Raytheon Company (RTN) reported first quarter 2011 adjusted earnings of $1.38 per share, beating the Zacks Consensus Estimate of $1.09. Results jumped 10% from earnings of $1.25 per share reported in the year-ago period.

Adjusting for 16 cents for both FAS/CAS pension expense and impact of UK Border Agency (UKBA) program, Raytheon reported GAAP EPS of $1.06, down from $1.16 in the year-ago period.

Operational Performance

Raytheon reported revenues of $6.1 billion in the quarter under review, approximately flat with both the prior-year period as well as the Zacks Consensus Estimate. The top line was affected by the duration of the continuing resolution.

Bookings in the current quarter were $5.1 billion versus $6.5 billion in the year-ago period. Backlog in the reported quarter totaled $33.7 billion, of which $21.7 billion was funded.

Total operating expenses in quarter were $5.5 billion, up 2.4% year over year. Operating income was $591 million versus $709 million in the prior-year period.

Adjusted earnings in the quarter were $497.0 million, up 4% year over year, driven by continued focus on cost efficiencies and program performance.

Segmental Performance

Integrated Defense Systems: Revenue decreased 9% year over year to $1.2 billion in the quarter due to lower sales on a U.S. Navy program. Segment operating income was down 7% to $193 million.

Intelligence and Information Systems: The segment generated revenue of $750 million, up 3% year over year, driven by higher sales from the Global Positioning System Operational Control business wing. However, the company incurred a segment operating loss of $28 million as against an operating profit of $48 million in the first quarter of 2010 due to the UKBA LOC adjustment.

Missile Systems: The segment revenue was $1.3 billion, down 2% year over year due to lower sales on Standard Missile-2 (SM-2). Operating income inched down 1% year over year to $155 million.

Network Centric Systems: The segment revenue at $1.1 billion was down 1.5% year over year due to lower sales on a U.S. Army sensor program. Segment operating income in the reported quarter also declined 2% year over year to $160 million.

Space and Airborne Systems: Revenue of $1.3 billion in the quarter increased 16% year over year on the back of classified business and an international airborne tactical radar program. However, segment operating income was flat year over year at $156 million.

Technical Services: Revenue was approximately flat at $799 million versus $801 million in the first quarter of 2010. The segment generated operating income of $81 million, up 21%.

Financial Update

Raytheon ended first quarter of 2011 with cash and cash equivalents of $2.7 billion, up slightly from $2.6 billion in the prior-year period. Long-term debt was $3.6 billion versus $2.3 billion in the first quarter of 2010.

Operating cash flow from continuing operations in the reported quarter was $69 million versus $257.0 million in the prior-year period due to a financial systems implementation at Technical Services, which impacted the timing of customer billings.

As a part of its previously announced share repurchase program, Raytheon repurchased 6.1 million shares of common stock for $312 million in the quarter under review. In March 2011, the company also increased its annual dividend rate by 15% from $1.50 to $1.72 per share.

Guidance

Raytheon expects net sales in the range of $25.5–$26.3 billion for fiscal 2011. The company maintained its pro forma EPS guidance of $5.50–$5.65 for 2011. It lowered its GAAP guidance to $4.67–$4.82 from its previous expectation of $4.83–$4.98. Operating cash flow from continuing operations is expected to be in the range of $2.0–$2.2 billion in 2011.

At the Peer

Yesterday, one of Raytheon’s competitors Northrop Grumman Corporation (NOC) released first quarter 2011 adjusted earnings of $1.67 per share compared with $1.34 in the first quarter 2010. Northrop results also exceeded the Zacks Consensus Estimate of $1.55 for the quarter.

Our Take

Raytheon is one of the best-positioned companies among the large-cap defense players because of its non-platform-centric focus. Future growth will be driven by its focus on Intelligence, Surveillance and Reconnaissance unmanned systems, training, cyber security, Standard Missile-6, Patriot, Zumwalt and Terminal High Altitude Area Defense.

These prospects are, however, muted 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. Thus, in the absence of any positive triggers, we have a long-term Neutral recommendation on the stock. The company presently retains a short-term Zacks #2 Rank (Buy).

Based in Massachusetts, Raytheon Company is a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world. Raytheon provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of command, control, communications and intelligence systems, as well as offers a broad range of mission support services.

 
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