Raytheon Company (RTN)

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Raytheo (RTN)

Q4 2010 Earnings Call

January 27, 2011 9:00 am ET

Executives

David Wajsgras - Chief Financial Officer and Senior Vice President

William Swanson - Chairman, Chief Executive Officer and Chairman of Executive Committee

Todd Ernst - Vice President of Investor Relations

Analysts

Cai Von Rumohr - Cowen and Company, LLC

Carter Copeland - Lehman Brothers

Douglas Harned - Bernstein Research

George Shapiro - Citi

Heidi Wood - Morgan Stanley

Robert Spingarn - Crédit Suisse AG

Jason Gursky - Citigroup Inc

Samuel Pearlstein - Wells Fargo Securities, LLC

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Peter Arment - Gleacher & Company, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Raytheon Fourth Quarter 2010 Results Conference Call. My name is John, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Todd Ernst, Vice President of Investor Relations. Please proceed, sir.

Todd Ernst

Thank you, John. Good morning, everyone, and thank you for joining us today for our fourth quarter conference call. The results that we announced this morning, the audio feed of this call and the slides that we'll reference are available on our website at raytheon.com. Following this morning's call, an archive of both the audio replay and a printable version of the slides will be available in the Investor Relations section of our website.

With me today are Bill Swanson, our Chairman and Chief Executive Officer; and Dave Wajsgras, our Chief Financial Officer. We'll start with some brief remarks by Bill and Dave, and then we'll move on to questions.

Before I turn the call over to Bill, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives, expected performance constitute forward-looking statements. These statements are based on a wide range of assumptions that the company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release and discussed in our SEC filings in detail. With that, I'll turn the call over to Bill.

William Swanson

Thank you, Todd. Good morning, everyone. I'd like to take a minute before getting into the details of the fourth quarter and full year results to welcome Todd Ernst, our new Vice President of Investor Relations. Some of you may already know Todd from his time in the investment community. We look forward to having him here as part of the Raytheon team. Welcome, Todd.

Now turning to our results. Raytheon delivered strong operating performance in 2010. This is a result of our focus on program execution and productivity initiatives driven by Six Sigma and operational improvements. Adjusted earnings were up 15% for the year and operating cash flow was once again very strong.

As you know, 2010 had some headwinds, including program delays, a continuing resolution and a difficult economic environment. Our strategies prepared us well for this, by leveraging our innovative technology, cost competitiveness, solid program execution and strong customer alignment. We had one of the highest competitive win rates in the company's history.

Notably, competitive wins included Small Diameter Bomb, GPS-OCX, AMDR, STARS, among others. These wins position us well for future competitions. For example, SDB or Small Diameter Bomb, where our sensor technology was a key discriminator, which positions us well as we compete for next-generation missile programs.

On the classified side, our sales increased in 2010 by 13%, driven by NCS and SAS. Our contract research and development or CRAD bookings were also up in 2010 by 28%, while sales on these programs increased by 13%. This provides much of the funding for the next generation of Raytheon technologies and keeps us at the cutting edge of technology development in areas directly aligned with our customers' needs.

As always, we remain focused on creating long-term value for our customers and our shareholders. To that end, Raytheon announced at the end of the fourth quarter that the company signed a definitive agreement to acquire Applied Signal Technology. AST brings world-class technologies and their talent complements Raytheon's strong, intelligent surveillance and reconnaissance solutions. This combination of strengths, along with our complementary cultures and innovation will provide capabilities to address our customers' current and future challenges while creating value for our shareholders.

In addition to announcing our agreement with AST, we completed three acquisitions in 2010. These acquisitions, coupled with our sixth consecutive year of dividend increases, our share repurchase program and discretionary pension contribution underscore our balanced approach to capital deployment.

Three weeks ago, Secretary Gates further outlined his plan to adjust DoD's spending priorities within a challenging fiscal environment. From a Raytheon perspective, there were some puts and takes within his plan. But on balance, our portfolio capabilities align very well with DoD's vision of the future. We remain confident that our strategy is the right one and will yield strong long-term growth opportunities for our core strategic areas. We are also reassured that DoD remains committed to preserving investment and modernization.

Let me take a moment to discuss the international environment, which remains a key area of growth for the company. In 2010, 23% of our sales were to international customers and our international's revenues grew by 10%. This growth is driven by the breadth and depth of Raytheon's portfolio of products that align well with our customers' needs to be able to address important threats. These threats have not changed.

Many of you heard me discuss the difficulty in pegging the timing of the international and domestic awards. And in 2010, we had a few opportunities move into 2011. But we remain confident that the ultimate awards are not a matter of if, but when.

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