Raytheon (RTN) Earnings Report: Q1 2015 …s.t.st/media/xtranscript/2015/Q2/13125043.pdfto harness rapid growth in the global cybersecurity market. Overall, we've made a considerable

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.




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




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




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.




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.




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.


Goodmorning,Howard.


Toby,justasanobservationfirst,Iwasthinkingwiththis20%marginnowthatDaveisnotheretorespondtoit,thinkingaboutmaybe-ifyouknowwhereI'mgoing-settingthatashisincentivetargetgoalsforthebalanceoftheyear.

T obyO'Brien (CFO):

That'sgoodinput,Howard.We'lldefinitelytakethatintoconsideration.





Butinallseriousness,Iaskedsortofasacollectionofbusinessesthathavesomeinterestingopportunities.Andwhenwelookedatthegrowthprofile,itseemstobechallengedrelativetotheoverallenvironment.Canyouexplainandelaboratealittlebitupon,notonlywhatWebsenseisgoingtodo,butwhereyourinitiativesaretheretoenhancethatbusiness?


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.


Andthenjustoneotherfollow-upquestioninaslightlydifferentarea.You'vealsoexpandedmissilesystemsbeyondjustPatriot.Andforamoment,couldyoujustaddresshowtheNASAMSofferingsare?IthinkyoustillhavesomeopportunitiesthereinPolandandelsewhere.


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.


Thankyouverymuchforyourtime.





Yes.

Operator :

YournextquestioncomesfromthelineofRobertStallardofRoyalBankofCanada.Pleaseproceed.

RobertStallard (Analyst-RoyalBankofCanada):

Thankssomuch.Goodmorning.


Hey,Rob.Goodmorning.


Tom,firstone,youmentionedOCD,thePolanddecision,butalsothatGermanyismovingtowardstheDAMs.SolikedoyouthinkthisisasignthatEuropeandefensespendingmightfinallybestabilizing?Anddoyouseeotheropportunitiesintheregion?


Numberone,wedoseeotheropportunitiesintheregion.ItisbeingdrivenbythegeopoliticsthataregoingonrightnowespeciallyintheEasternEurope.Polandisbuildinguptheirdefensesandmakingamajorplayinthatarea,again,undertheauspicesofastrongdefenseisastrongdeterrence.Andwe'realsoseeingthatinotherEasternEuropeancountriesalso.Germanyisinneedtoupgradetheirsystems.SoIthinkyou'reright.Thereisalittlebitofmaybesenseofurgency.Butthiswasintheirplantodothisupgradeforseveralyears.


Okay.Andjustaquickfollow-uponWebsense.Idon'tthinkyoumentioneditonthecalltheotherday.WhendoyouexpectittoactuallybeaccretiveonaGAAPEPSbasis?


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.





Okay.Thanks,Toby.

Operator :

YournextquestioncomesfromthelineofCaivonRumohrofCowenandCompany.Pleaseproceed.

CaivonRumohr (Analyst-SGCowenSecurities):

Yes.Thankyouverymuch.SothecompetitionclaimsthatGermanywantstohave360-degreecapability.Inopenarchitecture,neitherofwhichPatriotprovides.Andyetyouguysaretheincumbent.TellusaboutthefactorsyouthinkaregoingtobeimportanttoGermany'sdecisionandwhentheymightreachit.


Well,Idon'tknowexactlyhowthey'regoingtomaketheirdecision.Idoknowthattheywillbemakingthedecisioninthenextyear.Andwhattheyarelookingforistheyneedastrongsystemtoprovidedeterrence.AndsowebelievePatriotprovidesthat,numberone.

Andtwoiswebelievethesystemthatwecangetintheirhandsthesoonest.Inotherwords,we'reinproduction.Wecandeliverrightoutofthefactoryand[indiscernible]thequickesttimepossible.

TheotherelementisthefactthattheyhavealotoftheiralreadytrainedonusingthePatriot.Andsoeventhoughwe'veupgradedthePatriot,putinmodernmanstations,alotofthemaintenanceandtrainingisalreadybehindthem.Sotheyalreadyhavethatinplace.SowethinkthePatriotprovidesthemosteconomicalbutyetstrongestdeterrencecapabilityforthemmovingforward.


Okay,terrific.AndthenyourR&Dwasupfrom2%ofsalesto2.7%ofsales.Couldyoutelluswheredidyouspendit,whatdidyouspenditonandhowmuchofthatiscoveredbyIR&D?


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




thatthesearerightplacesforustoinvestin.

T obyO'Brien (CFO):

Yes.AndCai,thisisToby.Iwouldjustaddtothelevelofspendofthe2.7%.That'sprettymuchinlinewithwhatwetalkedaboutintheJanuarycallof2.7%,2.8%ofrevenuethisyearforthereasonsTomjustdescribed.


Great.ThankyouandcongratsonthePatriotwins.


Well,thankyou.

Operator :

YournextquestioncomesfromthelineofCarterCopelandofBarclays.Pleaseproceed.

CarterCopeland (Analyst-Barclays):

Hi.Yes.Hi,goodmorning,guys.


Goodmorning,Carter.Howareyoudoingtoday?


Doinggreat.Great,thanks,Tom.Sojustaquestion.IwonderedifyoumightexpandalittlebitmorespecificallyonGaNandsomeofthepriorcommentsaboutupgrades.Andreally,whenyoulookattheapprovaloftheexportabilityofthattechnology,canyoutalktospecificallywhatsortofupgradeopportunitiesthatmayenableandwhatsortofkindofsizeweshouldbethinkingaboutthoseortiming?Whatdoesthatmeanforthatfranchiselongerterm?


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.





HowdoyouthinkaboutthetimelineandthetimingofthosekindsofopportunitiesasyoulookacrossthebaseofPatriotcustomers?Andwhentheygetaroundtothatkindofupgrade,isthisathree-tofive-yearkindofopportunityforthemarket,the200radars?Howdoyouthinkaboutthat?


I'llonlyanswerone.OnthePatriot,wehavecustomersknockingonourdoortoday.Soit'samatterofgettingtoadevelopmentandthentransitiontoproductionandthenputtingitforward.Andwe'realsoworkingwithourU.S.customeronthattimingtoensurethatwehaveessentiallyallthelicensesandeverythingelsetobeabletodothat.

SoIthinkbottomline,thereispentupdemandforthoseAESAradars.Andwe'relookingtofillthatdemand.


Andjustanotheronetoswitchgearsquickly,IthinkatonepointwewereexpectingarecompeteofWarfighterFOCUS.WheredoesthatstandthesedaysintermsofanRFPonthatandmaybejustremindusofwhattoexpectonthatfront?


Well,rightnow,forthosewhodon'tknow,theWarfighterFOCUSisanIDIQprogramthatRaytheonrunsfortheUnitedStatesArmy.Thatisaprogramthatweareactivelyengagingtoday.It'srunningverywell.AndIthinkit'sservingthearmyandalsotheinternationalcustomersverywell.SoIthinkthey'reverypleasedwithit.

Webelievethatthatprogramwillcontinue.Thearmyislookingatsomeacquisitionchangesintermsofwhat'sthefollow-ontoWarfighterFOCUS.Thathasgonethroughseveralchangesrecently.AndIdon'tthinkrightnowhassettleddownintermsofwhatthefinalarrangementswillbe.


Okay,sojuststaytuned.


Ithinkstaytunedand-butin-andfromRaytheon'sperspective,it'smetmorestableworkrelativetoWarfighterFOCUSsincethatchangehasnotoccurred.


Great.Congratsonabigleap,guys.


Yes,thankyou.

T obyO'Brien (CFO):

Thanks,Carter.

Operator :




YournextquestioncomesfromthelineofRobertSpingarnofCreditSuisse.Pleaseproceed.

RobertSpingarn (Analyst-CreditSuisse):

Goodmorning.


Goodmorning,Rob.


Hi,guys.Coupleofquestions,twodifferenttopics.Thefirstisonthe-Toby,onyoursalesguidance,whichisessentiallydown2%toflatattheends-therangethere,whataretherelativegrowthratesyounowseefordomesticversusinternationalwithinthat?

T obyO'Brien (CFO):

Yes,soforthetotalyear,whatwe'dbelookingatfordomesticistobedowninthelowsingle-digits.Andforinternational,upinthelowtomidsingle-digits.


Okay.Anditsoundsliketheinternationalagainmaybealittlebackendweightedgiventherecentawards.

T obyO'Brien (CFO):

Yes,definitely--


Orthegrowthaccelerates?

T obyO'Brien (CFO):

Yes,yougotthatexactlyright.Imean,Ithinkifyouwanttothinkaboutthecadencethroughouttheyear,andobviouslywithinternationalgrowingversusdomesticdeclining,we'dseesecondquartersalesflattoupfromQ1fromasequentialpointofviewandthensequentiallygrowthinthebackhalfoftheyear.Andit'sexactlyasyousaid,Rob.It'sdrivenbythenewawardsfromtheendof2014pluswhatwe'reseeinghereinthefirstthree-plusmonthsofthisyearandtheirnaturalrampastheystartup.


Okay.AndthenjustwithrespecttothecommentonEuropeandemandsstabilizingandgrowinghere,isthereanycurrencyimpactonmarginsthatweshouldstarttocontemplate?


Sothatquestioncameuponapriorcall.I'llgiveyouwhatwe'reseeing.NumberoneismostofourbusinessistiedtotheU.S.dollar.Forexample,alltheFMScontractswehad,theForeignMilitarySalescontractsareallinU.S.dollars.Andthenalotofourcustomers,especiallyintheMiddleEast,theircurrencyispeggedtotheU.S.dollar.

Soevenondirectcommercialsalestherewedon'thaveanyimpact.Andwedohavetwolandedcompanies.WehaveRaytheonAustraliaandRaytheonSystemsLimited.Theytendtoworkwiththeirown




workingcapitalandessentiallyoursalesinBritishpoundsterlingandthentheRaytheonAustraliait'stheAustraliandollar.Theytendtowork--


Iwasgoingtosay,Iunderstandthatit'sconductedinU.S.dollarsbuttotheextentthattheseguysarebasedforexampleineuros,theEuropeanguys,they'vegottotranslate.Sodoesthatmaybeadjusttheirdemand,theirpricingappetite?


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.


Okay,thankyou.I'lljumpbackin.


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?





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.


Okay,great.Thanksalotforthat.Andlet'stalkaboutNextGenJammerforaminute,ifyouwould.Canyouhelpusunderstandhowit'sgoingtokindof[slewup]overthelongtermandgiveusanideahowtothinkofsomeofthefollow-onincrements?Whataresomeofthepacingitemsforthose?What'ssortofthecompetitivesetandmaybehelpusthinkabout,inabestcasescenario,thepotentialopportunityforyouguyslongerterm?Thanksalot.


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.


Thankyou.


Thankyou.

Operator :




YournextquestioncomesfromthelineofSamPearlsteinofWellsFargo.Pleaseproceed.

SamPearlstein (Analyst-WellsFargo):

Goodmorning.


Goodmorning,Sam.Howareyoudoing?


Okay.Couplelittlequestions.Firstis,whyiscashflowfromoperationsuponlyabout$100millionwhenIthoughttheeBorderssettlementwasGBP150million?


Yes,sotheeBorderssettlement,yougotthenumberright,it'sabout$226million.Butthepaymentcameinonthefirstdayofthesecondquarter.


Right.ButI'mjustsaying,forthefull-yearoutlook,you'reonlyincreasing$100million.


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.


Okay.That'sgreat.AndthencanyoutalkalittlebitabouttheIDSsegment,justlookingatthemarginsthisquarterandhowdoyougetthemto50%thisyear?Arethereothercertainmilestoneofcontractualresolutionsorsomeofitisthedirectforeignsaleoftherecentaward,whatisitthatdrivesthatmarginup?


Yes,sure.SoinQ1,asyoupointedout,right,themarginsweredown.Thatwasasexpected.AndconsistentwithwhatwesaidinJanuary,thatwasdrivenbythemixdueto-unfavorablemixduetotheplanramp-downoncertainofourinternationalPatriotprograms.Solookingforward,clearly,weseethemarginsatIDSimprovingprimarilyinthesecondhalfoftheyear.

Thatoverallbusinessmixwillimprovejustasyousaid,asthesenewinternationalprogramsfromtheendof2014andtheawardshereintheearlypartof2015starttorampupandmovethroughtheproductioncyclesothatthemixgetsmorefavorable,butnotuntilthesecondhalfoftheyear.





Okay.AndifIcanaddonemore.Ijustwanttosummarizeintermsofsomeofthecommentaryabouttheacquisitions.Isitfairtosaythatwe'llseemorebalancedafterthedeploymentinthat$1billionplustypeofacquisitionsfromhereonoutnowthatWebsensehasbeenannounced?


Aswesittoday,andwe'llcontinuetolookforvaluatedtargetacquisitionsthatdopositionthecompanyforfuturegrowth.Butwedon'tseeasIsitheretodayalargeacquisitionofthesizeofWebsense.Buttherecouldpotentiallybesomesmalleracquisitionstofitsometechnologyareasthatweneedtobesuccessfulinthatmarketspace.


That'sgreat.Thankyou.

Operator :

YournextquestioncomesfromthelineofPeterArmentofSterneAgee,CRT.Pleaseproceed.

PeterArment (Analyst-SterneAgee):

Yes,goodmorning,TomandToby.


Goodmorning.


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.


Okay.That'shelpful.Andthenjustlastly-andcongratulationsonallthesePatriotwins.Tom,youmentionedkindof14countriesthatnowthey'redeployed.Imeanhowdowethinkaboutthatlong-term?ImeanweaskthisIthinkeveryquarteraboutwhatinningareweinintermsofmissiledefenseordersoutintheMiddleEastandAsiabuthowdowethinkabouttheopportunitylongertermoutsideofkindofyoujustmentioned,Poland,Germany,etcetera?


Sooutsideofthebringingonawholebrandnewcountrylikewe'vedonewithPoland,wehopetodowith




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.


That'sgreatcolor.Thanks,Tom.

T obyO'Brien (CFO):

Thankyou.

Operator :

YournextquestioncomesfromthelineofPeteSkibitskiofDrexelHamilton.Pleaseproceed.

PeteSkibitski(Analyst-DrexelHamilton):

Goodmorning,guys.Nicequarter.


Goodmorning,Pete.Howareyoudoing?


Good,good.Hey,onPolandPatriots,Iwaswonderingifyoucouldgiveussomemorecoloronmaybeballparksomeofthecharacteristicsofthecontract.There'salotofnumbersfallingoutthere.Someofthemaretalkingaboutmorethan$5billion.Canyougiveusasenseofhowmanybatteriesit'sgoingtobemaybeballparkthesizeandlengthandthenwhenyoutalkaboutthe2016booking,areyoutalkingearlyintheyearorlaterintheyear?


Sojustrealquick.Sorightasoftoday,actuallyTuesday,weweredown-wewereselectedbyPolandtoprovidethePatriotsolutionfortheirintegratedairandmissiledefensesystem.Andthenaspartofthatactivity,wehaveprovidedvarious,Iwouldcallitoptions,forthePolishgovernment,variantsofPatriot




andquantitiesoffireunitsandhowtosetthemupintheircountry.Sowehavebeenworkingwiththem.

ButnowsomeadditionalworkisrequiredtomoveforwardtodefinitizewhatthatexactconfigurationwillbeforthePolishgovernment.Aspartofthateffort,wealsohavebeenworkingwithPolishindustry.Wehave25plusagreementswithPolishindustryintermsofdoingcoproductionandpotentialcodevelopmentactivitiesallinsupportofthePatriotsystem.

Sothebottomlineiswe'llbeinnegotiationswiththePolishgovernmenttoacttodefineexactlywhatthisconfigurationis.Andaswegetthatinformationandgetmoreclarityonthat,we'llbeprovidingthattoyouguystoensureyouunderstandwherethatprogramisgoing.

T obyO'Brien (CFO):

AndIthink,Pete,givenallthatTomsaid,whilewecan'texactlypredictwhentheawardwouldcome,thinkbackoutof2016becausethereissomeworktobedonetoworkthroughallthosesteps.


Okay.Igotit.Igotit.Andthenjustonthe[streak]youguysonwithPatriot,isitfairtosaythattheIDSbeingyourhighestmarginbusinessthatthatmaybehasthebestkindofmidrangegrowthoutlookforthefirm?


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):




AndIwould-Pete,I'djustaddthatspecifictoIDSwhenwetalkaboutmix,that'sprobablytheonebusinesswithinthecompanythatcanhavethebiggestswingorthemostimpactbecauseofmix,inpart,giventhenatureofthebeastwiththelarge$1billionpluscontractsthatdrivethatwithinIDS.

Sothatcombinedwithloadingupthefactoryhere,doesgiveusconfidencethatwewillbeseeingimprovementovertimeintheIDSmarginaswehadpreviouslytalkedabout.


That'sgreat.Thanks,guys.


Thankyou.


Allright.Chantilly,wehavetimeforonemorequestion,please.

Operator :

Okay.YourfinalquestioncomesfromthelineofDougHarnedofSanfordBernstein.Pleaseproceed.

DougHarned (Analyst-SanfordBernstein):

Goodmorning.Thankyou.


Goodmorning,Doug.Howareyoudoingtoday?


Good,good.IwantedtoaskonIDSbecauseifwegobackhistorically,thebusinesscouldbedoing16%,even17%typemargins.SoIknowtoday,onthepositiveside,you'vegotmoreinternationalwork,higherpercentageofthatthere,whichshouldbegood.

Andthenegativesideinthenear-term,alotofnewprograms,whichyouprobablyarelookingatlowermargin.Whenyoutalkaboutwhatthepercentageofinternationalisandthencanweexpectthistogobackovertimetothose16%,17%typemarginlevelsthatweusedtosee?


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




moveultimatelythroughproduction,they'llhelpliftthemargin.

Butitispossibletoseemarginsstartovertime.ButitwilltakeacoupleofyearsoncethisbacklogreallygetsintokindoffullsteamonthisinternationalPatriotawardsbeforewewouldpotentiallyseethemclimbingbackuptothosepasthistoricallevels.


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.


Andthenshiftinggearsalittlebit.TwotechnologiesthathavebecomeanincreasinglyhighpriorityinthePentagonhavebeendirectedenergyweaponsandrailguns,twothingsthatyouallhavebeenworkingonforquiteafewyears.

Couldyoutalkabouttheoutlookforthosetechnologies?Arethesesomethingthatyousee-andwhattimeframecontributingmateriallytoyourrevenues?


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.


Butitsoundslikeit'safewyearsoff.Isthat--


Yes,afewyearsoffIwouldsay.Butwe'renottalkingdecades.





Okay.Thankyou.


Okay.


Allright.We'regoingtohavetoleaveitthere.Thankyouforjoiningusthismorning.WelookforwardtospeakingwithyouagainonoursecondquarterconferencecallonJuly.Chantilly.

Operator :

Thankyouforyourparticipationintoday'sconference.Thisconcludesthepresentation.

Allrightsreserved(c)2014TheStreet,Inc.

Pleasefeelfreetoquoteupto200wordspertranscript.Anyquoteshouldbeaccompaniedby"ProvidedbyTheStreet"andalinktothecompletetranscriptandwww.thestreet.com.Anyotheruseormethodofdistributionisstrictlyprohibited.

THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.

THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.

Documents

Raytheon (RTN) Earnings Report: Q1 2015 …s.t.st/media/xtranscript/2015/Q2/13125043.pdfto harness rapid growth in the global cybersecurity market. Overall, we've made a considerable