Raytheon Company Earnings Call Nuggets: Operational Activity Margins and Eventual Benefits

Raytheon Company (NYSE:RTN) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Operational Activity Margins

Joseph Nadol – JPMorgan: Bill, could we go to the NCS segment, it looks like your guidance there is for margins coming down a bit and I know this is where a lot of the operational activity or operational tempo type of activity in the business have been located, but you’ve been restructuring that business to some degree. Can you just give us an update on what’s happening there?

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William H. Swanson – Chairman and CEO: Yes, sure Joe. We feel confident that that business has stabilized; I guess is a good way to say it. As you know, part of the focus there has been to concentrate on the network part of the business and show why our customers need to be presented with accurate actionable data on the move. So for us when we look at their full year sales and margin, they were consistent with the guidance we gave. Back in Q3 and in Q4, NCS had bookings of about $1.5 billion including the key international C4I win which drove their full year book-to-bill about 1.13 in line with guidance and bookings increased about $500 million over 2011, positioning them well for 2013. So taken together, I feel pretty good about where we are going and where we’re headed in that regard.

David C. Wajsgras – SVP and CFO: Joe, let me just add one thing. As the 2013 guidance also includes about 50 basis points related to the encryption acquisition that we made, so if you adjust for that, it’s basically in line with ’12.

Joseph Nadol – JPMorgan: Then Dave, just on the cash flow and the pension, it looks like you guys anticipate a positive variance in your cash flow of $600 million I think from pension from ’12 to ’13 just looking at the CAS going up and your contributions going down and your guidance calls for cash flow that’s flat to slightly up. What are the opportunities there? Are there other headwinds that you’re dealing with, such that your cash flow wouldn’t be a little higher?

David C. Wajsgras – SVP and CFO: Your math is right. There is a swing in the pension. There is a couple of things. We had a very strong performance from a cash perspective in Q4, both on the collection side and with respect to performance-based payments and advances. So, as you look at 2013, there is about a $300 million swing relative to timing between Q4 and Q1 from a cash standpoint, and we are continuing to post very strong cash performance of between $2 billion and $2.2 billion as we go into ’13, so there is nothing remarkable going on there. We continue to perform well from that perspective.

Joseph Nadol – JPMorgan: Then just finally, could you quantify when you get the question, if sequestration as currently – as it currently looks or is scheduled right now, kicks in, what’s the impact of sales in 2013. What’s your answer?

William H. Swanson – Chairman and CEO: Joe, let me take a minute and say that we need to get focused on getting sequestration fixed, its elephant in a room, but sucks all the air out of every conversation. By postponing the debt ceiling, we averted a government shutdown, which means federal checking or checks are not going out, servicemen or people operating our government, it would have been a horrible outcome. Sequestration cuts deeply into areas that Dems favor and cut scenarios is the Republicans favor, and for me I think sequestration sets the baseline upon which both sides will do the budget. It puts the budget where it belongs, it’s about making hard decisions that need to be made and we need to make them strategically and not across the board in a peanut butter fashion. So having said all of that I am not sure what the outcome of sequestration is since OMB and DOD have really not passed any guidance down. But if I had to look into a crystal ball and use all the intelligence that I can think of and kind of throw a dart at the wall I would tell you it probably means an additional point or two to us as we look at the balance and you have to remember we have our strongest funded backlog in our history.

Eventual Benefits

Jason Gursky – Citigroup: Dave you mentioned that there is 20 basis point headwind in the year from a margin perspective driven by some of these cost initiatives that you are engaging in. Just wondering, if you might perhaps describe to us what the eventual benefit you think will come out of those from a margin perspective and when you think we might see those benefits?

David C. Wajsgras – SVP and CFO: So let me start by saying we are continuing to take a lot of productivity actions and we are accelerating these in a number of areas. Obviously there are some implementation costs, which you are addressing, specifically with the utilization actions and we expect more of these due to acceleration than in the prior years. I think going forward these actions position us more competitively and with the environment that we expect to be seeing over the next few years it positions us well amongst the peer group.

Jason Gursky – Citigroup: Then on the (client harmonization) earlier in the 2012 year, you were able to begin increasing your billing rates, and just want to get an update on how successful those increased billing rates have gone, are those stuck? Are we actually going to see the full benefits that you might have or you might be able to see in the 2014 or ’15 timeframe from modernization efforts?

David C. Wajsgras – SVP and CFO: Yes. That is playing out as we had anticipated about a year ago and there is nothing new to report from that perspective. We expect the cash benefit to start being realized as we move into ’14 and continue to progress each year thereafter for about a three or four year timeframe. So there’s nothing new there and that’s going well on all fronts.

A Closer Look: Raytheon Earnings Cheat Sheet>>