Q2 2019 Earnings Call
Good day, ladies gentlemen, and welcome to the Raytheon first quarter 2019 earnings Conference call.
My name is Shannon and I'll be your operator for today.
As a reminder, discovered this matter recorded for replay purposes.
I would now like turn the call over to Ms. Kelcey, the Bryan Vice President of Investor Relations. Please proceed.
Thank you Shannon good morning, everyone. Thank you for joining us today on our second 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 Dot 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 and the proposed merger with UGC 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.
And with respect to the proposed merger and related matters in the registration statement on form S. Four filed by you Tc with the SEC on July 17, 2019 with that I will turn the call over to Tom. Thank you Chelsea good morning, everyone.
Briefly on delivered very strong operating performance in the second quarter sales increased 8.1% and our bookings sales operating margin EPS and operating cash flow all exceeded our expectations.
We continue to see strong global demand for our advanced solutions.
Our book to Bill ratio in the second quarter was 1.32.
This drove an increase in backlog $3.3 billion year over year to new record backlog of over $43 billion.
Given these strong results.
The opportunities we see in the second half of the year.
And the strength of our domestic bookings, we are increasing our bookings outlook for the year by $1.5 billion.
A 2019 bookings performance positions us well for continued growth in the future.
Also we are increasing our outlook for sales.
Operating income.
EPS and operating cash flow for the year.
Toby will discuss additional details about our second quarter performance and increases to guidance in a few minutes.
This strong quarter with a healthy book to Bill ratio and record backlog is clear evidence that we are making the right investments in the right innovative technologies to position the company for strong growth in the future.
Additionally, I want to take a few minutes to discuss the breadth of raytheon's franchises and the strength of our advanced and innovative technologies that are positioning the company for this future growth.
As we think about our franchises.
We not only extend them by refreshing their technology, we also seek to take them internationally to broaden our markets.
This has been our strategy with our combat proven Patriot franchise.
During the quarter, we continued to make progress on international opportunities.
In May we booked almost $500 million on our next Phase award with Romania to purchase Patriot.
Additional follow on awards to complete the program are expected to be booked in 2020 and 2021.
We continue to see the total Raytheon, Romania patriot opportunity to be around $2 billion.
And in June we booked almost $400 million on an award with the state of Qatar.
The current member of the Patriots 16 country coalition to purchase additional Patriot capabilities.
In July we received an award from Germany for over $100 million to upgrade 14 Patriot fire units to the current configuration three plus.
As you can see nations want to protect their sovereignty demand signal for proven defensive systems like Patriot is strong and global.
Demand for our integrated Air and missile Defense solutions is also driving growth in another key franchise.
Over the last few months, we've added two new countries to the naysayers family.
Mid range solution jointly manufactured by Raytheon and cons Berg.
In may.
We booked over $500 million to provide nay Sam's for Australia.
And in early July after the quarter close we received a $1.8 billion award to provide Qatar with nay sense.
As far as the 11th countries to procure nations, which uses our Raytheon radar in fires multiple interceptors, including our Amiram.
Amiram extended range.
And aim ninex missiles.
As a result, nams helps us expand to more of our franchises Amiram and aim ninex.
For Amiram Raytheon is continuing to expand capability with the development of the Amiram extended range and expansion of capability to support land based applications.
As part of guitars procurement of the NAV system.
We will also be the launch customer of the Amiram IAR surface to air missile, which significantly extends both the range and the market of the Nam system.
We expect a foreign military sales contract award from Qatar for Amiram IAR next year.
Given the current and projected domestic and Fms orders, we have line of sight to a production pipeline for Amiram for at least the next 15 years.
In May Raytheon launched and aim Ninex Sidewinder block two missile for the first time from the sands and engage and destroyed a target during a flight test supported by the Royal Norwegian Air Force.
This flight test opens the door for ne Sam's customers to add a vital short range layer to the ground based air defense to give them complimentary interceptors to better engage and destroyed threats.
In the airborne radar market, we're innovating to extend franchises with our advanced active electronically scanned array or Asia solutions.
In July Raytheon was selected as a writer supplier for the B 52 bomber radar modernization program.
Displacing the incumbent and extending our airborne radar franchise.
Under the contract within will design develop produce and sustain AESA radar systems for the entire US Air Force B 52 fleet.
With improved navigation reliability mapping and detection range the advance rate or upgrade will ensure the aircraft remains mission ready through 2015 and beyond.
Technology is the backbone of Raytheon and we had many accomplishments in the quarter that highlighted our capabilities.
For example.
During the quarter, we announced that is is working with the US military is V 22 Joint program office to test a new artificial intelligence tool to provide prognostics to better determine when repairs are needed for the multi mode radar installed on the US Air Force CV 22 Ospreys.
By using performance data, we are already collecting on CV 22 radars and AI tool can tell us exactly when the rate or may need to be repaired or replaced keeping the plane in service longer and saving money for the government.
Raytheon in the Air Force are working on this pilot program with benefits expected as early as 2020.
In June .
Our stonebraker weapon completed operational testing moving it closer to initial operational capability and bringing this new capability to our domestic and international markets.
The smart weapon is packed with innovative technology and has a tri mode seeker and data link with embedded machine learning.
As a result, the seeker can detect classify and track targets even in adverse weather conditions from stand off ranges and cannot eliminate a wide range of targets with fewer aircraft.
Reducing the pilots time in harm's way.
And in May.
Raytheon successfully completed technical testing and White Sands missile range in support of the sense off for the us Armys lower tier air and missile defense sensor.
The two week missile defense demonstration highlighted raytheon's readiness to deliver mission critical L. tams capability to the Us Army.
Our clean sheet approach and decades long investments in gallium nitride technology allowed us to demonstrate and deliver a mature solution that will meet the army's initial operational capability.
Our solution also showcased advanced capabilities and ease of maintenance and sustainment to the soldiers.
Earlier this month, we submitted a written proposal on LTM addressing the Army's key evaluation criteria and we are confident that we have the right advanced solution for our customer.
In July we completed a successful test of our solid rocket motor for deep strike.
Great the ons offering for the us armys precision strike missile or Prism program.
Presume will replace the ATACMS missile.
Whether it be from our record backlog.
Breadth of franchises that we continue to refresh and take internationally.
Our innovative technology solutions for our customers.
The company is focused in firing on all cylinders.
Our competitive win rates for Raytheon around 70% up from 50% in a few years ago.
We have a strong outlook for our business for the next five years 10 years and beyond.
In addition, we are also optimistic about the strength of the defense market, both domestically and internationally.
For the U.S. defense market. The deals you budget environment continues to be strong with modernization accounts demonstrating healthy growth over the last few years.
And internationally, the dynamic and unpredictable geopolitical environment continues to generate strong demand for our advanced solutions across the regions of Europe , Mena and Asia Pacific.
We begin the second half with continued confidence in our growth outlook and operating performance.
And it is from this position of strength and strong outlook that we agreed to combine with United technologies Aerospace businesses in a merger of equals transaction.
Was a little over a year ago. When we also had a strong outlook for Raytheon and the defense market that I approach Greg Hayes.
I did so because I was excited about what Raytheon and UTI see could accomplish together by combining our technology to both further strengthen our current franchises and create new ones.
Given the growth in the DSD research and development spending in the broad shift to new technologies to provide solutions to counter pure threats.
In 2018, and 2019 the growth rates for the R&D accounts were higher than the growth rates of the base budget and overall modernization accounts.
This growth trend is expected to continue in 2020 and beyond to support the National Defense strategy and plays to the strengths of the combined company and is well aligned to the NDS priorities.
By combining our technologies with UGC is complementary technologies, we can go after and when an increased number of these franchise opportunities.
His revenue synergy opportunities from a combined technologies will turn into franchises and continue to be value generators for decades to come.
Positioning the combined company to increase market share and outgrow the aerospace and defense markets.
There are numerous examples of these revenue synergies, including improved directed weapons by having an enhanced power source.
Opportunities to incorporate our new Expeditionary landing system on were military aircraft by changing software in a cockpit.
Using year drove traffic control experience to better position us to participate in upcoming air traffic control modernization competitions.
And using engine signature management technology to better position us on a multi billion dollar franchise opportunity.
These are the few of the many revenue synergy examples that we expect to achieve as a combined company.
The bottom line is.
We can start creating these revenue synergies immediately on day, one to becoming a combined company.
These potential revenue synergies from our complimentary technologies are sizeable and in a multi billions of dollars.
In short we are convinced that the merits of the transaction with UGC.
And are confident about the benefits it will bring to our shareholders customers and employees.
Let me close by thanking all the members of the Raytheon team worldwide.
They are the ones that were developing a solutions to grow our franchises.
Meeting customer needs and delivering the performance that gives us such a strong outlook.
Thank you for helping us continue to create the trusted innovative solutions, we're known for around the world.
And for helping us meet our commitments to our customers and shareholders.
With that I'll turn the call over to Toby.
Thanks, Tom I have a few opening remarks, starting with the second 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 please turn to page two.
We are pleased with the very strong performance the team delivered in the second quarter.
With bookings sales operating margin EPS.
And operating cash flow all better than our expectations.
We had record bookings in the second quarter of 9.5 billion.
Resulting in a book to bill ratio of 1.32.
And ended the quarter with a record backlog of 43.1 billion.
Sales were $7.2 billion in the quarter up 8.1% with growth across all of our businesses.
Our EPS from continuing operations was $2.92 better than our guidance and an increase of 5% year over year.
Ill give a little more color on this in just a moment.
We generated strong operating cash flow of over $800 million in the second quarter.
Which was also better than our prior guidance.
Primarily due to favorable collections.
During the quarter the company repurchased 1.7 million shares of common stock.
For $300 million.
Bringing the year to date share repurchase to 4.4 million shares for $800 million.
I want to point out that under the merger agreement with United Technologies, We are restricted from repurchasing shares.
I will discuss this further a little later.
At a high level, we are increasing our full year 2019 outlook for sales.
Operating income EPS and operating cash flow.
As well as making other updates.
I'll provide more color on guidance in a few minutes.
And as Tom mentioned earlier, we are raising our bookings outlook by 1.5 billion for the full year.
Turning now to page three.
Let me start by providing some detail on our second quarter results.
Company bookings for the second quarter were $9.5 billion.
Approximately $800 million or 9% higher than the same period last year.
And on a year to date basis bookings were $14.8 billion.
Which were essentially in line with the comparable period last year.
As Tom mentioned, the strong bookings position the company well for future growth.
For the quarter International was 33% of our total company bookings.
Again backlog at the end of the second quarter was a record 43.1 billion.
Up over $3 billion or 8% compared to last years second quarter.
Approximately 38% of our backlog is comprised of international programs.
If you now move to page four.
For the second quarter 2019.
Sales were above the high end of the guidance we set in April .
Primarily due to better than expected performance at our IRS missiles and SAS businesses.
For the second quarter, our international sales were approximately 30% of total sales.
Looking now at sales by business.
Rds had second quarter 2019, net sales of 1.6 billion.
Up 8% compared with the same quarter last year.
The increase from Q2, 2018 was primarily driven by higher sales on international Patriot programs.
In the second quarter 2019 is had net sales of $1.8 billion.
The 5% increase compared with Q2 2018 was primarily due to higher net sales on classified programs in both cyber and space.
And as Weve previously discussed.
We expect is this growth rate to moderate in the back half of the year due to the planned ramp down and transition on the Warfighter focus program.
Missile systems had second quarter 2019, net sales of 2.2 billion.
Up 8% compared with the same period last year.
The increase was driven by higher net sales on classified programs.
The high speed anti radiation missile program.
And the failings program.
Esas had net sales of $1.8 billion.
An increase of 13% compared with last years second quarter.
The increase in net sales for the quarter included higher net sales on classified programs.
The next generation overhead persistent infrared program.
And in international Tactical radar systems program.
And for Forcepoint.
Sales were up 5% compared with the same quarter last year.
Overall, we're pleased with our strong total company sales, which grew 8.1% in the quarter.
Moving ahead to page five.
We delivered strong operational performance in the quarter.
Our operating margin was 16.4% for the total company.
And 12% on a business segment basis.
Our business segment margins were up 30 basis points versus last years second quarter.
And better than our expectations at all the businesses.
It's important to note that the company incurred $23 million of merger related expenses in the second quarter of 2019.
Which was not included in the prior guidance and had an unfavorable impact of approximately 30 basis points in the quarter to the total company operating margin.
Without these expenses total company operating margin would have been up versus last years second quarter.
So looking now at margins by business.
Yes, the second quarter 2019 operating margin was 16.1%.
Better than our expectations.
You may recall last year's second quarter benefited from improved productivity.
I asked is operating margin was particularly strong at 9.1% up 150 basis points compared to last year's second quarter, driven by higher net program efficiencies in the quarter.
Missile's operating margin was 11.4% in the quarter up 10 basis points compared with the same period last year.
Primarily driven by a favorable change in program mix.
SCS margin was essentially in line in the quarter compared with the same period last year.
And at Forcepoint.
As we discussed on past calls.
Operating income was negative for the quarter due to the seasonality of their business.
We expect fourth points operating income to be positive in both the third and fourth quarters of 2019.
From a total company point of view, we remain focused on operating profit and margin improvement going forward.
And continue to see our business segment margins in the 12.1% to 12.3% range for the full year.
However.
We now expect operating profit dollars in total to be higher due to sales and margin improvement at is.
We see our segment margin improving in the back half of the year.
Driven by favorable program mix and productivity improvements.
Turning now to page six.
Second quarter 2019, EPS was $2.92.
5% higher than last years second quarter.
And was better than our expectations.
Operating performance drove strong Q2, EPS due to higher sales volume.
Higher margins and pension related items.
As I previously mentioned the merger related expenses incurred in the second quarter of 2019.
We are not included in the prior guidance and had an unfavorable EPS impact of six cents in the quarter.
Also as a reminder.
Last year's second quarter included a favorable tax related EPS impact.
Of 33 cents related to a discretionary pension plan contribution.
On page seven we have provided you with a 2019 financial outlook walk to bridge our prior view in April to our current guidance.
I want to point out that we're now providing business segment and total operating income to show the progress we are making.
As I mentioned earlier, we are increasing full year 2019 outlook for sales operating income EPS and operating cash flow to reflect our improved operating performance.
As well as for lower corporate interest and other non operating expenses.
Let me take you through each of these items.
In operations, we increased the sales range by $200 million.
Driven by higher domestic orders at is.
We now expect our company sales to be up approximately 6.5% to 8.5% for the full year.
This sales increase attributable to the IEI us along with their margin improvement.
Contributes about $30 million of operating income or nine cents.
To 2019 full year EPS.
We're also increasing the operating cash flow outlook by $100 million to reflect higher anticipated collections in the year.
Next we've lowered corporate expenses by approximately $25 million.
Improving EPS for the full year by about seven cents.
We are improving our net interest expense and other non operating expenses, which in total is worth about eight cents to EPS compared to our prior guidance.
Taken together before accounting for merger related items.
We are improving 2019 full year EPS by 24 cents.
These improvements to operating income and EPS.
Our partially offset by merger related expenses, which were not included in our prior guidance.
We expect to incur approximately $40 million or 11 cents of expenses related to the merger in 2019 of which 23 million was incurred in the second quarter.
Additionally, as I mentioned earlier.
As a result of the pending merger.
We are restricted from repurchasing shares.
This has an unfavorable three cents impact to our prior full year 2019 EPS guidance.
To summarize we increased the sales range by $200 million and now expect our full year 2019 guidance for net sales.
To be in the range of between 28.8 and 29.3 billion.
Up approximately 6.5% to 8.5% from 2018.
The year over year increase was driven by growth in both our domestic and international business.
We've increased our full year 2019 outlook for segment operating income by $30 million.
And full year 2019, EPS by 10 cents from our prior guidance and now expect it to be in a range of $11.50 to $11.70.
As discussed the increase is driven by our improved operational performance in the second quarter.
As well as expectations for the back half of the year.
Moving to operating cash flow from continuing operations.
As a result of the improved collections to date discussed earlier.
And our outlook for the balance of the year.
We are updating our 2019 operating cash flow outlook to be between four and 4.2 billion.
Similar to last year, our cash flow profile is more heavily weighted toward the fourth quarter due to the timing of program milestones and collections on some of our larger contracts.
On page eight we have provided you with our standard updated 2019 financial outlook.
Most of which I just discussed.
Before moving on I want to point out that we now see an improvement to net interest expense of approximately $10 million.
And now expected to be approximately $145 million for the full year, reflecting higher average cash balances.
And we have updated our diluted share count to be approximately 281 million shares for 2019.
On page nine we've included guidance by business.
We've increased the full year sales outlook at is.
And for the total company to reflect the combination of stronger bookings and sales to date and second half expectations.
Now turning to margin we have increased the range and expect higher full year operating margin performance for IEI us.
The strong year to date results exceeded our prior estimates.
And as I discussed earlier for the full year 2019, we increased operating income dollars, if the business segment level by $30 million.
Before moving on to page 10, as I mentioned earlier.
We are now raising our full year 2019 bookings outlook.
To a range of between $31 billion to $32 billion.
This reflects a $1.5 billion increase from the prior range and is driven by increased strong demand from our domestic customers.
On page 10, we have provided guidance on how we currently see the third quarter of 2019.
We expect our third quarter sales to be in a range of $7.2 billion to 7.3 billion.
And we expect EPS from continuing operations for Q3 to be in a range of $2.78 to $2.83.
And for operating cash flow, we expect Q3 to be in a range of $800 million to $1 billion.
Before concluding.
The collaborative merger efforts in integration planning between Raytheon and United Technologies are underway and progressing well.
Including the recent S four filing last week.
We look forward to the next steps in the process, including the definitive proxy filing and the shareholder vote later this year.
And post closing, we look forward to Raytheon technologies, delivering strong free cash flow growth and deploying a significant amount of free cash flow to its shareholders in the form of share repurchases and dividends.
In summary, we had strong performance in the quarter.
Our bookings sales operating margin EPS and operating cash flow from continuing operations were all higher than expected.
We increased our full year 2019 outlook for bookings sales.
Operating income EPS and operating cash flow.
We remain well positioned for continued growth.
With that Tom and I will open the call up for questions.
Ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one are you touched on telephone. If your question has been answered or you wish 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 allow for broader participation. You are asked to limit yourself to one question. The first question comes from the line of David Strauss with Barclays. Your line is open.
Good morning, Thanks for taking my question.
Good morning, David and.
Hey, Tom.
Could you touch on missiles the performance in the quarter and the changes that you put in place. There did did those things kind of take hold fascinating. You. Then you thought just just an overall update on the progress there. Thanks, David Thanks for the question I think number one is.
The administrative issues that missiles are not as significant as I think some folks think.
But we did put the we the change out some leadership we put in.
Our team too we have something called program management best practices, we went in and audited older programs relative to those.
Made some I would call it was more tune ups across the board, but we think missiles is a strong company. We think it has a lot of upside potential in the future and we were just putting our normal.
I would call it best practices in place on program management, we've done that we did due to some deep dives in some of the programs that had some of the issues and put corrective actions in on those.
And the other thing we're doing is they have a lot of the development activities going on we're really trying to accelerate those development activities and get those into production.
As soon as possible main reason is to drive into the higher margin positions.
And the other a big area and this is a future thing for another uplift for missiles as they are right now they are in the midst of negotiating to five year multi years. One is on the standard missile six in the others on and the SM three.
And that will be a big plus two and obviously increased significantly increasing our factory base for over about a period of seven seven years. So we're very upbeat about missiles I think they have a lot of upside to go where we're going to continue to press and driving them in that direction.
Our next question comes from Sheila Kaila with Jefferies and company. Your line is open.
Thank you good morning, everyone.
Good morning, Sheila Hi, Doug Hi, Tom I, just wanted to follow up on your remarks at the Paris Air show with regards to the state of the business you touched on it a little bit but over the next decade, maybe if you could expand on how you see that.
Filling about and that just given the more it seems like you have a very robust business profile on a standalone basis, Doug Hi, John comment, Yes, let me clarify the comments in Paris in first as you saw from the strong performance this quarter and also obviously defined in the us for.
We grew over 8% and achieved record backlog levels and then so bottom line is racing on very well positioned even as a standalone company.
And we are well positioned for the next 10 years 20 years in 50 years and beyond.
At Paris, I was trying to convey something and that was really it was really about the fact that the if we were to stop and I mean stop investing in Iran and stop in our Capex efforts at Raytheon. It would eventually limit our growth potential and it was really under the auspices that we're in and the environment. We are today that the time, where the DSD customers, increasing its research development budgets and the spending of those budgets to support next generation systems.
So as you know over the years several years, we have increased our internal investing in research and development and also our capex to position the company for this future growth.
And as a result revenue is very well positioned even as a standalone company.
For example over the last few years, we won numerous franchises.
And an accelerated our sales growth.
So bottom line is let me be very clear here on this one that we are very confident about the proposed merger with United technologies, and how that combination will even further enhance value for our shareholders customers and employees.
But even as a Standalone company Raytheon is very well positioned for the next 20 years and beyond.
Our next question comes from Myles Walton with Tvs. Your line is open.
Thanks, Good morning.
I was hoping you could comment on two things one is just update us on the export licenses.
For the precision weapons and they use to imagine you probably have them by now in the second.
It would be on the lower tier air missile defense sensor. The contract structure. There is a is a rapid acquisition and I guess the contractor is expected to self fund about a third of it.
Is that accomplished in your R&D profile and is that allowable expense.
Back to the customer thanks.
Yes, Myles I'll start on the first we're on the Pgms. So so you're right. We recently did receive.
Approve license from the state Department for about $1.2 billion worth of the Pgms that were previously awarded but not pad had not yet received our.
Export approval and were now in the process of coordinating.
Delivery of the completed product with our mid east customers.
So some some good progress there over the last couple of months.
And on the lower tier system I think its area and it brings you probably know we are significantly pursuing that system and we've been spending as in several years developing the technologies for the when they call it the LTM system.
We believe we're very well positioned for that capability to provide it to the army.
And so that they can be able to defend the most could challenging complex and integrated attacks.
And as I mentioned in my remarks, we did participate in the sense off I believe we put our best foot forward on that and provided a great capability and actually demonstrated at the sense off there was a lie fire environment. So we had a track life targets, we are able to demonstrate our unique technology that we brought to the game here at White Sands and it was over a two week demonstration period.
And we have delivered our proposal. It you are right the contract structure is something called and other transactional.
And in C O T a and it does have a requirement for 30%.
The content that can be provided by non traditional contractors.
And so.
And Thats see there so there's two elements to that and that we are working with nontraditional contractors and having them involved in helping us on that on that program Bottomline. We're confident in that solution that we provided for all teams in the sometime in the September timeframe. The army said that they're going to make that final selection.
Our next question comes from Seth Seifman with Jpmorgan. Your line is open.
Thanks very much.
Good morning.
Alright, I wanted to ask a quick question about the the S. Four and so we look at the data in there we're kind of looking at five ish percent growth that in 2022 and 2023.
And when we look at the investment account budget for fiscal 20, that's been submitted.
And probably consistent with the budget deal announced this week, it's flat to slightly up and the investment account, maybe something kind of similar and 21.
Based on your visibility on your programs domestically and internationally with that kind of flat to slightly up investment accounts and 20 and 21 be consistent with that 5% growth in 22 and 23.
Yes, Seth it's Tony let me take a crack at that here. So I think if you step back from the S. Four.
While we Hadnt previously quantified anything weve been pretty consistent in saying that based upon where at many points in time, where our backlog was our bookings outlook.
The alignment with both domestic and international customer needs. We saw that we were going to be able to continue to grow the company.
Beyond in this case 2019 for the next three or four years right. So.
As far as Directionally consistent with that type of.
Commentary that we provided in the past.
The other thing I would point out here right, we have been continuing to make our investments both from an R&D point of view of capital point of view.
In ways that aligned with customer priorities as dictated by the NDS and clearly as have been funded through the last few.
Budget cycles, especially in the R&D TNT account.
I think you know more importantly, it's worth noting that since the date of the projections in the form S. Four right. We are increasing our 2019 sales guidance that we just talked about this morning.
As well as because of the increase in our bookings the expected backlog that we'd have entering 2020.
Which gives us a high degree of confidence in our ability to continue to.
Grow the company at or beyond levels that we.
That you see in the in the S. Four.
Our next question comes from Cai von Rumohr with Cowen and company. Your line is open.
Yes, thank you very much so.
One of your competitors mentioned that they have three and a half billion of orders for hypersonic missiles about five or six programs could you update us on your position in Hypersonics and your backlog with respect to both offensive and defensive hypersonics. Thanks, so much.
Yes, let me let me cover that and then as we discussed in the past both Hypersonics in counter Hypersonics are areas, we continue to invest in for future growth and participate in DMD programs in that area and we're actively working multiple hypersonics and counter Hypersonics programs. For example, we have the Hawk system.
The tactical boost glide and we're also participating in the Navy is conventional prompt strike and also the Army's long range hypersonic weapons programs.
And also some other classified hypersonic and also counter hypersonic program. So it is it becoming a big part of our portfolio moving forward.
There's really three main categories, including the air breathing Hypersonics weapons and Thats. The the Hawk program and as we discussed on past calls. This program is successfully executing it did complete a free jet to testing and Nasa's Langley eight foot high temperature tunnel.
And then final analysis does show great comparison between the predictions and test results and so as the substantiating our system range performance predictions and putting us worth on the next step.
As you probably saw in the press that we have.
Signed an agreement with Northrop and we are working with them on developing and producing the next generation scram jet Combustors and to help power. The raytheon's air breathing hypersonic weapons second category is the hypersonic boost glide weapons, they call them tpgs or tactical boost glide and ground launch hypersonic boost glide weapons.
And back in February of this pad this year DARPA did award Raytheon at TPG.
Contract until we're off and working on that effort and we're also developing several counter hypersonic weapons and also the entire integrated counter hypersonic kill chain, including the sensors and as I mentioned on other calls we really believe that the counter hypersonic market is actually larger than the hypersonic market for multiple reasons. One is that not only does it include the weapons to counter the hypersonic weapons, but it also includes the entire kill chain communications and sensors.
And so rate that continues to build this presence in both the hypersonic and counter hypersonic market.
We are continuously and strategically investing in some of these 10 top technology areas to make sure that we have the right solutions to bring forward.
To win future competitions.
In both the hypersonic and counter hypersonic area.
And as we mentioned there.
Multiple potential revenue synergies also with the proposed merger with a UTI see from some of their complementary technologies relative to hot areas of engines in the materials required to use in those areas and so we see those complimentary.
Technology solutions, helping us even further in inner hypersonic areas.
And Cai, let me just add a little bit on the financial side of things right. So, especially in the area of counter Hypersonics right that gets across all elements of our company. Okay, not just our missiles business and as you can imagine.
There are parts of that that are classified are highly classified so we're a little constrained on what we can kind of put out there what I can tell you as it relates to our missiles business only right relative to the work that they're doing on the vehicles and related to Hypersonics, we'd expect revenue in the aggregate about $300 million this year and for a growing backlog their backlog grew here in the second quarter compared to first and would expect that to continue.
Certainly for the next.
12 to 18 months.
Our next question comes from George Shapiro with Shapiro Research Your line is open.
Oh, yes, good good morning.
George.
I noticed that operations in the quarter by your numbers were up 23 cents by mine and I had above above estimate guide 15 cents Tobey, but for the year, you're only raising it by nine cents. So I assume that means the second half you're expecting somewhat weaker performance. There. This quarter took some from the second half and the other quick questions. I have is the missile margin guide still requires north to 12% in Q3 and Q4, So just want to comment on that and on the other side. It requires a sharp reduction on the IR, yes margin in the second half. Thanks.
Okay George.
So let me start with the overall company level, Yes, I mean.
I said earlier, we are pleased with the increase of the 24 cents.
Prior to the merger related impacts right that were offset by 11 cents of expenses and three cents from a higher share count.
That netted to the 10 and we're extremely pleased with our performance in the quarter.
We had several of the business is outperforming our expectations. Some of this is timing as you alluded to I think timing between Q3, and Q2 and it does give us confidence in the overall guidance and the outlook for the year.
As I said at is with their strong performance in Q2 and their expected performance in the back half combined with their volume and margin that's where the.
The flow through of that 10 cents to the total year is primarily.
Driven by in addition to the improvements we saw in corporate and some of the non operating items. So overall, we're pleased with that but timing is really the way to think of it right that we saw some strong performance in the quarter from a margin point of view some improvements we expected in the second half primarily Q3 moving into the second quarter.
So missile specifically again, we're pleased with the 11.4% margin.
That they deliver here in Q2. It was ahead of what we are.
We're expecting.
As you pointed out you are right, we continue to see their margins, increasing and improving in the back half of the year.
The combination of some new and anticipated production awards will be ramping up.
From a total year basis, we expect better.
Productivity and overall missiles margins about in line with 2018 at the midpoint of the right in the midpoint of the range of 11 and a half to 11 nine.
So from an I.S. point of view.
Clearly they've had a.
Outstanding start to the year with their performance, including in Q2.
We did raise their guidance by another 20 basis points to the 8.2% to 8.4% of the range and yes, we do expect the margin in the back half is going to be a little bit lower.
Driven by mix.
And again, the timing of some of the performance performance improvements as they saw accelerated into Q2 versus Q3.
Our next question comes from Ronald Epstein with Bank of America Merrill Lynch. Your line is open.
Hey, good morning, guys.
I really can't talk.
Could you talk to a bit.
How you think about the kind of two.
How does BBN fit in.
In your view.
The combined or.
It seems like that.
Powerhouse.
And then too.
Commercial offset so when you when you're doing your international work in your offsets all of a sudden you'll have a much larger portfolio of things that you could offset how do you think about that.
Yes, let me talk about the first thing is.
You're right runners we between the two companies we have a powerhouse of technology.
One of the.
Areas that we have some of our technology concentrated it is BBN, which is.
One of our research arm does a significant amount of work with DARPA and a lot of technology of I would call a futuristic technology development has been kind of our leader in artificial intelligence and machine learning for us and several other key areas.
Right now that system is connected directly into our four businesses in their advanced programs area has a very tight coupling. So we try to do is even though we're developing advanced technology, we try to tie that back directly to our mission areas.
So that we can accelerate the development of that technology into the solutions that we provide.
For our customers and that is a model that we were going to take forward.
We need to.
Into the merger as we move forward, we are going to ensure that we don't break that and moving forward.
We have some organizational construct works that we're doing because.
You know technology is also has a research group.
That does work is also connecting into their businesses. So the end game is to essentially try to drive the synergies with all this technology that we're developing.
In a way that we can actually make this kind of technology, one plus one equals three and we're looking at accelerants by combining this technology in these different areas, but the bottom line is is that there is a significant amount of opportunity in the technology area and in the technology is complementary.
And we're trying to work that organizational construct so we make sure we maximize the benefits of that to both the both companies in a merger.
And I think Ron I know SEC second comment and Tom can jump in here and add some color you know thats another synergy opportunity around the offsets clearly.
Having more capability to put forward to satisfy.
What our international customers are looking to do relative to localization and developing.
Indigenous capability is a key area that will be.
Working some planning around and then post merger are figuring out how to.
Take full advantage of the capabilities that United Technologies Aerospace businesses will bring to the table and and give us more avenues to satisfy and fulfill offsets.
Your next question comes from Peter Arment with Baird. Your line is open.
Yes, good morning, Tom Toby.
Hi, good morning Tobey.
Good good thanks.
Until we could just circle back on I assess margins I wasn't clear to me why is it just all related to the war fighter ramp down that why you are seeing margins.
Come down pretty significantly in the second half I know Youve had some very strong performance in the first half, but what exactly are we seeing there.
Yes, no, it's two or three things right the war fighter.
Volume reduction as part of it and that is definitely more pronounced.
In the back half of the year significantly more pronounced in the back half of the year.
Than it was in the first half.
And part of the strength of their margin here in the quarter at that the 9.1% was their productivity improvements and and they were able to accelerate some from the second half into into the second quarter from Q3 to Q2, and then to a lesser degree they do have some general mix with other programs.
That have a lower margin than a heavier revenue contribution in the second half, but that all said overall.
They are performing well hitting on all cylinders, we raised their margin again, we're more than confident in their margins going forward and I know it wasn't a specific part of your question but.
I would tell you and we've touched on this at times on past calls when folks have asked.
Based upon the portfolio Eni, yes, and depending upon mix of their business, including as they work to capture more international work, especially around cyber.
This is a business that could approach 9% margins.
Depending upon how things line up so the team there is doing a great job in.
We're very pleased with their performance.
Our next question comes from Carter Copeland Melia.
Research Your line is open.
Hey, good morning.
The current quarter, how you doing.
Just a quick two parter on just to follow up on the Hypersonics discussion.
I wondered from whats in increasingly in the public domain on the Hypersonics versus kind of Hypersonics. It looks there is a lot.
More funding and effort on the counter on the Hypersonics fronting camera Hypersonics and I wondered if thats consistent with what you've seen in your portfolio or if theres a classified dynamic there that makes those a lot more equal in size and then I know on prior calls Tom you've emphasized counter hypersonics as a as a perhaps the bigger of the two opportunities for you and I just wondered when you think about the the elements of that.
Whether it's.
Can a traditional radars and traditional air missile defense things of that nature, which are really kind of core capabilities of your company today, how the UGC transaction helps in the counter hypersonics realm, or if I'm sort off on that any any color there would be great.
Yes so.
Moving them number one let me set the straight I mean, the Hypersonics is a big element for the department of defense and are pushing that forward, but I can also tell you that they are obviously fairly a very large effort relative to counter hypersonics theres activity is going on here a lot of that is in the classified areas I can't get into lot of details, but what I can tell you is the counter hypersonics efforts across every one of our four businesses.
I guess as a us missiles and even ideas and the reason is it requires a solution for the entire.
Fire control chain.
To be able to go to detect a threat.
That make your decision or what you're going to do it that threat and then event and then track that thread all the way through its its flight path and then interdict somehow to destroy the threat and the elements that go do the counter Hypersonics is there just more parts and therefore more parts one is that being more things develop and integrate and so thats why its really a bigger and thats why I use the word that is a larger market for us relative to our entire business.
In any case bottom line is we are heavily participating in both and we believe the future will will help us even further and then relative to you Tc I mean, they are helping us.
Well, we'll be able to help us once we close.
Relative to their technology, especially into a high temperature materials into inlets for hypersonic engines.
And that area and they will also do have some high end.
Sensors that we don't have we don't participate in areas that potentially could help us in that fire control chain.
Our next question comes from Robert Stallard with vertical research your line is open.
Thanks Raj good morning, Mike.
Hi, Rob.
Hi, Tom a quick question for you on the merger have you been surprised by this sort of feedback you've been getting from investors.
Well weve depends only extends only investors we've been getting a lot of positives from investors across the board.
I think so lot of our investors do see exactly the benefits of the merger moving forward.
I think the area whole area of technology, and being able to combine the I would call. It the power to powerhouse companies relative to their technology areas and bring it to bear on on a entire front moving forward has been very very well taken by our investors who understand the details of the company's and the technologies that they are developing.
So we most of the stuff we've been hearing is pretty pretty positive.
And Rob sorry.
Okay, and Rob I would just add in you know going back to the original announcement.
You know and I think we've talked about this so this wasn't a combination that was rumored right. So clearly people.
We're not expecting it.
We continue to engage with our investors as they have more questions about the deal and I think what people are.
From a financial point of view starting to really understand.
The long term cash flow generation potential for this business that the incremental.
Free cash flow growth.
We talked about the $18 billion to $20 billion of capital being returned to shareholders in the in the first three years.
We put a number out there about $8 billion in.
2021, which would kind of be the first full year based upon a mid 2020 close.
We've also put a little more color on that that thats conservative by plus or minus.
$1 billion. So I think people are getting their head around it right. It's got something for everybody. It's got that long term strategic play underpinned by the complementary technologies the revenue synergies that as Tom mentioned in his opening remarks or you know, we believe we're going to be measured in the billions.
It's Scott the synergies that would provide shareholders to benefit that from the near term and then all the elements I won't repeat them.
From a financial perspective around the cash flow generation.
Of of the.
The Raytheon technologies company.
Shannon we have time for one more question. Please.
Our next question from Pete Skibitski with Alembic Global your line is open.
Thanks, Nice quarter guys. Thanks fee.
John can you talk about some of the smaller programs that missiles that you have going on I hate to get too far into the weeds, but I think there are interesting and kind of emerging missionaries for the military wanted to discuss.
Steve announced a contract here this quarter four.
No not huge but not small either and then as fever radar in this whole program. It can you give us some color on some of those and maybe to the extent you can talk about the market size. So it just sounds pretty interesting.
Yes, I'll talk about the Coyote first actually that's a bright really bright super Brite star for missiles that was enacted.
Did an acquisition of a small company.
Back in 2015 at this you Avi on it and the reason we went into the acquisition I think was about $7 million. They have some technology and swarming you Avi swarming technology, and so we were able to take that system and integrated into some of our other solutions. They were doing it could create and we call. It now coyote system and have integrated that with one of our radars are kind of call a curse writers to create a new system called power.
Hal or that was just the Io seed by the by the United States Army and the Army's buying these systems for counter uses so this this you, yes actually goes off and attacks UAS and kills them.
And it's been it's actually is very good so it's a lower cost system. So it's a way of killing lower cost the uses.
And it's and I think the army's going off is going to be buying quite quite a few of those.
So it's a very very great program there the the other.
I would call a contract that I would like to bring up the in the area of missiles is there. They are pursuing a program called precision strike missile.
And that is a new system for them to be a brand new franchise for US moving forward were very positive on that system. It's a system that is required by the army to replace their attack them system and move that up to a longer range, but within the $1 of treaty, which may end in.
On August 2nd so if that happens there will be more activity in this area and were more upside and potential for the for the missile company in that arena.
That's all the time, we have thank you for joining us. This morning, we will look forward to speaking with you again on our third quarter conference call in October .
Ladies and gentlemen, this concludes the Raytheon second quarter 2019 earnings call. Thank you for joining and have a wonderful day.