(RTN) Raytheon Profits Up – Sales Slip

Raytheon Company (RTN) reported fourth quarter and fiscal 2011 results. The company reported fourth-quarter adjusted earnings of $1.74 per share, beating the Zacks Consensus Estimate by 40 cents. Results were also higher than the year-ago quarterly earnings of $1.55 per share. The solid results were driven by improved efficiencies and cost lowering initiatives.

For the fiscal year 2011, the company reported adjusted earnings of $5.90 per share comfortably surpassing the Zacks Consensus Estimate of $4.92 and the year-ago figure of $5.51.

Operational Performance

Revenue reported by Raytheon in the quarter under review was $6.44 billion, down 6.4% from $6.89 billion in the year-ago period and also short of the Zacks Consensus Estimate of $6.76 billion. Fiscal year 2011 sales were $24.9 billion, down 1.2% year over year. The top-line in the fiscal year also fell short of Zacks Consensus Estimate of $25.39 billion.

In the fourth quarter of 2011, the company reported strong bookings of $7.1 billion versus $6 billion in the year-ago period. As of December 31, 2011, backlog was $35.3 billion compared with $34.6 billion in the year-ago period.

Total operating income generated by the company in the reported quarter was $860 million as compared to $804 million in the year-earlier period.

Segment Performance

Integrated Defense Systems (IDS): Revenue decreased 11.8% year over year to $1.29 billion in the quarter due to lower sales on a U.S. Navy program and on an international Patriot program. During the quarter, the segment booked $2,771 million which mainly includes a $1,027 million contract from the United Arab Emirates for AN/TPY-2 radars.

Intelligence and Information Systems (IIS): Segment revenue decreased 8.2% year over year to $753 million in the quarter. Net sales suffered from weak domestic programs. The segment booked $433 million on a number of classified contracts.

Missile Systems (MS): Revenue declined by 5.3% year over year to $1.48 billion due to lower sales on the Rolling Airframe Missile and Standard Missile-2 programs. Bookings for the segment mainly include a $383 million contract from the Missile Defense Agency (MDA) for the development of Standard Missile-3.

Network Centric Systems (NCS): Revenue decreased 13.2% year over year to $1.13 billion in the quarter, largely due to lower sales on U.S. Army programs.

Space and Airborne Systems (SAS): Revenue of $1.3 billion in the quarter increased 3% year over year driven by higher net sales from Raytheon Applied Signal Technology, which was acquired in the first quarter of 2011. During the quarter, the segment booked $212 million for the production of Active Electronically Scanned Array radars for the U.S. Navy and $177 million on a number of classified contracts.

Technical Services (TS): Revenue decreased 8% year over year to $886 million in the quarter. The year-over-year decline reflects lower sales on programs nearing completion, including a Defense Threat Reduction Agency program and a Transportation Security Administration program.

Financial Update

As of December 31, 2011, Raytheon had cash and cash equivalents of $4.0 billion versus $3.64 billion at fiscal-end 2010. Long-term debt increased to $4.6 billion from the year-end 2010 figure of $3.6 billion.

During the quarter, the company generated strong operating cash flow of $1.4 billion compared with $0.861 billion million for the fourth quarter 2010. This includes discretionary cash contributions to the company’s pension plans.

As a part of a previously announced share repurchase program, the company repurchased 7.0 million shares of common stock for $313.0 million in the fourth quarter 2011.

Acquisitions

In order to serve more efficiently the cybersecurity, enterprise architecture and systems engineering needs of customers, in the intelligence community, as well as in the Department of Defense, the company made twin acquisitions of Pikewerks Corporation and Henggeler Computer Consultants, Inc.

Guidance

In the first quarter of 2012, the company sold the remaining operating assets and ceased operations of Raytheon Airline Aviation Services. The company expects to take into account the slight gain from the sale, as discontinued operations, beginning in the first quarter of 2012.

Raytheon expects 2012 full-year net sales to be in the range of $24.5–$25.0 billion. The company expects 2012 adjusted EPS in the band of $5.45–$5.60.

Peer Comparison

Yesterday, Raytheon’s peer The Boeing Company (BA) reported solid fourth quarter results. Boeing posted operating EPS (excluding special items) of $1.32, beating both the Zacks Consensus Estimate of $1.02 and year-ago EPS of $1.06.

Our Take

Raytheon is one of the best-positioned companies among the large-cap defense players because of its non-platform-centric focus. We expect the company to focus on product innovation and also benefit from the global demand for its affordable solutions. Looking forward, we expect the future growth to be driven by its hub on ISR unmanned systems, training, cyber security, Standard Missile-6, Patriot, Zumwalt and THAAD.

These positives are, however, offset by apprehensions over future growth of the U.S. defense budget, the fate of high-cost programs, risks related to key project executions and order cancellations. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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