RTN
#I have a few opening remarks, starting with the first quarter highlights
And then we'll move on to questions
During my remarks, I'll be referring to the web slides that we issued earlier this morning
If everyone would turn to page 3. We are pleased with the solid performance the team delivered in the first quarter with bookings, sales and EPS better than our expectations
After this good start, we're raising our full year outlook for all three of these measures, which I'll discuss further in just a few minutes
We had solid bookings in the first quarter of $5.7 billion and sales in the quarter were $6 billion, up 3.4%, led by our IDS and SAS businesses
Our EPS from continuing operations was $1.73 which I'll give a little more color on in just a moment
During the quarter, the company repurchased 2.7 million shares of common stock for $400 million
And as a reminder, effective January 1, 2017, we adopted the new revenue recognition standard
The 2016 results have been recast to reflect this change
Turning now to page 4. Let me start by providing some detail on our first quarter results
Company bookings for the first quarter were $5.7 billion, which were ahead of our expectations and down slightly from the same period last year
And on a trailing four quarter basis, our total book-to-bill ratio is 1.12. International awards represented 33% of the total bookings, an increase of approximately 14% over last year's first quarter
A couple of key bookings in the first quarter included the $1 billion award for the upgraded early warning radar for Qatar at IDS, $256 million for active electronically scanned array radars at SAS, and at missiles over $200 million on AIM-9X Sidewinder short-range air-to-air missiles
Backlog at the end of the first quarter was $36.1 billion, an increase of approximately $1.9 billion or 5.5% compared to the first quarter 2016. It's worth noting that approximately 41% of our backlog is comprised of international programs
We now move to page 5. As I just mentioned, for the first quarter 2017, sales were higher than the guidance we set in January
Sales were particularly strong at both IDS and at SAS
We expect sales for the company to increase throughout the year with a strong second half driven by our bookings over the past several quarters
Looking now at sales by business
IDS had first quarter net sales of $1.4 billion
The increase from Q1 2016 was primarily driven by higher sales on an international early warning radar program
We expect IDS sales to increase through the year as some of our larger international programs continue to ramp up
In the first quarter, IIS had net sales of $1.5 billion
Compared with the same quarter last year the change, as expected, was primarily due to lower net sales on an international classified program which substantially completed in 2016. Missile Systems had net sales of $1.8 billion, up slightly compared with the same period last year
SAS had net sales of $1.6 billion
Higher sales on electronic warfare systems program contributed to the 8% increase versus last year
And for Forcepoint, sales were up about 4% in the quarter
Moving ahead to page 6, let me spend a few minutes talking about our margins
We delivered strong margin performance in the quarter
Our operating margin was 12.4% for the total company, up 180 basis points, and 11.8% on a business segment basis, an increase of 160 basis points
Margin improvement in the first quarter of 2017 was driven by favorable program mix with some of our largest international awards progressing through their lifecycle
And, as a reminder, in the first quarter of 2016, at IDS, we had a $36 million unfavorable program adjustment that impacted their margins
At Forcepoint, as expected, the first quarter 2017 operating margin was down for the quarter
This is due to the internal investment to support Forcepoint's long-term growth that we discussed on the earnings call in January
We remain focused on margin improvement going forward and see our business segment margins in the 12.4% to 12.6% range for the full year, consistent with the guidance we laid out in January
We also see our margin improving as we move throughout the year
Turning now to page 7. First quarter 2017 EPS of $1.73 was up 21% from last year's first quarter and was better than expected
This year-over-year increase was largely driven by higher volume and margin expansion
On page 8, as I mentioned earlier, we are updating the company's financial outlook for 2017 to reflect our improved performance to-date
We're increasing our full year 2017 net sales range by $100 million, which favorably impact EPS by about $0.04. This increase is driven by higher expected sales at our Missile Systems business
We now expect net sales to be in the range of between $24.9 billion and $25.4 billion
For the year, we expect sales to be up 3% to 5% from 2016. Earlier this month, we gave notice to redeem $591 million in notes that were due in March and December of 2018. As a result, in the second quarter of 2017, we expect to record a non-operating charge associated with the make-whole provision related to the early retirement of debt
This charge of approximately $40 million pre-tax or $26 million after-tax based upon current market conditions impacts EPS by $0.09 and has been included in our updated EPS guidance
We're also reducing the range of our interest expense to be between $196 million and $201 million to reflect this early retirement of debt
This is expected to reduce our interest expense primarily in both the third and fourth quarters worth about $0.04 to EPS compared to our prior guidance
We have slightly lowered our effective tax rate to reflect the improved benefit associated with stock-based compensation and various other items, which in total is worth about $0.06 for the full year
We now expect our full year effective tax rate to be approximately 31%
Looking at our EPS guidance, we exceeded the high-end of our guidance in the first quarter by $0.18. For the year, due to the strong first quarter operating performance, we are raising guidance by $0.05 after absorbing a net $0.05 financing charge that was not in our prior guidance
The remaining $0.08 is due to timing within the year
And as a result, we now expect our full year EPS to be in a range of between $7.25 and $7.40. As I discussed earlier, we repurchased 2.7 million shares of common stock for $400 million in the quarter and continue to see our diluted share count in the range of between 291 million and 293 million shares for 2017, a 2% reduction at the midpoint of the range
Operating cash flow in the first quarter was essentially in line with our prior expectations and was slightly impacted by the higher sales we saw in the first quarter
We continue to see our full year 2017 operating cash flow outlook between $2.8 billion and $3.1 billion
And, as you can see on page 9, we've included guidance by business, which reflects the higher net sales at Missile Systems that I mentioned earlier
Before moving on to page 10, as <UNK> mentioned earlier, we're now raising our full year 2017 bookings outlook to be between $25.5 billion and $26.5 billion
This $500 million increase is driven by demand from a broad base of domestic and international customers
On page 10, we provided you with our outlook for the second quarter of 2017. As we mentioned on our last call, we still expect the cadence for the balance of 2017 to play out similar to 2016 with sales, EPS and operating cash flow ramping up in the second half of the year
I want to point out that we expect second quarter sales to be in a range of $6.05 billion to $6.2 billion and EPS from continuing operations is expected to be in a range of $1.67 to $1.71. It's important to note that we expect the tax rate to be approximately 29.5% in the quarter, lower than the full year, primarily due to the timing of the benefit associated with stock-based compensation
Again, I want to reiterate that our second quarter EPS outlook includes an estimated unfavorable $40 million pre-tax or $0.09 EPS impact to non-operating income associated with the early retirement of debt
This charge will be recorded in other income and expense
Before concluding, I'd like to spend a minute on our balanced capital deployment strategy
As we said on the call in January, we expect the full year 2017 share buyback to approximate 2016's levels
And as mentioned earlier, we recently raised the dividend by 8.9%
We continue to expect to generate strong free cash flow for the year and target returning approximately 80% of free cash flow to shareholders, while maintaining a strong balance sheet
In summary, we saw a good performance in the first quarter
Our bookings were strong, sales and EPS from continuing operations were higher than the guidance we set in January and our operating cash flow remains on track for the year
With that, <UNK> and I will now open the call up for questions
Question-and-Answer Session
And <UNK> or <UNK>, I'd just add the following from a big Patriot point of view with IDS
A lot of talk about their margins over the last couple years
I think as we closed out the back half of 2016, we saw the margins improving there as we had indicated they would
They are off to a solid start this year with regard to their Q1 margin
The rate they achieved in the quarter is just below the guidance for the year and they had strong sales
The margin – they did exceed in Q1, exceeded our expectations, primarily due to the earlier timing on some program improvements partly related to the mix
And when we look at the full year, at IDS, we expect to see margins improve a bit more because of the mix that you referred to and increased productivity
Recall as well that, in 2016, IDS did have the exit from the business venture
So when you look at IDS, excluding the impact, we would expect to see about 100 basis points of margin expansion that's reflected in our guidance for the year compared to last year normalized for the business exit
And we're pleased with the track that the business is on
Hi, Rob
And I think, Rob, just to kind of maybe complete and pile on a little bit what <UNK> said
From a margin perspective, the quarter was a little ahead of our expectations
It was at the high-end of our guidance for the year
One thing I would say the Q2 margin we do expect it to be down slightly from Q1, probably in the mid-single-digits, driven by a combination of some seasonality as well as, as I referred to in my opening comments, the timing of the investment that we see at the business there
So, I think that kind of sums up Forcepoint
Last year, <UNK>, our Navy business in total was about 18% of our total revenue
Yeah
So, I mean, it just effectively mapped, right, the relationship of their bookings in the quarter to the sales that they generated, nothing out of line there
At a total company level, as we indicated, the bookings in the quarter exceeded our expectations
But if you peel that back, Missiles' bookings were roughly that order of magnitude below their sales in the quarter
But for the total year, we expect them to be on track and have a slight increase on a year-over-year basis with their backlog
And just as a remainder, they've had some strong bookings over the last couple of years
Their book-to-bill, I think, last year was about 1.13, so nothing out of the norm there
Just the burn-off of revenue and lower than what they had been experienced – level of bookings, but nothing to be concerned about
Yeah
So, let me hit that a couple ways
I think given everything that you just laid out, what I think is important we're going forward with the early retirement of debt under our balanced capital deployment
And that still assumes, which has been our stated objective now for a couple of years of returning about 80% of free cash flow to shareholders
And I think in my opening comments I reaffirmed that
We did buy back the $400 million of stock in the first quarter
We're on track to reduce the shares outstanding by about 2% at the midpoint of our range
And as <UNK> mentioned in his comments, for the 13th year in a row, we raised our dividend this year by 8.9%
As it relates to the retirement of debt, the debt that we're retiring is out there at about 6.5%
We're going to finance that, if you will, with a combination of cash on hand and commercial paper and rates on CP around 1%
And we're doing this because this approach allows us to do a couple things, lower interest expense, clearly maintain our financial flexibility, especially ahead of potential tax reform and what that could mean for us
I think, overall, more importantly, it doesn't change our philosophy around our balanced capital deployment, including the 80% of free cash going back to shareholders
And it also does not reflect the change in the view of how we view our balance sheet, which, as I mentioned earlier, remains very strong and gives us flexibility
Good morning
Yeah
I can give you that, <UNK>
Funded backlog at the end of Q1 was $24.6 billion
That's about 68% of our total backlog
And that's in the range that we typically see it out
It typically runs 60% to 70% of total
The reason we didn't put it in, as I mentioned earlier, we did adopt a new revenue recognition standard in Q1. And we've adjusted our reporting, including around backlog, to align with the new standard
But we're still tracking it and we'll provide it, if folks are interested
Yeah
Let me kind of hit that from two or three different angles here to make sure I give it the right context
So, obviously with the guidance we'd given in January of zero to $100 million, we were expecting our overall operating cash flow to be relatively low – lower than last year
And that was all driven by the cadence around the working capital
For one thing, recall, we really exceeded our cash flow expectations for 2016 by about $300 million, which otherwise, from a timing point of view, all tied to collections, would have been beneficial to Q1. And we'll always take the cash earlier, right? So we saw what was lining up here for the quarter
It really is all due to the timing of collections that are tied to the timing of pre-determined or negotiated contract milestones with each of our particular contracts
And also, we're continuing to grow and we're ramping up to support some of that growth
If you want to think of it from a total year point of view, I'd expect that to continue to build over the next couple quarters into Q2 and Q3 and then we would come back down in the fourth quarter
And, again, to try to help you size that a little bit, we will come back down, it will below the levels we're at for – somewhere between the levels we're at at Q1 and where we were at the end of 2016. And, again, really tied primarily to the timing of payments related to executing contract milestones
From a – translate that to cash flow, I'll just throw in there, for Q2, we expect cash flow – strong cash flow, operating cash flow above $700 million
And as we said earlier, we feel confident in the total year outlook of the $2.8 billion to $3.1 billion
No
We've seen pretty consistent terms here for the last year or two and from a terms' point of view not seen anything different
Rob, obviously, I'll take the first one
As I just said, we're confident in our outlook for the cash flow for the year
We do expect to see about $700 million in Q2 with the rest of the year playing out or following a cadence that is roughly in line with prior years but with the majority of the cash flow weighted in the second half and even then more into Q4 driven by the program milestones and deliveries that I just referred to
Good morning
Good morning, <UNK>
So again the profile – as I just described a little bit a while ago, not anything really new than what we were counting on
By year-end, as I said, the absolute balances from where they are here in Q1, they will be lower, okay
But part of it is – a little bit of it is the growth aspect of it and the growth profile
And we're going to continue to work to drive down working capital
There is always kind of the things that fall December versus January
So there are some opportunities that we're working on that we're looking at that could potentially get accelerated into 2017 and provide a better outlook, similar to what happened at the end of 2016.
I think when you go – if you go back to the outlook for January – and I know we gave a range right for just using cash as a surrogate for the working capital to $2.8 billion to $3.1 billion
What we were saying is that when you normalize for the discretionary contribution that we made last year, free cash last year would have been – I'm sorry, operating cash last year would have been $3.4 billion
The decrease this year was driven by the net pension effect of higher required contributions
And we said that we thought working capital could be flattish to maybe nominally favorable
And we still could end up in that range there, but because of the growth that is maybe a little bit more pressure
But you're thinking of it relatively correctly
