Jeff Cope

1. Welcome to Raytheon’s BUILDING Business Acumen® Jeff Cope Raytheon

2. Post-Course Action Items • 7-days: Teach one of the principals learned in class, to someone in your department. • 7 days: Discuss your action items with your manager in the next. • 30 days: Read the first 90 pages of: “What The CEO Wants You to Know“ • 30 days: Get with your class coach and give an accounting of your progress on the action items. • Start now: • Build and practice your new business acumen skills. • When making decisions, determine how the outcome will impact Cash, Profit, Assets, Growth, People… • HINT: Tear out page 47 and use it at your desk!

3. Important Question! What’s your “Business Acumen”? How much do you know about Raytheon’s Key Success Measures? Let’s find out!

4. Pop Quiz! For fiscal year: 2012 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? 35

5. Clear Learning Objectives: 1. Listanddescribethe 12 measures most important to our CEO and Executive team, and how you can impact them. 2. Understand the 5 Business Drivers that all successful businesses focus on. 3. Create a personal action plan that can positively impact personal performance and company results. ® 4. Develop a better understanding of the company’s financial statements and be able to teach them to others. 5. Betterarticulatecompany performance and strategy!

6. Acumen means? …the ability to make good business decisions, in a timely manner, with an understanding of how the decision should impact the business. 3

7. Cash Cash On Hand Generation Cash is King! Cashis a company’s oxygen supply … and allows you to stay in business.”-Ram Charan Growth Top Line Bottom Line People Employees Customers Profit Revenues Expenses Cashis more important than your mother.“ -Al Shugart, Former Seagate CEO) Assets Strength Utilization X Cash : Lack of cash - #1 reason why companies fail! Growth Growth Profit Cash Assets 8

8. Definitions: Definition: Cash:What is required to Grow and Maintain the business. Measures • Cash: • Cash in the bank, register, cash equivalents. (p.58) • Profit is an Opinion • Cash is a Fact • Cash Flow: • Cash that comes from your core business. • Most important indicator of a company’s financial health and strength. (p.58) Cash • Free Cash Flow: • The cash that a company is able to generate (cash flow), after spending the money required to run or expand it’s business. (p.60) • Merck: Cash flow • - capital expenditures • Free Cash Flow • What is it used for?? • Pay debt, providing dividends to investors, buying back stock, expansion, acquisitions, and/or financial stability to weather difficult market conditions. ® 8 8

9. Cash Flow is NOT Profit • Calculated for financial reporting & tax purposes • Match Revenue with Expense • GAAP & SEC rules • Expenses & revenue which are not Cash • Cash in, Cash out • Influenced by timing of Accounts Payable & Receivable • Change in Cash includes Investing & Financing Activities ® Why do you think Peter Drucker would say… “Cash Flow is more important than profit.” 9

10. Top Uses of Cash at Raytheon $643M $704M $339M $825M $970M $301M ®

11. How to Obtain Cash: 3 Sources Earn it Sell Assets Borrow it 1. 2. 3. Pro:Con: Pro:Con: Pro:Con: No Cost Not Immediate Immediate Reduce Assets Immediate Cost (Interest) Can a company have: Too much Cash? Too little Cash? Too much Cash Flow?  Yes! Banks offer low interest /return, not using cash wisely. Investors want company to: “Either invest it or return it to us in dividends!”  Yes!#1 reason why companies fail. 1. 2. 3. • No! Most important indicator of a company’s financial health and strength.

12. Key ways to increase CASH and CASHFLOW: To increase CASH: • Paying slower • Collecting faster … with the same sales revenues and costs. To increase CASHandCASH FLOW: • Increase revenues/sales • Reduce/cut costs ® 9

13. CASH: Raytheon 3,188 = 13.1% 24,414 Cash Cash Flow S&P 500 Average: Cash = 6% ® 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. 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.

14. CASH: Raytheon Cash Cash Flow S&P 500 Average: Cash = 6% ®

15. CASH - Review • 1. Define Cash Driver • What is required to grow and maintain the business. 2. Measures of Cash Cash: Easily converted into cash in 90 days or less. Cash Flow: Difference: Cash In and Cash Out over a given period of time. Free Cash Flow: Cash Flow minus Cap Ex. • 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. • 4. Action Plan • Accounts Payable: pay slower • Accounts Receivable: Collect Faster • Capital Expenditures: • Better inventory management: lower levels • Don’t give customers excuses not to pay… ® 9

16. Action Plan: What Single Action are You Committed to do to Positively Impact CASHand CASHFLOW? • Increase Sales or Price • Reduce Costs • Better manage Accounts Receivable (preserve customer relationships) • Better manage Accounts Payable (preserve supplier relationships) • Better manage Inventories • Minimize DSO (Days Sales Outstanding) • Reduce/Conserve operating costs • 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 • 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

17. Profit Cash On Hand Generation “Every business must earn a return that is greater than the cost of using other people’s money.” ~Ram Charan Growth Top Line Bottom Line People Employees Customers Profit Revenues Expenses “No Margin, No Mission.” ~Stephen R. Covey Assets Strength Utilization Growth Growth Profit Cash Assets 10

18. Definition: PROFIT Definition: Profit is the money made after expenses are subtracted from your revenues. It can be expressed in dollars ($) or as a percent (%). You can improve profit in two fundamental ways: • #1 Increase Revenues • charge more • sell more “Profit” = $ “Margin” = % #3 - Both! Profit #2 Decrease Expenses Measures ® Gross Profit ($) / Gross Profit Margin(%) SALES – COGS Operating Income (EBIT)($) / Operating Margin(%) SALES – COGS – Operating Expenses Net Income($) / Net Margin(%) SALES – ALL expenses Earnings Per Share (EPS) Net Income / # of outstanding shares 10

19. PROFIT: Measures Notes Profit = Income = Earnings Profit = $ Margin = % Profit = Expressed in Dollars ($) or as a Percent (%) Gross Margin = Sales  A good indication of how profitable a company is at the - COGS 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 (EBIT) = Sales  Earnings Before Interest and Taxes (non-controllables) - COGS EBIT is a good gauge of how well a company is being managed. - Operating Exp.  Controllables Net Profit Margin = Sales - COGS - Operating Exp.  Controllables - Interest & Taxes  Non-Controllables(All Expenses)

20. Gross & Net Profit($) / Margin(%) Sales Price: $1.50 Water - $ .04 Label - $ .11 COGS Bottle & cap - $ .15 Packaging - $ .20Direct Labor Total: ($ .50) $1.50 - $.50 = $1.00 Gross Profit = 67% Gross Margin Rent - $ .03 Salaries, Gen, Admin. (SG&A) - $ .30 Marketing - $ .08 (Controlables) Shipping - $ .19 Total: ($ .60) $1.50 - $.50 - $.60 =$.40 Operating Income (EBIT) Interest Expense - $ .04 (Non-controlables) Taxes - $. 06 Total: ($ .10) $1.50 - $.50 - $.60 - $.10 = $.30 (EBITDA) Depreciation /Amortization - $ .02 $1.50 - $.50 - $.60 - $.10 - .02 = $.28 Net Profit = 18.6% Net Margin ® Life Spring Artesian Water 11

21. 4 Profit Calculations 2012 (in millions) Sales (Revenues) $100 100% - Costs of Goods Sold $ 35 = GrossProfit/Margin$65 65% - R&D, SG&A, etc. $ 50 = Operating (EBIT) Income/Margin $15 15% - Taxes, Interest $ 2 = NetEarnings/Margin $13 13% / Total Shares (diluted) 6.5 = EPS(Public Company) $2 1 2 ® 3 4 11 “Net Earnings = NetProfit”and “NetEarnings”

22. High Margin vs. Low Margin High Margin Low Margin [2012] 8.7% 34% Market Share 3.7% 30% Patent 1.7% 24% Brand WHY? They sell commodities. (Lower demand than supply) “If you’re not unique, you better be cheap!” WHY? They offer something Unique! (Higher demand than supply) S&P 500 Average: Net Margin = 13% To drive Profit($) you need either: High Margin(%) or High Volume 11

23. Profit: Raytheon ® S&P 500 Averages: Gross Margin = 30% Operating Margin = 15% Net Margin = 10% Earning Per Share (EPS) = $ 1,866 M (Net Income available to common stockholders) ÷ 353.6 M (Diluted Shares) $ 5.28  On Statement of Operations

24. Profit: Benchmarks ® S&P 500 Averages: Gross Margin = 30% Operating Margin = 15% Net Margin = 10%

25. Raytheon Sales 11

26. Raytheon Operating Profit

27. Raytheon EPS

28. PROFIT - Review • 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 • 4. Action Item • Increase Revenue • Sell more • Charge more • Lower Expenses • Satisfy customers & employees to reduce turnover… • 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 ®

29. Discussion: Action Plan- What Single Action are You Committed to do to Positively Impact PROFIT? • Increase Sales: • - Sell more, increase pricing, increase employee product knowledge to better up-sell or cross-sell, • increase accessory sales (higher margin business) • Decrease Costs: • - Decrease operating expenses: Reduce product failures/returns/replacements, reduce utilities, better • maintain equipment, no color copies, book flights 4 weeks in advance, etc. • - Manage cost budgets, approve only costs that have relevance and a business need • - Manage/Reduce OCC’s (other credits & charges), decrease delinquent paying customers • Improve staffing practices • Minimize turnover and anticipate needs (vacancies can = loss in revenues) • Faster on-boarding & effective training: Have people with contingent offers lined up for backfills • 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

30. Assets Cash On Hand Generation Anything you own or control… which has value. Growth Top Line Bottom Line People Employees Customers Profit Revenues Expenses Assets Strength Utilization Growth Growth Profit Cash Assets 12

31. Definition: Assets Definition What we have and how well we use what we have. 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. ® 12

32. Definition: Assets 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

33. Definition: Assets (Page 12) • 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 Balancing… Asset Asset Strength Utilization ® • A strong asset base = financial strength = …costs MONEY! • Strong asset utilization = higher efficiencies = higher productivity • …more profit or MONEY! 13

34. Asset Utilization Measures Book to Bill Ratio: DEFINITION: The ratio of orders received to units shipped and billed for a specified period. EXAMPLE: A book-to-bill ratio of 1.10 implies that $110 of orders were booked for every $100 of product billed during the period. A ratio of above 1 implies that more orders were received than filled, indicating strong demand, while a ratio below 1 implies weaker demand. It is closely watched by investors & analysts as an indication of performance and future outlook. 13

35. Raytheon: ASSETS ® 13

36. Assets: Raytheon S&P 500 Averages for 2012: Inv. Turnover = 8.6 ROA = 5.8% R&D Spend = 5% Cap Ex = 5% ® Inventory = COGS Turnover Inventory ROA = Net Income How efficient is the company in using Total Assets its assets to generate profits. DSO = Ending A/RA measure of the average number of (Sales/360) days that a company takes to collect revenue after a sale has been made. Bookings: New/awarded contract that year. Backlog: Contracts won, but not yet delivered. Book-to-Bill New business booked vs. current Ratio: business delivered and billed. ROIC = Net Income – Dividends Total Capital 13

37. Assets: Benchmarks ® S&P 500 Averages for 2012: Inv. Turnover = 8.6 ROA = 5.8% R&D Spend = 5% Cap Ex = 5% 13

38. Assets - Review • 1. Define Asset Driver • What we have and • How well we use what we have. • 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. Action Item • Increase efficiencies (personal & company) • Improve processes and systems • Manage Inventories • Invest and upgrade in the right assets…

39. 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 Action Plan: What Single Action are You Committed to do to Positively Impact ASSETS? (page 13) REVIEW: • 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… ® 13

40. Growth Cash On Hand Generation Why is GROWTH so important to business? Growth Top Line Bottom Line People Employees Customers Profit Revenues Expenses Grow or die! Assets Strength Utilization Growth Growth Profit Cash Assets 14

41. Definition: Growth Definition: Growth is defined as an increase over a period of time such as: year/year, quarter/quarter, or month /month. There are two types of Growth: • Organic Growth:Comes from a company’s existing business  Slower. More controlled growth. • Inorganic Growth:Comes from a merger or an acquisition  Faster. Less controlled growth. Measures: Growth is most commonly measured by: Growth ® EPS (Investor) Sales (Top Line) Profit (Bottom Line) Op. Profit (EBIT) 14

42. Why is Growth so important? • “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. ® 15

43. How do I Impact Organic Growth? • Listen to your customers • What keeps your customer up at night • How can we improve the mission • Will innovation improve the process or output • Performance: Leads to organic growth and demonstrates capability to perform new business through past/present performance

44. Growth: Raytheon ® S&P 500 Average Revenue Growth: 10.5%

45. 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.

46. Growth - Review 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. Action Item • Everything we do to improve performance around all the other Drivers, results in Growth. • Bundle products/services. • Solution based: Understand client objectives… 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.”

47. 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. Action Plan: What Single Action are You Committed to do to Positively Impact GROWTH? (page 15) • 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 ® 15

48. People Cash On Hand Generation Customers and employees are the key to driving profitable & sustainable growth. “People are considered, by many organizations, their most important asset.” Growth Top Line Bottom Line People Employees Customers Profit Revenues Expenses Why are “People” at the heart of this model? Assets Strength Utilization 8

49. People Definition: People are the: • External customers, • Internal customers,, • In-direct influences such as affiliates, vendors, and suppliers. Measures: There are several ways to measure People. Some example are: Sales/Revenues Number of customers Revenue per Employee Number of employees Profit per Employee Customer churn Employee Turnover People ® 16-17

50. Anticipate Customer Needs & Expectations! Internal People: 1. A’s hire A+’s and B’s hire C’s 2. “People don’t leave companies, they leave their managers” ~First Break All the Rules by Marcus Buckingham “Management is doing things right. Leadership is doing the right things.” ~Peter Drucker 4. Meet monthly/quarterly with your boss and ask: #1) Are there any gaps in my performance, and #2) Have my priorities changed?” External People: Know your business so you can anticipate  Build your Business Acumen skills! Have a formal process for listening to your customers. (Net Promoter Score (NPS). “People will forget what you said, people will forget what you did, but people will never forget how you made them feel.” ~Maya Angelou (AmericanPoet, b.1928) 17 16-17