Raytheon Company (RTN) reported first quarter 2012 adjusted earnings per share of $1.46, beating the Zacks Consensus Estimate of $1.16. The result was also higher than the year-ago quarterly earnings of $1.37 per share.
During the quarter, on a reported basis, earnings were $1.33 as compared to $1.06 in first quarter of 2011. The difference between reported and adjusted was due to FAS/CAS Adjustment.
Operational Performance
Revenue was $5.94 billion, down 2% from $6.05 billion in the year-ago period. However, it surpassed the Zacks Consensus Estimate by $166 million.
Total backlog at the end of the quarter was $34.3 billion, up from $33.7 billion in the year-ago period.
Operating income was $706 million versus $589 million in the year-ago period.
Segment Performance
Integrated Defense Systems (IDS): Revenue was approximately flat year-over-year at $1.22 billion. The segment received a $182 million contract to provide Patriot engineering services and a $90 million contract to provide engineering services, production and support for the Aegis weapon system. Segment operating income was $216 million, up 11.9% year over year.
Intelligence and Information Systems (IIS): Segment revenue increased 1.87% year over year to $764 million in the quarter driven by recent acquisitions in cyber security. Segment operating income was $62 million compared to a loss of $28 million in the prior year period. During the quarter, the segment received a number of classified contracts for $284 million.
Missile Systems (MS): Revenue increased 1.66% year over year to $1.35 billion. MS recorded $180 million of operating income compared with $155 million in the first quarter of 2011.
During the quarter, the segment booked a $497 million contract for Advanced Medium-Range Air-to-Air Missiles (AMRAAM) and a $172 million contract for AIM-9X Sidewinder short range air-to-air missiles, both for the U.S. Navy and international customers. The company also received a $171 million contract for the development of Standard Missile-3 (“SM-3”) for the Missile Defense Agency (“MDA”) and $79 million for the development of the Accelerated Improved Intercept Initiative (“AI3”) program for the U.S. Army.
Network Centric Systems (NCS): Revenue decreased 10.8% year over year to $1 billion in the quarter, largely due to lower sales in U.S. Army programs. The segment operating income was $116 million, down 27.5% year-over-year. During the quarter, NCS received an $81.0 million contract on the Navy Multiband Terminal (“NMT”) program for the U.S. Navy.
Space and Airborne Systems (SAS): Revenue in the quarter decreased marginally by 0.6% year over year to $1.26 billion. SAS recorded $173 million of operating income, up from $156 million in the previous year period.
Technical Services (TS): Revenue was approximately flat year over year at $802 million. The segment generated operating income of $71 million compared with $81 million in first quarter of 2011.
Financial Update
Raytheon ended the reported period with cash and cash equivalents of $3.54 billion versus $2.66 billion at the end of first quarter of 2011. Long-term debt increased to $4.61 billion compared to $3.61 billion in the year-ago period.
Operating cash flow generated from continuing operations during the reported quarter was $111 million compared with $60 million in the prior year period.
As a part of its previously announced share repurchase program, the company repurchased 7.9 million shares of common stock for $400 million. Also, during the quarter, the company increased its annual dividend rate by 16% to $2 per share.
Peer Comparison
Yesterday, one of its peers, Northrop Grumman Corporation (NOC) reported impressive first quarter 2012 results. Earnings of $1.88 per share compared favorably with $1.44 per share posted in the first quarter of 2011. Northrop results also exceeded the Zacks Consensus Estimate of $1.59 for the quarter. Sales for the reported quarter decreased 7.9% to $6.19 billion from $6.73 billion in the year-ago quarter, and were 1.0% lower than the Zacks Consensus Estimate of $6.26 billion.
Guidance
The company maintained its sales guidance in the range of $24.5 billion to $25 billion for 2012. However, it raised its EPS guidance to $5.55-$5.70 for 2012 versus its previous expectation of $5.45 to $5.60.
Outlook
We believe that Raytheon is one of the best-positioned companies among the large-cap defense players due to its strong order bookings and order backlog of $34.3 billion at the end of the first quarter of 2012. Going forward, we expect revenue and earnings growth to be driven by a 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.
This is, 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 cancelations.
The company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.
Based in Waltham, Massachusetts, Raytheon Company is a leader in technology and innovation specializing in defense, homeland security and other government markets throughout the world. It provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects and command, control, communications and intelligence systems, as well as a broad range of mission support services.
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