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Raytheon Company (NYSE:RTN)

Annual Shareholder Meeting

May 30, 2013 11:00 am ET

Executives

William H. Swanson - Chairman, Chief Executive Officer and Chairman of Executive Committe

Jay B. Stephens - Senior Vice President, Secretary and General Counsel

Peter Descovich

William H. Swanson

I think there's no penalty for starting early. So welcome to the meeting, and I'd call the meeting to come to order. Welcome to Raytheon's 84th Annual Meeting. I'm Bill Swanson, Chairman and CEO of Raytheon.

Each of you should find a program on your chair describing the flow of the meeting and the procedures proceedings we will follow. If you don't have a program, please raise your hand. I see none. If this your first meeting, you may want to familiarize yourself with the ground rules. We request only shareholders or shareholder representatives address the meeting. We also ask that you limit your question or your comments to 2 minutes.

The meeting is being webcast, and we welcome those listeners.

I'm pleased to report that your company had a strong year in 2012. And based on our first quarter results announced last month, we're off to a good start this year. And I'll discuss our progress in a few minutes.

Right now, there are some individuals I would like you to meet. First, our Board of Directors. I'd like to introduce each director and ask each to please stand. First, Linda Stuntz; Bill Spivey; Ron Skates; Mike Ruettgers, our Lead Director; Fred Poses; Steve Hadley; Vernon Clark; and Jim Cartwright.

In addition to myself, all the directors are standing for reelection, except for John Deutch and Fred Poses, who are retiring from the Board effectively today. John has served the Board for 15 years, and Fred has served for 13 years. We gratefully acknowledge their dedicated service and numerous contributions to Raytheon.

Fred, may I ask you to please stand again on behalf of the company, the Board, our shareholders and our employees. Thank you very much.

Also with us today is our leadership team. I'd like to ask the LT to please stand and be recognized. Please, everybody. I'm very proud of this team and what -- I'm very proud of this team and what it does and has accomplished for our customers and our shareholders. Thank you, all, for what you do.

Joining me on stage this morning is Jay Stephens. Jay is our Senior Vice President, General Counsel and Corporate Secretary. He'll act as secretary of the meeting and take the minutes.

We're also pleased to have with us today Andrea Smith, who will provide sign language interpretation. Welcome, Andrea, and thank you for joining us again. Did I do this right?

The Board has designated Peter Descovich of Broadridge Financial Solutions as the Inspector of Election today. This is Peter's 10th year serving in this capacity. Welcome, Peter, again. Good to see you and keep the string going.

Now let me make sure we have a quorum present. Jay?

Jay B. Stephens

Mr. Chairman, we have a quorum.

William H. Swanson

The secretary advises me that a quorum is present in person and by proxy. It is approximately 11:02, and I declare the polls open. The polls will remain open until all business properly before the meeting has been acted upon. The proxy describes the items to be acted upon today. And if you would like a ballot, please raise your hand.

I think we're all set. We won't have to collect any ballots. So the first 3 items on the ballot, as proposed by the Board and discussed in the proxy, are as follows: The election of directors, the advisory vote on executive compensation and the ratification of PricewaterhouseCoopers as the company's independent auditor. These items are now formally placed before the meeting. Are there any comments on the director nominees or the company proposals?

Hearing none, I'll now move to the consideration of the shareholder proposals appearing in the proxy.

We will address the proposals in the order that they appear in the proxy. And we consider these -- as we consider these proposals, I would like you to know that the governance and nominating committee and the full Board engage in a thorough review of the company's governance practices to ensure they are sound and contemporary and that we remain focused on world-class governance practices. These practices are described in detail on our proxy. Additional information is available at our website at www.raytheon.com.

Now to the consideration of the first shareholder proposal regarding political expenditures. Does Soh Guan [ph] or another representative of the New York State Common Retirement fund wish to introduce and discuss the proposal?

Unknown Shareholder

Here.

William H. Swanson

Okay.

Unknown Shareholder

Hello? Okay. Mr. Chairman and fellow shareholders, my name is Soh Guan [ph], and I am here today on behalf of the New York State Common Retirement Fund to present the Fund's resolution on Raytheon to fully report on its political spending and its process and procedures for making political contributions with corporate treasury funds.

As long-term shareholders of Raytheon, we support policies that apply transparency and accountability to corporate political giving. In our view, such disclosure is fully consistent with public policy in regards to public company disclosures. Company executives exercise why discretion over the use of corporate resources for political purposes, and relying only on the limited data available from the Federal Election Commission and the Internal Revenue Service can give shareholders incomplete picture of the company's political giving.

We believe that a complete disclosure by the company is necessary for shareholders to be able to fully evaluate the political use of corporate assets. And therefore, on behalf of the New York State Common Requirement Fund, a holder of more than 1.5 million Raytheon shares, I submit the resolution on political spending disclosure found in your proxy materials. Thank you.

William H. Swanson

Thank you very much. Are there any other comments? Hearing none, the Board has opposed to the proposal. The company has established effective policies to ensure appropriate disclosure of political expenditures, and the Board, through its Public Affairs Committee, has exercised appropriate oversight of these activities. Raytheon discloses its political expenditures and activities consistent with state and federal law and provides additional voluntary disclosure of the company -- on the company's website. Additional or different disclosure is not necessary to provide shareholders visibility into the company's activities in this area. For these and other reasons stated in the proxy, the Board recommends a vote against the proposal.

The next item on the agenda is the shareholder proposal regarding action by written consent. Does John Chevedden or another representative of the Chevedden Trust wish to introduce and discuss the proposal?

Unknown Shareholder

Yes, Mr. Chairman, my name is Bart Mayo [ph], and I'm here on behalf of John Chevedden. Thank you. By day, I'm a banking lobbyist. I'd like to say that with a delicious pause as -- if I'm responsible for the financial crisis, but I work for public citizens.

I'd like to associate myself with the comments in the resolution that you and your Board have just recommended against. As you know, Justice Stevens and Citizens United assumed that shareholders actually have some control, some influence over political spending, that they knew about it and they could just e-mail the CEO and say, "I think we ought to or ought not to spend in this particular direction." Of course, that's not the way it is. That's not the way it is. You are obliging the law consistent with state law and so forth, but you're not actually telling shareholders or involving them in the decision.

Now it's also instructed to me that you asked if anybody wanted to vote and nobody did. Why is that? They've already voted by, essentially, written consent, which is Mr. Chevedden's proposal that we actually have the ability to vote more than once a year on critical decisions such as Item 4 presented by the State of New York and Item 5. Thank you.

William H. Swanson

Thank you. Are there any other comments? Hearing none, the Board's opposed to this proposal because the company already has in place meaningful mechanisms for shareholder access, which are superior to action by written consent.

We have annual meetings. The Board can call special meetings, and shareholders owning collectively at least 25% of the company shares can call a special meeting at any time. This 25% special meeting provision is superior in process for shareholder access because it allows the discussion of multiple viewpoints. It gives greater access to shareholders at a lower threshold and is more cost effective.

Additionally, we have engaged in concentrated effort to outreach our shareholders outside the proxy season, resulting in a dialogue on governance and compensation and other matters in 2012, representing a good share of the company's outstanding shares. For these and other reasons described in the proxy, the Board recommends a vote against this proposal.

The next item on the agenda is a shareholder proposal regarding approvals of supplemental executive retirement plans. Does Vineeta Anand or another representative of the AFL-CIO wish to introduce and discuss this proposal? If so, please go to the mic.

Okay. I'm not seeing a representative. Since no one is present, we'll move on to the next item.

Unknown Shareholder

Mr. Chairman, would you allow me to present this proposal on behalf of the AFL-CIO, of which I am a member?

William H. Swanson

Yes, go ahead.

Unknown Shareholder

I so move Item 6.

William H. Swanson

We want to reference that a representative of the shareholder proposal was not here, and we're okay with you speaking.

Unknown Shareholder

Okay. I so move Item 6. Is that sufficient?

William H. Swanson

Okay.

Unknown Shareholder

Thank you.

William H. Swanson

Since it's introduced, I want to say the company has opposed to the proposal because the company has served as an important tool for recruiting and retaining key executives. It is intended to establish parity in the retirement benefit of senior executives, who've come to the company mid-career, so that the executives' retirement benefits are on par with other senior executives.

Further, their SERP benefit is offset by amounts payable under any prior employment pension plans and social security. All SERPs are not the same. Raytheon's SERP is narrowly tailored, sparingly used, fully disclosed and is de minimis. In other words, it's well under 1% of our current pension obligations. For these and other reasons stated in the proxy, the Board recommends a vote against this proposal.

Now the last shareholder proposal regarding the accelerated vesting of equity awards upon change in control. Does John Chevedden or his representative wish to introduce and discuss this proposal?

Unknown Shareholder

Yes, Mr. Chairman, it's my honor to represent Mr. Chevedden on this. He simply asks that there'd be no moral hazard in accelerating the vesting of bonus payments or other remunerations should the company change the control, et cetera. We want our executives handcuffed to a fine job at this company and not either its demise or its change in control. Thank you.

William H. Swanson

Thank you. The Board's fully-independent Management Development and Compensation Committee has established a balanced approach to vesting of stock awards upon change in control. This approach is clearly specified in Raytheon's 2010 stock plan, which was overwhelmingly approved by shareholders at our 2010 Annual Meeting.

Our approach is designed to align with the achievement of overall business objectives, maximize the value for our shareholders in a change in control situation. Adopting this proposal would undermine that focus. For these and other reasons described in the proxy, the Board recommends a vote against the proposal.

Now we will proceed with the vote. Since we have no ballots here and no one has one to offer. I'm not seeing anything. It is now 11:10. I declare the polls closed. I instruct the Inspector of Election to prepare a report with preliminary voting results. While the Inspector is preparing his report, I'd like to make a few brief comments on the state of the company.

With that, I'm pleased to report that Raytheon continue to deliver strong operating results in 2012, our 90th anniversary. Our focus on program execution and productivity drove higher-than-expected earnings and cash flow for the year. Demand for our broad portfolio of cutting edge technologies and innovative solutions resulted in bookings in excess of expectations, and we ended 2012 with a record funded backlog.

In addition, our total shareholder return of 23.1% for 2012 was the highest for large cap defense prime contractors. 2013 started off with another good quarter. Raytheon's first quarter sales, margins, earnings per share and cash flow were all above expectations. This continued growth performance allowed us to raise our EPS and cash flow guidance for the year.

Additionally, we announced a 10% increase in our annual dividend rate, marking the ninth consecutive year we've increased our dividend. This increase represents continued confidence in the company's financial position and outlook, as well as our dedication to a balanced capital deployment strategy.

In today's challenging and dynamic environment, we continue to focus on the things we can control. And while we are disappointed that the U.S. government has been unable to come to an agreement to avoiding spending cuts or sequestration, we've been preparing for this possibility for sometime by reducing our costs, improving our efficiencies and our productivity. Leveraging Raytheon's continuous improvement culture, we believe we've been adapting well to this environment. And in the first quarter, we move forward with several new initiatives to improve our agility and to streamline our operations.

These include establishing our global business services group; consolidating our businesses from 6 to 4; appointing Tom Kennedy to the new position of chief operating officer to help implement and manage these initiatives, along with the day-to-day operating activities. These moves provide greater synergy within our products and our services and, most of all, increase our speed in responding to customers' future needs with affordable solutions.

In this world of evolving threats, our customers are continuing to look to Raytheon to provide the most advanced technologies. We continue to see global demand for our affordable and innovative solutions with the portfolio of capabilities and missile defense, ISR, electronic warfare, cyber, C3I and training that are well aligned with our customers' needs going forward.

International continues to be a key differentiator for us, with international business representing 26% of our sales in the first quarter and 26% of our revenues in 2012. In the domestic U.S. market, we're encouraged by the passage of the fiscal '13 defense budget and by the fiscal year '14 defense budget request, which focuses on the key missionaries that play to our strengths.

We also draw strength from the strong Raytheon culture, which marked many milestones and accomplishment in 2012. These are outlined in our Corporate Responsibility report in the back of the room. I'd ask and hope you'd take one home and read a little bit about your company. It talks about our focus and what we worry about day in and day out and strive to be better.

We have a consistent and proven strategy, and the solid foundation of our vision, our strategy, our goals and values aligns and focuses the Raytheon team to do really hard things. Of course, our success in the last year would not have been possible without the outstanding Raytheon team. Their dedication, their hard work have helped the company deliver solid results and provide for the success of our customers. Together, we stand ready to continue to deliver value to our customers and our shareholders. Thank you very much.

At this time, we're now ready for the question-and-answer segment. After which, we will announce the voting results. If a shareholder has a question, I would ask that you please proceed to the mic -- stand-up mic and wait to be recognized, and please confine your questions to topics related to the company's business of interest to all shareholders. And as I mentioned at the beginning of the meeting, if we could keep it to 2 minutes, that would be great.

Are there any questions at this time?

Question-and-Answer Session

William H. Swanson

If you don't mind, behind you first. Thank you.

Mary Ellen Gondeck

Good morning.

William H. Swanson

Good morning.

Mary Ellen Gondeck

Mr. Swanson and management team and Board of Directors, my name is Mary Ellen Gondeck with the Congregation of St. Joseph. For the past 2 years, the ICCR shareholders have been in dialogue with members of your staff, basically with regard to the human rights policy. This past year, you have incorporated such a policy into your Code of Conduct document, and we applied your efforts in bringing this forward to this point. We also applied your new Code of Conduct document as a whole. It's very complete, and it's very usable and we're just very pleased with that.

Now looking forward to the next steps, one area to look at is the accessibility of this document. It's difficult to find the policy on the website. The search function does not connect directly with human rights policy itself. One can find it in the Code of Conduct but then needs to read the document looking for the specific human rights policy. And one would also need to know that, that's where it is, in the Code of Conduct to be able to search for it. So in the future, it would just be helpful if that could be a more direct connection because it's a fine piece that folks should know about.

Building on your excellence in the ethics policy, as well as a very fine training module for your employees, we would like to pursue this conversation with regard to the human rights policy, as we move our dialogues forward this year. We're grateful for the good work that Patti Ellis has done in making the ethics policy so visible to the workforce. And why we would like to continue our dialogue is to define someone who might do the same thing for the human rights policy. The ethics policy focuses on the internal environment, for those within the corporate structure. And we see the human rights policy as going one step further, a very important step at that, which would include those who are working within the supply chain, bringing raw materials to your -- to our production sites, such as mining minerals. And this would include topics such as slave labor, rights to unionize, fair wages, safe working environment, child labor.

Now these areas are covered by the ILO standards and the Ruggie Principles, which are included in policies of other folks in the industry. And you have included the principles of the UN Global Compact in your ethics policy and should be applauded for that. So we look forward to having these areas also brought into the human rights document.

And finally, a very critical part of having such policies is in developing metrics in order to ensure compliance with these said standards. So we would like to explore with you the designation of a member of your senior team as one who would focus on the policy and shepherd its compliance and education throughout the company as is applicable to the ethics policy. And again, kudos on your Corporate Responsibility report. It's really wonderful again this year. And looking forward maybe next year, there will be a little expanded piece for the human rights policy. Thank you very much.

William H. Swanson

Sister Mary Ellen, thank you very much. I appreciate those fine comments on our CSR report. It's something we're very proud of, and we will continue our dialogue with you. As you know, Raytheon's policies and practices and procedures reflect a strong commitment to respect for human rights. And we see that the next stage here is in our subcontracts and those that supply material to us. So I think the dialogue will continue, and we appreciate your input over the years. Thank you very much.

Next?

Unknown Shareholder

Mr. Chairman, sir, I'm Alex Vacca [ph], a shareholder from Avondale, Virginia. And my question is, we're hearing a lot of about -- from the Defense Department about lowest cost, technically acceptable. We're sort of seeing declining R&D spending and, certainly, pressuring on government R&D spending. Increased assertiveness of national labs is sort of the keeper of the flame [indiscernible] a lot of technological advances. And we're also seeing tightening requirements on allowability for IRAD expenditures, something that you sort of alluded to when you talked about this based on your [indiscernible] systems dispute. And I guess my question is, how in this kind of environment does our company maintain the technological leadership for which it's been known? And how, in the process of doing that do, we ensure that we receive sort of adequate returns or better than adequate returns for our investment? Thank you.

William H. Swanson

Thank you. It's a great question. I think there is no one silver bullet answer. For us, we look for all available funding sources, whether that be a credo, which is research dollars; whether it be through DARPA; through advanced initiatives; through it be -- through the company's own funding in IRAD. We make sure that, first of all, when we look at the cash that's available to the company, do we see opportunities to invest in technology that give us a leading edge, and this company continues to do that. We're one of the largest contractors to DARPA. BBN, one of our companies that we acquired a number of years ago, is a leader in that field. So I can tell you we are really focused on that. And if you look at our portfolio of programs, this company probably has 17,000-plus contracts that are under $5 million, which are really the seed corn for us in technology. So we know that, that is the seed corn for the future, and we are focused on that. As a nation, though, I would explain that I do have concern that we reduced our R&D dollars as a nation. This country has always been very innovative, and we shouldn't lose sight of that. And through our associations and through our discussions with DoD and other customers, we're making sure that they understand that and hear our voice. But thank you for your concern.

Is there any other questions at this time? Seeing that there are none, the Inspector General indicates to me that he's ready for his report. So, Peter, could you please let us know the results?

And I should point out that the posting of the final voting will be on our website tomorrow and thereafter in the Form 8-K filed with the SEC.

So, Peter? Do we have a slide, please?

Peter Descovich

Yes, we do.

William H. Swanson

Thank you.

Peter Descovich

Mr. Chairman, all nominees have been elected with a majority of the votes cast.

As to Proposal 2, the compensation of the named executive officers as described in the proxy statement, it has been approved with 96.11% of the votes for versus 3.89% against and abstaining.

As to Proposal 3, the selection of the company's independent auditor, the proposal has been ratified with 98.05% of the votes for versus 1.95% against and abstaining.

With respect to the shareholder proposals, the results are as follows: The political expenditures proposal has received 23.06% of the votes for the proposal versus 76.94% against and abstaining and has, thus, failed to pass.

The action by written consent proposal has received 42.68% of the votes for the proposal versus 57.32% against and abstaining and has, thus, failed to pass.

The supplemental executive retirement plans proposal has received 28.35% of the votes for the proposal versus 71.65% against and abstaining and has, thus, failed to pass.

The accelerated vesting of equity awards upon the change in control proposal has received 42.72% of the votes for the proposal versus 57.28% against and abstaining and has, thus, failed to pass.

My certificate as Inspector of Election will be executed and delivered to the Secretary. Thank you.

William H. Swanson

Peter, thank you very much and good seeing you again. Thank you. Since we've concluded the business of our meeting, the meeting is hereby adjourned. I'd like to thank you all for taking the time to attend and listen in to today's meeting. And I would also like to thank you for your confidence you've shown in our company. Have a nice day, everyone, and safe travels.

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