(RTN) Raytheon Beats Earnings Forecast – Updates Outlook

Raytheon Company (RTN) reported third-quarter 2011 adjusted earnings of $1.39 per share, beating the Zacks Consensus Estimate of $1.33. Results were also higher than the year-ago quarterly earnings of $1.35 per share.

Operational Performance

Revenue reported by Raytheon in the quarter under review was $6.13 billion, down 2% from $6.27 billion in the year-ago period and also short of the Zacks Consensus Estimate of $6.39 billion. Income from continuing operations decreased to $500 million from $640 million in the year-ago quarter, reflecting a fall of 22%. Overall, the company recorded net income of $510 million compared with $737 million in the year-ago period.

Segment Performance

Integrated Defense Systems (IDS): Revenue decreased 11% year over year to $1.18 billion in the quarter. The change in net sales was primarily due to lower sales on an international Patriot program and a U.S. Navy program. IDS recorded $204 million of operating income compared with $206 million in the third quarter 2010. The change in operating income was primarily due to the change in volume partially offset by improved program performance and favorable contract mix.

Intelligence and Information Systems (IIS): Segment revenue increased 3% year over year to $760 million in the quarter. The increase in net sales was primarily due to higher sales on classified programs.  IIS recorded $58 million of operating income, flat year over year.

Missile Systems (MS): Revenue increased 2% year over year to $1.41 billion. MS recorded $178 million of operating income compared with $161 million in the third quarter 2010. The increase in operating income was primarily due to improved program performance.

Network Centric Systems (NCS): Revenue decreased 10% year over year to $1.10 billion in the quarter, largely due to lower sales on U.S. Army programs. NCS recorded $162 million of operating income compared with $169 million in the third quarter 2010. The change in operating income was primarily due to lower volume partially offset by improved program performance and favorable contract mix.

Space and Airborne Systems (SAS): Revenue of $1.31 billion in the quarter increased 5% year over year. The improvement was largely driven by growth on intelligence, surveillance and reconnaissance (ISR) systems programs and higher net sales related to Raytheon Applied Signal Technology (RAST), which was acquired in the first quarter of 2011. SAS recorded $171 million of operating income compared with $188 million in the third quarter 2010.

Technical Services (TS): Revenue decreased 6% year over year to $817 million in the quarter. The change in net sales was primarily due to lower sales on programs nearing completion, including a Defense Threat Reduction Agency (DTRA) program and a Transportation Security Administration (TSA) program. TS recorded operating income of $75 million compared with $77 million in the third quarter 2010.

Financial Update

Raytheon ended the reported period with cash and cash equivalents of $2.41 billion versus $3.64 billion at fiscal-end 2010. Long-term debt remained flat at $3.61 billion with fiscal-end 2010. Operating cash flow generated from continuing operations during the third quarter 2011 was $859 million compared with $413 million in the third quarter 2010. The change in operating cash flow from continuing operations was primarily due to the timing of payroll periods, a tax refund and reductions in working capital. In the reported quarter the company repurchased 7.6 million shares of common stock for $312 million. Year to date, the company repurchased 20.1 million shares of common stock for $937 million.

Outlook

Raytheon is one of the largest aerospace and defense companies in the U.S. It boasts of a well-diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems and technical services.

Raytheon reported strong bookings of $6.9 billion in the reported quarter compared with $6.0 billion in the year-ago period, resulting in a book-to-bill ratio of 1.12.

We believe Raytheon’s strong balance sheet provides financial flexibility in matters of incremental dividend, ongoing share repurchases and earnings accretive acquisitions. The bullish outlook is also shared by Moody’s Investors Service, the credit rating arm of  Moody’s Corp. (MCO), which on October 17, 2011, upgraded the company’s senior unsecured credit rating from Baa1 to A3, reflecting the company’s strong financial position.

Raytheon reduced its 2011 full-year guidance for net sales. The company now expects its sales for 2011 to be in the range of $25.0–$25.3 billion versus the earlier guidance range of $25.5–$25.9 billion. The company has also narrowed its 2011 adjusted EPS guidance to a range of $5.55–$5.65 versus an earlier range of $5.50–$5.65.

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.

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