RTX Corporation (RTX) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Raytheon First Quarter 2012 Earnings Conference Call. My name is Jeff, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Todd Ernst, Vice President of Investor Relation. And you have the floor, sir.

Thank you, Jeff. 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 the 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 the 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 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 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 Bill

Thank you, Todd. Good morning, everyone. Raytheon's off to a good start in 2012. First quarter sales, adjusted margins, EPS and cash flow were all ahead of expectation. Our continued solid operating performance was once again driven by our strong execution. As a result of this performance, we're raising our EPS guidance for the year. Overall, I'm pleased with how the company is operating. We remain focused on delivering the best value across our broad portfolio of programs and technologies, and we're well-aligned with our customers evolving requirements. We are adapting our proven technologies for new and innovative applications. As an example of how Raytheon is able to leverage cost-effective solutions that can be brought to the market quickly is a recent contract we won to develop the Accelerated Improved Intercept Initiative, or as we call it AI3. This system will detect and destroy incoming rockets fired at forward-deployed forces, and it adapts Raytheon's proven missile and sensor technologies for new application in a rapid fashion. Another example is our Multi-Function Radio Frequency System Radar, which we affectionately call MFRFS. This system was originally developed as part of the Army's future combat system program. Now in response to an urgent operational need, we received an award to develop a Ku Band version to help better detect rocket, artillery and mortar threats. Both of these are truly life-saving capabilities for our men and women in uniform. On a different note, given the ever evolving nature of technology, our ability to develop innovative counter technologies remains key to keeping our defense capabilities on the cutting edge. Part of our strategy is continue to invest and develop new capabilities for cybersecurity and electronic warfare applications that are aligned with our customers' requirements. We're doing all of this, while at the same time continuing to improve our operating efficiency. As many of you are aware, an advantage for Raytheon is our strong position in global markets. Our International business represented 25% of our total sales and 27% of our bookings in the quarter. Emerging threats are driving demand for our products around the globe, in particular the Middle East and Asia Pacific regions. Our opportunities range from large integrated air and missile defense systems to precision weapons and missiles, to intelligence and information systems and to a wide variety of ISR solutions for both military and civil markets. In the quarter, we have strong classified bookings, which represented 26% of the total bookings. This is yet another example of how the diversity of Raytheon's portfolio contributes to our overall success. For the company, total backlog was up approximately $600 million year-over-year, and on a funded basis, our backlog is up over $500 million from the end of 2011 and up approximately $1.2 billion from the same period last year. Overall bookings in the quarter were in line with what we had expected. This follows a very strong fourth quarter where we had a book-to-bill ratio of 1.11. As we mentioned on our last call, we expect bookings in the back half of the year to be better than the first half. Last month we announced a 16% increase in our dividend per share. This is the eighth consecutive year in which we increased our dividend, and as a contributor of our overall balance capital deployment strategy and reflects our confidence in our cash generation potential and the strength of our overall financial portfolio. From a broader perspective, we recognize that the prospect of sequestration continues to affect the visibility of the longer-term DoD budget outlook. The risk associated with implementing this legislation have been well-articulated by DoD leadership and by many on The Hill. Whether or not it ultimately occurs won't be determined today. The debate's not settled and it will likely continue through the year. Given that backdrop, we're focused on the things we can control, and we're managing the business to maximize value for all our stakeholders. Whatever the environment and if one looks back at our track record of financial performance, you can be assured that this is what we'll continue to do. More recently, a key driver of our performance has been our supply chain initiative. About 1.5 years ago, we started talking about our strategic sourcing and centralized procurement efforts. We're now taking the next step, which is to optimize subcontractor management, which should allow us to drive further improvements over time. Before I turn it over to Dave, I'd like to talk about the company's sustainability effort with Earth Day having been on Sunday. For us, sustainability is part of our DNA. Focusing on sustainability is not only the right thing to do, it also has a positive impact on our bottom line. We've worked hard to improve our performance in this area and our efforts are yielding results. Since 2008, we've reduced our water consumption by 21%, our greenhouse emissions by 16% and our energy consumption by 9%. We're proud of these results, but we're not stopping here. Our goal is to continuously improve in this area and further reduce our environmental footprint. As I mentioned before, we finished last year with the best safety record in the company's history. Through our best-in-class programs, we lead our industry and workplace safety. I'm pleased with our overall performance in the quarter. The Raytheon team continues to work diligently to deliver outstanding products to our customers and to deliver value to our shareholders. I'd like to thank the team for their efforts and continued dedication. And with that, let me turn it over to Dave.

Okay. Thanks, Bill. I have a few opening remarks starting with first quarter highlights and then we'll move on to some questions. During my remarks, I'll be referring to the web slides that we issued earlier this morning. So if everyone would please move to Page 3. As Bill noted, we're pleased with the solid performance in the first quarter. And once again, both International bookings and International sales were strong. Our adjusted EPS of $1.46 was up 7%, driven by capital deployment actions and continued operational improvements. Adjusted operating margin was 13.1%, up 60 basis points compared to last year's first quarter. Sales of $5.9 billion exceeded the high end of our expectations, which I'll discuss further in just a moment. Operating cash flow from continuing operations of $111 million was better than our prior guidance due to the timing of collections previously expected in the second quarter. During the quarter, the company repurchased 7.9 million shares of common stock for $400 million. In addition, our Board of Directors approved an increase to the company's annual dividend rate by 16% to $2 per share. We've now increased the dividend for 8 consecutive years. Our full year 2012 guidance for EPS has now increased by $0.10, which I'll discuss in more detail in a few minutes. Turning now to Page 4, let me start by providing some color on our first quarter results. Our total bookings for the quarter were $5.2 billion. As I mentioned on the January call, we continued to see the order book back end loaded, ramping up in midyear. From a cadence standpoint, we expect the book-to-bill to expand as we move through the year, resulting in an estimated full year book-to-bill range of between roughly 1x and 1.05x. Notable bookings in the first quarter included $182 million at IDS to provide Patriot engineering services for the U.S. and international customers and $90 million to provide engineering services production and support for the Aegis weapon system for the U.S. Navy. Missile Systems booked $497 million for the newest version of the AMRAAM missile for the U.S. Air Force and international customers. MS also booked $172 million for the AIM-9X sidewinder short-range air-to-air missile for the U.S. Navy and international customers, and $171 million for the development of SM-3 for the Missile Defense Agency. NCS booked $81 million on the Navy multiband terminal program. Space and Airborne Systems booked $159 million to supply radar spare parts on the APG-63 for an international customer, $99 million on a radar performance-based logistics contract for international customers, and $77 million for the production of radar warning receivers for the U.S. Navy. Technical Services booked $119 million for foreign training and $68 million for domestic training programs in support of the Warfighter FOCUS program. In addition, IIS and SAS booked $284 million and $925 million respectively on a number of classified programs. Backlog at the end of the first quarter was $34.3 billion compared to $35.3 billion at the end of 2011. Our backlog at the end of the first quarter of 2012 was approximately $600 million higher than the same period last year. And as Bill just mentioned, on a funded basis, our backlog was up over $500 million from the end of 2011 and up approximately $1.2 billion from the same period last year. If you move to Page 5, sales were ahead of our expectations, driven by international customer demand. Booking at sales by business, 5 of the 6 businesses had sales essentially in line with the same period last year. NCS had net sales of $1 billion in line with our expectations. The change in net sales was primarily due to the planned decline in production of U.S. Army programs. Moving ahead to Page 6, we're pleased by our overall company margin performance, once again showing year-over-year increase driven by operational improvements. Our adjusted margin was up 60 basis points to 13.1%. Our focus on execution, productivity and efficiency across the board continues to be reflected in our financial results. So looking at the business margins, IDS, IIS, MS and SAS margins were up in the quarter compared with the same period last year. At IIS, margins were up 120 basis points over last year's first quarter, excluding the U.K. BA letters of credit adjustment. I do want to point out that IIS also benefited from $8 million related to an insurance recovery for legal expenses. At NCS, the change in operating margin in the first quarter of 2012 compared to the first quarter of 2011 was primarily due to the production program efficiencies last year. And the Technical Services, several minor favorable items in the same period last year drove the difference in operating income and margin. These included a contract modification, contract extension and a legal settlement. Overall, the company continues to perform well. So turning to Page 7, first quarter 2012 adjusted EPS was $1.46, up 7%. The increase was driven by capital deployment actions, specifically share repurchases, and operational improvements, partially offset by a higher tax rate due to the expiration of the R&D credit. As a reminder, the R&D tax credit is not included in our guidance this year. On Page 8, you'll note that we raised our full year 2012 EPS guidance by $0.10 to a range of between $5 and $5.15, and on an adjusted basis to a range of between $5.55 and $5.70. I'd like to point out that the increase is primarily driven by operational improvements. We repurchased 7.9 million shares of common stock for $400 million in the quarter. We expect the quarterly repurchase amount to moderate for the balance of the year, which is reflected in our share count guidance. And as you can see on Page 9, we've included the change in our guidance by business. The increase in margin guidance reflects the results from our continued efforts on productivity and efficiency initiatives. Importantly, we continue to pass along substantial savings to our customers. On Page 10, we provided some directional guidance on how we currently see the quarterly cadence for sales, earnings per share and operating cash flow from continuing operations for the balance of 2012. We saw a good performance in the first quarter compared to both Q1 2011, and also the initial outlook for Q1 2012 that we provided in January. To put this in perspective, we were able to implement improved productivity and efficiency initiatives, along with accelerated volume tied to customer demands on a number of programs. This resulted in an improvement in our performance and our outlook. Okay, so now let me summarize our overall performance in the first quarter. While the environment remains challenging, we had solid sales and strong margins, EPS and cash flow. As we stand back and look over the last 4 quarters, there are several items I think that are important to highlight. Our bookings have been strong, with a trailing 12-month book-to-bill ratio of 1.08x. Our operational performance has also been strong, with adjusted margin exceeding 13% over that same time period. We're in a good financial position with net debt of just over $1 billion. We raised our dividend 16% in the first quarter and are raising our EPS guidance for 2012. We remain well-positioned in key areas and are aligned with the priorities of our global customers. And we continue to drive the business to maximize value for our customers and shareholders. With that, Bill and I will open the call up for questions.

[Operator Instructions] Our first question comes from the line of Jason Gursky with Citi.

Dave, I was wondering if you could just walk through the rest of the year and the cadence. And maybe offer up some qualitative comment around why we're seeing a bit of a degradation in both revenues and earnings relative to the guidance that you gave earlier this year. Is it just a bit of conservatism based on the environment that we're in today?

No. We are feeling very positive about the results in the first quarter. From a sales standpoint, we exceeded our initial guidance by about $200 million, and that was primarily driven by increased customer demand for certain of our programs. You'll recall that the end of last year, we received some large international air and missile defense programs, and we're off to a good start in that area. Let me just kind of put things in perspective. So if you look back, 2011 was a strong year, and we discussed in January the results of last year. We expected margins to moderate in 2012. Q1 came in stronger than we expected. This was partially due to some timing and a few small non-recurring items. Without these items, we're still posting margins in the high 12% range. I'll repeat some of what I went through a few months back that I mentioned on the fourth quarter call. There is a shift in our backlog and our sales profile this year versus last year, and it's weighted more toward international customers. And within the International business, we're also seeing mixed impacts driven by the stage of maturity of some of these programs. We want -- like I just said, we want some large programs at the end of last year. These are longer in duration and slower to ramp up, and typical domestic awards of similar size. So we're be impacted by mix in 2012, along with the continued completions and wind down of some later stage production programs in our domestic backlog. So with all that said, we are accelerating the ramp up of some programs, and this is resulting in a shift in our sales cadence compared to prior guidance, as well as some efficiencies from a margin standpoint, in particular at IDS.

Our next question comes from the line of Carter Copeland with Barclays Capital.

I have 2 bigger picture questions, one for each of you. Dave, I wondered if you might speak to some of the things you and your peers, and for that matter, the DoD customer might begin doing; the sort of contingency planning exercise for the sort of looming wall of sequestration. I'm sort of interested in things around workforce planning, past management, contracting. What sorts of things are you guys envisioning as having to do from a contingency planning standpoint if this gets closer and we sort of progress through the year?

So I'll start, and I'm sure Bill wants to mention a few things. We've talked about this on the last couple of earnings calls. First of all, we've gone through a number of different planning scenarios, and I think the best way for me to put this is we are prepared to operate effectively under any given industry conditions. So without getting specific, because at this stage it's inappropriate, just given where we are and all the discussions taking place in Washington, we are confident that we'll continue to perform well, irrespective of how this actually plays out. It's important to keep in mind we have a very broad portfolio. Close to 40% of our backlog is international. That's obviously, I think, an important differentiator and competitive advantage for the company. We have over 8,000 different programs and technologies. And we continue to manage the business in a very cost-effective manner. We talked about this in the past, we have -- 7, 8 years ago, we embarked on a strategic initiative to implement company-wide information technology systems from a factory standpoint, from an HR standpoint, from a supply chain standpoint and from a people standpoint. So that gives us a platform to be very flexible, irrespective of how things play out. So, yes...

Just to kind of expand on that, just in one area, as you think about cash management, is it something where you want to preserve cash as we get later in the year and protect in case -- should you decide to sell fund some contracts? Or how should we think about cash management in the latter part of the year?

Right, so we've provided our cash guidance, and again, this was thoughtful and talked about on the last call. From an environmental standpoint, not much has changed from the last call, so we wouldn't expect any change from our capital deployment plan all things considered.

Okay, and one for Bill. Bill, I think there's something like 6 cyber-related bills making their way around Congress this week. And I wondered if you might tell us what, if anything, this means for the future of this domain from your perspective. I mean, does any of this legislation have a chance of passing? And if it did, does it signal new areas of risk or opportunity, or if nothing else more funding?

One, I think what I would say is it's a good healthy debate that's taking place in the cyber arena of what to go do. And for me, I always remember something that Secretary Gates had said that when he first went into office, he really wanted to get a definition of what to go do in cyber. And some 4 years later plus, there still wasn't direction of what to go do. And clearly, we now see some of that direction taking shape of who calls the ball and what action to take at least from what I'll call the sword aspect of cyber, which is the attack or counterattack. And for me, it's taken a while for this to gel, but I'm encouraged that Congress is looking at it or having a debate. They're talking to all aspects, whether it's Facebook or Twitter or the people from Google or Microsoft, and they're talking to us and they're trying to take responsible action. The good news is there is attention to this problem, and we need attention and I think attention is healthy. And so I view it as positive.

Our next question comes from the line of Joe Nadol with JPMC. Joseph Nadol - JP Morgan Chase & Co, Research Division: Start with NCS, and we know that's where much of the Army exposure has been and the supplemental exposure. I was wondering if we could step back and look at the sector today, where it is today with the $1 billion of sales in the quarter, maybe the profile and how it's changed the last couple of years and what you see going forward.

While traditional sales of Army products have declined at NCS, consistent with the drawdown, I believe NCS is well positioned on our Army's new platforms, such as the ground combat vehicle, the modernization of their electro-optic sights, we're going from second gen to third gen on the existing vehicles and fielding advanced battlefield radars and the new radars, which are really sense and warn radars like MFRFS, which is important in the MFRFS radar for your benefit if you didn't know, or if you do know I'll just repeat it, is that radar is really the primary sensor to help execute the Army's new Counter Rocket, Artillery, and Mortar, C-RAM mission. And as I mentioned in my remarks, the AI3 program, that particular missile uses a MFRFS radar to help it in the counterattack. So we look at that part of the business. As the Army transitions, we're going to transition with them. The next area where NCS works in is in the satellite terminal business. There, the Army SMART-T program has been on track, and we're ramping up deliveries. The Navy's multiband terminal program has been awarded the production, and that's starting to ramp up for us. And of course, the Air Force's MMPU program positions us well in the satellite terminal business. And we see NCS positioned well where others have ran into trouble in that area. We've just recently completed our NATO air command and control system, we call it ACCS, which is the largest software program of its type in the world. And we just got awarded an initial Q1 award to add missile defense capabilities for NATO into that. So that's bodes well for Europe and our systems there. And then recently, as you probably know, the U.S. government decided to pursue alternatives to JTRS, the ground mobile radar and airborne maritime fixed radios. And that's created a real opportunity for us in our ARC-231 radios and our MAINGATE mobile ad hoc networking radio gateway. For us, we believe in the future here. One of the discriminators is passing full video across the battlefield and supporting large node networks. And none of the current JTRS radios can do that, but MAINGATE's able to do it. And then the other thing I would point out is NCS is one of our -- they win most of the CRAD work within the company. So we see the transition that has taken place with the Army, changing their focus, going more to smaller and on the run. And NCS is adapting with them, and we see the back half of the year being where that starts to change. So everything's kind of consistent with what we saw in the transition, and they've been performing well from an operational point in doing that with no surprises at all, if that helps. Joseph Nadol - JP Morgan Chase & Co, Research Division: Would you say that we're much of the way through that transition? And if this was close to a $5 billion business, a couple of years ago, obviously the war spending was a big part of that. Margins were over 14%. So margins come down as you shift towards some of the newer programs and sales are coming off, but are we in the fourth inning or the eighth inning if we -- over a multiyear period of time?

We're probably in about the sixth or seventh inning in that, probably standing up and looking at where we're at. We expect some awards here in the second and third quarter, which bode well for them as they start to do it. So everything is consistent. We went through this, if you'll remember, because you followed us long enough. Our TSE transition through one of these and came out of it very strong, and we expect the same thing for NCS. And that's the nature of our portfolio. You look at it. We'd love for everything to be hitting on all 8 cylinders, but it doesn't happen all the time. So what you have are other businesses that carry the load and as you adjust. And that's why we love our portfolio. Joseph Nadol - JP Morgan Chase & Co, Research Division: Okay. Just a quick one for Dave, if I might. On IDS, you're -- you got 3 really solid margin quarters now in a row, 17%, 18%. You boosted your guidance, but it's still below where you've been in the last 3 quarters. I'm sure there's been some risk reduction there. Can you just give us a sense as to whether there's -- those contracts that you've been booking, the positive adjustments, are those falling off now or is there still more opportunity the next couple of quarters?

No, that business is performing well. It is the business that it focuses on the larger radars and the air and missile defense systems. I'll repeat what I said a little bit earlier, they did -- they were able to secure some large awards, both domestically and internationally at the end of last year. The team over there continues to focus on the productivity side and on the cost efficiency side. They have posted, I would say, very strong results. We were very pleased with how the first quarter played out. Some of this was due to timing. The timing of some of the productivity initiatives being pulled ahead to the first quarter that were anticipated later in the year. But with that said, I would suggest the higher end of the margin range is probably the appropriate way to think about IDS for the balance of the year.

Our next question comes from the line of Sam Pearlstein with Wells Fargo.

Actually, I guess, Dave, I wanted to just follow-up on that last comment, which is just relative to January, a lot of improvement in terms of the margin outlook for the different segments, and it may only be 20 basis points here and there. But can you talk about things that you had been worried about that you've retired in terms of risk and why things would've changed so much in just a couple of months?

Well, we had strong results in the fourth quarter of last year, as I'm sure you recall. And there is a broad company-wide focus on execution, and on again, I'll repeat it, the productivity initiatives. And we are seeing some strong and positive results as a result of this focus by all areas of the company. Supply chain is doing an outstanding job and has implemented a number of new initiatives, both with respect to material procurement and subcontractor management. And we've continued to take cost out of our G&A and general overhead structure. And this is resulting in a margin profile that is slightly exceeding what we had initially anticipated. As we move further along with some of these programs, and we're off to a good start and solid launches, we're able to retire some early program risk. But by and large, it's around the execution side from a productivity standpoint.

And then you mentioned in one of your earlier comments about some onetime items that did help, can you quantify the insurance recovery in IIS, and was there anything else that you would consider onetime?

Yes. So the IIS insurance recovery was about $8 million. It was worth about 100 basis points to IIS. But let me make this point because I think it's important, when you normalize IIS operations for the letter of credit last year and the insurance recovery this year, they're up about 20 to 30 basis points operationally. From a non-recurring or onetime event standpoint, the only other item of note would be a consolidation of a couple of related contract in SAS, where we were able to realize some material and labor efficiencies that was originally planned for the second quarter. And we were able to affect that in the first quarter.

Our next question comes from the line of George Shapiro with Shapiro Research.

42, LLC: Bill, the usual question I ask, I mean, can you give us the international sales growth in the quarter, the classified sales growth, and then by deduction, how much the domestic x classified change?

Let me take a shot at the international. As I mentioned, 27% of the bookings were international and about 25% of the sales were there. We still think for the year that bookings are going to be around 30%, plus or minus. Sales should be 26%, plus or minus and that'll probably internationally mid-single-digit kind of growth for us as we look at it. Classified, as I said, was strong for us with 26% of the bookings. We expect classified to be around 15%, plus or minus a little bit there, which will be double-digit growth year-over-year. Sales will probably be on the flattish side on the classified, but pump is really getting primed here so we'll feel better about '13 as we look at it and go into it. And so from our standpoint, the international is offsetting kind of the weakness that we see in the domestic, which is kind of related to inflation being that percentage of inflation taking a negative. It's kind of how I look at it if that helps.

42, LLC: Yes. So do I conclude that mid-single-digit growth in international was for the quarter, as well as what your expectation is for the year?

Yes. So George, this is Dave. So let me just get a little more specific. So sales overall were down about 2% quarter-over-quarter. Domestic -- overall domestic was down about 3% and foreign or international was up about 2%. Within the domestic, classified business, was slightly less than breakeven. So it was down about 1%, and all other domestic was about 3.5% down.

42, LLC: Okay, that's good color, Dave. And then I just wanted to ask a more general one. I mean, this is like the first quarter in a long time where you've actually been better than what your sales projection is. I guess my question is, is that due to being overly conservative because of missing last year, or are things somewhat better so that your reach is still being conservative by not raising the sales guidance for the year? Or it's just the mix that you talked about in your conversation?

That was a lot of questions there, George. I think easiest answer for us is we saw strong demand and we see some customers asking for things even earlier. So we have the ability to ramp that up, and I think Dave covered that in his remarks. It's not about being conservative. It's just that there's some good demand for the product.

Our next question comes from the line of Robert Spingarn with Crédit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: Bill, another high-level question, if I may.

Sure. Robert Spingarn - Crédit Suisse AG, Research Division: As we've looked forward, it seems like OSD is actually starting to think about the possibility of a sequester. Sec Def [Leon] Panetta talked about officially looking into it, preparing in the summer, but I suspect they're starting to do that now. And even if we get a negotiation or decision from Congress in the lame duck session, it may be too late to avoid some impact to Q1. So on that basis, from what you're hearing about what's going on in D.C., do you think they're contemplating this across-the-board type scenario? Or are they starting to compartmentalize areas of focus?

Yes. I would tell you that, at least my views on The Hill, no one likes sequestration, no one has a plan that everyone likes to avoid it. So therefore, I don't see anything happening to November. Come November, everybody's got everything happening during a lame duck session. I don't see the lame duck session being able to do everything that everybody's asking it to do, so we end up in the January timeframe much like you've just articulated. And the one thing that we've got to think about is that this is not only defense. This is state and education and housing and energy, and their budgets get completely whacked. And so my view is that we're going to go into a holding period come January, and then we're going to take a timeout for about 12 months to figure out what to go do. And the outcome is not anything that anybody wants to live with. The other part that I think we lose sight of is we're in an industry that does not change dramatically overnight. There are -- you have to look at companies' backlogs, you have to look at programs, and I don't see and I've never heard anybody talk about a peanut butter approach to this problem. If they're going to solve it, they're going to have to solve it with some very hard programmatic cuts, and they'll be after things that are large in nature not across the board, because everyone has learned or at least if you've been in business or been associated with our budgeting process, that when you use the peanut butter, all you do is push the problem to the right and the problem gets bigger. And I've been encouraged that I have not heard that as a solution, if that helps. Robert Spingarn - Crédit Suisse AG, Research Division: Okay, well -- and then for my follow-up, if we can just bring this now down to the Raytheon level. When you take what you just said and then throw in the possibility of a fiscal '13 CR in Q4, how would you and/or Dave assess your risk essentially to the guidance by segment toward the end of the year?

I think the way I would answer your question is, is that CRs have become a way of life. And in our guidance, we have planned for what we think is what happened last year, you go down to the wire and then something happens. So that's kind of got to be the norm. Everyone I've talked to on The Hill, no one wants to repeat going all the way to April of the following year with the CR. I think everybody's experienced that pain and what that causes. So I would tell you, we're planning the kind of activity that we saw happen last year, and we put that into our thinking caps and into our guidance as we look at it. The other thing that I want to point out is you all know we're a process company. So we have plans in place if something went up, if it stayed flat and if it went down. And one of the things that I'm extremely proud of is our workforce planning. It's something that we think is world-class, and it helps us be able to -- they've started to articulate our IT systems, but the way I like to think of it is we can win it anywhere, we can perform it anywhere and we can deliver it anywhere. And that's how we've kind of set up the company to make sure, during these headwinds, you have the flexibility and that you don't end up with your work in the wrong places. Robert Spingarn - Crédit Suisse AG, Research Division: Bill, which segments have the greatest amount of variability, though, as this plays out?

Oh, boy. If I thought about it, you have to look at the funded backlog of each of them. And if you look at the international, those aren't affected by it. So you've got to take out 26% or 30% of our business. And so, it really makes it hard. I don't know how to answer your question in that way because what I'm now going to start speculating on is what programs get cut and what don't. And that's really our proprietary information, I guess I'd say it.

Yes. And I think you need to consider the way the various customers are going to plan through fiscal '13 and beyond. So it's difficult to handicap which product areas are affected more than others or less than others, because much of it will depend on the situation within that particular customer group.

And Dave, I want to go back. We have the fiscal '13 budget right now today. There were no surprises for us. We're not hearing anything that deviates from what we have in our plans. Our programs are performing, and we've got to remember that ISR, EW, Cyber are areas where the department is focused well on and there's not going to be changes there. And the other thing that happens is when something gets cut, there's still a need. So something has to go back in its place. And a good example of that is when Enlows [ph] had its issues, Griffin now has come back in and filled it. So it's not a static world. It's dynamic. And so when you look at what happens over in A, you react in B.

Our next question comes from the line of Myles Walton with Deutsche Bank.

Bill, you mentioned the 26% bookings were classified. It seems really high. So I'm just kind of curious, is that a monolithic one or 2 programs or is this a release of classified bookings? And then conversely, I guess, the implied nonclassified domestic bookings looked -- the run rate there looked to be relatively light. Can you just talk about the 2 dynamics there? Maybe there's some sort of reclassification of what's classified or not.

No. I think it's on the call in January, we talked about this being the year that was back end loaded. And so when you look at it, the back end loaded is not only international, but it's also domestic. But on the classified side, we had a few good programs that came in, in the quarter that the timing of them is plus or minus a month or 2 here or there but they all stacked up and they came in nicely and they've primed the pump for a couple of our businesses really driven by SAS and IIS.

And then just a clarification on the international sales and the sequestration, do you actually have kind of full clarity that FMS sales won't essentially be handicapped by the fact that they have to go through the DoD from a contracting perspective?

No, I don't see that. I actually see good help from our DoD partners on the FMS side, because you have to think about it in a way. For us, the FMS helps keep our rates in check and in control because if we can put these systems into our plants, they carry a burden of the overhead and help our domestic customers from a rate point of view. So we've got sophisticated domestic customers that understand that. So it's in their best interest to help us say, on Patriot or other programs, that our FMS for us or in our missile programs, they help load our factories and give us a good competitive advantage.

I guess I was just thinking mechanically, a lot of the contracts are going through the same program offices who are going to be under massive amounts of stress for various reasons. I'm just curious if you think that they'll be able to essentially prioritize to the FMS where the money is.

Yes, I do because these things are not pop-ups. If you saw the planning that we go through on, say, a TPY-2 radar sale to UAE, it's in conjunction not only with the country but with the Missile Defense Agency, with the State Department, there's a lot of coordination on that. And you lay it out so you look at your workflow and you determine your peaks and valleys. And we all try and work in unison to understand that flow and give some insight on both sides. So I think this is where we've got a great working relationship.

Our next question comes from the line of Robert Stallard with Robert Royal Bank of Canada.

So on the export, I was wondering if you could give us any updates on the timing of some of your large awards, because sometimes these can move around, and whether you've seen any progress in the U.S. with regarding opening up more military product for export.

Two-part question, the international for us, the big one's still out there, or -- probably second half are Kuwait relative to some new fire units for them. We expect here sometime in the third quarter, fourth quarter on Turkey, on their decision. We've got ground-based air defense in Oman that will be in the last half of the year. We've got Paveway awards throughout the year that represent $400 million to $500 million in business. Air traffic radars are $200 million to $300 million, they're sprinkled throughout the year. Missiles, we expect some short-range missile sales, maybe in about the $600 million range, mid 3 quarters of the year. Training will happen in the second half, probably, say $400 million. And then we've got some international C4I that we're hoping to bring in this quarter. If not, it'll be the first part of Q3. Relative to releasability, we see some attention there. It moves slowly. But I think as the domestic budget gets under pressure, as I was just talking about a minute ago, we see our customers view the international business as being good for them too, because it helps control the price or the cost of their programs that run through our factories, if that helps.

Our next question comes from the line of Howard Rubel with Jefferies. Howard A. Rubel - Jefferies & Company, Inc., Research Division: Dave, I want to go back to sort of your comments you talk about mix and performance as sort of being the driving factors pretty much across the board for all of the businesses. And Bill talked a lot about mix. Could you talk about, again, some of the initiatives that you're undertaking and what it means when you say productivity? Does that mean more outsourcing, does it mean a change in the way you're speeding processes? Could you elaborate a little bit? And what kind of a runway do you continue to see with these items?

Sure. So obviously, Howard, it's a multitude of different areas, and I think a very good question to put some color on this. From a -- there is the basic, such as looking at our G&A structure. We look at the travel and outside services and the way we manage those types of areas and cost-reduction opportunities from that standpoint. We continue to expand our shared services activity and become more efficient on -- or with respect to a number of what I would term back office activities. Much of this is underscored by our approach we take, which is -- I spoke about this earlier, which is driven by our Six Sigma approach. And these bear out continued results quarter-over-quarter and year-over-year. From a manufacturing standpoint, we continue to improve factory process across the board through both lean initiatives, as well as Six Sigma initiatives. Our touch labor continues to improve. I think the best way to look at this is what we call our wrap rate, which is basically the overhead dollars that are applied to our products. We have essentially held that flat, and in many areas, decreased it for the last number of years, and we're seeing that trend continue as we go into 2012 and 2013. There is a meaningful amount of the cost structure that is tied to our material space, both direct material, indirect material and subcontractors. We embarked on a number of initiatives a couple of years ago. They continue to bear out fruit. I may have mentioned earlier that we've gone from roughly 30,000 suppliers a few years ago to about 12,000 suppliers today. And we continue to gain both quality and economic improvements from that initiative. We are now working closely with our major and even our smaller subcontractors to take a meaningful cost reduction and embark on meaningful quality and delivery improvements. They're already doing a fine job and we're suggesting that they begin to implement the same type of initiative that we did a number of years ago. Howard A. Rubel - Jefferies & Company, Inc., Research Division: Okay. Sort of -- part of it's like, for example, you're reducing the number of trailers that supported Patriot in the past. So there's a whole host of might've been 3 trailers and now it's one. I mean and there's a number of things like that. Is that sort of also -- which really is more engineering driven? Is there a whole initiative on that, that continues as well?

Howard, let me jump in here. If you remember the old Patriot, we can basically clearly get all of those 3 trailers and one trailer now and have room left over. So one of the things that engineering does is the tremendous job of taking technology and adapting it to make our products more affordable and more capable. I look at a JSOW missile, for example. What we used to be able to do and what we do, we can adjusted it in flight today and have it communicate back awareness. And that never existed before and you do it in the same airframe at a lower cost. So yes, a lot of it has to do with the engineering productivity in our designs.

Okay, we'll have to leave it there. Thank you for joining us this morning. We look forward to speaking with you again on our second quarter conference call in July. Jeff?

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.