RTX Corporation

Good day, ladies and gentlemen. Welcome to the Raytheon First Quarter 2019 Earnings Conference Call. My name is Shannon, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Kelsey DeBrian, Vice President from Investor Relations. Please proceed.

Thank you, Shannon. Good morning, everyone. Thank you for joining us today on our first 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 Tom Kennedy. our Chairman and Chief Executive Officer, and Toby O'Brien, our Chief Financial Officer. We'll start with some brief remarks by Tom and Toby and then move on to questions. Before I turn the call over to Tom, 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, and 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 are discussed in detail in our SEC filings. With that, I'll turn the call over to Tom.

Thank you, Kelsey. Good morning, everyone. Raytheon delivered strong operating performance in the first quarter. Sales increased 7.4% in our bookings, sales, EPS, and operating cash flow were all better than expected. We had backlog of over $41 billion, which is up almost $3 billion versus the same period last year. Our trailing four-quarter book-to-bill ratio is strong at 1.13, and our growth strategy continues to be well aligned with the needs of our global customers. Overall, I was pleased with our results in the first quarter, including strong performance at IIS and SAS, which more than offset missiles performance, which was below our expectations. Toby will review additional details about the quarter in a few minutes. Given the constantly evolving threat environment, I'd like to take a few minutes to discuss some of the innovative solutions we are developing. Consistent with Raytheon's long history of pushing the bounds of what is possible, today we are at the forefront providing advanced technology solutions for our customers' most complex challenges. and we are seeing strong future opportunities in our core capabilities, such as in radars and missiles. In a great accomplishment for the company and our customer, for the first time in March, the U.S. Missile Defense Agency, in partnership with the industry team, launched two Raytheon exo-atmospheric kill vehicles in back-to-back test. One EKV successfully destroyed a complex threat representative intercontinental ballistic missile outside of the Earth's atmosphere, while the other EKV gathering test data in what is now known as a two-shot salvo engagement. This was a critical milestone for the ground-based mid-course defense system, and it also relied on Raytheon's advanced sensing capabilities, such as the sea-based X-band radar, TIFI-2 radar, and multispectral targeting system on unmanned aerial vehicles to provide the EKV with tracking and targeting data of the ICBM. Next, as we have discussed on prior calls, Raytheon is a leader in providing the next generation of GAN-based naval radars. Our air and missile defense radar and our enterprise air surveillance radar for the U.S. Navy and international customers will form the backbone of radar capabilities for U.S. and allied surface fleets of the future. AMBR provides integrated air and missile defense capabilities with greater range, increased accuracy, and higher demonstrated sensitivity, allowing it to counter large and complex raids. The Acer is the Navy's next generation radar for aircraft carriers and amphibious warfare ships that provide simultaneous anti-air and anti-surface warfare, electronic protection, and air traffic control capabilities. Understanding our customer's need for performance at the speed of relevance, we are making considerable progress on these advanced capabilities. During the first quarter, AMDR completed its latest and most complex test and has exceeded all performance requirements. The radar is currently in low-rate initial production and on schedule for delivery to the Navy's first modernized DDG-51 Flight 3-class ship in 2020. And in March, we booked over $400 million for the next award of three AMDR LRIP units. As for EASER, in April, the radar was moved to Wallace Island in Virginia to begin its next phase of system-level testing. We expect EASER to shift from the engineering and manufacturing development phase to the production phase at the end of 2019. And earlier this week, we received the first of two critical contracts from the Missile Defense Agency valued at approximately $400 million for our TIPI-2 radars, as part of the Kingdom of Saudi Arabia's purchase of the Terminal High Altitude Area Defense, or THAAD, air and missile defense system. We continue to see the total Raytheon opportunity on this program to be around $3 billion. In the area of missiles, Raytheon is continuing our leadership as a provider of numerous advanced and innovative solutions to our customers. During the quarter, Raytheon and the U.S. Army completed a successful preliminary design review for Deep Strike, Raytheon's solution to meet the Army's precision strike missile or PRISM requirement. This moves the missile down the development path toward its first flight tests planned for later this year. The new missile's range and speed will enable Army combat units to engage targets over vast geographic areas in high-threat environments and will fly farther, faster, and pack more punch than the current missile. And our franchise win of the Naval Strike Missile for the U.S. Navy last year continues to show opportunities for growth. The missile is offered by Raytheon in partnership with Consberg. And recently, we entered into an agreement that expands the franchise further by integrating NSM into U.S. Marines' existing force structure to support the National Defense Strategy and modernization efforts. And in April, we saw further extension of the NSM franchise with an approved international sale to integrate NSM onto rotary wing aircraft. We are also developing both offensive and defensive hypersonic systems and providing our nation's military with the advanced tools they need to stay ahead of the escalating threat. In March, Raytheon was awarded a DARPA contract to further develop the Tactical Boost Glide hypersonic weapons program. This joint DARPA and U.S. Air Force effort includes a critical design review, a key step to fielding this technology. In addition, We are working on advanced interceptors for missile defense. During a quarter, Raytheon successfully completed more than 1,700 rigorous wind tunnel tests on the newest extended range variant of the combat-proven AMRAAM air-to-air missile. Testing is a major step in the missile's qualification for integration with the NASAM's ground-based air defense system. The AMRAAM-ER missile will intercept targets at longer distances and higher altitudes. thus enhancing system performance for our customers worldwide. While we are pleased with the growth MISLS has achieved and we remain confident about their future opportunities, we recognize there is more work to be done to meet our expectations on performance. The fundamental is that MISLS remains very strong and we are implementing action plans to improve program execution. In the meantime, as I previously mentioned, we are pleased with the strength in the rest of our portfolio, especially at IIF and SAS, which offset missiles performance. In addition to the strong performance at IIS earlier this year, an IIS team demonstrated a land-based expeditionary version of its Joint Precision Approach and Landing System, or JPALs, for the first time to the U.S. Air Force, Navy, and Marine Corps officials. The Precision Landing System is currently used on ships to guide F-35Bs in all types of weather. JPALs has the potential to help any fixed or rotary-wing aircraft land in rugged, low-visibility environments at austere bases worldwide. I would like to highlight one more of our many innovative solutions, this one at SAS. Last year, we were selected as one of two companies to complete for the opportunity to provide the mission payload for the Next Generation Overhead Persistent Infrared Program. NextGen OPR-IR is a new missile warning satellite system for the US Air Force aimed at countering emerging global threats. During the first quarter, we were awarded a proposal update. And in April, we successfully completed the payload system design review on schedule. We are in an era of rapid technological change. And as a result, it is becoming clear that the solutions our customers will need in the future relative to escalating threats will most likely be complex systems integrating multiple technologies including radars, missiles, missile defense, and cybersecurity. This is an area of strength for Raytheon. With our deep portfolio of capabilities and leading franchises across all of our segments, we are well positioned to be a key partner for our customers. The initial development of our advanced capabilities is often through our classified work, which, as we have discussed on past calls, funds next generation technology development that is integral to the long term growth of our future franchises and production awards. And our classified business was once again strong in the first quarter, with classified bookings up 37% and classified sales up 22% versus the same period last year. Turning to DC, we were pleased to see the increase in the base budget and modernization levels in the 2020 Department of Defense budget request that was released in March. Raytheon programs fared well in the request with notable increases from weapons, radars, and C5ISR programs. The budget request was clearly driven by the priorities of the National Defense Strategy, with the research and development accounts increasing substantially to develop high-end capabilities to counter peer threats. and the NDS aligns well with our other innovative solutions that address our customers' most complex challenges. We will continue to work to ensure robust funding for our programs, which are of critical need for our customers. In closing, the Raytheon team remains focused on driving strong execution and future growth, backed by a workforce of over 67,000 employees and a corporate culture grounded in our company's values. These values, trust, respect, collaboration, innovation, and accountability guide the way we engage with colleagues, customers, investors, and other stakeholders. Now let me turn the call over to Toby.

Thanks, Tom. 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 three. We are pleased with the strong performance the team delivered in the first quarter with bookings, sales, EPS, and operating cash flow better than our expectations. We had solid bookings in the first quarter, resulting in a strong trailing four-quarter book-to-bill ratio of 1.13 and a backlog of over $41 billion. This positions us for continued growth throughout 2019 and beyond. Our sales in the quarter was 6.7 billion, up 7.4% with growth across all of our businesses. Our EPS from continuing operations was $2.77. Better than our guidance and an increase of 25.9% year over year. I'll give a little more color on this in just a moment. We had an operating cash outflow of $411 million in the first quarter, better than the guidance we provided in January. And as expected, operating cash flow was lower than last year's first quarter, primarily due to higher net cash taxes and the timing of payments. During the quarter, the company repurchased 2.8 million shares of common stock for $500 million. And I would add that last month, we announced an 8.6% increase in our dividend. This marks the 15th consecutive year of increasing dividends at Raytheon. Turning now to page four. Let me start by providing some detail on our first quarter results. Company bookings for the first quarter were 5.4 billion, resulting in backlog at the end of the first quarter, of $41.1 billion. This represents an increase of approximately $3 billion, or 8%, compared to the first quarter of 2018. It's worth noting that around 38% of our backlog is comprised of international programs. If you now move to page five, for the first quarter of 2019, sales were better than the high end of the guidance we set in January. Sales were especially strong at IIS. Looking now at sales by business. IDS had first quarter net sales of 1.6 billion, up 4% compared with the same period last year. The increase from Q1 2018 was primarily driven by higher sales on various Patriot programs and a Naval radar program. In the first quarter, IIS had net sales of $1.8 billion. Compared with the same quarter last year, the 12% increase was primarily due to higher net sales on classified programs in both cyber and space. As we've previously discussed, we expect IIS's growth rate to moderate in the back half of the year due to the continued planned ramp down and transition of the warfighter focus program. Missile systems had net sales of $2 billion, up 9% compared with the same period last year. SAS had net sales of $1.7 billion in the first quarter of 2019, up 5% compared to last year's first quarter. The increase from Q1 2018 was primarily due to higher net sales on classified programs. And at fourth point, sales were up 12% in the quarter, compared with last year's first quarter. Overall, we're pleased with our total company sales, which grew 7.4% in the quarter. Moving ahead to page six. Now let me spend a few minutes talking about our margins in the quarter. Our operating margin was 16.5% for the total company and 11.8% on a business segment basis. both generally in line with last year's first quarter and better than our expectations at the company level. IDS margin was lower in the first quarter of 2019, as expected, primarily due to lower sales on a large international Patriot program awarded in last year's first quarter. IIS's margin was higher by 310 basis points compared to last year's first quarter, primarily due to a gain of $21 million related to the consolidation, as planned, of an entity that was previously an equity investment and from a $13 million gain from the sale of excess assets. Excluding these items, the margin at IIS would be about 8.5%, better than last year's first quarter, primarily due to higher net program efficiencies. Missiles margin was lower in the first quarter compared with the same period last year and lower than our expectation. We expected there to be an impact from program mix in the first quarter, but we also saw lower than planned net program efficiencies, which I'll discuss further when I review our outlook by business. From a total company point of view, we remain focused on margin improvement going forward, and continue to see our business segment margins in the 12.1 to 12.3% range for the full year, consistent with the guidance we laid out in January. We see our margin improving in the back half of the year, driven by favorable program mix and productivity improvements. Turning now to page seven. First quarter 2019 EPS of $2.77 was up 25.9% from last year's first quarter, and was better than our expectations. The year over year increase was largely driven by higher sales volume and pension related items. On page eight, as I mentioned earlier, we have updated the company's financial outlook for 2019. We continue to expect our full year 2019 net sales to be in the range of $28.6 billion to $29.1 billion, up 6% to 8% from 2018. We still expect our full-year 2019 EPS to be in the range of $11.40 to $11.60. As I discussed earlier, we repurchased 2.8 million shares of common stock for $500 million in the quarter, and continue to see a diluted share count in the range of between 279 and 281 million shares for 2019, driven by the continuation of our share repurchase program. Operating cash flow in the first quarter was higher than our prior expectations, primarily due to the timing of collections. Given that it is still early in the year and our cash is back half weighted, we continue to see our full year 2019 operating cash flow outlook to be between 3.9 and 4.1 billion. And although not on the page, it is worth noting that we continue to see our full year 2019 bookings outlook to be between 29.5 billion and 30.5 billion. Turning now to page nine, as you can see, we've included guidance by business. Before I discuss the other businesses, I wanted to address missiles first. At missiles, as I mentioned earlier, we saw lower than expected net program efficiencies this quarter. As a result, we have reduced their outlook to reflect first quarter performance, and what we now expect for the balance of the year. We now see their margin to be in the 11 and a half to 11.9% range. As Tom mentioned earlier, we have an action plan in place to improve their execution. The strong performance we saw at both IIS and SAS in the first quarter and their improved outlook for the remainder of the year offset the performance at MISLS. This reflects the strength of our balanced portfolio. We now expect IIS margins of 8% to 8.2%, which is up 20 basis points over the prior outlook we provided in January. And we've updated SAS margins to 13.2 percent to 13.4 percent, an increase of 30 basis points from our prior outlook. As a result, it's important to note that for the full year 2019, we continue to see our business segment margins in the 12.1 to 12.3 percent range for the full year. consistent with the guidance we laid out in January. We are committed to improving margins across all of our businesses. And this focused effort is now starting to come through in the margin performance at our IIS and SAS businesses. On page 10, we provided you with our outlook for the second quarter of 2019. As we mentioned on our last call, we still expect the cadence for the balance of 2019 to play out similar to 2018. We see sales, EPS, and operating cash flow ramping up sequentially in the second half of the year. I want to point out that we expect second quarter sales to be in a range of approximately $6.95 billion to $7.1 billion, and EPS from continuing operations is expected to be in a range of $2.50 to $2.55. We expect operating cash flow to be in a range of $500 million to $700 million. Before concluding, I'd like to spend a minute on our capital deployment strategy. As we said on the call in January, we expect to continue to generate strong cash flow and maintain a strong balance sheet that provides us with financial flexibility. We remain focused on deploying capital in ways that create value for our shareholders and customers. This includes internal investments to support our growth, paying a sustainable and competitive dividend, reducing our share count, making targeted acquisitions that fit our technology and global growth needs, and making discretionary contributions to the pension. In summary, if you stand back and look at the quarter, we had strong performance, which provides a solid foundation for the balance of 2019. Our bookings, sales, EPS, and operating cash flow from continuing operations were all above our expectations, and we remained well-positioned for continued growth. With that, Tom and I will now open the call up for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press stars and 1 on your touchtone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. In the interest of time and to allow for broader participation, you are asked to limit yourself to one question. The first question will come from the line of Sheila Kajuluk, Listeria Friesen Company. Your line is open. Thank you. Good morning, everyone.

Good morning, Julie. Good morning.

On missiles, how do we think about the franchise programs, Tom, you mentioned in your prepared remarks, and how they develop longer term as growth drivers and maybe just a return on sales of those assets? And then as a follow-up, you both mentioned action plans in place for MS. Can you maybe describe that a little bit more? Thank you.

Yeah, let me start off with the franchises. I mean, I think what's unique about missiles is the fact that they have a very strong, first of all, have a very strong stable of existing franchises that have gone through a significant refresh here over the last five years. In other words, new technology being inserted into them, essentially give them legs for another two decades. And the other one is that the success we've had in extending those franchises into the international marketplace is What's special now is that we have an opportunity for bringing some new franchises on board. We just brought one on board, NSM, and I mentioned how just within a matter of six months, we've extended that franchise into two other mission areas. So essentially doing three mission areas right off the bat. The other items are the ones where we're in a competition for. One is the PRISM, which is a precision strike missile for the United States Army. And that program there just had a very successful test. It had a CDR I mentioned, and it just had a very successful motor test. So we're very keen that we're in a very good position to potentially win that new franchise. And that will replace all of the Army's ATACMs out in the field today and give us the Army, number one, a great significant capability, but also a brand-new franchise for Raytheon. And we're also working on the – The next generation nuclear weapon for the LRSO program, that isn't a competition. That has a down select out in the 2022 period, but it's also the next generation weapon for the United States Air Force with about over 1,000 weapons that will be procured over a period of time. So I feel very strongly about, number one, I would call it the competitiveness of our existing franchises. and our ability to extend them over a couple of decades and then also provide them international legs and the new opportunities we have at MISLS. So bottom line is MISLS has a lot of upside in terms of growth, and we're supporting that. Back on the action plan that we're taking at MISLS, this is, you know, for us, we have a new leader that has come on board. That's Wes Kramer. Wes was the president of IDS. did a great job for us at IDS. He's also been in missiles before. He ran their largest business area, which was a standard missile business area. So he knows the business. He knows what levers to pull to drive both continued growth and also margin expansion there. And we're putting in some very detailed action plans to go drive a margin expansion in the business. We're very certain for the margin range we have for this year set. But we're also very positive on growing margins incrementally in 20 and then 21. And that's our main focus at missiles.

And, Shiel, I'll just add a little bit, you know, on the details of the things that we're doing out there. So there's already been some changes that have been made. There were some modifications to the org structure. Some product lines were consolidated, which obviously reduces costs. management costs. There were some other leadership changes made on the staff. The team out there continues to review the cost structure, looking for opportunities, you know, to get benefit of the leverage that we have given the growth we've seen. We're reviewing the factory operations for, you know, incremental efficiencies. And Wes, as Tom mentioned, will leverage his prior experiences at missiles and will be clearly focused on improving execution. And there will be, you know, some other things we make, other changes we make along the way. But bottom line, you know, the team is very focused on growing the business, improving program execution, and as Tom mentioned, expanding margins.

Thank you. Our next question comes from John Raviv with Citi. Your line is open. John, are you on the line? John, your line is open. Please check your mute button.

Hello, can you hear me?

Now we can. Good morning.

Thanks, guys. Sorry about that. Good morning. Tom, you had mentioned an era of rapid technological change. Maybe for both of you, can you talk about the earnings algorithm in that sort of era where we're seeing, obviously, this almost tradeoff between growth and margin, which has maybe reversed in a couple years? And then also you mentioned that customers in that era want more integrated solutions, but how do they balance that desire for integration with them wanting more open architectures and maintaining competition? Perhaps in that answer you can also address the LTAMS competition. Thank you.

Well, first of all, we are having an explosion in technology. Essentially people talk about the fact that there's an exponential change in technology that is occurring now with things like machine learning, nanotechnology, quantum computing coming on board, additive manufacturing. We're heavily involved in all of those areas. I think our customer realizes that they need to take advantage of those new technologies to be able to generate the next generation of capability to put the United States in a premier position from a defense perspective. And so we're seeing a lot of activity in R&D on the government side to bring those technologies new technologies to fruition. And what we're doing at Raytheon, our strategy is to take those technologies and, again, upgrade our existing franchises, whether they be radars or missiles, ground stations, ground systems, and then also generate the next generation ones. And so we're playing, you know, both extending our existing franchises and then also working to take these technologies to win new franchises. So we're, frankly, we're all over that. And a prime example, and you brought it up, is the U.S. Army's lower-tier air missile defense sensor, we call it LTAMS. We are in a competition on that. We'll be proceeding here in May to something called the U.S. Army Sense-Off. What we're doing there is we're taking brand-new technology and inserting it, coming up with the new 360-degree active electronically scanned array radar using our high-end GAN technology that we produce here at the Raytheon Company. We expect the sense of this taking place between May and June of this year, and at some point we believe the Army will complete their analysis. There is an RFP that's out there. But sometime, you know, late 19, early 2020, we expect a down select there.

Yeah, so, John, let me maybe just add a little bit on the, you know, part of the question related to the earnings algorithm or exactly how you put that. You know just a couple things to remember right so we've talked before you know a lot last year about the mix We're seeing the change in the mix be driven by The national defense strategy and obviously the changing technology plays into that as well and just as a reminder the you know segment margin that we guided to this year it has about 20 basis points of margin headwind right that we we see and because of that mix and we're offsetting that and a little bit more with about 40 basis points of productivity. We're clearly in an era or a time when we are, you know, winning many of these new developed and classified programs and as Tom said, we see them as future franchises that ultimately transition and lead to production over time. And as I mentioned, you know, near-term margin pressure, but it should be tailwinds to margin in the future. These awards strengthen our portfolio, right? We're all about franchises, and the more franchises that we can get, you know, help, and we expand those internationally at a point in time as well. So while we've seen some puts and takes, you know, as a result of this, especially, you know, in our 2019 guidance by business, we continue to see margin expansion going forward. And again, don't forget about our international content, right? About 30% of our business is international. It's on the higher end of our, you know, margin scale that we, you know, have the benefit of working the leverage when looking at the earnings equation also.

Thank you. Our next question comes from Doug Harnett with Bernstein. Your line is open.

Thank you. Good morning. Good morning, Doug. You know, I'd like to go back to missiles because I just want to understand what's been the evolution here. We've really seen margin guidance reduced for four quarters in a row now, essentially. You know, I understand that some of last year that was attributed to a mixed shift and more development. But now when you look at Q1, we actually see the backlogs drop by more than a billion dollars in missiles. And you've made a leadership change. Can you talk about how you've looked at this unit over the last three to four quarters and what you've seen as the issues there and when did you come to the decision that there had to be some significant changes?

Let me start off and then Toby will follow. The first thing is in terms of the leadership change, the leadership Prior leader, prior president Teller didn't inform the company that he plans to retire. So that president change was based on that retirement request. And so we were able to, at the time, bring on a very strong player. That's Wes Kramer. And I say he's a strong player because right now he's running the IDS business, and they're doing quite well. And it's a similar type of business to missiles. They do have some strong franchises there, a lot of production there. also a lot of growth opportunity at the IDS, and so we're taking that to the missile company and applying some of the techniques that Wes put in place and we have in place at IDS at the missile company. But I think in the end game, first it was originally an issue relative to MIX. We were winning and have won quite a few contracts and missiles in the development area, and essentially it's the R&D area for the government, which put pressure on us from a MIX perspective. The other issue we were seeing is we do have quite a bit of production programs going on there. We weren't seeing as much pickup on the production programs that we had seen in the past. And this started about probably about three quarters ago. And so we're putting much more emphasis on the essentially on the leaning out the factory, really working on our supply chain, and really driving productivity across all the production programs. The mix is the mix. But what we can do is we can drive essentially significant improvement in the factories and in our supply chain to drive, you know, margin expansion on that part. I'll let Toby answer some of this, too. Go ahead, Toby.

Yeah, so, you know, Doug, just to your question about what's happened, you know, over time with the guidance, you know, a lot of that last year was around the mix, and we did – get hit with a lot more of the lower margin development classified work, right? We believe the guidance for this year, going back to what we provided in January, properly sized that, you know, relative to missiles, the mixed effect. We still feel that's the case today. The change that you're seeing here in the quarter is, as we said, around performance and execution. There were a couple of program adjustments in the quarter at missiles. We did have one that was about $15 million, but, you know, when you step back from it, they're growing. The kind of the effects of mix, I think, are well understood. We pegged it right, and it was all performance-related. So, as I said before, we took that into account, re-looked at the year, and made the adjustments. You know, I think Tom said it in his opening remarks, the fundamentals there remain strong and we believe that. I'll just, you know, comment to your comment about the backlog. So I think it's important, you know, you can't take one quarter and think of that as a, you know, trend either good or bad. You know, I'd take you back to the fact that, you know, missiles has been leading growth in the company going back the last four or so years. As a reminder, last year they had a book to bill of 1.09. It was 1.26 in 2017. Their book to bill was low in the quarter, which is what drove the backlog down. It's all timing related. I would tell you we expect north of $9 billion of bookings at missiles this year, you know, a book to bill of 1.05. or greater. Again, I think we've talked about it before. We expect two multi-year production awards in the back half of this year out at missiles that is part of what is going to drive that. So I wouldn't read anything into the change in the backlog in the quarter other than just timing related to some large bookings.

Thank you. Our next question comes from Robert Stallier with Vertical Research. Thanks so much.

Good morning.

Hi, Rob.

To stay on the missile theme, unfortunately, if you sort out the performance issues, what sort of benefit could you have to the operating margin in this business going forward? So ignoring mix, just looking at productivity.

So, Rob, I think the way to think of it, right, and I'll kind of maybe start with this year and move forward, you know, move forward for you here. Excuse me. So first of all, again, as Tom said, you know, we believe we've sized it. We've adjusted their range downward. It's 11.7% at the midpoint, which is, you know, in line with where they ended last year. And we think we've seen that appropriately. We would expect the cadence of margin to improve quarter to quarter. throughout this year with a little bit of a bias towards the second half. And then when you think about 2020 and beyond, if I were to take you back to the 2016 timeframe, 2017, even 2015, you know, MIFLS was generating margins in the 13% range before we started to see. you know, this higher influx of the development and the classified work. And I believe that's still attainable, albeit out in time, right? Because it's going to take time both for these development programs to transition into production and, you know, to implement some of the actions that we talked about and, you know, refocus on the program execution. So, you know, we're not going to peg a number, right? But we would say, you know, improvements, incremental improvements, in 2020 and beyond, driven by both the combination as that mix shifts a little bit more favorably to production. The two big multi-year awards get into a strong production cadence out in the future, and we execute better. It's going to be a combination of all of that, but clearly the business has demonstrated in the past, especially when the mix is different, how they can perform.

Thank you. Our next question comes from George Shapiro with Shapiro Research. Your line is open.

Yes, good morning.

Good morning, George.

You wound up beating the high end of your EPS guidance by 25 cents. You beat the high end of your sales guidance by $150 million. I mean, a lot of this is due to IIS. But you didn't raise the guidance or the sales guidance. And usually when you beat it by this much, you raise it by something. Is it all IIS where warfighter sales didn't come down this quarter or unexpected to come down? And then also, was there any kind of benefit to IIS sales from the consolidation that you did in the quarter? And any other color you might provide? Thanks.

Sure. I'll address a couple IIS things, and then I'll tell you how we're thinking about the year from a company level. So the Warfighter sales came down in the quarter like we expected, but, you know, year over year we're looking at about a half a billion dollar reduction. Most of that's in the back half of the year. So there is an imbalance first half, second half relative to how Warfighter is going to, you know, impact the revenue cadence at IIS. I would tell you, you know, even with that decline, the rest of the IIS business is strong. You saw some of that in the first quarter in the cyber and space areas. And ex-warfighter, IIS is growing, you know, around 10% for the year. The consolidation of the entity that you asked about did have about a $38 million impact in the quarter on revenue. So that's IIS. At a total company level, you know, as we said, we're pleased with the first quarter results. They did exceed our expectations at the company level. Some of the higher sales volume we saw was timing related, right, driven by timing. And it clearly gives us confidence in our, you know, outlook of our, you know, 6% to 8% growth for the year. We mentioned the favorable performance at IIS and SAS, and we improved their total year guidance. But those improvements were offset by the decrease in the missiles margin, you know, for the quarter that we flowed through to the year. So in total, as we said, the range stayed the same for segment margins, 12.1 to 12.3. Bringing it down to EPS, you know, we were 35 cents higher than the high end of our guidance range, as you mentioned. You know, roughly half of that, driven by the timing of sales and margins within the year, The other half driven by the timing of some corporate and non-operational items within the year that would now be expected to, you know, have an impact, a negative impact in the back half. So, you know, the change in margin guidance at the two businesses that, you know, improved IIS and SAS, that flowed through and offset missiles. It's early in the year, right? We continue to be focused. you know, on growing the top line and improving margins. And then I just add for completeness, you know, I think I mentioned in my open remarks, we were pleased with the cash performance for the quarter about 140 million better than the high end of our guidance. It was timing related, it's early, you know, the 3.9 to 4.1 billion that we have out there for the year would be on top of the or is on top of the record performance we saw last year. Bottom line, you know, we'll keep an eye on all this, but we're confident in the outlook for the year.

Thank you. Our next question comes from David Strauss of Barclays. Your line is open.

Thanks. Good morning. Last one on missiles and then also one other question. Toby, I think you said you highlighted maybe a $15 million negative EAC. What were the total negative EACs of missiles in the quarter? And then on cash deployment, I think the $500 million share repo number, that's the biggest I've seen on a quarterly basis out of you guys in a while, how you're thinking about share repo from here, and then also, you know, the potential to potentially pull forward some of the future pension contribution needs into this year. Thanks.

Okay. So on missiles, you know, just to put it in perspective, the net EAC adjustments in the quarter are, were 4 million, all right, and there were about 60 million, a little over 60 million of negatives. And again, if you just kind of think of the, right, the 9.5% margin, if the performance had been more, the EAC adjustments had been more in line with our expectation, we would have been in a, you know, plus or minus 11% margin range for the quarter. Again, the issue we're dealing with here in missiles in the quarter are all related to their performance. On the share repo, you know, we continue to see value in our shares. You know, we're committed to the share repurchase program. The, you know, the outlook for the year, you know, similar from a dollar value point of view, give or take, to next year, to last year, I'm sorry, you know, about $1.3 billion and the, you know, 2 plus percent reduction and We'll continue to evaluate that. As far as the pension goes, per our normal practice, we're looking at that all the time, but we'll have a clearer view of that as we get towards the back half of the year. We obviously want to see what's going on from an overall cash generation, allocation of capital, and certainly what's happening in the market and how the the plans are performing. You know, last year, just as a reminder, the reason we did something a little bit earlier was we got the benefit with the change in the tax laws to make the deduction at the prior tax rate of the 35%. So we were, you know, a little bit ahead of when we would normally look at discretionary contributions.

Thank you. Our next question comes from Kaizan Rumor with Cowan & Company. Your line is open.

Yes, thank you very much. So your guidance for the second quarter, 250 to 255 in earnings, looks like we get a fair amount of margin compression given your revenue guide. Could you walk us through maybe some of the puts and takes on margins, particularly missiles? Do we have some more pain to sort of get things under control in the second quarter? And is that the reason for what looks like a light margin guide. Thanks.

Yeah, sure, Kai. So, you know, typically for the company, our segment margins do ramp up in the second half and obviously therefore start a bit lower in first half. We did see some Q1 margins, about 50 basis points higher than our expectations, right, so that we were ahead of our guidance, ahead of our expectations on the segment margins. A decent portion of this improvement was driven by the timing of some profit previously expected in Q2, primarily at both IIS and SAS. And therefore, you know, taking that all into account does result in a lower margin in Q2. If I look at the businesses specifically for Q2, we do see lower IDS and IIS margins compared to Q1. and also just as a bit of a reminder, you know, Forcepoint traditionally or typically does have a loss, you know, in both Q1 and Q2 due to the seasonality of their business. So, you know, although the Q2 margin expectations, you know, they are a little bit lower, we do feel good about our guidance for the total year of the 12-1 to 12-3, and I can tell you, We have had years in the past where the cadence was similar. And, you know, part of that, you know, is driven, as I mentioned, by force point, given that they're in a loss for the first half of the year and a, you know, a profit in the back half as their volume increases.

Thank you. Our next question comes from Rob Spingarn with Credit Suisse. Your line is open.

Good morning.

Good morning, Rob. Good morning, Rob.

So, Tom, I wanted to go to hypersonics and think about Raytheon's positioning in offensive hypersonics. So you talked about the TVG, and I think you won something on Hawk a few years back, but it seems like one of your competitors has been winning a lot of the hypersonic work lately. Where do you stand, and what are the opportunities? Can you catch up, or is this the wrong way to think about it?

Well, let me start off with what we are doing right now. So on the offensive, and I think I mentioned on a prior call that the defense of hypersonics is actually a bigger market than the offensive. But on the offensive, we are heavily involved in multiple programs. One of them is the air-breathing hypersonics weapons program, and that's with the DARPA program, and we are working that program. We're also on a hypersonic boost glide weapons programs. One of them is the Tactical Boost Glide Program that I mentioned during my discussion up front. So that's essentially the two big programs that we are engaged in from a hypersonic perspective on the offensive side. We are also working several other arrangements in the hypersonic area that I can't really get into on the phone here, but we feel in a very strong position relative to where we want to be on offensive hypersonics. On the defensive side, we are heavily involved in that, have several activities involved in that, but it also moves on beyond just the missile part. It also moves into the sensor part, both on land and in space. So the overall area of hypersonics is a big opportunity for Atheon. We believe we're engaged in the right elements of that, and we're proceeding forward.

Thank you. Our next question comes from Seth Seisman with J.P. Morgan. Your line is open.

Thanks very much. Good morning. I wanted to ask briefly another question about IIS, where excluding any warfighter headwinds, the performance has been consistently good for several quarters now, both sales and margins. I mean, if we look just specifically at the margin and we exclude the one-timers from the quarter, it's been kind of consistently mid-eighths for the past three quarters now. I mean, is this Is this a mid-eight business going forward, and if not, why not? And just, you know, you're obviously growing nicely. The end markets are growing, and it seems like you're taking some share, too. How do you think about growth potential in the out years?

Yeah, so let me jump in there, and obviously Tom can add any color if he wants. Hopefully I get it all. You broke up a little bit on the question, but, you know, I'll go back to Q1 performance, right, and kind of to your question about the margins. If we exclude the couple items that we, you know, talked about in the comments and the release around the consolidation of the entity that we planned on and the material sales, right, IIS would have had about an 8.5% margin in the quarter. And they're seeing real strong execution. That was largely driven by their net program efficiencies compared to, you know, where they perhaps performed through the year last year and their prior guidance. So we expect them to continue to perform, you know, at a strong level going forward. I think I've said before, this business can certainly get north of 8% on a consistent basis from a margin point of view. I think they've got the execution side of it down real well based upon how they performed last year and certainly into the first quarter this year. I think as everybody knows, they are the one business, right, that from their business model has the structure that drives the margins to be a little suppressed, right? They have the least amount of fixed price and least amount of international work. But I know Dave and the team are working hard to improve that, especially in the area of cyber and various international opportunities. So I expect they're going to continue to grow even with the headwinds of warfighter that, you know, that they'll be through this year between cyber and space and international. And I would expect that, you know, over time they'll continue to incrementally improve the margins and that, they clearly have the ability to get this business to operate in the very high single-digit margins, albeit over time, especially as that mix transitions and becomes a little bit more international biased.

Thank you. Our next question comes from Pete Skibitsky with Olympic Global. Your line is open.

Hey, good morning, guys. One more question on missiles, but more from a revenue standpoint. Tom, I know you guys kind of organize each of your segments by product area, and I'm wondering, you know, which of the product areas within MS is going to grow the fastest this year to get you to your guidance, and just how dependent is the guidance on signing the two multi-years on the SM this year?

Yeah, so I think a big player this year for missiles and actually for their segment that has the two multi-years in it, the SM-3 Block 1B multi-year and the SM-6 multi-year, Those are combined, that's about a little bit over a $4 billion booking. And so the ramping up the later half of this year and obviously into 2020 and beyond, I think they're going to get significant. They are multi-years, five-year multi-years. We'll give them significant base improvements in their factories moving forward. We're seeing across all elements, all the business areas within – within missiles, significant growth and also significant international demand signals. So I think it's – let me give you the exact numbers here, but we're very positive on the growth side of missiles. And so, again, we want to leverage the fact that we are growing, not just on the development programs, but now with these two multi-years on the production programs, we want to leverage that to drive productivity and efficiency improvements to essentially drive the intermargin expansion going in the right direction also.

Yeah, the only thing I'd add, Pete, you know, Tom hit it right on. I mean, they've got such a broad portfolio. There isn't a single program or program area that we're dependent upon here in the near term, certainly this year and into the future, to drive the growth. It's coming from some of the classified work, some of our air-to-air business, the missile defense business that, you know, SM-3 companies, participates in, so I think that's a key feature. They've got the largest amount of franchises in the company, and while they're all at various stages, they're all contributing, or most all are contributing to the growth this year.

Shannon, we have time for one more question, please.

Our last question is from Carter Copeland with Milius Research. I'll let it open.

Just let me in. Thanks, guys. Good morning, Carter. How are you doing? I'm good, Tom. Just to dot some I's and cross some T's to close us out, Toby, I just had a couple. I wondered, you called out in missiles in the K a charge on a next-gen precision strike weapon, and then in your earlier remarks you mentioned a couple of charges. Can you tell us if there's – If that's that same program, if we added another program, if we're talking about, you know, an expansion of, you know, loss making or zero margin work there, any clarification on that? And then just in general with respect to the mix at missiles, you know, with respect to the 2019 plan versus 18, how much more of the cost type work do you have as a percentage this year than, say, you would have had last year? Thanks.

Sure. So let me start with the last one first. You know, at missiles in particular, the cost type mix and directionally is, you know, think of it as maybe five to seven points, you know, 500 to 700 basis points higher or more biased towards cost type versus fixed price on a year over year basis. On your first question, you know, I mentioned, I forget who asked the question earlier, but When I was talking about the performance, and I mentioned in the quarter we had one adjustment that was about 15 million, it is not the same program that you referenced from the K. This was an international test range upgrade program that we saw some growth driven by design-related issues in the early phases, and we're now moving into the production and the integration phase. So it's not the same program that was driving the, you know, negative adjustments that I referred to here in Q1.

That's all the time we have today. Thank you for joining us this morning. We look forward to speaking with you again on our second quarter conference call in July.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.