Raytheon Flashing Solid Numbers – Analyst Blog

Raytheon Company (RTN) posted strong adjusted earnings of $1.18 per share in the first quarter of fiscal 2010 – outpaced both the Zacks Consensus Estimate and year-ago quarterly earnings of $1.11 per share. On a reported basis, including one-time items, earnings came in at $1.16 per share, up four cents from $1.12 delivered in the year-ago quarter. EPS growth in the reported period also benefited from fewer outstanding shares. At the end of the quarter outstanding shares were 384.4 million compared with 404 million at the end of the year-ago period.

Stable Growth in Topline

On the revenue front, Raytheon in the reported quarter grew 3% to $6.1 billion over the year-ago period. Top-line growth was fueled by all but the Intelligence & Information Systems (-7%) and Missile Systems (-1%) segments. The upside came from Technical Services (15%), Integrated Defense Systems (6%), Space and Airborne Systems (5%), and Network Centric Systems (2%).

Technical Service’s quarterly net sales rose primarily due to continued growth in domestic and foreign training programs supporting the U.S. Army’s Warfighter Field Operations Customer Support (FOCUS) activities. Integrated Defense Systems quarterly net sales rose primarily due to growth from international Patriot programs. Space and Airborne Systems quarterly net sales increased primarily due to growth in classified business.

Intelligence and Information Systems quarterly net sales fell due to lower net sales based on a classified program and an international advanced border control and security program.

Stalemate at Bottom

Raytheon however witnessed a 0.4% fall in its Operating income in the reported quarter. Operating income de-grew to $709 million from $712 million in the year-ago quarter.

The spoilsport was Intelligence and Information Systems’ segment where lower volume from an international program led to lower margins, which fell to 6.8% from 7.8% in the year-ago quarter.

This was partially offset by Integrated Defense Systems, Space and Airborne Systems and Technical Services. Integrated Defense Systems witnessed rise in margins from 14.9% to 15.7% due to higher volume on international Patriot programs. Space and Airborne Systems margins also rose due to growth on classified business. Fortunes at Technical Services were greener due to improved program performance, including higher award fees, and higher volume. 

Financial Condition

Raytheon ended the quarter with cash and cash equivalents of $2.6 billion, identical with the liquidity at the end of the year-ago period. Long term debt also remained at the same level of $2.3 billion, identical with the year-ago period. The company generated solid operating cash flow from continuing operations of $257 million in the first quarter 2010, which included federal and foreign tax payments of $59 million. Operating cash flow from continuing operations in the reported quarter was $411 million, which included a net tax refund of $323 million. Excluding these tax items, operating cash flow from continuing operations in the reported quarter increased by $228 million, primarily due to improved performance.

Outlook

Raytheon reaffirmed its fiscal 2010 outlook. The company expects 2010 revenue in the range of $25.9 – $26.4 billion. EPS for fiscal 2010 is forecasted in the range of $4.75 – $4.90. However this is below the Zacks Consensus EPS Estimate of $4.98 for fiscal 2010.

Our View

Raytheon is one of the largest aerospace and defense companies in the U.S. It boasts of a well-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.

Raytheon reported total bookings of $6.5 billion for the quarter, compared to $5.2 billion in the year-ago quarter. The company ended fiscal 2009 with a backlog of approximately $37 billion compared with $36.9 billion at the end of fiscal 2009.

Raytheon’s order backlog is quite diversified, consisting of more than 15,000 contracts. Its largest contract in fiscal 2009 was the Zumwalt Class Destroyer (DDG 1000) program, which accounted for less than 5% of total net sales in 2009. A diversified revenue base greatly insulates its performance from cancellation, curtailment or deferment of a program.

Raytheon is also focused on increasing its shareholder value through incremental dividend, and ongoing share repurchases. In the first quarter of 2010 the company repurchased 5.5 million shares of its common stock for $300 million. Earlier in March 2010, it increased its annual dividend payout rate by 21% from $1.24 to $1.50 per share. 

However in the near-term we do not expect any upside since we feel all these positives have been factored in the current market price of the stock. Thus we maintain our near-term market neutral recommendation on the Zacks #3 stock.