Raytheon Beats, Raises Outlook

| About: Raytheon Company (RTN)

Raytheon Company (RTN) reported third-quarter 2010 adjusted earnings of $1.36 per share, beating the Zacks Consensus Estimate of $1.13 by 5 cents. Results were also ahead of earnings of $1.25 reported in the year-ago period. Net income in the quarter was $510 million, up 3.7% from $492 million in the year ago period.

The better-than-expected results in the quarter were largely attributable to cost control measures as well as strong program performance.

Including a favorable tax settlement of $170 million or $0.45 per diluted share, Raytheon reported net income of $640 million or $1.72 per share, compared with $491 million or $1.25 per share in the prior-year quarter.

Revenue reported by Raytheon in the quarter under review was $6.3 billion, up 1.1% from $6.2 billion in the third quarter of 2009. Strong revenue generation at Network Centric Systems, Space and Airborne Systems and Technical Services resulted in the overall climb. Results, however, lagged the Zacks Consensus estimate of $6.5 billion.

Operating expense totaled $5.5 billion, up 1.5% year over year. Increases in cost of sales and research and development expenses fed the rise.

Operating income totaled $749 million, down 2.1% year over year.

Bookings in the quarter were $6 billion, up from $5.1 billion in the third quarter of 2009. Backlog at quarter-end totaled $35.7 billion, of which $22.6 billion was funded.

Segment Update

Integrated Defense Systems: Revenue decreased to $1.31 billion, from $1.39 billion in the year-ago period. Lower volume on various U.S. Navy programs and on two joint battlefield sensor programs resulted in lower revenue.

Operating income was $208 million or 15.8% of sales compared with $217 million or 15.6% of sales in third quarter.

Intelligence and Information Systems: Segment revenue declined to $735 million in the quarter from $805 million in the third quarter of 2009. The decline was attributable to lower volume on various programs.

Operating income was lower at $60 million or 8.2% of sales compared with $$68 million or 8.4% of sales.

Missile Systems: Revenue was flat with the prior-year quarter and totaled $1.39 billion in the quarter.

Operating income was higher at $162 million or 11.6% of sales compared with $145 million or 10.4% of sales in the prior year quarter.

Network Centric Systems: Revenue increased slightly to $1.23 billion from $1.21 billion in the year-ago quarter.

Operating income was $172 million, flat with the year-ago results. Operating margin was 14.0%, down from 14.2% in third quarter 2009.

Space and Airborne Systems: Revenue of $1.24 billion was up from $1.13 billion in year-ago quarter. The improvement was largely driven by growth on classified business and on an international tactical radar program.

Operating income was higher at $191 million or 15.4% of sales, compared with $159 million or 14.0% of sales in the year-ago quarter.

Technical Services: Revenue increased to $873 million, up from $797 million in third quarter 2009. Growth in domestic and foreign training programs supporting the U.S. Army's Warfighter Field Operations Customer Support activities drove the improvement in revenue.

Operating income was $77 million or 88% of sales, higher than $60 million or 7.5% of sales in the year-ago quarter.

Financial Update
Raytheon ended the quarter with cash and cash equivalents of $2.1 billion, lower than the 2009 year-end level of $2.6 billion.

Total debt at the quarter-end was $2.3 billion, flat with the 2009 year-end level. Subsequent to the third quarter-end, Raytheonraised $2.0 billion in long-term debt and will be redeeming $678 millionof long-term debt maturing in 2012 and 2013 in November. As a result, it expects to record an after-tax charge of $50 millionin the fourth quarter.

Cash from operations in the third quarter was $413 million lower than $749 million in the year ago period.

Capital expenditure in the reported quarter was $75 million, higher than $57 million in the year-ago quarter

Share Repurchase
Raytheon spent $425 million to buy back 9.5 million shares in the third quarter. Year-to-date, the company had spent $1.2 billion to buy back 23.7 million shares.

Full-Year 2010 Guidance
Raytheon now expects net sales to be in the range of $25.3 billion–$25.6 billion, revised upward from the previous guidance of $25.6 billion–$26.1 billion.

Number of diluted shares is projected in the 377–379 million range, revised from the 377–382 range.

Effective tax rate is expected to be approximately 24.3%, down from 31.5%.

Adjusted earnings are expected to be $5.28–$5.38 per share, up from $5.13–$5.28 guided previously.

Earnings from continuing operations are guided in a range of $4.45–$4.55 per share, up from $4.00–$4.15 per share

Cash flow from operations is projected to be $1.4–$1.6 billion, lowered from the previous guidance of $2.0–$2.2 billion.

Return on invested capital is projected to be 12.3%–12.6%, revised from 12.2%–12.6%

Raytheon is expected to post solid results going forward based on continued bookings, contract wins and lower debt level. On the flip side, the company’s business is substantially dependant on contracts from the U.S. Department of Defense. The prospects of the company could get dented if the $100 billion proposed reduction of U.S. defense expenses is carried out over the next five years.

We maintain a Neutral recommendation on Raytheon Company in the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.