Security Solutions

Transportation

Sensor Systems

Civil Communications

Mission Control

Military Communications

NCS

GOAL: Understand how the decisions you make impact key company measures.

…to make better, smarter, faster, business decisions!

Road Map

Today:• Understand the 5

key drivers of business

• How Raytheon is performing around each driver

• The annual report and financial statements

Tomorrow:• Examples of companies performing well around

the 5 drivers

• Deepen our understanding through teaching the 5 drivers and the financial statements

• Applying the business drivers to your business and communicating this to the class

• Aligning our personal objectives with the business needs

• Individual Action plans

Our Program Methodology

Important Question!

What’s your “Business Acumen”?

How much do you know about Raytheon’s

Key Success Measures?

Let’s find out!

1 - How much Cash was on hand? $________

2 - How much Cash was generated by Operating Activities? $________

3 - How much Free Cash Flow was on hand? $________

4 - What was our total Net Sales? $________

5 - What was our Operating Income/EBIT? $________

6 - What was our Net Income? $________

7 - What was our EPS? $________

8 - What was our Backlog? $________

9 - How much did Net Sales grow (Y/Y)? _______%

10 - What was our Operating Income growth? _______%

11 - What was our Net Income growth? _______%

12 - What was our EPS growth (Y/Y)? _______%

*Given all the above, how do we stack up against other companies?

Pop Quiz!

For fiscal year: 2011

35

Clear Learning Objectives:

1. List and describe the 12 key performance measures that are important Bill, Dan and the Executive Team.

2. List and describe the 5 business drivers all successful businesses must focus on.

3. Create a personal action plan that can positively impact personal performance and company results.

4. Teach specific components of Raytheon’s financial statements.

5. Better articulate company performance & strategy.

®

Only 5-10% of business start-ups survive past 5 years.

16% of CEOs lose their job every year. Booz Allen Hamilton 5th annual Study

70% of merger and acquisition activity do not live up to expectation. Wall Street Journal 2007

Business can be tough!

So why do businesses fail?

Acumen means?

3

…the ability to make good business decisions, in a timely manner, with an understanding of how the decision should impact the business.

Every business must focus on five business drivers.

If they do, they will be successful. If they don’t, they’ll fail.

Let’s Start a Business!

Ram Charan Believes:

When it comes to running a business successfully,the street vendor and the CEOs of some of the world’s largest and most successful companies talk and think very much alike.

-Ram Charan

®

8

Cash

Growth Growth

Cash Assets

Profit

Definitions:

Cash:

Measures

Cash Flow:

Definition

See Page 58

(Savings Account)

$5,000 On hand

(Savings Account)

$5,000 On hand

(Checking Account)

$100,000 Salary- $90,000 Expenses $10,000 Cash Flow

Put in Acct.

Spend it

Invest it

(Checking Account)

$100,000 Salary- $90,000 Expenses $10,000 Cash Flow

Put in Acct.

Spend it

Invest it

Cash FlowCash Flow

Cash Cash

What is required to Grow and Maintain the business.

Cash

8

Free Cash Flow:Operating cash flow minus capital expenditures minus internal use software expenses. What is it used for??

It is the cash available to a company to use for paying debt, providing dividends to investors, buying back stock, expansion, acquisitions, and/or financial stability to weather difficult market conditions.

®

Why is CASH so important?

“Cash is more important than your mother.“

-Al Shugart (Former Seagate CEO)

“Cash is a company’s oxygen supply...” …and allows you to stay in business.”

-Ram Charan

Cash is King!Cash is King!

“Cash is more important than profit.”

-Peter Drucker

®

Top 6 Uses of Cash1 - Dividend Pay-outs 4 - Research & Development (R&D)

2 - Stock Buy-Back 5 - Capital Expenditures (CAP-EX)

3 - Mergers & Acquisitions (M&A) 6 – Debt Retirement9

$588M

$1,250M$645M

$625M

$340M

$0M

1. Can a company have: •Too little cash?

• Too much cash?

2.How much cash should a company have?•“Companies ought to keep just enough cash to cover their

o Operational expenseso Interest expenseso Capital expenditureso ….plus a little bit more in case of emergencies.” ~Investopedia

•Why carry more cash:• Cash Conversion Cycle: Time to turn inventory & A/R into cash.• Projected Reliability: Timing of expenditures & required disbursements.• Growth Needs: Strategic objectives regarding expansion & acquisitions.• Risk Reserve Needs: Uncertainties/Risk factors: economy, loss of key mgmt, loss of patent

life, etc. • Current Access to Cash: Status of lines of credit.• Additional Access: Ability to raise cash from equity or debt offerings. (Based on company’s credit rating).

•Sources of Cash:•Earn it: Core business/Sales (Cash From Operations) Pros: Cons?•Sell an asset: Stocks, real estate, capital assets, etc.) Pros: Cons?•Borrow it: Get loans (Debt Financing) Pros: Cons?

Sell stocks (Equity financing)

CASH

Yes! #1 reason why companies fail.

Yes! Not using cash wisely. Shareholders want:

Invest it or return it to us!

®

9

WHY? •They sell commodities•Short sales cycle•More predictable business model

WHY? •They sell commodities•Short sales cycle•More predictable business model

High Cash vs. Low Cash

1.8%

2.0%

1.7%

High Cash Position

WHY? •Acquisitions•Long sales cycle•High risk industries (pharma, tech)•Unique brand

S&P 500 Average: Cash = 6%

Low Cash Position

42%

75%

32%

9

DSO (Days Sales Outstanding) is a measure of number of days before Sales turns into Cash.

Total Days Sales Outstanding

Sales Invoice Collections

Unbilled/Retained DSO

Billed DSO

9

What is the connection

between DSO and Cash Flow?

Why is important to collect cash (money) as soon as possible?

Put the money to work again. What if I can increase retention – customers & employees

What if I can pay slower? Spread costs out. Depends on the contract type. Can hurt relationships.

Key ways to increase CASH and CASH

FLOW:

To increase CASH:

Paying slower Collecting faster … with the same sales revenues and costs.

To increase CASH and CASH FLOW:

Increase revenues/sales Reduce/cut costs

®

9

CASH: Raytheon®

Total “Sales”

Cash

Cash Flow

Cost of Capital: The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity.

Free cash flow: Operating cash flow minus capital expenditures. It is the cash available to a company to use for paying debt, providing dividends to investors, buying back stock, expansion, acquisitions, and/or financial stability to weather difficult market conditions.

Business DriverRaytheon

  (in Millions)  

  2011 2010 2009 2008

Net Sales $24,857 $25,183 $24,881 $23,174

Net Income $1,896 $1,879 $1,935 $1,672

Cash        

Cash $4,000 $3,638 $2,642 $2,259

Cash as a % of Sales 16.1% 14.4% 10.6% 9.7%

Cash From Operations (CF) $2,156 $1,931 $2,745 $2,036

Free Cash Flow (FCF) $1,719* $1,599 $3,111 $1,252

S&P 500 Average: Cash = 6%

CASH: Raytheon®

Total “Sales”

Cash

Cash Flow

Business Driver

RaytheonGeneral

DynamicsLockheed

MartinBoeing

Northrop Grumman

  2011 2011 2011 2011 2012

Net Sales $24,857 $32,677 $46,499 $68,735 $26,412

Net Income $1,896 $2,526 $2,655 $4,018 $2,118

Cash        

Cash $4,000 $2,649 $3,582 $10,049 $3,002

Cash as a % of Sales 16.1% 8.11% 7.70% 14.62% 11.37%

Cash From Operations (CF) $2,156 $3,238 $4,253 $4,023 $2,115

Free Cash Flow (FCF) $1,719* $2,780 $2,310 $2,503

S&P 500 Average: Cash = 6%

4. Benchmark the numbers

2011 2010

Cash $4,000 M $3,368 M (UP)

Cash Flow $2,156 M $1,931 M (UP)

Free Cash Flow $1,719 M $1,599 M (UP)

1. Define Cash Driver• What is required to grow

and maintain the business.

2. Measures of Cash1. Cash: Easily converted into cash in 90 days

or less.

2. Cash Flow: Difference of cash in and cash out over a given period of time.

3. Free Cash Flow: Operating cash flow minus capital expenditures.

3. Importance of Cash Driver• Have sufficient cash to run the business

• What is the cost of that cash (capital)

• Enhance shareholder value

• Improve attractiveness to suppliers and customers.

CASH - Review

9

®

Action Plan: What Single Action are You Committed to do to Positively Impact CASH and CASH

FLOW?

®

Manage billing milestones – efficiently execute completion milestones Minimize time from task completion to payment (Days Sales

Outstanding – DSO) Ensure timecard compliance

Timely – DAILY input / accurate entry of time worked Establishment and communication of proper charge numbers Pre-emptive discussion on how to charge in weather calamities,

training, etc. Timely review/approval of subcontractor and consultant invoices Focus on timely submittal of invoices and hours by subcontractors Fully participate and understand monthly financial reviews Maximize profitability Excellent contract performance

Equates to happy customer who don’t protest invoices or delay payments due to dissatisfaction

9

10

Profit

Growth Growth

Cash Assets

Profit

How do you increase Profit($)?

#1- Increase price

#2- Lower costs

#3- Or Both!#3- Or Both!

SALES - all expenses SALES - all expenses

Net IncomeNet Income

•Profit = Earnings or Income•Expressed in Dollars $ or as a Percent %

Profit

®

Definition: PROFIT

SALES – All program costs SALES – All program costs

Operating Profit:Operating Profit:

10Earnings Per Share (EPS):Earnings Per Share (EPS): Net Profit / # of outstanding shares

Measures

Profit

Notes:

Gross Margin: Sales – Cost of Goods Sold (COGS)A good indication of how profitable a company is at the most fundamental level. Companies with higher gross margins will have more money left over to spend on other business operations, such as research and development or marketing.

Operating Profit or EBIT: Earnings Before Interest and Taxes (non-controlables)EBIT is a good gauge of how well a company is being managed.

EBITDA:Earnings Before Interest, Taxes, Depreciation and Amortization

Net Profit Margin:Revenues - all expenses.

11

Sales Price: $1.50

Water - $ .04Label - $ .11 COGSBottle & cap - $ .15 Packaging - $ .20 Direct LaborTotal: ($ .50)

$1.50 - $.50 = $1.00 Gross Profit = 67% Gross Margin

Rent - $ .03Salaries, Gen, Admin. (SG&A) - $ .30Marketing - $ .08 (Controlables) Shipping - $ .19 Total: ($ .60)

$1.50 - $.50 - $.60 = $.40 Operating Income (EBIT)

Interest Expense - $ .04 (Non-controlables) Taxes - $. 06Total: ($ .10)

$1.50 - $.50 - $.60 - $.10 = $.30 (EBITDA)

Depreciation /Amortization - $ .02

$1.50 - $.50 - $.60 - $.10 - .02 = $.28 Net Profit = 18.6% Net Margin

Gross & Net Profit($) / Margin(%)

®

Artesian Water

Company

11

= Gross Profit/Margin $5,160 20.8%

Net Revenue (Sales) $ 24,857 - Costs of Goods Sold (COGS) (Cost of Sales) - $ 19,697

2011(in millions)

= Operating Income (Profit) / EBIT $ 2,857 11.5%

Also called: “Net Profit” and “Net Earnings”

- SG&A, R&D (Op Ex): - $ 2,303

®

= Net Income($) / Margin(%) $ 1,866 7.5%

- Interest Expense, Taxes, Etc: - $ 991

$1.00

Gross Profit/Margin & Net Profit/Margin

11

WHY?

They sell commodities.

“If you’re not unique, you better be cheap!”

WHY?

They sell commodities.

“If you’re not unique, you better be cheap!”

To drive Profit($) you need either: High Margin (%) or High Volume

High Margin vs. Low Margin

28%

32%

22%

3.6%

8.0%

1.7%

High Margins

Low Margins

WHY?

They offer something Unique!

S&P 500 Averages: Net Margin = 14%

11

Examples of PROFIT In Action ®

General Mills: Hot’n Spicy Chex Mix:

“We had 14 different pretzel shapes. By getting rid of some of them, we saved $1 million a year.”

Yoplait: Ditched multicolored lids, saving $2 million a year:

Airlines: Baggage Fees fatten airline revenues by $3.8B

Why do we want our company to be

profitable???

11

Example of Example of ProfitProfit

®

11

“In 1912, the Model T for the first time cost less than the prevailing average annual wage in the United States.”

“Ignoring conventional wisdom, Henry Ford continually sacrificed margins to increase sales. In fact, profits per car did fall as he slashed prices from $220 in 1909 to $99 in 1914.”

“But Sales Exploded!”

“Ford demonstrated that a strategic, systematic lowering of prices could boost profits, as net income rose from…

$3 million in 1909 to $25 million in 1914.”~Daniel Gross, Forbes Greatest Business Stories

(in millions)

®

Earning Per Share = $ 1,866 M (Net Income available to common stockholders) ÷ 353.6 M (Diluted Shares)

$ 5.28 On Statement of Operations

Profit: Raytheon

S&P 500 Averages: Gross Margin = 34% Operating Margin = 15% Net Margin = 14%

Business Driver

Raytheon

  (in Millions)  

  2011 2010 2009 2008

Net Sales $24,857 $25,183 $24,881 $23,174

Net Income $1,866 $1,879 $1,935 $1,672

Profit        

Operating Profit ($) $2,857 $2,607 $3,042 $2,620

Operating Margin (%) 11.5% 10.4% 12.2% 11.3%

Net Income ($) $1,866 $1,879 $1,935 $1,672

Net Margin (%) 7.6% 7.5% 7.8% 7.2%

EPS ($) $5.28 $4.79 $4.89 $3.92

®

Profit: Benchmarks

(in millions)

Business DriverRaytheon

General Dynamics

Lockheed Martin

BoeingNorthrop Grumman

  2011 2011 2011 2011 2012

Net Sales $24,857 $32,677 $46,499 $68,735 $26,412

Net Income $1,896 $2,526 $2,655 $4,018 $2,118

Profit          

Operating Profit ($) $2,857 $3,826 $3,980 $5,844 $3,276

Operating Margin (%) 11.5% 11.7% 8.6% 8.5% 12.4%

Net Income ($) $1,896 $2,526 $2,655 $4,018 $2,118

Net Margin (%) 7.6% 7.7% 5.7% 5.8% 8.0%

EPS ($) $5.28 $6.82 $7.81 $5.34 $7.52

S&P 500 Averages: Gross Margin = 34% Operating Margin = 15% Net Margin = 14%

Raytheon Raytheon ProfitProfit

11

1. Define Profit Driver What is left over after you have subtracted

expenses.

Can be expressed in dollars ($) or as a percent (%).

2. Measures of Profit

1. Gross Profit (Margin) – subtract COGS

2. Operating Income - EBIT – Earnings Before Interest and Taxes

3. Net Income – subtract ALL expenses

3. Importance of Profit Driver Net Profit is one of the most important

#’s for the business.

Indicates price strength & cost controls

Identifies ability to manage costs

4. Benchmark the numbers

1. Operating Income = UP

2. Net Income = UP

3. EPS = UP

®

PROFIT - Review

Discussion: Action Plan-What Single Action are You Committed to

do to Positively Impact PROFIT? ®

• Manage expenses: - Manage cost budgets, approve only costs that have relevance and a business need

• Improve staffing practices- Reduce number of days between “Need Date to Start Date” to minimize

Opportunity Loss in revenue- When a position is vacant, we are not generating revenue- Have people with contingent offers lined up for backfills when required- Ensure the right people are in the right job- Minimize turnover- Support staffing efforts by participating in job fairs- Emphasize / encourage job referrals with your employees

• Effective program execution• Continuous process improvement – minimize waste, and reduce costs• High Customer satisfaction – award fees• Understand the various contract vehicles that are available, how

each one works – i.e. Firm Fixed Price, Cost Plus, etc., and the impact on profit

11

12

Assets

Growth Growth

Cash Assets

Profit

Definition: Definition: AssetsAssets

Assets

Asset Strength (Have)

• People:

• Property:

• Cash:

• Inventory:

• Plant & Equipment:

• Information:

Asset Utilization (Use)

Increase employee productivity.

increase usage with lower number of buildings.

Buy back stock, acquire another company, invest in higher returns.

“just in time” inventory increasing inventory turnover.

Decrease cycle time.

Increase number of patents per year.

What we have and how well we use what we have.

Definition

®

12

Definition: Definition: AssetsAssets®

Definition:What we have and how well we use what we have.

Assets: Include cash, property, plant, equipment (PP&E), technology, intellectual property, and people. Work processes are key “assets.” “People are considered, by many organization, their most important asset.”

Asset Strength (Have): Refers to the amount of liquidity your company has, including cash, cash equivalents, and unused lines of credit. The greater your company’s liquidity, the greater your Asset Strength.

Asset Utilization (Use): Refers to the return you obtain from your Assets. The more you can increase an asset’s ability to make or save money, the higher the utilization. In general Asset Utilization means the efficient use of assets—how hard a company’s assets work to make money, to produce revenue profitably.

We can increase Asset Utilization in two fundamental ways: (1) Decrease the amount of assets used to get results, and (2) increase the results obtained from using the same assets.

13

AssetsHigh & Low: ROA

High ROA Low ROA

Business Measures and Metrics

Raytheon Coach RIMM Proctor & Gamble Abbott Labs

2011 2011 2-26-2011 6-30-2011 2010

Revenues $25,857 $4,158 $19,907 $82,559 $38,166

Assets

Return on Assets (ROA) 14.8% 33.4% 26.5% 8.5% 7.8%

(In Millions)

ROA = Net Income = 1,866 = 7.2% Total Assets 25,854

S&P 500 Average: 6.56%13

AssetsHigh & Low: Equity Position

High Equity Ratio Low Equity Ratio

Business Measures and Metrics

Raytheon Google Apple Bank of America US Bankcorp

2011 2011 2011 2010 2010

Revenues $24,857 $37,905 $108,249 $110,220 $20,518

Assets

Equity Ratio 32.3% 80.1% 65.8% 10.1% 9.6%

(In Millions)

Raytheon = . Equity = $8,340 = 32.3%.

Total Assets $25,854

S&P 500 Average: 20%

13

Definition: Definition: AssetsAssets(Page 12)

®

Balancing…

Asset AssetStrength Utilization

The costs of excess inventory: - Cost of capital - Storage costs - Obsolescence - Inventory shrinkage

Benefit of a strong credit rating:-Can borrow more money… -at a cheaper rate.

What a company may sacrifice to have a high rating:- Borrow less money- Hold more cash- Take less risk thus lower returns

A strong asset base = financial strength = …costs MONEY!

Strong asset utilization = higher efficiencies = higher productivity

…more profit or MONEY!

13

Raytheon: ASSETS

13

®

Financial Summary Financial Summary Bookings

– Key Bookings (> $100M) to go in 2011: Sentinel, Saudi MODA C4I, Angola HFSWR, VIRTSIM and LA-RICS

– Book-to-bill >1.0 in all five years, with backlog growing 7.6 percent over the five-year period

Sales – $6.4 Billion in 2016 – Five percent (CAGR 2011-2016) driven by growth in Security Solutions (23 percent) Mission Support (13 percent)

and Transportation (7 percent)

– International – 14 percent CAGR to $1.8 Billion by 2016 driven primarily by MENA, India and Australia

2012 Op Margin – 2012 operating margin decline driven by run-out of 2nd Gen EO programs; margins remain consistent throughout remaining five years

Cash Conversion – 101 percent for the five-year period

'11 '12 '13 '14 '15 '16

Bookings

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

'11 '12 '13 '14 '15 '16

Sales

0%

2%

4%

6%

8%

10%

12%

14%

16%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

'11 '12 '13 '14 '15 '16

Op Profit/ROIC

’11–’16CAGR 5.6%

’11–’16CAGR 5.6%

’11–’16CAGR 5.0%

’11–’16CAGR 5.0%

’11–’16CAGR 3.4%

’11–’16CAGR 3.4%

14% MarginTarget 4%

Ext. Sales GrowthTarget 14%

Ext. Op Margin

13

(in millions)

ROA = Net Income Total Assets

Assets: Raytheon

ROIC = Net Income - Dividends Total Capital

®

Business Driver

Raytheon

  (in Millions)  

  2011 2010 2009 2008

Net Sales $24,857 $25,183 $24,881 $23,174

Net Income $1,896 $1,879 $1,935 $1,672

Assets    

Net Sales $24,857 $25,183 $24,881 $23,174

Bookings $26,555 $24,449 $25,058 $26,820

Backlog $35,312 $34,551 $36,877 $38,884

ROIC 14.60% 13.30% 12.00%

13

S&P 500 Averages for 2010:

ROA = 5.8%R&D Spend = 5%Cap Ex = 5%

(in millions)®

Assets: Benchmarks

Business Driver

RaytheonGeneral

DynamicsLockheed

MartinBoeing

Northrop Grumman

  2011 2011 2011 2011 2012

Net Sales $24,857 $32,677 $46,499 $68,735 $26,412

Net Income $1,896 $2,526 $2,655 $4,018 $2,118

Assets        

Net Sales $24,857 $32,677 $46,499 $68,735 $26,412

Backlog $35,312 $57,410 $80,700 $355,500 $39,515

13

S&P 500 Averages for 2010:

ROA = 5.8%R&D Spend = 5%Cap Ex = 5%

Assets - Review

1. Define Asset Driver

• What we have and

• How well we use what we have.

2. Measures of Asset• ROA – Percent value of total revenue to total

assets.

• Backlog

3. Importance of Asset Driver• Demonstrates ability to work smarter

rather than harder.

• Indicates company invests in “right” assets

• Indication of execution

4. Benchmark the numbers

5. Bookings = UP

6. Backlog = UP

ASSETS = Efficiencies, productivity, speed,

making assets work harder

• Increase efficiencies (employee/company)• Increase employee productivity• Measure employee output• Increase performance • Increase process efficiencies• Reduce under-performing assets• Reduce steps in work processes• Increase cross-training of employees• Reduce cycle time• Decrease travel distance for US Trainers• Increase multi-sales• Increase smart road mapping

(page 13)

®

• Decrease customer churn• Increase FCR (First Call Resolution)• Decrease average handle time (AHT) per call• Use resources better within the company • Least cost network design• Schedule more efficiently• Encourage web meetings• Least cost routing• Reduce unplanned absences Your own idea…

REVIEW:

Action Plan: What Single Action are You Committed to

do to Positively Impact ASSETS?

13

Growth

Growth Growth

Cash Assets

Profit

14

Definition: Growth

Growth

14

The ability to increase year over year, quarter over quarter, and/or month over month.

• Sales Growth: Top-line Sales/Revenue

Measures

• EPS Growth:Increase/decrease in earnings per share.

• Operating Income Growth:Measures operational efficiencies.

“In today’s business world, no growth means lagging behind in a world that grows every day…”

“Investors expect it, employees are energized by it, customers are generally attracted to it and executives are measured by it.”

Definition

• Net Income/profit Growth:Bottom-line/Profit

“Change is a constant in today’s business world so you are either growing with it or dying from it. Growth forces a company to change and adapt, to anticipate customer needs, and to look for new opportunities.”

Investors expect it

Employees are more energized

Growth provides opportunities for employees

Customers are generally more attracted to it

Attracts better suppliers

Executives are measured by it.

It takes 5 times as much to win a new customer as it does to keep an existing one.

Why is Why is Growth Growth so so important?important?

®

15

Business in Rapid Business in Rapid GrowthGrowth

• Best & brightest leave first• Productivity goes down• Morale goes down• Costs are cut, which limits ability to

grow, and the company becomes less profitable.

Studies Show: It usually takes 4 or 5 years for the company to recover.

Business in Rapid Business in Rapid DeclineDecline

• Attracts/Retains the best & brightest!• Productivity goes up = more profit =

more cash = more ability to grow!• Morale is typically higher.• You have the ability to grow in your

career!

Public Company: Gets more time and attention than any of the 5 drivers.

15

GrowthHigh & Low: Revenue Growth

High Revenue Growth Low Revenue Growth

Business Measures and Metrics

Raytheon Apple Amazon Wal-mart Yahoo!

2011 2011 2010 2010 2010

Revenues $24,857 $108,249 $34,204 $421,849 $6,324

Growth

Revenue Growth (1.3%) 65.9% 39.6% 3.4% (2.1)

(In Millions)

Growth Calculations = This Year - 1 x 100 = % Growth Last Year

Raytheon Rev Growth = 24,857 - 1 x 100 = (1.3%) 25,183

(in millions)®

Growth: Raytheon

Business Driver

Raytheon

  (in Millions)  

  2011 2010 2009 2008

Net Sales $24,857 $25,183 $24,881 $23,174

Net Income $1,896 $1,879 $1,935 $1,672

Growth        

Net Sales Growth -1.3% 1.2% 7.4% 8.8%

Operating Income Growth 9.6% -14.3% 16.1% 11.3%

Net Income Growth 0.9% -2.9% 15.7% -35.1%

EPS Growth 10.2% -2.0% 24.7% -31.8%

S&P 500 Average Revenue Growth: 10.5%

(in millions)®

Growth: Benchmarks

Operating Income:The only way to determine if a companies operating margin is good is to compare it to that of other companies in the same industry.

Business Driver

RaytheonGeneral

DynamicsLockheed

MartinBoeing

Northrop Grumman

  2011 2011 2011 2011 2012

Net Sales $24,857 $32,677 $46,499 $68,735 $26,412

Net Income $1,896 $2,526 $2,655 $4,018 $2,118

Growth          

Net Sales Growth -1.3% 0.65% 1.80% -5.80% -6.15%

Operating Income Growth 9.6% -0.03% -0.02% 17.56% 15.88%

Net Income Growth 0.9% -3.73% -7.7% 21.50% 3.17%

EPS Growth 10.2% 0.88% 0.00% 20.00% 10.26%

Growth: Raytheon - Financial Outlook

15

Growth: By Business - Financial Outlook

15

Our Strategic Approach

Significant shifts to meet growth objectives

Rigorous market/business selection Exploit existing capabilities and costs Strategies that are clear on how and

why we win Resources allocated to highest returns Shaping the market

Market LeadershipMarket LeadershipIdentify • Shape • Brand • AchieveIdentify • Shape • Brand • Achieve

Program centric Duplicate cost and base erosion Competing on multiple fronts/one off

investments Democratic allocation of resources Reactive to RFP’s

Top 10 programs represent Top 10 programs represent 30% of Sales and 50% of Profit30% of Sales and 50% of Profit

RAYTHEON MOST PRIVATE

2011 Total Revenue = ~$5 Billion

Business definition drives resource alignment

0

20

40

60

80

100%

PrecisionMachining

ELCAN(Midland)

$0.3B

ELCAN (Texas)

Soldier Sensors

Military Platform Sensor Systems

Small Unit ImmersionClose Combat Radars

$1.1B

Combat & Sensing Systems

SATCOMTerminals

TacticalCommunications

Electronic Warfare

IFF

$1.0B

IntegratedCommunications

Systems

CivilCommunications

Cyber-C2

IT Network Ops &Support

ATC Radars

ATADomestic

Security Solutions

Military GBAS

SBAS

Highway TransportationManagement Systems

ATA Int'l

$1.1B

Security &Transportation

Systems

Military C2 Domestic

Military C2 Int'l

Short/IntermediateRange Radars

$1.1B

C4ISystems

BBNR&D

RVSMilitary/Science

$0.5B

AdvancedPrograms

Operations

Soldier Systems MSI (NettWarrior)

2011 Revenue by Business Area

Short-Short-to-Int. to-Int. Range Range RadarsRadars

ATC ATC RadarsRadars

Cyber-C2

Highway Transportation Management Systems

Civil Comms

Tact. Comms

IFF

Mil. C2 Mil. C2 Intl.Intl.

Security Solutions

High

Low

Mil PlatformSensor Systems

SoldierSensors

RVS Non-Mil.Commercial

IT Network Ops

HealthcareBrokerage

Small UnitImmersion

ATA ATA Dom.Dom.

Mil. C2 Mil. C2 Dom.Dom.

ATA ATA Intl.Intl.

Close Combat Radars

GBAS GBAS (Mil)(Mil)

RVS RVS Military/ Military/ ScienceScience

ELCAN

SATCOMTerm.

Soldier Sys MSI(NettWarrior)

Distant Follower Follower Market Leader

SBASSBAS

Integrated Comms Systems

C4I Systems

Security & Transportation Sys.

Advanced Programs

Combat & Sensing Systems

Key Input Provider/Broader RTN Asset

EW

Mar

ket

Att

ract

iven

ess

Current size Growth rate Profitability Unawarded contracts

Current size Growth rate Profitability Unawarded contracts

NCS Ability to Win Relative market share Technology advantages Customer access/relationships

Relative market share Technology advantages Customer access/relationships

$500M Revenue

NCS Portfolio Map: Current

3. Importance of Growth Driver “Investors expect it, employees are energized

by it, customers are generally attracted to it and executives are measured by it.”

1. Define Growth Driver

The ability to increase year over year, quarter over quarter, and/or month over month.

2. Measures of Growth• Net Sales Growth: Top-line/Sales

• Operating Income Growth:

• Net Income Growth: Bottom-line/Profit

• EPS Growth:

4. Benchmark the numbers5. Net Sales = (-1.3%) Down

6. Operating Income = 9.6% Up

7. Net Income = 0.9% Up

8. EPS growth = 10.2% Up

Growth - Review

GROWTH = Increase: -Sales, and/or

-Profits, and/or

-Earnings per share (EPS) for public companies. Quarter over quarter, or year over year increases Organic growth: comes from a company’s existing business Inorganic growth: comes from merger and acquisitions.

• Perform well on a daily basis – performance is key to retaining AND acquiring new business

• Keep customers informed about contract options• Know the program deliverables, risks, scope and opportunities• Anticipate customers’ needs• Keep BD Process and PM Involvement• Know what Raytheon contract vehicles are available to have customers shift new

work to, or to consolidate work under one of our prime contracts• Help with proposals• Provide insight into customer/business intelligence being careful NOT to compromise

OCI (Organizational Conflict of Interest)• Understand and tell management what other contractors are doing in our customer

spaces

(page 15)

®

Action Plan: What Single Action are You Committed to

do to Positively Impact GROWTH?

15

8

People

(page 16)

Definition: People

People

People: The end user or consumer of your product.

The re-seller.

The “internal customer”.

“Communicate a persons potential so clearly that they are inspired to see it within themselves.”

®

“People are considered, by many organizations, their most important asset.”

16

1. People will forget what you said, people will forget what you did, but people will never forget how you made them feel ~Maya Angelou

2. “Under promise and over deliver” (Satisfaction is a function of expectations!)

3. We speak at ____ words per minute, versus, We think at ____ words per minute!

4. 93% of communication is non-verbal. 7 percent verbal (words) 38 percent vocal (volume, pitch, rhythm, etc) 55 percent body movements (mostly facial expressions)

5. Vocabulary! (Active Vocabulary): Average person: 5-6,000 root words Genius: 16,000 words Shakespeare: 29,000 wordsStudies show:1. CEO & Executives: Highest Vocabulary Business Acumen!2. Entry level employees: Lowest Vocabulary

The The “Experience”“Experience”(Take notes on Page 17)

®

170420

17

Customers:Customers:(Take notes on Page 17)

What’s more important than What’s more important than meetingmeeting Customer Customer Expectations?Expectations?

Anticipate Customer Needs & Expectations!Anticipate Customer Needs & Expectations!

Henry Ford: Henry Ford: “ “If I would have asked my customers what they wanted, they If I would have asked my customers what they wanted, they would have said a faster horse.”would have said a faster horse.”

Wayne Gretzky:Wayne Gretzky:““I skate where the puck is going to be.”I skate where the puck is going to be.”

®

17

What companies have failed to anticipate customer expectations? What were the results?

GM/Ford Kodak & Polaroid Jet Blue (Airlines industry) IBM Sony

How Do You Impact your CUSTOMERS (or anticipate their needs)?

Failing to Anticipate Failing to Anticipate customer needs/expectations!customer needs/expectations!

“I think there is a world market for maybe five computers.” - Thomas Watson, chairman of IBM, 1943

 Source: How Computers Work, Ron White, Que Corp/Macmillan, 1999 pgs 4, 38, 108.

(Take notes on Page 17)®

17

Raytheon Leadership Competencies

Leader of the Future Profile

Experiences

• Multifunctional professional experience

• Multiple Raytheon Businesses or multiple industry experiences

• Led teams in distinctly different environments

– Turnaround, Site Lead, Growth Opportunity, Increased Scope, High Visibility, Enterprise Initiative, Resource Constrained, Org Transition

• Proven success driving business growth – Adjacent markets, M&A, international

• Strong business fundamentals

• Lived and worked outside the USA

Behaviors

Has vision & leads with courage Exhibits 100% integrity Leads organizational change Vigilantly cultivates talent pipeline Exhibits global mindset & inclusivity Drives growth through innovation, taking

appropriate risks Has “Board Room” level presence Fosters strong relationships

– Promotes matrix effectiveness & alignment – Operates “from the market back”

Strategic and Visionary Thinking Influential Communication People Development Innovative / Creative

Customer Focus Business Acumen Performance / Results Ethical Leadership

Courage Alignment Achievement Diversity / Inclusive Self-Management

PeopleHigh & Low: Profit per Employee

High Revenue Growth Low Revenue Growth

Business Measures and Metrics

Raytheon Apple Amazon Wal-mart Yahoo!

2011 9/2011 2010 2010 2010

Revenues $24,857 $108,249 $34,204 $421,849 $6,324

Profit $1,896 $25,922 $1,152 $16,389 $1,231

People

Employees 71,000 60,400 43,200 2,100,000 13,600

Revenue Per Employee $350,098 $1,792,201 $791,759 $200,880 $465,000

Profit Per Employee $26,704 $429,172 $26,666 $7,804 $90,514

(In Millions)

RaytheonGeneral

DynamicsLockheed

MartinBoeing

CompanyNorthrop

Grumman 2011 2011 2011 2011 2011

24,857 32,677 46,499 68,735 26,412Net Income 1,896 2,526 2,655 4,018 2,118

People Employees 72,000 88,000 126,000 160,500 79,600

Revenue per Person $345,236 $371,330 $369,040 $428,255 $331,799 Income per Employee 36,333 28,705 $21,071 $25,034 $26,608

®

People: Raytheon

Revenue per Employee = Employees Net Sales

Income per Employee = Employees Net Profit

INTERNAL:

• Develop teams into leaders• Invest in employees• Develop a learning culture• Exceed deadlines• Be positive• Always follow through• Increase vision• Anticipate needs and expectations• Increase employee education• HR: Hire the best!

(page 17)

EXTERNAL:

•Listen with empathy to resolve unhappy customers•Ensure equipment functionality before customer takes it home•Possess good product knowledge when selling •Qualify each customer•Better educate customers•Set up customer phones•Increase customer negotiations•Increase customer awareness•Accurately set customer expectations

®

Action Plan: What Single Action are You Committed to

do to Positively Impact PEOPLE?

REVIEW:People: Internal & External1)Meet Exceed Anticipate!2)Ask Listen Follow Through!3)Meet monthly: ask, “Are there any gaps in my performance and have my priorities changed?”

17

Question: Can you ignore any of these over time and still be successful?

Drivers are Inter-dependant!

5 Business Acumen Elements:5 Business Acumen Elements:(Page 18)

®

18

Demystify the Annual Demystify the Annual ReportReport

-Training, Teaching Module--Training, Teaching Module-

Purpose of the Annual Report?(high-level view)

General Communication to _____?

Marketing to _____?

Compliance.

Demystify the Annual Report

21

Raytheon: Annual Report

• Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . (pages 0-1)

• Letter from CEO . . . . . . . . . . . . . . . . . . . . . . . . . . . . (pages 2-3)

Management’s Discussion & Analysis . . . . . . (pages 29-)

• Financial Statement

Notes to the Financial Section . . . . . . . . . . . . . (pages 73-)

• Statement of Operations . . (page 70)

• Balance Sheet . . . . . . . . . . (page 71)

• Statement of Cash Flows. . (page 72)

22