(RTN) Raytheon Reports Mixed Third Quarter Earnings

Raytheon Company (RTN) reported third-quarter 2012 adjusted earnings of $1.60 per share, beating the Zacks Consensus Estimate of $1.27. The result was also higher than the year-ago earnings of $1.39 per share.  The strong results were driven by continued focus on reducing cost, and increasing productivity.

Operational Performance

Revenue was $6 billion, down 1.2% from $6.1 billion in the year-ago period. It also missed the Zacks Consensus Estimate by $118 million. Total backlog at the end of the reported period was $35 billion, up 0.09% year over year. Operating income during the quarter was $786 million, up from $722 million in the year-ago period.

Research and development expenses were up 18.3% year over year to $181 million. Total operating expenses were $5.3 billion, down 2.5% year over year.

The company reported adjusted net income of $532 million, higher than $487 million in the prior-year period.

Segment Performance

Integrated Defense Systems (IDS): Segment revenue increased 8.4% to $1.28 billion year over year driven by higher sales on international Patriot program. Segment bookings for the Upgraded Early Warning Radar (UEWR) system were $123 million.  The segment also received contract worth $84 million to provide air and missile defense capability for the U.S. Army.

Intelligence and Information Systems (IIS): Segment revenue was down 2.4% year over year to $742 million. During the quarter, the segment received a contract worth $170 million to provide intelligence, surveillance and reconnaissance (“ISR”) support to the U.S. Air Force.  It also booked $559 million on a number of classified contracts.

Missile Systems (MS): Segment revenue increased 2.1% year over year to $1.44 billion. The increase was driven by higher sales on the Standard Missile 3 (SM-3) program.

During third-quarter 2012, the segment received a contract worth $1,242 million for the production and development of SM-3. It also booked $350 million for the production of Tube-launched, Optically-tracked, Wireless-guided (TOW) missiles for the U.S. Army and Marines, $101 million for Phalanx weapon systems for the U.S. Navy and an international customer, and $87 million on Miniature Air-Launch Decoy (MALD) for the U.S. Air Force.

Network Centric Systems (NCS): Segment revenue decreased 12.8% year over year to $963 million. The decline reflects lower sales in the U.S. Army programs. The segment received contracts worth $70 million on the Family of Advanced Beyond-Line-of-Sight Terminals (FAB-T) program for the U.S. Air Force.

Space and Airborne Systems (SAS): Revenue in the quarter increased 1.3% year over year to $1.32 billion. The segment received contract worth $105 million for an international sensor program. It also booked $382 million on a number of classified contracts.

Technical Services (TS): Revenue fell 3.9% year over year to $785 million. The decline reflects lower net sales on a National Science Foundation (NSF) Polar contract that was completed in the first quarter of 2012.

During third-quarter 2012, the segment booked $246 million for the Air Traffic Control Optimum Training Solution (ATCOTS) contract for the Federal Aviation Administration (FAA). The segment also received contract worth $252 million on domestic training programs and $137 million on foreign training programs in support of Warfighter FOCUS activities.

Financial Update

Raytheon ended the reported period with cash and cash equivalents of $3.03 billion versus $2.40 billion as of October 2, 2011. Long-term debt was $4.60 billion versus $3.61 billion at the end of October 2, 2011.

The company generated operating cash flow from continuing operations of $1.1 billion, significantly up from $845 million in the year-ago quarter. The increase was driven by the timing of collections and pension contributions, which was partially offset by higher tax payments.

As a part of its previously announced share repurchase program, the company repurchased 2.2 million shares for $125 million. Year-to-date, the company repurchased 14.1 million shares of common stock for $725 million.

Guidance

Raytheon lowered its full-year 2012 sales guidance and expects it to be in the range of $24.3 billion to $24.7 billion versus its prior expectation in the range of 24.5 billion to 25 billion. It raised its adjusted earnings and expects it to be in the range of $$5.85 to $5.95 versus its previous expectation of $5.70 to $5.85.

The company expects operating cash flow from continuing operations in the range of $1.8 billion to $2 billion for full-year 2012.

Outlook

Raytheon’s earnings surpassed the Zacks Consensus Estimate, but revenue missed the Zacks Consensus Estimate. Going forward, the company sees significant opportunities in both domestic and international markets.

Raytheon is one of the best-positioned companies given the declining trend in U.S. defense spending. Going forward, revenue and earnings growth would continue to be driven by its strong presence in the areas of Intelligence, Surveillance and Reconnaissance (ISR); air & missile defense systems; border security; air traffic management; training and homeland security; and cyber security.

However, we remain concerned about the apprehensions over the future growth of the U.S. defense budget, the fate of high-cost programs, risks related to key project executions and order cancellations.

Raytheon Company retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Based in Massachusetts, Raytheon Company is one of the largest aerospace and defense companies in the U.S., with a 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.

The company mainly competes with L-3 Communications Holdings Inc. (LLL) and FLIR Systems Inc. (FLIR).

Read the full analyst report on “FLIR”
Read the full analyst report on “RTN”
Read the full analyst report on “LLL”
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