Raytheon Company Earnings Call Nuggets: Cadence, Contingency Planning

On Thursday, Raytheon Company (NYSE:RTN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Cadence

Jason Gursky – Citigroup: David, I was wondering if you could just walk through the rest of the year and the cadence and maybe offer some qualitative comments around why we’re seeing a bit of degradation in both revenues and earnings relative to the guidance that you gave earlier this year, so just a bit of conservatism based on the environment that we are in today?

Raytheon Earnings Cheat Sheet>>

David C. Wajsgras – SVP and CFO: No. We are feeling very positive about the results in the first quarter. From a sales standpoint, we exceeded our initial guidance by about $200 million and that was primarily driven by increased customer demand for certain of our programs. You’ll recall that at the end of last year we received some large international air missile defense programs and we’re off to a good start in that area. Let me just kind of put things in perspective. So, if you look back, 2011 was a strong year and we discussed in January the results of last year. We expected margins to moderate in 2012. Q1 came in stronger than we expected. This was partially due to some timing and a few small nonrecurring items. Without these items we’re still posting margins in the high 12% range. I’ll repeat some of what I went through a few months back that I mentioned on the fourth quarter call. There is a shift in our backlog and our sales profile this year versus last year, and it’s weighted more toward international customers. Within the international business we’re also seeing mixed impacts driven by the stage of maturity of some of these programs. We once – like I just said, we won some large programs at the end of last year, these are longer in duration and slower to ramp up than typical domestic awards of similar size. So we’re being impacted by mix in 2012 along with the continued completions and wind down of some later stage production programs in our domestic backlog. So with all that said, we are accelerating the ramp up of some programs and this is resulting in a shift in our sales cadence compared to prior guidance, as well as some efficiencies from a margin standpoint, in particular at IDS.

Contingency Planning

Carter Copeland – Barclays Capital: I have two bigger picture questions, one for each of you. Dave, I wondered if you might speak to some of the things you and your peers and for that matter the DOD customer might begin doing the sort of contingency planning exercise for the looming wall of sequestration. I’m sort of interested in things around workforce planning, cash management, contracting. What sorts of things are you guys envisioning as having to do from a contingency planning standpoint as this gets closer and we sort of progress through the year?

David C. Wajsgras – SVP and CFO: So, I’ll start and I am sure Bill wants to mention a few things. We’ve talked about this on the last couple of earnings calls. First of all, we’ve gone through a number of different planning scenarios, and I think the best way for me to put this is, we are prepared to operate effectively under any given industry conditions. So, without getting specific, because at this stage it’s inappropriate just given where we are in all the discussions taking place in Washington, we are confident that we will continue to perform well irrespective of how this actually plays. It’s important to keep in mind we have a very broad portfolio, close to 40% of our backlog is international. That’s obviously, I think, an important differentiator and competitive advantage for the Company. We have over 8,000 different programs and technologies, and we continue to manage the business in a very cost effective manner. We’ve talked about this in the past. We have – seven, eight years ago, we embarked on a strategic initiative to implement companywide information technology systems from a factory standpoint, from an HR standpoint, from a supply chain standpoint, and from a people standpoint. So, that gives us a platform to be very flexible irrespective of how things play out.

Carter Copeland – Barclays Capital: Just to kind of expand on that just in one area. As you think about cash management, is it something where you want to preserve cash as we get later in the year and protect in case should you decide to self fund some contracts or how should we think about cash management in the latter part of the year?

David C. Wajsgras – SVP and CFO: Right. So, we have provided our cash guidance and again, this was thoughtful and talked about on the last call. From an environmental standpoint, not much has changed from the last call. So, we wouldn’t expect any change from our capital deployment plan all things considered.

Carter Copeland – Barclays Capital: One for Bill. Bill, I there are something like six cyber related bills making their way around Congress this week, and I wondered if you might tell us what if anything this means for the future of this domain from your perspective? I mean, does any of this legislation have a chance of passing and if it did, does it signal new areas or risk or opportunity or if nothing else, more funding?

William H. Swanson – Chairman and CEO: One I think what I would say is it’s a good healthy debate that’s taking place in the cyber arena of what to go do. For me, I always remember something that Secretary Gates had said that when he first went into office he really wanted to get a definition of what the go do in cyber and some four years later plus there still wasn’t a direction of what to go do. Clearly, we now see some of that direction taking shape of who calls the ball and what action to take at least from what I’ll call the sword aspect of cyber, which is the attack or counterattack. For me, it’s taken a while for this to jell, but I’m encouraged that Congress is looking at it, they’re having a debate. They’re talking to all aspects whether it’s Facebook, or Twitter, or the people from Google or Microsoft, and they’re talking to us and they’re trying to take responsible action. The good news is there is attention to this problem and we need attention, and I think attention is healthy, so I view it as positive.

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