Raytheon Company (RTN) reported fourth-quarter 2010 adjusted earnings of $1.57 per share, beating the Zacks Consensus Estimate by 42 cents. Results leaped 20% from earnings of $1.31 reported in the year-ago period. Adjusted earnings in the quarter were $575 million, up 13% from $510 million in the year ago period.
The better-than-expected results in the quarter were largely attributable operational improvements and capital deployment actions.
Adjusting for 11 cents FAS/CAS pension expense, 13 cents charge associated with the impacts of the early debt retirements, 3 cents gains related to terminated interest rate swaps on retired debt and loss from discontinued operation of 11 cents, Raytheon reported net income of $1.25, down 4% year over year.
For full year 2010, Raytheon reported adjusted earnings of $5.58 per share, surpassing the Zacks Consensus Estimate by a substantial 99 cents. Earnings improved 15% from $4.87 in 2009. Adjusted earnings in 2010 were $2.1 billion, up 9% from $1.9 billion in the year ago period.
Adjusting for 40 cents FAS/CAS pension expense, 75 cents unfavorable impact of United Kingdom Border Agency program adjustment, 13 cents favorable tax settlement, 13 cents charge associated with the impacts of the early debt retirements, 3 cents gains related to terminated interest rate swaps on retired debt and income from discontinued operation of 10 cents, Raytheon reported net income of $4.88, down by a penny form 2009.
Operational Performance
Revenue reported by Raytheon in the quarter under review was $6.9 billion, up 3% from year over year. Strong revenue generation across the segments, partially offset by lower revenues at only Integrated Defense Systems led to the overall climb. Results, however, lagged the Zacks Consensus estimate of $7.1 billion.
Full year 2010 revenue improved 1% from 2009 to gross $24.9 billion, though lagged the Zacks Consensus estimate of $25.4 billion.
Operating expense totaled $6.1 billion, up 4% year over year. Increases in cost of sales and Administrative and selling expenses fed the rise. Full year 2010 operating expense also climbed 3% year over year to $22.6 billion.
Operating income in the fourth quarter 2010 totaled $804 million, up 0.5% year over year. Full year 2010 operating income totaled $2.6 billion, down 14% from 2009.
Bookings in 2010 were $24.4 billion, up from $25.1 billion in 2009. Backlog at year-end totaled $34.6 billion, of which $22.6 billion was funded.
Segmental Performance
Integrated Defense Systems: Revenue decreased 5% year over year to $1.5 billion in the quarter while. Lower sales on various U.S. Navy programs and on two joint battlefield sensor programs resulted in lower revenue.Revenue decreased 1% year over year to $5.5 billion in 2010.
Operating income was $240 million or 16.4% of sales compared with $249 million or 16.2% of sales in fourth quarter 2009. Full year 2010 operating income was $879 million or 16.1% compared with $859 million or 15.5% of sales in 2009.
Intelligence and Information Systems: Segment revenue increased 2% year over year to $820 million in the quarter. The increase was attributable to higher sales on various programs. Revenue decreased 14% year over year to $2.6 billion in 2010.
Operating income was lower at $69 million or 8.4% of sales compared with $64 million or 8.0% of sales in fourth quarter 2009. For 2010, the segment posted operating loss of $150 million or -5.4% of sales compared with operating profit of $259 million or 8.1% sales in 2009.
Missile Systems: Revenue increased 11% year over year to $1.6 million. Higher sales on various programs drove the increase. Revenue improved 3% year over year to $5.7 billion in 2010.
Operating income was higher at $170 million or 10.9% of sales compared with $154 million or 10.9% of sales in the prior year quarter. Full year operating income was $654 million or 11.4% of sales compared with 604 million or 10.9% o sales.
Network Centric Systems: Revenue increased 4% year over year to $1.3 billion in the quarter, largely due to higher sales on a classified international program. 2010 revenue increased 2% year over year to $4.9 billion.
Operating income was $198 million or 15.1% of sales, compared with $169 million or 13.4% of sales. 2010 operating income was $701 million or 14.3% of sales, compared with $674 million or 14.0% in 2009.
Space and Airborne Systems: Revenue of $1.30 billion in the quarter increased 3% year over year. The improvement was largely driven by growth on classified business and on multi-spectral targeting system program. 2010 revenue increased 5% year ovr year to $4.8 billion.
Operating income was lower at $165 million or 12.7% of sales, compared with $174 million or 13.7% of sales in the year-ago quarter. Full year operating income was $686 or 14.2% of sales compared with $647 million or 14.1% of sales in 2009.
Technical Services: Revenue increased 9% year over year to $964 million in the quarter. Growth in domestic and foreign training programs supporting the U.S. Army’s Warfighter Field Operations Customer Support activities and higher sales on programs with the Transportation Security Administration drove the improvement in revenue.
Operating income was $83 million or 8.6% of sales, higher than $58 million or 6.5% of sales in the year-ago quarter. Full year operating income was $300 or 8.6% of sales compared with $215 million or 6.8% of sales in 2009.
Acquisition
Raytheon inked a deal to acquire Applied Signal Technology, Inc. The transaction is expected to close in the first quarter 2011. Applied Signal Technology will become part of Raytheon’s Space and Airborne Systems segment.
Financial Update
Raytheon ended 2010 with cash and cash equivalents of $3.6 billion, higher than the 2009 year-end level of $2.6 billion.
Long term debt at 2010 end was $3.6 billion, higher the 2009 year-end level. In the fourth quarter 2010, the company issued $2.0 billion in long-term debt and retired $678 million in long-term debt maturing in 2012 and 2013.
Cash from operations in 2010 was $1.9 billion lower than $2.7 billion in the year ago period.
Capital expenditure incurred by the company in 2010 was $319 million, higher than $280 million incurred in 2009.
Raytheon spent $250 million to buy back 5.3 million common shares as part of its previously announced share repurchase program. In 2010, the company bought back 29 million shares for $1.45 billion.
Full-Year 2011 Guidance
Raytheon now expects net sales to be in the range of $25.5 billion – $26.3 billion.
The company expects FAS/CAS Pension expense to be 367 million and interest expense to be in $155-$165 million.
Number of diluted shares is projected in the 353 – 359 million range.
Effective tax rate is expected to be approximately 30.5%.
Adjusted earnings are expected to be $5.50 – $5.65 per share.
Earnings from continuing operations are guided in a range of $4.83 – $4.98 per share.
Cash flow from operations is projected to be $2.0 – $2.2 billion.
Return on invested capital is projected to be 13.4% – 13.9%.
Peer Comparison
The Boeing Company (BA), which competes with Raytheon, reported fourth quarter operating earnings of $1.11 per share, missing both the Zacks Consensus Estimate of $1.13 and year-ago EPS of $1.77.
The company’s tepid result was due to lower deliveries of both commercial airplanes and military aircraft. Fiscal 2010 operating earnings came in at $3.99, above the Zacks Consensus Estimate of $3.85 and fiscal 2009 earnings of $1.83.
Lockheed Martin Corporation (LMT), another competitor of Raytheon, posted fourth-quarter 2010 operating earnings of $2.30 per share, beating both the Zacks Consensus Estimate of $2.20 and year-ago adjusted quarterly earnings of $2.19 by margins of 10 cents and 11 cents, respectively.
Fiscal 2010 operating earnings came in at $7.18 per share, way above both the Zacks Consensus Estimate of $6.91. However, this came below fiscal 2009 earnings of $7.71.
Our Take
Raytheon is expected to post solid results going forward based on widened product portfolio aided by continued bookings and contract wins.
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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