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CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
Raytheon(RTN)EarningsReport:Q12015ConferenceCallTranscriptThefollowingRaytheonconferencecalltookplaceonApril23,2015,09:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
ToddErnst;Raytheon;VP-InvestorRelationsThomasKennedy;Raytheon;Chairman,CEOTobyO'Brien;Raytheon;CFO
OtherPart icipants
HowardRubel;Jefferies&Company;AnalystRobertStallard;RoyalBankofCanada;AnalystCaivonRumohr;SGCowenSecurities;AnalystCarterCopeland;Barclays;AnalystRobertSpingarn;CreditSuisse;AnalystHunterKeay;WolfeResearch;AnalystSamPearlstein;WellsFargo;AnalystPeterArment;SterneAgee;AnalystPeteSkibitski;DrexelHamilton;AnalystDougHarned;SanfordBernstein;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Goodday,ladiesandgentlemen.WelcometotheRaytheonfirstquarter2015earningsconferencecall.(OperatorInstructions)
Asareminder,thisconferencecallisbeingrecordedforreplaypurposes.
I'dnowliketoturntheconferenceovertoyourhostfortoday,Mr.ToddErnst,VicePresidentofInvestorRelations.Pleaseproceed,sir.
T oddErnst (VP-InvestorRelations):
Thankyou.Goodmorning,everyone.Thankyouforjoiningusthismorningonourfirstquarterconferencecall.
Theresultsthatweannouncedthismorning,theaudiofeedofthiscallandtheslidesthatwe'llreferenceareavailableonourwebsiteatraytheon.com.Followingthismorning'scall,anarchiveofboththeaudioreplayandaprintableversionoftheslideswillbeavailableintheInvestorRelationssectionofourwebsite.
WithmetodayareTomKennedy,ourChairmanandChiefExecutiveOfficer;andTobyO'Brien,ourChiefFinancialOfficer.We'llstartwithsomebriefremarksbyTomandTobyandthenwe'llmoveontoquestions.
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
BeforeIturnthecallovertoTom,I'dliketocautionyouregardingourforward-lookingstatements.Anymattersdiscussedtodaythatarenothistoricalfacts,particularlycommentsregardingthecompany'sfutureplans,objectivesandexpectedperformanceconstituteforward-lookingstatements.Thesestatementsarebasedonawiderangeofassumptionsthatthecompanybelievesarereasonable,butaresubjecttoarangeofuncertaintiesandrisksthataresummarizedattheendofourearningsreleaseandarediscussedindetailinourSECfilings.Withthat,I'llturnthecallovertoTom.Tom?
T homasKennedy(Chairman,CEO):
Thankyou,Todd.Goodmorning,everyone.Beforewegetstarted,I'dliketowelcomeTobyO'BrientohisfirstearningsconferencecallasCFO,arolewhichheofficiallyassumedonMarch2nd.Tobywillwalkyouthroughadditionaldetailsregardingourfirstquarterfinancialresultsinjustamoment.
I'mpleasedtoreportthatthecompanydeliveredsolidoperatingresultsinthequarterwithsales,EPSandcashflowthatwerealleitherinlineoraheadofourexpectations.Ourinternationalbusinesscontinuestogrowinthequarterandrepresenta28%oftotalrevenue.Internationalalsorepresented34%ofourtotalbookingsinthequarter.Andourinternationalbacklogwas41%oftotalbacklogatquarter'send.Thisbacklogpercentagewillgohigherwiththe$2billioninternationalPatriotawardweannouncedlastweek,whichwasfromtheKingdomofSaudiArabia.
Iwillnotethatwecontinuetoseestrongdemandsignalsbeyondourrecentbookingsactivityforoursolutionsfromourglobalcustomers.Inthequarterandtheweeksimmediatelyfollowing,youwillseeimportantpartsofourglobalgrowthstrategyplayout.
We'veannouncedsignificantrecentbookingsacrossourportfolio,particularlyintheinternationalPatriotthatpositionthecompanyforfuturegrowth.Andweannouncedthestrategicinvestmentandpartnershiptoharnessrapidgrowthintheglobalcybersecuritymarket.
Overall,we'vemadeaconsiderableprogressonthese[weak]frontsandcontinuetomoveforwardwithourgrowthstrategy.Duringthequarter,wealwaysraisedourdividendby10.7%,the11thconsecutiveannualincrease,andwillremainontracktoreduceoursharesoutstandingfortheyear.Thisreflectsourlongtermtrendofreturningcashtoshareholders,somethingwewillcontinuetodoinlinewithourbalancedcapitaldeploymentstrategy.
We'vecomeoutofthegatestrongafterthecloseofthefirstquarterwithapproximately$3billioninbookingswithintheinitialweeksofthesecondquarter,includingthe$2billionPatriotbookingfromSaudiArabiaanda$507millionbookingtoupgradetheevolvedSeaSparrowMissile,apremiershipdefensemissilefortheU.S.Navyandinternationalcustomers.
I'dliketotakeamomenttotalkaboutourPatriotIntegratedAirandMissileDefensefranchise.Overthepast15months,wehavereceivednearly$7billioninbookingsforPatriotproductionandsupportservicesfromarangeofcustomers.ThisincludestherecentSaudi$2billionawardaswellastheKuwait,Qatar,SouthKorea,andtheU.S.Army.Thisprovidesthecompanywithyearsofproductionworkandbacklog,andpredictabilitytothemanufacturingoutlookandtheopportunitytoachievehigherproductionefficiencies.
Lookingforward,wecontinuetoseesignificantopportunitiesforPatriot.Earlierthisweek,wewerenotifiedthatthePatriotwasselectedbyPolandfortheirmediumrangeIntegratedAirandMissileDefensesystem.We'llbeworkingwithourPolishcustomeronthefinalofferingandanticipatereceivingabookingin2016.Additionally,we'reinthefinaldownselectprocessinGermany.Ifselected,weanticipatethatthiswillalsotranslateintoabookingopportunityin2016.
Patriotcontinuestoevolve,ensuringthatitwillbecapableofmeetingnextgenerationthreats.Overthe
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
nextfewyears,you'llseeusincollaborationwithourcurrentandfuturecustomersandnewcapabilities,includinga360-degreeAESAradarcapabilityandotherenhancements.ThesecapabilitieswillpositionPatriottobetheleadingIntegratedAirandMissileDefensesolutionforthenextseveraldecades.
Butasyouknow,RaytheonismuchmorethanjustPatriot.Andtothatpoint,we'veseenconsiderablerecentorderactivitydomesticallyandinternationallyacrossawiderangeofoursystemsandproducts,particularlyinourmissilesbusiness.Demandformissilesisbeingdrivenbytheevolvingthreatsaswellasourincorporationoftechnologicaladvancesintoourproducts.OneexampleofthisisAMRAAMwherewereceiveda$539millionawardinthefirstquarterforthelatestversionofthemissile.WereceivedasimilarsizeawardinDecemberoflastyear.Sowithinthepastsixmonthsalone,wehavereceivedmorethan$1billioninordersforAMRAAM.
Wecontinuetomakeimportantprogressonmanyotherkeyprogramsthatwilldrivefuturegrowth.Forexample,onSmallDiameterBombII,apremierprecisionweaponforbothcurrentandnextgenerationplatforms,wecompletedsystemsverificationreviewinearlyApril.ThissetsthestageforMilestoneCwhichwillbecomplete,thedevelopmentphase,allowingtheprogramtomoveintolowratesinitialproduction.
OurNextGenerationJammerprogramremainsasignificantpartofourelectronicwarfareinitiative.Theprogramcontinuestoexecuteonoraheadofscheduleandcost,andalsocompletedkeytestingmilestonesinthequarter.
Turningtoabroadermarketperspective,domestically,I'mencouragedbyrecentdevelopmentsonthefiscalyear'16defensebudgetprocessthatboththeadministrationandCongresshavepresentedinitialbudgetproposalsthatcouldexceedpreviouslyestablishedbudgetcaps.Manyofourleadersagreethatthecaplevelsarenotsufficienttocontendwithtoday'sdynamicthreatenvironmentandarethereforeseekingwaystoaddmoreresources.
Well,wewon'tspeculateonwhatthefinalfundinglevelforDoDwillbein2016.Evenifthebudgetcontrolcapsarenotraisedatall,theDoDbasebudgetfundingwillbeseveralbilliondollarshigherin2016than2015.BottomlineisthetrajectoryoftheDoDbasebudgetisfinallystartingtotrendupward.
Lateinthefirstquarter,weannouncedthesettlementwiththeU.K.HomeOfficerelatingtoRaytheonSystemsLimitedeBorderscontract.Underthesettlement,wereceivedacashpaymentequaltoapproximately$226millioninexchangefortheresolutionofallclaimsandcounterclaimsofbothparties.Tobywillwalkyouthroughthedetailsinhisremarks.
Asweannouncedearlierthisweek,consistentwithourstrategytopositionRaytheonforglobalgrowth,wearenowenteringintoapartnershipwithVistaEquityPartners,combiningtheirpremiercommercialcybersecuritybusiness,Websense,withRaytheon'scyberproductstoformanewcompany.Thisnewcompanywillprovideabroadsetofintegrateddefensegradecybersecurityproductsandservicestotheglobalmarketplace.Weareveryexcitedaboutthisopportunity.Weseesignificantrevenuesynergiesandlookforwardtoclosingsometimelateinthesecondquarter.
Inconclusion,I'mpleasedwithourperformanceinthefirstquarter,theprogressinsettingthefoundationforfutureglobalgrowth.AndI'dliketothankouremployeesfortheirhardworkanddedicationforthisgreatstarttotheyear.
Withthat,letmeturnitovertoToby.
T obyO'Brien (CFO):
Okay.Thanks,Tom.Ihaveafewopeningremarksstartingwiththefirstquarterhighlightsandthenwe'll
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
©2014TheStreet,Inc.Al l R ightsReserved Page4of21
moveontoquestions.Duringmyremarks,I'llbereferringtothewebslidesthatweissuedearlierthismorning.
IfeveryonewouldturntoPage3.Wearepleasedwiththesolidperformancetheteamdeliveredinthefirstquarter.All[app]arebetterthanourexpectations.It'sagoodstarttotheyearandwe'repositionedwellforachievingourfull-yearoutlook.OurEPSfromcontinuingoperationswas$1.78.Andonanadjustedbasis,EPSwas$1.26.I'lldiscussthisinmoredetailinjustamoment.
Operatingmarginwassolidat15.9%andincludedthepreviouslyannouncedeBorderssettlementwiththeU.K.HomeOffice.Andonanadjustedbasis,ouroperatingmarginwas11.5%.Salesof$5.3billionwereslightlyhigherthanourguidance.
Duringthequarter,thecompanyboughtback2.8millionsharesofcommonstockunderthesharerepurchaseprogramfor$300million.Andweannouncedlastmonththatweincreasedourdividendby10.7%.Wehavenowraisedourannualdividendeveryyearforthepast11years.
Ialsowanttopointoutthatwe'reraisingtheguidancethatwe'veprovidedinJanuarytoincludetheeBorderssettlement.I'lldiscussguidancefurtherinjustafewminutes.
TurningnowtoPage4.Letmestartbyprovidingsomedetailonourfirstquarterresults.
Companybookingsforthefirstquarterwere$4.5billion.Internationalawardsrepresented34%ofthetotal.Andonatrailingfour-quarterbasis,thebook-to-billratiois1.07.Acoupleofkeybookingsinthefirstquarterincludeda$769millionawardforPatriotfromtheRepublicofKoreaanda$539millionawardforAMRAAMfortheU.S.AirForce,U.S.Navyandinternationalcustomers.
AndasToddmentionedafewminutesago,justaftertheendofthefirstquarter,wereceivedsignificantordersfrombothdomesticandinternationalcustomers.We'reofftoastrongstartinthesecondquarterandtheyear-to-datebookingswillhelpdriveoursecondhalfperformance.
Backlogattheendofthefirstquarterwas$32.5billionandonafundedbasiswas$23.7billion,anincreaseofalmost$1billioncomparedtothefirstquarterof2014.It'sworthnotingthatweendedthefirstquarterof2015withapproximately41%ofourbacklognowcomprisedofinternationalprograms.
Ifyou'dnowmovetoPage5.AsIjustmentioned,forthefirstquarterof2015,saleswereslightlyhigherthantheguidancewesetinJanuary.Asareminder,thefirstquarterof2015hadonelessworkdaythanthefirstquarterof2014andthisequatestoabout$100millioninsalesoverall.
AswesaidinJanuary,weexpectedthefirstquartertobethemostchallenging.Westillexpectsalestorampupthroughouttheyear.
Lookingnowatsalesbybusiness.IDSatfirstquarterof2015netsalesof$1.4billion.ThechangefromQ12014wasprimarilyduetotheplancompletionofcertainproductionphasesoninternationalPatriotprograms.WeexpectIDSsalestoincreaseaswemovethroughtheyearastherecentlyawardedPatriotinternationalprogramsbegintorampup.
Inthefirstquarterof2015,IIShadnetsalesof$1.4billion.Comparedwiththesamequarterlastyear,thechangeisprimarilyduetoourtrainingprograms.Missilesystemsatfirstquarterof2015netsalesof$1.5billion.Thechangefromthefirstquarterof2014wasprimarilyduetoboththeTomahawkandSM-3programs.
AndSAShadnetsalesof$1.4billion.Securecommunicationsystemsprogramscontributedtothechangeversuslastyear.
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
©2014TheStreet,Inc.Al l R ightsReserved Page5of21
MovingaheadtoPage6,wewerepleasedbyouroverallcompanymargins.Ouroperatingmarginwas15.9%andonanadjustedbasiswas11.5%.
Asareminder,ourfirstquarterof2015adjustedmarginexcludesboththefavorableFAS/CASadjustmentwhichwasworth90basispointsor$0.10pershareand340basispointsor$0.42persharefortheeBorderssettlement.
AndaswediscussedonthelastearningscallinJanuary,comparedto2014,weexpectourmarginsfor2015willbeimpactedbyachangeinprogrammixaswellashigher[R&D]andprograminvestments.Wecontinuetoinvestinourselveswiththeobjectiveofpositioningthecompanyforfuturegrowth.
Solookingatthebusinessmargins,thechangeinmarginatIDSwasprimarilydrivenbyachangeinprogrammixoninternationalPatriotprogramsnearingcompletion.IESmargininthefirstquarter2015benefitedfromtheeBorderssettlementthatIpreviouslydiscussedwhichcontributed$181milliontooperatingincome.Withoutthesettlement,IESmarginswouldbe7.5%orinlinewithourexpectations.
Missilesmarginwasupinthequartercomparedtothesameperiodlastyear.Thisyear'sfirstquarterbenefitedfroma$25millionorapproximately170basispointfavorableresolutionofacontractualissuewhichwaspreviouslyexpectedlaterintheyear.
AndSASmarginof12.7%wasdowncomparedtothesameperiodlastyear,primarilydrivenbyhighernetprogramefficienciesinthefirstquarterof2014.Overall,thecompanycontinuestoperformwell.
TurningnowtoPage7.Firstquarter2015EPSwas$1.78andonanadjustedbasiswas$1.26.EPSforthefirstquarterof2015wasbetterthanexpected,primarilyduetotheeBorderssettlementandfromtimingatMissiles.
OnPage8,weareupdatingthecompany'sfinancialoutlookfor2015whichnowincludestheimpactoftheeBorderssettlement.
AsTommentioned,earlierintheweekweannouncedtheWebsensetransaction.Weexpectthistransactiontocloselateinthesecondquarterandwewillupdateourfinancialguidancesubsequenttotheclosing.
Westillexpectourfull-year2015netsalestobeintherangeofbetween$22.3billionand$22.8billion.Wehaveraisedourfull-year2015EPSwhichisnowexpectedtobeinarangeofbetween$6.67and$6.82.WeexpectadjustedEPStobewithinarangeofbetween$5.49and$5.64whichisunchangedfromourpriorguidance.
Asareminder,wehavenotincludedthepossibleextensionoftheR&Dtaxcreditinour2015guidance.Ifthelegislationpasses,itwouldfavorablyimpacttheeffectivetaxratebyabout110basispointsandourEPSbyabout$0.10.
AsImentionedearlier,were-purchased2.8millionsharesofcommonstockfor$300millioninthequarterandcontinuetoseeourdilutedsharecountintherangeofbetween305millionand307millionsharesfor2015,a2%reductionatthemidpointoftherange.
Operatingcashflowinthequarterwasinlinewithourpriorguidance.AsaresultoftheeBorderssettlement,wenowseeour2015guidanceforoperatingcashflowtobebetween$2.4billionand$2.7billion.Wereceivedthesettlementpaymentinthesecondquarter.
AndasyoucanseeonPage9,we'veincludedguidancebybusinesswhichisunchangedfromourprioroutlookexceptforIISandtotalcompanymargin,whichnowincludetheeBorderssettlement.
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
©2014TheStreet,Inc.Al l R ightsReserved Page6of21
OnPage10,weprovidedsomedirectionalguidanceonhowwecurrentlyseethequarterlycadenceforsales,EPSandoperatingcashflowforthebalanceof2015.
AswediscussedonthecallinJanuary,salesareexpectedtorampupthroughouttheyear.Inthefirsthalfof2015,westillexpectsalestobedownonapercentagebasis.Salesinthebackhalfoftheyearareexpectedtobeinlinetoslightlyupversus2014.Andifyoucomparesecondhalfsalestofirsthalfsales,weexpecttoseemidsingle-digitgrowth.
Asyoumayrecall,our2014bookingsfinishedstrong,particularlywithrespecttointernational.This,takentogetherwiththecombinedfirstquarterandearlysecondquarter2015bookings,areallkeydriversofoursecondhalfsalesexpectations.
AndaswediscussedontheJanuarycall,oureffectivetaxrateinthesecondquarterisexpectedtobeimpactedbyafavorablenon-cashtaxsettlementof$88millionor$0.29perdilutedshare.
Beforeconcluding,I'dliketospendaminutetotalkaboutourcapitaldeploymentstrategy.Weexpecttocontinuetogeneratestrongfreecashflowandmaintainastrongbalancesheetgoingforward.Wewillremainfocusedondeployingcapitaltocreatevalueforourshareholders,includinginternalinvestmentstosupportourgrowthplansaswellassharebuybacksanddividendincreasesthataresubjecttoboardapproval.Andaswesitheretoday,possiblysmallertargetedacquisitionsthatfitourtechnologyandglobalgrowthneeds.
Insummary,wesawagoodperformanceinthefirstquarter.Wecontinuetoexecutewell.Ourbookingswereaheadoflastyear'sfirstquarterandsalesEPSandoperatingcashflowfromoperationswereallinlineorhigherthantheguidancewesetinJanuary.
Weremainwellpositionedwithourdomesticcustomers'priorityareasandcontinuetobealignedwiththeevolvingprioritiesofourinternationalcustomers.Ourobjectiveistodrivethebusiness,tomaximizevalueforourcustomersandshareholders.
Withthat,TomandIwillnowopenupthecallforquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)YourfirstquestioncomesfromthelineofHowardRubelofJefferies.Pleaseproceed.
HowardRubel(Analyst-Jefferies&Company):
Goodmorning,gentlemen.Thankyou.
T homasKennedy(Chairman,CEO):
Goodmorning,Howard.
HowardRubel(Analyst-Jefferies&Company):
Toby,justasanobservationfirst,Iwasthinkingwiththis20%marginnowthatDaveisnotheretorespondtoit,thinkingaboutmaybe-ifyouknowwhereI'mgoing-settingthatashisincentivetargetgoalsforthebalanceoftheyear.
T obyO'Brien (CFO):
That'sgoodinput,Howard.We'lldefinitelytakethatintoconsideration.
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
HowardRubel(Analyst-Jefferies&Company):
Butinallseriousness,Iaskedsortofasacollectionofbusinessesthathavesomeinterestingopportunities.Andwhenwelookedatthegrowthprofile,itseemstobechallengedrelativetotheoverallenvironment.Canyouexplainandelaboratealittlebitupon,notonlywhatWebsenseisgoingtodo,butwhereyourinitiativesaretheretoenhancethatbusiness?
T homasKennedy(Chairman,CEO):
Yes,hey,Howard,thisisTom.Letmetakethat.Numberone,oneofthestrategiesthatIASisactuallyexecutingverywellistoexpanditscybercapabilitiesincorecompetenciesintoboththeinternationalandnowthecommercialmarketspace.
Andaswediscussedonpriorcalls,wehavehadsomesignificantwinsontheinternationalmarketplace.Andsowe'reshowingthatwe'regloballycompetitiveinthecyberarena.Andsowe'reseeingexpansioninthatarea.
We'realsoseeingthemexpandintheirtrainingworldwide.AndsomeofitisundertheWarfighterFOCUSprogram.Butwe'realsoexpandingintootherareasoftrainingintointernationalmarkets.We'redirectwithinternationalgovernments.Sothat'sanotherbigareathatthey'removingouton.
Theotherplayisessentiallyupgradingalotofthesystemsthatareoutthereintermsofaddingininformationassurancecapabilitytakingtheknowledgethatthey'vegainedfromtheGPSOCXprogramandleveragingthatintootherprograms.
Andthenthelastoneis-hopefullyyou'vebeenwatchingandnoticingthatthey'vebeenwinningquiteafewprogramsoutthere.Andforexample,theywontheLISCprogram.They'vealsojustrecentlywontheNISSCprogram.Sothey'vebeenwinningmorethantheirfairsharesofprograms.Andwe'revery,Iwouldsay,upbeatrelativetoIASintheirabilitytocontinuetogrowandexceedtheindustryintheirareaintermsofgrowth.
HowardRubel(Analyst-Jefferies&Company):
Andthenjustoneotherfollow-upquestioninaslightlydifferentarea.You'vealsoexpandedmissilesystemsbeyondjustPatriot.Andforamoment,couldyoujustaddresshowtheNASAMSofferingsare?IthinkyoustillhavesomeopportunitiesthereinPolandandelsewhere.
T homasKennedy(Chairman,CEO):
Yes,it'sagreatquestion.Andalotofpeople-theNASAMsystemorsometimescalledSL-AMRAAM,getsovershadowedbythePatriot.ButourlastbigwinontheNASAMSwasinOman.Thatwasbackin2013.Andthatwasabout$1.3billionforthesystemitselfandthentherewasanother$300millionworthofAMRAAMactivities[indiscernible]FMScontractforatotaldealof$1.6billion.
Thatsystemisdeployednoworbeingdeployedinsixcountries.I'lltellyou,it'saverygreatsystem.Andtheotherareathatwearepursuingrightnowandweshouldlearnin2017isapursuitinPoland.Thisisa-wealreadygotselectedforthePatriotsystemfortheir,Iwouldcall,theirmediumintegratedairandmissilesystem.ThisisthelowertiermissiledefensesystembelowPatriot.Andwe'reinacompetitionforthat.Again,2017they'regoingtomaketheirselection.
HowardRubel(Analyst-Jefferies&Company):
Thankyouverymuchforyourtime.
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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T homasKennedy(Chairman,CEO):
Yes.
Operator :
YournextquestioncomesfromthelineofRobertStallardofRoyalBankofCanada.Pleaseproceed.
RobertStallard (Analyst-RoyalBankofCanada):
Thankssomuch.Goodmorning.
T homasKennedy(Chairman,CEO):
Hey,Rob.Goodmorning.
RobertStallard (Analyst-RoyalBankofCanada):
Tom,firstone,youmentionedOCD,thePolanddecision,butalsothatGermanyismovingtowardstheDAMs.SolikedoyouthinkthisisasignthatEuropeandefensespendingmightfinallybestabilizing?Anddoyouseeotheropportunitiesintheregion?
T homasKennedy(Chairman,CEO):
Numberone,wedoseeotheropportunitiesintheregion.ItisbeingdrivenbythegeopoliticsthataregoingonrightnowespeciallyintheEasternEurope.Polandisbuildinguptheirdefensesandmakingamajorplayinthatarea,again,undertheauspicesofastrongdefenseisastrongdeterrence.Andwe'realsoseeingthatinotherEasternEuropeancountriesalso.Germanyisinneedtoupgradetheirsystems.SoIthinkyou'reright.Thereisalittlebitofmaybesenseofurgency.Butthiswasintheirplantodothisupgradeforseveralyears.
RobertStallard (Analyst-RoyalBankofCanada):
Okay.Andjustaquickfollow-uponWebsense.Idon'tthinkyoumentioneditonthecalltheotherday.WhendoyouexpectittoactuallybeaccretiveonaGAAPEPSbasis?
T homasKennedy(Chairman,CEO):
I'llturnthatovertoToby.
T obyO'Brien (CFO):
Yes.SoonaGAAPbasis,Rob,we'reprobablylookingaboutthreetofouryearsdowntheroadbeforeitwouldbeaccretive.Andthat'sduereallytotheamortizationoftwonon-cashitems.Onewouldbetheintangiblesassociatedwiththetransaction.
Thenalsowe'dbeamortizingsomedeferredrevenue.Theyhaveasubscriptionmodelwheretherevenuesarerecognizedratablyoverthelifeofthecontract.Butthepaymentsareallupfront.Andwe'regoingtofairvaluethat.Andthatamortizationtellsalot,abitshorter,that'saboutatwotothreeyears.Whereastheintangibleswillgooutoversevenyears.Thatsaid,wedothinkthebestwaytolookatthisbusinessismoreakintoacashbasis.Andadjustingtheresultsfortheimpactsofthesetwoitems,thedeferredrevenueandtheamortizationoftheintangibles.Andonthatbasis,itwouldbeimmediatelyaccretivetoearnings.
RobertStallard (Analyst-RoyalBankofCanada):
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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Okay.Thanks,Toby.
Operator :
YournextquestioncomesfromthelineofCaivonRumohrofCowenandCompany.Pleaseproceed.
CaivonRumohr (Analyst-SGCowenSecurities):
Yes.Thankyouverymuch.SothecompetitionclaimsthatGermanywantstohave360-degreecapability.Inopenarchitecture,neitherofwhichPatriotprovides.Andyetyouguysaretheincumbent.TellusaboutthefactorsyouthinkaregoingtobeimportanttoGermany'sdecisionandwhentheymightreachit.
T homasKennedy(Chairman,CEO):
Well,Idon'tknowexactlyhowthey'regoingtomaketheirdecision.Idoknowthattheywillbemakingthedecisioninthenextyear.Andwhattheyarelookingforistheyneedastrongsystemtoprovidedeterrence.AndsowebelievePatriotprovidesthat,numberone.
Andtwoiswebelievethesystemthatwecangetintheirhandsthesoonest.Inotherwords,we'reinproduction.Wecandeliverrightoutofthefactoryand[indiscernible]thequickesttimepossible.
TheotherelementisthefactthattheyhavealotoftheiralreadytrainedonusingthePatriot.Andsoeventhoughwe'veupgradedthePatriot,putinmodernmanstations,alotofthemaintenanceandtrainingisalreadybehindthem.Sotheyalreadyhavethatinplace.SowethinkthePatriotprovidesthemosteconomicalbutyetstrongestdeterrencecapabilityforthemmovingforward.
CaivonRumohr (Analyst-SGCowenSecurities):
Okay,terrific.AndthenyourR&Dwasupfrom2%ofsalesto2.7%ofsales.Couldyoutelluswheredidyouspendit,whatdidyouspenditonandhowmuchofthatiscoveredbyIR&D?
T homasKennedy(Chairman,CEO):
Okay.SothatisallIR&D,numberone,I'llanswerthat.Butwe'recontinuingtoinvestintechnologies.That'sbeencrucialtoourrecentcompetitivesuccess.I'llgiveyouanexample.
OntheGaNtechnology,westartedinvestingin10yearsagowhenfolksthoughtyoucouldn'tmakeGaNwork.Andwecontinuedtoinvestinovertheyearsandessentiallyweprovedthemwrong,thatitcanworkanditcanprovideagreatcapability.Andthatputusinagreatpositiononmultiplewins,AMDR,NextGenerationJammer,3DELRR.Andthere'sactuallyafewradarcompetitionscomingoutnow.
Sowedoinvesttoessentiallyestablishdiscriminatorsforustogowininthefuture.Andthat'swherewe'reputtingoureffortsmovingforward.Andareas-andthisisactuallypartofourstrategyistoinvestinwhatwecallnewemergingareas.Soweareinvestinginnextgenerationradars,highenergylasers,hypersonics.Infact,wejustrecentlywonamajorhypersonicscontractfromDARPA.It'scalledtheTacticalBoostGlideprogram.Thatwasforthedevelopmentanddemonstrationoftechnologiestoenableair-launched,tacticalrangehypersonicboostglidesystems.
Andsowe'vebeeninvestinginthatarea.AndthatgaveusthetechnologiestogowinthisadvancedDARPAprogram.Wealsowereinvestinginunderseacapabilities.Webelievetheunderseaoffersalotofsignificantopportunitiesmovingforwardbasedonthearenaofanti-access/areadenial.EW,that'spartofourstrategytocontinuetoinvestinEWandgrowourbusinessinthatarea.
That'skindofafewoftheareasthatwe'reinvestingin.Webelievewehavealreadyorestablishingdiscriminatorsineachofthoseareasandbasedonwheretheroadmapisforourcustomers.Webelieve
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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thatthesearerightplacesforustoinvestin.
T obyO'Brien (CFO):
Yes.AndCai,thisisToby.Iwouldjustaddtothelevelofspendofthe2.7%.That'sprettymuchinlinewithwhatwetalkedaboutintheJanuarycallof2.7%,2.8%ofrevenuethisyearforthereasonsTomjustdescribed.
CaivonRumohr (Analyst-SGCowenSecurities):
Great.ThankyouandcongratsonthePatriotwins.
T homasKennedy(Chairman,CEO):
Well,thankyou.
Operator :
YournextquestioncomesfromthelineofCarterCopelandofBarclays.Pleaseproceed.
CarterCopeland (Analyst-Barclays):
Hi.Yes.Hi,goodmorning,guys.
T homasKennedy(Chairman,CEO):
Goodmorning,Carter.Howareyoudoingtoday?
CarterCopeland (Analyst-Barclays):
Doinggreat.Great,thanks,Tom.Sojustaquestion.IwonderedifyoumightexpandalittlebitmorespecificallyonGaNandsomeofthepriorcommentsaboutupgrades.Andreally,whenyoulookattheapprovaloftheexportabilityofthattechnology,canyoutalktospecificallywhatsortofupgradeopportunitiesthatmayenableandwhatsortofkindofsizeweshouldbethinkingaboutthoseortiming?Whatdoesthatmeanforthatfranchiselongerterm?
T homasKennedy(Chairman,CEO):
Well,I'llstartwiththeAMDR.WeareworkingwiththenavytoensurethattheAMDRwillbeexportabletoourcoalitionpartnerswhousethosetypesofradarsfortheirships.Wearealso-the3DELRRprogramwasamodelprogramforOSDforexportability.Andsowewonthatprogram.ItisinprotestrightnowbutthatprogramusesGaN.Sothat'snumbertwo.
Wearealso,andImentionedinmyscript,thatweareworkingona360AESAradarforthePatriot.AndthatisaGaNbasedradar.Andweareworkingtoensurethatthatisexportablealso.Sointermsofwhowouldbuythesesystems,withPolandcomingonboard,therearenow14countriesthathavethePatriotsystem.
Andyousaidifyouhadtogooffandyouwantedtohaveanopportunitytoreplacethoseradars,theexistingradarsonthose,itwouldbe200-plusradars.Andthatwouldbeupforgrabstoreplacetomorewiththese360AESAradars,ourAESAsforPatriot.
Andthisis,Ithink,agreatopportunityforustakingforththesenewadvancedradarsystemstobothourdomesticandinternationalcustomers.ButweseesignificantopportunitiesinthefuturefortakingthisGaNtechnologyintotheradarsandintotheinternationalmarketplace.
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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CarterCopeland (Analyst-Barclays):
HowdoyouthinkaboutthetimelineandthetimingofthosekindsofopportunitiesasyoulookacrossthebaseofPatriotcustomers?Andwhentheygetaroundtothatkindofupgrade,isthisathree-tofive-yearkindofopportunityforthemarket,the200radars?Howdoyouthinkaboutthat?
T homasKennedy(Chairman,CEO):
I'llonlyanswerone.OnthePatriot,wehavecustomersknockingonourdoortoday.Soit'samatterofgettingtoadevelopmentandthentransitiontoproductionandthenputtingitforward.Andwe'realsoworkingwithourU.S.customeronthattimingtoensurethatwehaveessentiallyallthelicensesandeverythingelsetobeabletodothat.
SoIthinkbottomline,thereispentupdemandforthoseAESAradars.Andwe'relookingtofillthatdemand.
CarterCopeland (Analyst-Barclays):
Andjustanotheronetoswitchgearsquickly,IthinkatonepointwewereexpectingarecompeteofWarfighterFOCUS.WheredoesthatstandthesedaysintermsofanRFPonthatandmaybejustremindusofwhattoexpectonthatfront?
T homasKennedy(Chairman,CEO):
Well,rightnow,forthosewhodon'tknow,theWarfighterFOCUSisanIDIQprogramthatRaytheonrunsfortheUnitedStatesArmy.Thatisaprogramthatweareactivelyengagingtoday.It'srunningverywell.AndIthinkit'sservingthearmyandalsotheinternationalcustomersverywell.SoIthinkthey'reverypleasedwithit.
Webelievethatthatprogramwillcontinue.Thearmyislookingatsomeacquisitionchangesintermsofwhat'sthefollow-ontoWarfighterFOCUS.Thathasgonethroughseveralchangesrecently.AndIdon'tthinkrightnowhassettleddownintermsofwhatthefinalarrangementswillbe.
CarterCopeland (Analyst-Barclays):
Okay,sojuststaytuned.
T homasKennedy(Chairman,CEO):
Ithinkstaytunedand-butin-andfromRaytheon'sperspective,it'smetmorestableworkrelativetoWarfighterFOCUSsincethatchangehasnotoccurred.
CarterCopeland (Analyst-Barclays):
Great.Congratsonabigleap,guys.
T homasKennedy(Chairman,CEO):
Yes,thankyou.
T obyO'Brien (CFO):
Thanks,Carter.
Operator :
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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YournextquestioncomesfromthelineofRobertSpingarnofCreditSuisse.Pleaseproceed.
RobertSpingarn (Analyst-CreditSuisse):
Goodmorning.
T homasKennedy(Chairman,CEO):
Goodmorning,Rob.
RobertSpingarn (Analyst-CreditSuisse):
Hi,guys.Coupleofquestions,twodifferenttopics.Thefirstisonthe-Toby,onyoursalesguidance,whichisessentiallydown2%toflatattheends-therangethere,whataretherelativegrowthratesyounowseefordomesticversusinternationalwithinthat?
T obyO'Brien (CFO):
Yes,soforthetotalyear,whatwe'dbelookingatfordomesticistobedowninthelowsingle-digits.Andforinternational,upinthelowtomidsingle-digits.
RobertSpingarn (Analyst-CreditSuisse):
Okay.Anditsoundsliketheinternationalagainmaybealittlebackendweightedgiventherecentawards.
T obyO'Brien (CFO):
Yes,definitely--
RobertSpingarn (Analyst-CreditSuisse):
Orthegrowthaccelerates?
T obyO'Brien (CFO):
Yes,yougotthatexactlyright.Imean,Ithinkifyouwanttothinkaboutthecadencethroughouttheyear,andobviouslywithinternationalgrowingversusdomesticdeclining,we'dseesecondquartersalesflattoupfromQ1fromasequentialpointofviewandthensequentiallygrowthinthebackhalfoftheyear.Andit'sexactlyasyousaid,Rob.It'sdrivenbythenewawardsfromtheendof2014pluswhatwe'reseeinghereinthefirstthree-plusmonthsofthisyearandtheirnaturalrampastheystartup.
RobertSpingarn (Analyst-CreditSuisse):
Okay.AndthenjustwithrespecttothecommentonEuropeandemandsstabilizingandgrowinghere,isthereanycurrencyimpactonmarginsthatweshouldstarttocontemplate?
T homasKennedy(Chairman,CEO):
Sothatquestioncameuponapriorcall.I'llgiveyouwhatwe'reseeing.NumberoneismostofourbusinessistiedtotheU.S.dollar.Forexample,alltheFMScontractswehad,theForeignMilitarySalescontractsareallinU.S.dollars.Andthenalotofourcustomers,especiallyintheMiddleEast,theircurrencyispeggedtotheU.S.dollar.
Soevenondirectcommercialsalestherewedon'thaveanyimpact.Andwedohavetwolandedcompanies.WehaveRaytheonAustraliaandRaytheonSystemsLimited.Theytendtoworkwiththeirown
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
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workingcapitalandessentiallyoursalesinBritishpoundsterlingandthentheRaytheonAustraliait'stheAustraliandollar.Theytendtowork--
RobertSpingarn (Analyst-CreditSuisse):
Iwasgoingtosay,Iunderstandthatit'sconductedinU.S.dollarsbuttotheextentthattheseguysarebasedforexampleineuros,theEuropeanguys,they'vegottotranslate.Sodoesthatmaybeadjusttheirdemand,theirpricingappetite?
T homasKennedy(Chairman,CEO):
Tobyisgoingtogiveyoutheexactnumbers,right.Toby,whydon'tyoujustgivethemthenumbers?
T obyO'Brien (CFO):
Yes,soIthinkfroma-thetwotypeofpotentialexposureswehaveisaroundwherewe-ifwehaveamismatchbetweenU.S.dollarandadifferentdenominatedcurrency.AsTomsaid,that'sveryminimalbecausemostofourcontractsarematchedtothedollar.Inthecaseswhenwehavethat,wehedgeitusingforeignexchangecontracts.Andthat'sthelittletono-minimalexposurethere.
AndinthecaseswherewehavetheseforeignentitieslikeintheU.K.andAustraliawheretheydooperateinanon-U.S.dollarfunctionalcurrency,again,they'regenerallygettingpaidinthatsamecurrency.SoinAustralia,theyoperateintheAussiedollar.TheygetpaidfromtheircustomerintheAussiedollar.
Andwedohavesometranslationrisk,right,whenweconvertthoseforeigndenominatedfinancialresultsbacktoU.S.dollars.Butagain,historically,thathasbeenprettyminimal.
RobertSpingarn (Analyst-CreditSuisse):
Okay,thankyou.I'lljumpbackin.
T homasKennedy(Chairman,CEO):
Okay.
Operator :
YournextquestioncomesfromthelineofHunterKeayofWolfeResearch.Pleaseproceed.
HunterKeay(Analyst-WolfeResearch):
Thanks,everybody.Iappreciateit.AlittlebitmoreonIRAD,afollow-upmaybetoCai'squestion,alittlebitofadifferentangle,though.YouguyssaidthelongtermIRADshouldstillbeinthehigh2%rangeofsales.
Ifglobaldefensebudgetscontinuetoimprove,doesthatgohigherordoesitgolower?Imean,mygutwouldsayitwillgolowerbutthreatsareverydynamic.Thecompetitiveenvironmentisstillverydifficult.SoIwouldthinkthere'dbesomelevelofsortofelevatedinvestmentonanongoingbasisthatmaybeneeded.
Butassumingthebackdropofbetterdefensespendingonaglobalbasis,whereshouldthatlongtermIRADgo?
T homasKennedy(Chairman,CEO):
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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Onlytokindofbackyouupinto-andtyingthistoourstrategy,sowego-oftenwelookatourstrategy,welookatwhatthedemandneedsarefromthecustomersandthenwegolookatwhatgaswehaveintermsoftechnologythat'srequiredtogofulfillthemoveraperiodofathree-yearwindow,afive-yearwindowandthena10-yearwindow.
Andthenbasedonthat,welookatwhattechnologiesneedtobedevelopedandthenwhatwewilllookatintermsoffundingthosetechnologiesandtobereadyatthetimethattheyneedtobereadyatforustobecompetitiveinthemarketplace.Andit'salldrivenbythestrategyandbywhatwe-thecapabilityneedsofthecustomer.
It'snotdrivenbysalesandsomeexactpercentageofsales.That'sjusthowwedoit.Essentially,it'sabottoms-upbuildupbasedonthedemandcyclefromthecustomerandalsowhatourtechnologygapsare.
T obyO'Brien (CFO):
AndI'djustthrowinthere,anditplaysexactlyintowhatTomwassaying.Whenwemakethesedecisionsonhowtoinvest,whereandwhatlevel,it'sallwithaneyetowardsreturningvaluetoshareholders,increasingvaluetoshareholders,drivinggrowth,profitablegrowth.Soit'salittledifficulttogeneralizelookingforwardwhetherthatrelationship,thatpercentagewouldgoupordownforallthepreviousreasons.
HunterKeay(Analyst-WolfeResearch):
Okay,great.Thanksalotforthat.Andlet'stalkaboutNextGenJammerforaminute,ifyouwould.Canyouhelpusunderstandhowit'sgoingtokindof[slewup]overthelongtermandgiveusanideahowtothinkofsomeofthefollow-onincrements?Whataresomeofthepacingitemsforthose?What'ssortofthecompetitivesetandmaybehelpusthinkabout,inabestcasescenario,thepotentialopportunityforyouguyslongerterm?Thanksalot.
T homasKennedy(Chairman,CEO):
Yes.So,ourNextGenerationJammer,forthosewhodon'tknow,that'saelectronicwarfare-essentially,it'saself-containedpod,generatesitsownpower.Thatgetsconvertedintoelectricalenergytodrivejammerswithinthepod.There'stwoofthosepodsperGrowler.That'stheF-18GwhichistheelectronicwarfareplatformfortheUnitedStatesNavy.
Andsowewonamajorcontractforthatacoupleyearsback.AnditactuallyusesaGaNtechnology.Sothereisatechnologythatwehadinvestedin10yearsagothathelpeduswinthatprogram.Andweseethatprogramhavingquitelonglegs.Numberone,we'regoingintothedevelopmentphasenowandthenthey'lleventuallygetintotransitiontoproductionandthenenterproduction.
AsImentioned,it'sonschedule.It'soncostandit'shittingallofitsmilestones.Andwethinkthat'sgoingtobeaverysuccessfulfranchiseprogramforRaytheoninthefuture.
HunterKeay(Analyst-WolfeResearch):
Thankyou.
T homasKennedy(Chairman,CEO):
Thankyou.
Operator :
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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YournextquestioncomesfromthelineofSamPearlsteinofWellsFargo.Pleaseproceed.
SamPearlstein (Analyst-WellsFargo):
Goodmorning.
T homasKennedy(Chairman,CEO):
Goodmorning,Sam.Howareyoudoing?
SamPearlstein (Analyst-WellsFargo):
Okay.Couplelittlequestions.Firstis,whyiscashflowfromoperationsuponlyabout$100millionwhenIthoughttheeBorderssettlementwasGBP150million?
T homasKennedy(Chairman,CEO):
Yes,sotheeBorderssettlement,yougotthenumberright,it'sabout$226million.Butthepaymentcameinonthefirstdayofthesecondquarter.
SamPearlstein (Analyst-WellsFargo):
Right.ButI'mjustsaying,forthefull-yearoutlook,you'reonlyincreasing$100million.
T homasKennedy(Chairman,CEO):
Yes,not-yes,sure,Sam.SofistI'llstartand,asyousaid,weincreasedtheyearby$100million.We'realsogoingup$100millioninthesecondquarteraspartofthat.ItisattributabletotheeBorderssettlement.Butithasbeenpartiallyoffset-thisisgettingatthecruxofyourquestion-bysomechangesinprogrammilestonecollectionsasaresultofsomelatertimingonawardswithintheyear.
Sothecashisn'tgone.It'sjust-it'satimingissueforthat$100million,ifyouwill,between2015andin'16.Wedohavearangeof$300millioninouroutlookorourguidancethere.Soourexpectationsaretobewithinthisrange.
Overall,wecontinuetoseestrongoperatingcashflowin2015.Therangenowexpectedtobebetween$2.4billionand$2.7billion.Wedoseestillthemajorityofthecashflowbeingweightedinthesecondhalfoftheyearreallydrivenbythetimingofsignificantprogrammilestones.
SamPearlstein (Analyst-WellsFargo):
Okay.That'sgreat.AndthencanyoutalkalittlebitabouttheIDSsegment,justlookingatthemarginsthisquarterandhowdoyougetthemto50%thisyear?Arethereothercertainmilestoneofcontractualresolutionsorsomeofitisthedirectforeignsaleoftherecentaward,whatisitthatdrivesthatmarginup?
T homasKennedy(Chairman,CEO):
Yes,sure.SoinQ1,asyoupointedout,right,themarginsweredown.Thatwasasexpected.AndconsistentwithwhatwesaidinJanuary,thatwasdrivenbythemixdueto-unfavorablemixduetotheplanramp-downoncertainofourinternationalPatriotprograms.Solookingforward,clearly,weseethemarginsatIDSimprovingprimarilyinthesecondhalfoftheyear.
Thatoverallbusinessmixwillimprovejustasyousaid,asthesenewinternationalprogramsfromtheendof2014andtheawardshereintheearlypartof2015starttorampupandmovethroughtheproductioncyclesothatthemixgetsmorefavorable,butnotuntilthesecondhalfoftheyear.
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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SamPearlstein (Analyst-WellsFargo):
Okay.AndifIcanaddonemore.Ijustwanttosummarizeintermsofsomeofthecommentaryabouttheacquisitions.Isitfairtosaythatwe'llseemorebalancedafterthedeploymentinthat$1billionplustypeofacquisitionsfromhereonoutnowthatWebsensehasbeenannounced?
T homasKennedy(Chairman,CEO):
Aswesittoday,andwe'llcontinuetolookforvaluatedtargetacquisitionsthatdopositionthecompanyforfuturegrowth.Butwedon'tseeasIsitheretodayalargeacquisitionofthesizeofWebsense.Buttherecouldpotentiallybesomesmalleracquisitionstofitsometechnologyareasthatweneedtobesuccessfulinthatmarketspace.
SamPearlstein (Analyst-WellsFargo):
That'sgreat.Thankyou.
Operator :
YournextquestioncomesfromthelineofPeterArmentofSterneAgee,CRT.Pleaseproceed.
PeterArment (Analyst-SterneAgee):
Yes,goodmorning,TomandToby.
T homasKennedy(Chairman,CEO):
Goodmorning.
PeterArment (Analyst-SterneAgee):
Aquestionon-IguessaclarificationbacktoRob'scommentonkindofdomesticversusinternational.Clarification,Toby,onyousaidthedomesticbeingdownalittlebit,lowsingle-digit,international,up.
Doesthatcontinueatthatsamepaceinthe'16ordoweseedomesticimprovekindofgivenTom'scommentsaboutthe'16budget?
T obyO'Brien (CFO):
Yes.Soletmeansweritthisway.Clearly,withtheawardsthatwe'veseen,again,comingoutoftheendoflastyearandinto'14,we'dexpecttoseestrongperformanceinto'16ontheinternationalfront.Onthedomesticsideofit,Todd,backtothecommentsthatTommadeearlierrelativetowherethedomesticbudgetsaregoing,we'dprobablyseeourdomesticprofilestarttoflattenouttowardstheendoftheyear.Andwecouldstarttoseesomeimprovementgoingforward.
PeterArment (Analyst-SterneAgee):
Okay.That'shelpful.Andthenjustlastly-andcongratulationsonallthesePatriotwins.Tom,youmentionedkindof14countriesthatnowthey'redeployed.Imeanhowdowethinkaboutthatlong-term?ImeanweaskthisIthinkeveryquarteraboutwhatinningareweinintermsofmissiledefenseordersoutintheMiddleEastandAsiabuthowdowethinkabouttheopportunitylongertermoutsideofkindofyoujustmentioned,Poland,Germany,etcetera?
T homasKennedy(Chairman,CEO):
Sooutsideofthebringingonawholebrandnewcountrylikewe'vedonewithPoland,wehopetodowith
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
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Germany,thatwediddowithQatar,therearealsotheupgradecapabilitieswitheachofthepartnercountriesthathavethePatriotsystem.Andrightnowwe'vebeendoingsomethingcalledConfiguration-3plus.Youmayhaveheardustalkaboutthemonsomeofthecalls.That'samajorupgradetothePatriotsystemthatwe'reoffandworkingwiththeArchon.
Andasoftoday,thereis72fireunitsthatarestillthereforupgradepotential.Andweareworkingwiththosecustomerstoupgradethosesystems.AndthenIalsomentionedpreviouslytheupgradeforthe360AESAradar.ThatwillbeanewupgradeforallthePatriotsystems.Andthere'sover200ofthoseradarstobeupgraded.
SoIthinkthewayoflookingatitisthatthese14countriesareamarketofsurroundedaroundPatriot.Andsoweareworkingwiththosecustomerstocontinuallytoupgradethosesystemstocountertheevolvingthreat.Sothere'sabaseprogramthatthesoftwareupgradesandotherthingsasthethreatchanges.Andthatweworkacrossthosecountries.Andthenalsoasnewtechnologycomesonboardtoimprovethecapabilityofthesystem,wetheninsertthattechnologyacrossthose14countries'Patriotsystems.
Soessentially,it'samarketonitsownthatwelooktocontinuallytoupgradeandprovideasupportactivity.Soit'sagreatfranchisebusiness.Anditalsodoes,forthecustomers,itallowsthemtoshareinthecostforanysoftwareupgradesfortheevolvingthreatandthenalsotoshareinthecostofthedevelopmentofnewtechnology.Soit'sagreatwin-winsituationforbothsides.
PeterArment (Analyst-SterneAgee):
That'sgreatcolor.Thanks,Tom.
T obyO'Brien (CFO):
Thankyou.
Operator :
YournextquestioncomesfromthelineofPeteSkibitskiofDrexelHamilton.Pleaseproceed.
PeteSkibitski(Analyst-DrexelHamilton):
Goodmorning,guys.Nicequarter.
T homasKennedy(Chairman,CEO):
Goodmorning,Pete.Howareyoudoing?
PeteSkibitski(Analyst-DrexelHamilton):
Good,good.Hey,onPolandPatriots,Iwaswonderingifyoucouldgiveussomemorecoloronmaybeballparksomeofthecharacteristicsofthecontract.There'salotofnumbersfallingoutthere.Someofthemaretalkingaboutmorethan$5billion.Canyougiveusasenseofhowmanybatteriesit'sgoingtobemaybeballparkthesizeandlengthandthenwhenyoutalkaboutthe2016booking,areyoutalkingearlyintheyearorlaterintheyear?
T homasKennedy(Chairman,CEO):
Sojustrealquick.Sorightasoftoday,actuallyTuesday,weweredown-wewereselectedbyPolandtoprovidethePatriotsolutionfortheirintegratedairandmissiledefensesystem.Andthenaspartofthatactivity,wehaveprovidedvarious,Iwouldcallitoptions,forthePolishgovernment,variantsofPatriot
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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andquantitiesoffireunitsandhowtosetthemupintheircountry.Sowehavebeenworkingwiththem.
ButnowsomeadditionalworkisrequiredtomoveforwardtodefinitizewhatthatexactconfigurationwillbeforthePolishgovernment.Aspartofthateffort,wealsohavebeenworkingwithPolishindustry.Wehave25plusagreementswithPolishindustryintermsofdoingcoproductionandpotentialcodevelopmentactivitiesallinsupportofthePatriotsystem.
Sothebottomlineiswe'llbeinnegotiationswiththePolishgovernmenttoacttodefineexactlywhatthisconfigurationis.Andaswegetthatinformationandgetmoreclarityonthat,we'llbeprovidingthattoyouguystoensureyouunderstandwherethatprogramisgoing.
T obyO'Brien (CFO):
AndIthink,Pete,givenallthatTomsaid,whilewecan'texactlypredictwhentheawardwouldcome,thinkbackoutof2016becausethereissomeworktobedonetoworkthroughallthosesteps.
PeteSkibitski(Analyst-DrexelHamilton):
Okay.Igotit.Igotit.Andthenjustonthe[streak]youguysonwithPatriot,isitfairtosaythattheIDSbeingyourhighestmarginbusinessthatthatmaybehasthebestkindofmidrangegrowthoutlookforthefirm?
T homasKennedy(Chairman,CEO):
I'lltakeitoutfirstandthenI'llletTobycomeinandhecanputsomenumbersonsomethings.ButthebottomlineisinIDS,withallthesePatriotscomingin,insomecasesbumper-to-bumperandsomecasecominginontopofeachother.Whatthat'sdoingandthat'sallowingustostackallthisupinthefactorytogainsignificant,Iwouldcall,productionefficienciesandgettingIDSmarginsbacktowhatwe'vetraditionallyhavehadinthatbusiness.
Soessentially,it'sreplenishingthebacklogforthatfactoryandallowingustogainthoseefficienciesasyoumoveforward.That'sagoodnewsonIDS.Butdon'tforget,IDSisalsoonceamajorprogram.Forexample,theairandmissiledefenseradarprogramthattheyhavethatareoffandrunning.Theyalsowonthe3DELRR,whichisinprotest.
SoinadditiontothePatriotfranchisegettingreinventedtoacertainextentandalltheupgradepotentialforit,theyalsohavesomebrandnewfranchisesthatareonthehorizonthattheyhaveinhand.AndthattheAMDRisindevelopment.That'sgoingtobetransitioningintoproduction.That'sgoingtogointoboththeU.S.domesticandalsointernationalcoalitionpartners.Andthenwehavethe3DELRRwhichisinprotestrightnow.Butwhenthatcomesoutofprotest,assumingRaytheonisontherightsideofthat,thatisanotherprogramthathasasignificant,actuallywassetupbyOSTtobeaninternationalprogramondayone.Soabrandnewfranchiseforthemthere.
SobottomlineisIDSismuchmorethanjustPatriotmovingforward.AndIhavethatsame-Icangiveyouthatsameplayforeachoftheotherbusinesses.AllthebusinessesarecomingupwithIwouldcallitnewfranchises.Andthey'realsoreinventingtheirexistingfranchises.
WetalkedaboutAMRAAM.AMRAAMhasgonethroughawholenewupgradeprogram.It'scalledtheAIM-120D.It'sabrandnewmissile.Greatcapabilities.Andsoit'sessentiallybeenreinvented.Andjustinthelastyear,overa$1billionworthofAMRAAMorders.
Sothisisgoingonallthroughoutthecompanyacrossallourproductlinesandacrossallourpursuits.
T obyO'Brien (CFO):
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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AndIwould-Pete,I'djustaddthatspecifictoIDSwhenwetalkaboutmix,that'sprobablytheonebusinesswithinthecompanythatcanhavethebiggestswingorthemostimpactbecauseofmix,inpart,giventhenatureofthebeastwiththelarge$1billionpluscontractsthatdrivethatwithinIDS.
Sothatcombinedwithloadingupthefactoryhere,doesgiveusconfidencethatwewillbeseeingimprovementovertimeintheIDSmarginaswehadpreviouslytalkedabout.
PeteSkibitski(Analyst-DrexelHamilton):
That'sgreat.Thanks,guys.
T homasKennedy(Chairman,CEO):
Thankyou.
T oddErnst (VP-InvestorRelations):
Allright.Chantilly,wehavetimeforonemorequestion,please.
Operator :
Okay.YourfinalquestioncomesfromthelineofDougHarnedofSanfordBernstein.Pleaseproceed.
DougHarned (Analyst-SanfordBernstein):
Goodmorning.Thankyou.
T homasKennedy(Chairman,CEO):
Goodmorning,Doug.Howareyoudoingtoday?
DougHarned (Analyst-SanfordBernstein):
Good,good.IwantedtoaskonIDSbecauseifwegobackhistorically,thebusinesscouldbedoing16%,even17%typemargins.SoIknowtoday,onthepositiveside,you'vegotmoreinternationalwork,higherpercentageofthatthere,whichshouldbegood.
Andthenegativesideinthenear-term,alotofnewprograms,whichyouprobablyarelookingatlowermargin.Whenyoutalkaboutwhatthepercentageofinternationalisandthencanweexpectthistogobackovertimetothose16%,17%typemarginlevelsthatweusedtosee?
T homasKennedy(Chairman,CEO):
So,Doug,you'reaskingaveryinterestingquestiontotwoindividualswhousedtoactuallyrunthatbusiness.Idon'tknowifyourememberthatornot.Butwehaveadeepdomainunderstandingofwhatittakestodrivethemarginsinthatbusiness.SoTobyisgoingtowalkyouthroughthis.Andyoucouldn'thaveaskedthetwopeoplethataremorefamiliarwithourbusiness.
T obyO'Brien (CFO):
SoIDSdoeshavethelargestinternationalcontentofourfourbusinesses.Ithasbeenrunningclosetoabout50%,50-50domestic-international.Andobviouslythatmixinandofitself,puttingtimeintheside,doeshelptodrivethemarginprofile.
Asyoupointedout,wehaverungoingbacklastyear16%;in2013,alittleover17%.Anddependinguponthetimingofsomeoftheseotherprogramsthatyoualludedto,whichtheyaredevelopmentprograms,theyarebeingbookedatlowermargins,thingslikeAMDR.Tommentioned3DELRR.Asthose
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
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moveultimatelythroughproduction,they'llhelpliftthemargin.
Butitispossibletoseemarginsstartovertime.ButitwilltakeacoupleofyearsoncethisbacklogreallygetsintokindoffullsteamonthisinternationalPatriotawardsbeforewewouldpotentiallyseethemclimbingbackuptothosepasthistoricallevels.
T homasKennedy(Chairman,CEO):
Ithink,Doug,onethingthatreallyhas-twoguysthatrunthatbusiness,veryexcitedaboutwhatwe'reseeingisthe,Iwouldcallitthebumper-to-bumperwork,andwementionedjustoverthelast18monthscloseto$7billionworthofnewbookings.Andthatdoesn'tincludePoland.AndifyoulayinorlayerinPolandontopoftheseothers,thatyouhaveessentiallyafullfactorygoingupalmostto2022.
Sothatallowsustoreallyworktheefficiencies,productivity,reallyallowsustoworkwithoursuppliersacrosstheboard,givesusleversthatyoudon'thavewhenyoujusthaveonecontract.
Andsowe'reveryupbeataboutIDShereoverthenextseveralyear.BothandIwillbedefinitelyprobingtoensurethattheymeetourexpectations.Havingrunthebusiness,weknowwhichleverstheyare.Andiftheydon'thavetheirhandsonthoselevers,we'llmakesurethosehandsgetonthoseleversveryquickly.
DougHarned (Analyst-SanfordBernstein):
Andthenshiftinggearsalittlebit.TwotechnologiesthathavebecomeanincreasinglyhighpriorityinthePentagonhavebeendirectedenergyweaponsandrailguns,twothingsthatyouallhavebeenworkingonforquiteafewyears.
Couldyoutalkabouttheoutlookforthosetechnologies?Arethesesomethingthatyousee-andwhattimeframecontributingmateriallytoyourrevenues?
T homasKennedy(Chairman,CEO):
Well,numberoneiswe're-you'reabsolutelycorrect.Wehavebeeninvestinginthesetechnologiesformanyyears,especiallythehighenergylaser.Weseethatascoretoourbusiness.Wehavegreatdomainexpertiseinthatarea.Webelievewehaveagreatnewtechnologyinthatareathatwillallowustogainmarketshare.WeareworkingwiththeU.S.governmentonseveralprogramsrelativetohighenergylasers.
Ithinkthebottomlineisgoingtobe,Doug,iswhenistheU.S.governmentreadytomoveforwardintoamajorEMDprogramononeofthesesystems.Thepowerlevelshavetogetuptobesomethingthatyou'dactuallywantto,Iwouldcallit,putintoservice.Andthetechnologythatwehaveallowsustogettothosepowerlevels.
Butagain,youdoneedinthismarketplace,youneedessentiallyacustomersponsorwho'swillingtoworkwithyouandtakeyouintoEMDprogramandthentransitiontheproductionalsotogothroughallthetestingrequiredtogetoneofthesesystemsintothehandsofourwarfighters.ButIthinkwe'reonthecuspofmovinginthatdirection.
DougHarned (Analyst-SanfordBernstein):
Butitsoundslikeit'safewyearsoff.Isthat--
T homasKennedy(Chairman,CEO):
Yes,afewyearsoffIwouldsay.Butwe'renottalkingdecades.
CompanyName:RaytheonCoCompanyTicker:RTNSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12015EarningsCallMarketCapasofEventDate:33.45BPriceasofEventDate:108.55
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DougHarned (Analyst-SanfordBernstein):
Okay.Thankyou.
T homasKennedy(Chairman,CEO):
Okay.
T oddErnst (VP-InvestorRelations):
Allright.We'regoingtohavetoleaveitthere.Thankyouforjoiningusthismorning.WelookforwardtospeakingwithyouagainonoursecondquarterconferencecallonJuly.Chantilly.
Operator :
Thankyouforyourparticipationintoday'sconference.Thisconcludesthepresentation.
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