Raytheon 3Q16 Earnings Call Notes

Raytheon (RTN) Q3 2016 Results
Thomas A. Kennedy

Demand in Europe focused on deterrence, demand in Middle East is focused on counter terrorism

“In Europe, I think the big one there is deterrence. We’re seeing Eastern Europe very concerned in that area, and so they’re looking for systems that will provide in that kind of a deterrence capability. And so we’re seeing a lot of action on things like the Patriot System and then also our NASAMS system that we have at the nation’s capital and we had a sale in Oman and several other countries out there. So we’re seeing significant pull for those deterrence type systems in Europe. As we move to the Middle East, you’re correct. I would say it’s a little different in Middle East. It’s demand from both the counter insurgency, counter terrorism bucket, and then also the deterrence bucket. And on the counter insurgency, I think you can understand that. That’s some of the demand, OPTEMPO pull here, for precision weapons and some other ground systems that we have.”

Asia Pacific also focused on deterrence

“On the deterrence side, I mean there is a concern, there is neighbor of the GCC that the GCC is concerned about and so you’re getting into deterrence there and therefore you see the demand for systems like Patriot across the whole region, and so that’s the deterrence bucket. And if we go over to the Asia-Pacific region, it’s clear that it’s most of the effort there, demands signals is again coming from this deterrence bucket, looking for solutions like Patriot advanced weapons, radars to be able to see things, ballistic missiles before they hit them and so the Asia-Pacific region is in big demand on the deterrence.”

Department of Defense shifting to dealing with near-peer threats

“The third bucket is really coming directly from the Department of Defense, obviously for all regions in the global area to be able to essentially come up from 20 years of fighting wars of insurgency to now dealing with near-peer threats that potentially have capabilities that are at or potentially in some cases maybe better or perceived to be better than what the U.S. has, and so it’s a big catch up area there. I mentioned, we did mention on the call about a significant increase in classified work. I think that’s really addressing that bucket and to help the Department of Defense regain in some cases its superior capabilities over near-peer threats.”

The demand signals have never been as strong

“I think what’s different here in my entire career is each of those buckets is overflowing, and so the demand signals have never been as strong in each of the three buckets and across those three regions. And you’re seeing that in our book-to-bill, the 1.15 for the third quarter, 1.14 year-to-date and then over the trailing four quarters, 1.16. We wouldn’t be having those book-to-bills if the demand signals isn’t as high as it is and across three regions and across three buckets.”

Raytheon 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Bill Swanson stepping down as CEO

“As you all know, I announced my intention to step down as Raytheon’s CEO, and the board appointed Tom Kennedy to be CEO, and Tom is on the call with us today”

Must continue to invest in R&D

“Since you asked me to reflect, one thing that I would say that I am concerned about as we go through this budget process, we seem to be protecting personnel and readiness, which is okay. Those can be bought back very quickly, and I’m going to be working hard to make sure that on the R&D side that we don’t take a lot of cuts in the budget there because, being an engineer, I know how long it takes for R&D to come to fruition. And we’re always a country that has invested in our capability, in war-fighting capability. I know Raytheon, even in the tough times when we had $13 billion in debt, we still invested, and that’s paying off in some of our wins as we look today, and we’ll continue to invest as a company. But I think as a nation, as we look at the — our investments, we’ve got to make sure that R&D is not sacrificed because you can’t buy back that time that you lose.”

It takes time to develop relationships and trust

“I mean, what I would do is remind everybody back to about 8 or 9 years ago when, I guess, we were talking about international. It’s not something you can flip a switch and turn on a light and have it instantaneously happen. So I appreciate people starting organizations and putting things in place, but it takes a while to establish your credibility internationally. And our customers really count on the fact that, I mean, we’ve been in the Mideast 50 years, Japan 50 years, Taiwan 50 years, Korea. I mean, these are the sort of things we’ve done for a long time, and your performance over that period really helps you capture new business. And it’s, to me, it’s all about relationships and trust, and that does not happen overnight.”

Raytheon 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“As you know, the U.S. government was shut down for 16 days this month, and we’re operating under a sequestration and yet another CR. To call this a very challenging environment would be an understatement.

Clearly, this is not the way we’d prefer the budget process to operate. No one wants to have to manage their strategic business plans under such circumstances. But by working closely with our customers and focusing on performance, we continue to deliver the solutions our customers need.”

“Financially, the shutdown impact was minimal and has been captured in our updated financial guidance. But personally, the situation was hard on the individuals and the government and the industry who devoted their entire careers to supporting our nation. And while a larger company such as Raytheon have the ability to mitigate the impact to our workforces, our industry supply base does not. These companies are often small and minority owned, don’t have the same resources or flexibility to weather these ongoing budget storms.”

“we’re raising our guidance for sales, EPS and cash flow for the year. This kind of performance doesn’t just happen, rather, it’s a function of a dedicated team working every day to find new ways to improve, to lower our cost and to respond more quickly to our customers’ needs.”

“The growth we are experiencing in our international business partially offsets the decline we’re seeing in our domestic business as a result of sequestration and CRs.”

“we do expect strong bookings for the year, particularly international, and there’s several significant awards that we anticipate in the quarter. As I mentioned, every one of them has got a milestone plan that’s associated with them. They’re reviewed daily or weekly, depending on the business or the program.”

“we’re planning for sequestration to continue. I mean, that’s the environment we’re in. I’d like to think that this budget process is not working. I’ve grown up in an industry where we have appropriations bill. There was a sequence to what we’re doing. You could see it, you could plan on it. Today, we operate under CRs. We have another one that goes to January 15.”

“From what I understand, our customers are planning 2 budgets. Which one gets submitted, I can’t tell you. That’s a product of somebody else making that decision. I just know that American industry really likes to have some finality in what we do. And if you give us a number, we know how to put our strategies and plans in place to make that happen.”

” In my experience, in price, when you buy that way, you don’t get all the capabilities you want, and so they’re going to have to deal with that.”

“clearly, I’m an engineer by training and a technologist, I’d like to think of myself that way. And people, when they look at U.S. systems, they are still state-of-the-art. What people don’t realize is that life cycle costs really run into these decisions. And if you don’t take that into account, you’re going to be really sorry with some stuff you bought. And we know of systems around the world produced by other countries that aren’t working and can’t be [ph] manned. And you have to almost learn that lesson the hard way. So we’ll see what happens here.”

“our customers stay with us because they recognize that we consistently deliver value and equipment to them to be able to handle the threat environment that they’re in.”

“The Army is under the most pressure. They have the largest headcount of any of the services, and the hard choices are strategically, how do you handle the future, do you do it with a smaller service? Do you do it that’s more mobile, more light, and how do you think through that? And when you come from very high numbers to a smaller number, it really makes it hard for them to do that, plus planning, do they have sequester, don’t they have sequester? That’s really tough on them. We’re really trying to work with them in any way we can. But Dave and I would both tell you that, from our standpoint, planning for sequester, we know exactly in our minds what the Army will be doing and that’s in our forecast as we look at things. And we’re not centric around any one service. And from that standpoint, we could weather the storm and why our portfolio is probably in better shape than others.”

“if you look at missile defense, it’s one of the key areas going forward. The other part of missile defense is it never stands still from my standpoint, have been doing this a long time. When you realize you need missile defense, you put it in, then you go through the training to get your troops up to speed. But the threat keeps evolving and changing. ”

“the supply base, and especially minority or small-owned businesses, they are the heartbeat of this country. And for some of them, they’re really key to what we do. So we work with them and try and help them in any way. We send Six Sigma teams in to some of our suppliers to help them be more competitive, that’s good for us and it’s good for them. We’ve sent people in to help on technical issues. And financially, if they’re in trouble, we’ll sit down and work with them to figure out what we can do to be able to get through this. I mean, the shutdown was really hard. I mean, we spent time every day trying to figure out how to make sure that people were getting paid. How did we move, work around? I mean, one of the beauties in our company is with our common systems and processes. We were able to do things, and it identifies areas for us real quick. But it is an area that, as a person that’s been in this industry my whole career, I worry what we’re doing to that, into the business, as a country.”

Raytheon 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“In the U.S., the debate surrounding near and long term resource allocation to national security is ongoing. Congress and the administration continue to work toward a compromise on the fiscal ’14 budget and are not there yet. Current versions of the budget don’t include sequestration, and barring some type of grand bargain, the defense budget ultimately will need to be reconciled with the cap spelled out in the Budget Control Act of 2011, which is about $50 billion lower than the currently proposed levels.

The outcome remains unclear, but as we’ve said all along, we remain focused on executing our strategy and managing the business in order to deliver the best value for our customers and shareholders, whatever the environment.”

“International continues to be a key driver of the business.”

“I can tell you that Raytheon will be making a shift in how we look at our international business because 30% will happen and we’ll be prepared for it. And then as we get to that milestone, we’ll be thinking about 35% because you got to think in increments to go do it.”

[analyst comment] “Northrop mentioned that the impact of higher rates had an adverse impact on their return on assets [in their pension plan] year to date. They were only up 50 bps through the end of June.”

” For us, I would say more than on a year to date basis, but as of just a couple of days ago, we were just under 8% return on assets.” [in the pension plan]

Raytheon 1Q13 Earnings Call notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“International continues to be a key differentiator for the company…approximately 36% of our backlog is comprised of international programs”

“On April 10, the fiscal year ’14 defense budget request was released. While it did not comply with sequestration and is likely to undergo modification over the coming months, it was a clear statement of DOD’s priorities. The focus continues to be on rebalancing to the Asia-Pacific region and our key mission areas such as Missile Defense, EW and cyber, which play to our strengths.”

“30 of our contracts represent 1/4 of our business. 128 contracts represent the 50%. And then if you look, the last half of our sales are driven by 15,000 contracts that represent $1.5 million, $2 million worth of business. And that’s this company and that’s what makes it so strong, because we convert those smaller programs into bigger programs later on in time”

“clearly, the department is trying to make sure that they’re leaner, they’re more flexible, they’re agile, they’re going to be smaller, and they’re going have to be able to adapt. And there is a focus on the Asia-Pacific region. There’s been 60 years of peace there. And the United States wants to make sure our allies and our friends over there continue to enjoy another 60 years of peace. That doesn’t mean, from a standpoint, that the threat is China, some people predict. That’s more of, how do we make sure that North Korea and others don’t threaten the well-being of our friends and allies over there. So I think part of the strategy is how do we do that. Probably in more of a focus on naval. It’ll be a repositioning of personnel, probably in places they haven’t been before, but that’s because they’ve been fighting in a battle in Iraq or Afghanistan. And so from my standpoint, I think special ops are going to get more attention. They’re quicker. I think companies are going to have to have technology and things they can put on the table rather than view graphs, which appeals to us. And I also see a real attention to cyber, and I break the cyber down into 3 areas. Those areas would be the network, they would be in cyber weapons and they’d be in infrastructure. And that’s where part of the focus is going to be there. And of course, you all know that, that’s what we’ve been doing for the last 4, 5 years here, getting ready for what we thought was coming.”

“It’s unlikely there is going to be any change in sequester in the next few months. We assume it’s going to take the full year, the fiscal year ’14 budget. It gives them — Congress and the administration, a chance for maybe a grand bargain.”

“a part of our philosophy here, the company or the strategy, is that our products or our services have got to both be forward-looking but they’ve also got to be backward-compatible.”