Robert Stallard -- Vertical Research -- Analyst
Tom, obviously, some issues in the Middle East at the moment and specifically Saudi Arabia. Given your experience of the region, I was wondering if you could give us your perspectives on what could happen here, whether there could be any negative ramifications for your business?
Thomas Kennedy -- Chairman and Chief Executive Officer
Yes, I'll start it off, and then Toby. Obviously, this is something that we've been watching very carefully. And as you know, and I think as you kind of alluded to upfront, we have supported the Kingdom of Saudi Arabia in Security and Defense for more than 50 years. And through that course of time we have seen issues that have occurred at different periods of uncertainty, and we've always resolved and through the end and by doing this one thing is actually following the direction and position of the US administration and which we're right behind and making sure that we understand where they're going and that we're locked in step behind them.
Also our business, just a reminder if you want is, not dependent on any one customer or one program or one franchise. We are a global company providing technology and security solutions for over 80 countries. And we have numerous global franchises. So I'm pretty confident that we will weather this complexity. Generally, it's kind of a geopolitical environment what we have right now and then working through that. With that said, we have looked at things, and Toby will kind of give you some of the financial details of what this potentially could mean to us moving forward.
Anthony O'Brien -- Chief Financial officer
Yeah. So just given the events, to give you a little bit of color insight to how we're thinking about Saudi. Sitting here today, as Tom mentioned, we continue to be aligned with the administration's policies, and we plan to honor our commitments. We don't usually get into customer specific financials, but again, given all the events of late, I will tell you that our Saudi business represents nearly 5% of our year-to-date 2018 revenue. And looking ahead, we see it flattish year-over-year in 2019. This includes our backlog for both defensive and offensive weapons, as well as services and support programs.
As far as any new orders, we have an assumption in the fourth quarter of 2018 for a couple of follow on support contracts. And next year, we have a major award assumed for the TPY-2 radar program, which as all of our bookings are as factored.
And, as Tom said, and just to reinforce it as a reminder, our sales aren't dependent on any one contract or foreign country specifically. And again, it just goes to show the strength of our diverse portfolio, but that's a little color on how we're thinking of Saudi based upon what we know today.
Operator
Thank you. And our next question comes from George Shapiro of Shapiro Research. Your line is now open.
George Shapiro -- Shapiro Research -- Analyst
Yeah, good morning. Tom, I just want to follow up a little bit with Doug's question on Missiles. I mean, if I compare your growth rate in missiles this year, I mean, you've kind of downticked it through the year. Lucky that we'll have a faster growth rate and it's upticked it. It's not directly comparable. I mean, they have Patriot in their missiles you have it in IDS. But, is there any competitive issues that you've lost that would suggest why they're raising their forecasts while yours are coming down in that area?
Thomas Kennedy -- Chairman and Chief Executive Officer
Well, George. We don't -- I don't see any issue there. I mean, we all started from different points and we've been on a ride here since 2015 with the increases and actually have accelerated growth through that business here since that time. So we're very happy with where we're at relative to the missiles and where we're going. We just had a big -- several being wins here. One is the Naval Strike Missile, which will be a replacement to the Harpoon missile, which we believe is close to about an $8 billion franchise program. And several others like that, we were heavily participating in the hypersonic new missile work that's going on with DARPA and with two programs. One is the HAWC and the other one is the TBG, Tactical Boost Glide.
And we're also participating on the Army programs. The PrSM precision strike weapon, which is a replacement to ATACMS. Again, all of these are up side to us, because we didn't have the Harpoon before, and we didn't have the ATACMS before. So we feel very competitive, and then, even on the Hypersonics, there's a whole other area, nobody seems to be talking about, which is the counter-hypersonics, which we're heavily engaged in on -- lot of this activity. It's classified, so we can't go on a lot of details, but we're very positive about the missile company and its growth moving out here in the next several years.
Anthony O'Brien -- Chief Financial officer
And George, I would just add on the financial side of it. The revised outlook, it's in line with where we started the year out with the original guide for missiles. And I mentioned when I -- when Doug -- on Doug's question, we did have an international order move out of the year where we would have had some inventory liquidation, that's the major driver for the change in the revenue guidance. And that was not competitive. That was a sole-source order that, it's a timing issue. And that also tell you quantitatively, we've talked about before how the company -- at the company level we see our competitive win rate in the 70% range plus or minus. I'll tell you missiles is above that on a year-to-date basis this year. So, really just timing is the way to think of it.
Operator
Thank you. And our next question comes from Carter Copeland of Melius Research. Your line is now open.
Carter Copeland -- Melius Research -- Analyst
Hey, good morning, gentlemen.
Thomas Kennedy -- Chairman and Chief Executive Officer
Good morning, Carter.
Carter Copeland -- Melius Research -- Analyst
Nice win last night. The Dodgers knocked my brains out, so I'm counting on you guys.
Thomas Kennedy -- Chairman and Chief Executive Officer
All right we're trying. Going forward, we're going into some warmer weather, so we'll see how that plays out.
Carter Copeland -- Melius Research -- Analyst
Well, so it's not on your favor, but I hope you'll pull it out. Look, I just wanted to talk about the sort of news of yesterday and the whole bidding environment. And obviously the opportunity pipeline for everyone looks a little bit more robust, but we're seeing in different levels of sort of strategic aggression, if you will, in terms of going after stuff that people deem vital to their franchise. I just wonder, maybe, Tom, if you could kind of walk us through your thought process on what that means for you guys in terms of IRAD investment, cost structure, just in general how you compete in that kind of environment? Thanks.
Thomas Kennedy -- Chairman and Chief Executive Officer
Yeah. Thanks for the question, Carter. Let me start with, first of all, Raytheon is not a platform company. And instead, our innovative solutions and our franchises have across multiple platforms. So I think that helps us relative to some of the rhetoric that you heard yesterday bouncing around. So, we have not really seen those kind of impacts relative to our competitions. So, it hasn't really been meaningful to us.
But and the endgame, we feel that when the contracting environment is such that we have a level playing field. We do quite well. And as Toby just mentioned a bit while ago, is our win rates are in the 70% across the Board for the Company. So, we feel we're doing a very good job relative to winning new competitive business.
And the other element is that we take that competitive business into new international marketplace relative to expanding these franchises globally, which has helped us out quite a bit. All that said, price is important, and it's important to our customer. So, we have to be cost-effective, so one of the things that we have been doing is using our technology, and technology we've been developing and bringing to these competitions, not just to enhance the performance of our solution, but also to take out the costs significantly. And so we've been looking at costs on day one of every one of these competitions to figure out our overall strategy, who we're going to go team with, what type of technologies we're going to bring to the game, what we're going to have to do in our factories to get cost out.
And I think the work that we have been doing seems to be paying off. And again, you have to look at our results and our results are win rates. So, we're very comfortable. And now at the same time, we do understand that folks will do a return on investment relative to these some of these major franchise programs. And we'll do long ball relative to those and try to determine what makes sense for them and where they can expand these franchises both globally and do a lot of exploitation of them into potentially other solutions for the customers. I will tell you, we do that on a daily basis here. And that's why we have a franchise strategy, and I think that's one of the reasons why our win rates are so high in this market.
Anthony O'Brien -- Chief Financial officer
And I think, just a real quick on relative to the investment I mentioned, CapEx on Jon's question for next year, from our R&D -- IR&D point of view, I think of it similar to where we are this year around 3% of sales.
Operator
Thank you. And our next question comes from Seth Seifman of JP Morgan. Your line is now open.
Seth Seifman -- JP Morgan -- Analyst
Thanks very much, and good morning.
Thomas Kennedy -- Chairman and Chief Executive Officer
Hi, Seth.
Seth Seifman -- JP Morgan -- Analyst
Tom, maybe just a follow-up on that last question from a little bit of a different angle. You mentioned Raytheon is not being a platform company, and we just got news within the last couple of weeks that Harris and L3 are planning to merge for creating more sizable defense contractors that also is kind of more not a platform company. Does that have any impact on the way that you view the competitive landscape and the way that you think about deploying cash?
Thomas Kennedy -- Chairman and Chief Executive Officer
Well, first of all, we don't see a direct impact relative to the merger of the two companies, L3 and Harris. It turns out they are not our main competitors across our markets. We do run into them on uncertain competitions and we are definitely pleased with the current portfolio of advanced solutions we have, we have been investing significantly here since about 2014. That was our road map that we laid out for our investors that we said that we were going to grow the company and we have been doing that year-over-year. So, we essentially have accelerated growth through that time span.
And again, I think those investments have been paying off relative to the competitions that we have been in. And that's so much leading to this greater than 70% competitive win rate moving forward.
Operator
Thank you. And our next question comes from Sam Pearlstein of Wells Fargo. Your line is now open.
Sam Pearlstein -- Wells Fargo -- Analyst
Good morning.
Thomas Kennedy -- Chairman and Chief Executive Officer
Good morning, Sam.
Sam Pearlstein -- Wells Fargo -- Analyst
I wanted to go back and just look at the margin again. And you talked about 2019's overall flat and you've now reduced 2018 a little bit. So in terms of where you were after last quarter, it's little bit down. But can you just talk directionally about the different segments where they may be up, where they may be down, because what you just said about Missile Systems would imply that that should be up, last quarter there's a contractual matter that moved out of the year, and now this other piece. So wouldn't that should be pushing Missile Systems leased up. So I'm trying to just think about what might be down.
Thomas Kennedy -- Chairman and Chief Executive Officer
Yeah, Sam. So we're not going to give specific detail by business for '19, really just because we're early on in the process. What I can tell you to give you a little bit of color, we do see most of the business margins in line with 2018. And I'm just going to leave it at that for now and we'll go into the segment-by-segment detail and year-over-year flux on the January call.
Operator
Thank you. And our next question comes from Peter Arment of Baird. Your line is now open.
Peter Arment -- Robert W. Baird -- Analyst
Yeah, thanks. Good morning, Tom and Toby.
Thomas Kennedy -- Chairman and Chief Executive Officer
Good morning, Peter.
Anthony O'Brien -- Chief Financial officer
Hi, Peter.
Peter Arment -- Robert W. Baird -- Analyst
Hi, Tom. A question I guess on the budget, it's nice to see the '19 budget coming in on time. Can't remember when the last one was on time. But thinking about '20, there's been a lot of discussions around kind of a flat or topline potentially. I assume investment accounts are more inflation-oriented. How do you see the kind of the Raytheon portfolio setting up? You've obviously had a lot of wins and are gaining share, but just maybe some comments around that.
Thomas Kennedy -- Chairman and Chief Executive Officer
Let me just say lay things out here. It's a great, great question. First of all, there was this administration talking about a potential 5% cut to the fiscal year '20 budgets. And many of the agencies, a 5% cut from fiscal-year '19 and there has been some further discussions out there. Some other information that says it's really for the defense budget, it's really they're looking at potentially 2.5% cut.
Now that was after the number that included OCO, so we're not positive. Some of that 2.5% or majority of it could come right out of OCO, and therefore have zero impact. But even if it's full 2.5% against the fiscal year '19 budget, what that will do is take it back to the fiscal year '18 budget. And remember the fiscal year '18 budget was 19% increased over the fiscal year '17 budget. So bottom line, the fiscal year '18 pretty healthy defense budget.
So we're not -- and then based on the orders that we received and will be receiving in '18 and also in '19, we feel that we will be in a really great shape for fiscal year '20. And that's one of the reasons why we -- given we're fairly leaning-forward guidance relative to revenue growth in 2020 and 2019, 6% to 8% growth.
And so the bottom line is, we think the budget process is right in line with where we need to be and we obviously will be watching it on a day-to-day basis. The other one I just mentioned earlier which has helps us relative to some stability here over the next several years is the multi-year awards on SM-6 and then also on the SM-3, five-year multi-years on both of those taking us out and giving us stability in the factory for about eight years.
And bottom line is, we still have a long process to go in the fiscal year '20 budget, before it's finalized. That Congress has to weigh in on the defense level spendings, and then, but do remember Congress did provide increases significantly above the Trump administration's request for the DoD topline of fiscal year '18 and the DoD modernization budget in fiscal year '19. So bottom line is not over till it's over. We've got to go through a long process, but right now we believe that we're at a -- even at the minimum we're in a very good position moving forward.
Operator
Thank you. And our next question comes from Cai von Rumohr of Cowen and Company. Your line is now open. Cai, are you there. Cai, are you on mute?
Cai von Rumohr -- Cowen and Company -- Analyst
Excuse me. I was on mute.
Operator
Let's move to the next -- there you are.
Cai von Rumohr -- Cowen and Company -- Analyst
So, you've raised your bookings target by $1 billion for this year and look for book-to-bill over one next year. Could you comment on the relative book-to-bill between foreign and domestic, both this year and kind of the trends going into next year?
Anthony O'Brien -- Chief Financial officer
Yeah, so Cai, for this year, based upon $1 billion (ph) increase, the book-to-bill for both domestic, foreign and the total company are kind of sort of in the same ballpark. Think around 1.1 plus or minus. Just a coincidence, Tom mentioned even in the quarter, we have 1.28 and that was 1.28 domestically and internationally. So, right around 1.1 for both the domestic, foreign and total company. As far as next year, I think at this level just at a high level we expect to see continued growth, both domestically and internationally and we will quantify that more in January.
Operator
Thank you. And our next question comes from Rajeev Lalwani of Morgan Stanley. Your line is now open.
Rajeev Lalwani -- Morgan Stanley -- Analyst
Good morning, gentlemen.
Thomas Kennedy -- Chairman and Chief Executive Officer
Good morning.
Anthony O'Brien -- Chief Financial officer
Hi, Rajeev.
Rajeev Lalwani -- Morgan Stanley -- Analyst
Tom and Toby, it was asked a little bit before, but just on the underlevered balance sheet with the sell-off that we've seen in the stock and maybe declining number of M&A opportunities out there. Is that pushing you to maybe change your stance maybe be a bit more front-footed versus what we've seen over the last year or so?
Thomas Kennedy -- Chairman and Chief Executive Officer
I'm going to hit that real quick. Bottom line is we are committed to a balanced capital deployment strategy and you can see that we are continuing to invest in ourselves. Those investments are paying off and our win rate is on competitive deals. So, we do believe that's the right thing to continue to grow our topline as we're making continuing with those investments. Obviously, we're also supporting the pension and our dividend and ensuring we do drive total shareholder return relative to this capital deployment strategy that we have in place.
Anthony O'Brien -- Chief Financial officer
I just add, I mean, I wouldn't expect to see any dramatic shift or reallocation of capital around the framework or within the framework, Tom talked about. We do see value in our stock clearly and we are committed over time to continue to reduce our share count. The guidance we have for this year is about a 1.5% reduction year-over-year, and again in January, we'll give you some insight on to how we're thinking about the total aspect of capital deployment for 2019?
Operator
Thank you. And our next question comes from Myles Walton of UBS. Your line is now open.
Myles Walton -- UBS -- Analyst
Thanks. One confirmation, and then one question. So, on the confirmation, Toby, is that '19 and '20 look still, or it's just combined now, it's $8 billion to $9 billion of operating cash flow. And then, secondly on IIS. Tom or Toby, the IIS numbers look increasingly better. I'm just curious, is Warfighter FOCUS becoming less and less of the headwind? You mentioned some of the uppers, but I mean it's a short-cycle business. Are you just seeing that short-cycle business come through a heck of a lot quicker than I would have otherwise thought?
Thomas Kennedy -- Chairman and Chief Executive Officer
Yeah. Myles, let me take that one first. The Warfighter FOCUS is -- bottom line of that program is rolling off a lot slower than we initially anticipated. And we are picking up other similar work, both domestically and internationally to fill the whole from Warfighter FOCUS. So bottom line is as they -- the team has been very successful at that, but they've also been very successful of winning other awards and bringing other business on-board. The competitive win rates are very high and they're actually making quite a bit of progress on the international front relative to their international cyber work. They just won a major deal in Oman and so the business is doing really well.
Anthony O'Brien -- Chief Financial officer
Yeah. So, I think you're right on the cash, Myles, just to confirm your -- how you characterize the cash is correct.
Operator
Thank you. And our next question comes from Sheila Kahyaoglu of Jefferies. Your line is now open.
Sheila Kahyaoglu -- Jefferies -- Analyst
Thank you, and good morning.
Anthony O'Brien -- Chief Financial officer
Hi, Sheila.
Sheila Kahyaoglu -- Jefferies -- Analyst
Maybe just touch upon Forcepoint for a minute. There was an improvement in the quarter on a sequential basis. The performance overall has been weaker than expected. Maybe can you talk about what's going on in that business at the moment and how you think about potential optionality from here?
Anthony O'Brien -- Chief Financial officer
Yeah, I think, relative to Q3 in the quarter. Let me start with bookings, there was a 13% year-over-year growth. And if you remember they had a 29% year-over-year improvement in Q2. So, the trend there is positive and encouraging. The Q3 sales growth was a little lower than our expectations. However, the team did do a good job in controlling costs in the quarter, and we were pleased with the return to profitability that you alluded to in Q3 with margins in line with our expectations.
Looking forward to Q4, we do expect to see continued bookings growth about in line with Q3's growth rate. We do expect stronger sales growth and another quarter of positive operating profit and margins about in line with Q3 9%, 10% give or take, from that perspective there. As far as the optionality, everything remains in play. We did, as we've talked about in the past, we did go into the commercial cyber business to unlock trap value in the company. And over time, we expect to do that, and all options are out there that we will consider at the right time.
Operator
Thank you. And our next question comes from Richard Safran of Buckingham Research. Your line is now open.
Richard Safran -- Buckingham Research -- Analyst
Tom, Toby, Kelsey, good morning. How are you?
Thomas Kennedy -- Chairman and Chief Executive Officer
Good morning, Rich, how you doing?
Richard Safran -- Buckingham Research -- Analyst
Lot's been asked. So I wanted to just talk to you about productivity for a second if I could. Tom, Toby, you've been talking about productivity improvements for quite some time and I wanted to get a sense from you about how much runway you think you have left here with the productivity improvement initiatives. To the extent you can discuss it, could you talk about how productivity is factoring into your '19 margin guide and if improvements are still having a meaningful impact?
Thomas Kennedy -- Chairman and Chief Executive Officer
Yeah, Rich. As I mentioned earlier and we do all the time, we're always looking for different ways to improve our productivity through capital investment, through initiatives to our supply chain, utilizing Six Sigma, more from an automation point of view. We talked about our shared services that we stood up several years back that we continue to try to maximize the benefit from there.
We continue to see productivity, we've got assumptions in the '19 numbers that we talked about earlier and the way to think about it, we're getting more productivity, and it's needed, because right now when we said margin is in line, we're seeing the headwinds from the mix within the business, and that improved productivity is helping to mitigate the impact from a margin point of view of the improved mix -- negative mix from a margin point of view.
Kelsey DeBriyn -- Vice President of Investor Relations
That's all the time we have today. Thank you for joining us this morning. We look forward to speaking with you again on our fourth quarter conference call in January.
Operator
Ladies and gentlemen, thank you for participating in today's conference. That does conclude the program, and you may all disconnect. Everyone have a great day.
Duration: 59 minutes
Call participants:
Kelsey DeBriyn -- Vice President of Investor Relations
Thomas Kennedy -- Chairman and Chief Executive Officer
Anthony O'Brien -- Chief Financial officer
Jonathan Raviv -- Citigroup -- Analyst
Robert Spingarn -- Credit Suisse -- Analyst
Doug Harned -- Bernstein & Co -- Analyst
Robert Stallard -- Vertical Research -- Analyst
George Shapiro -- Shapiro Research -- Analyst
Carter Copeland -- Melius Research -- Analyst
Seth Seifman -- JP Morgan -- Analyst
Sam Pearlstein -- Wells Fargo -- Analyst
Peter Arment -- Robert W. Baird -- Analyst
Cai von Rumohr -- Cowen and Company -- Analyst
Rajeev Lalwani -- Morgan Stanley -- Analyst
Myles Walton -- UBS -- Analyst
Sheila Kahyaoglu -- Jefferies -- Analyst
Richard Safran -- Buckingham Research -- Analyst
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