Raytheon Company (RTN) reported second-quarter 2011 operating earnings of $1.39 per share, beating the Zacks Consensus Estimate of $1.16. Results also were higher than the year-ago quarterly earnings of $1.34 per share.
On a reported basis the company clocked earnings of $1.23 versus 55 cents in the year-ago quarter. In the year-ago quarter the company digested a charge of 71 cents related to an unfavorable adjustment for the UK Border Agency program.
Operational Performance
Revenue reported by Raytheon in the quarter under review was $6.22 billion, up 4% from $5.97 billion in the year-ago period. Results also were marginally higher than the Zacks Consensus Estimate of $6.21 billion.
Income from continuing operations more than doubled to $438 million from $212 million in the year-ago quarter, reflecting a quantum leap 107%. However, in the year-ago period an adjustment for the UK Border Agency program reduced income from continuing operations by $395 million. Overall, the company recorded net income of $438 million compared with $208 million in the year-ago period.
Segmental Performance
Integrated Defense Systems (IDS): Revenue decreased 6% year over year to $1.27 billion in the quarter. The change in net sales was primarily due to lower sales on a U.S. Navy program. IDS recorded $203 million of operating income compared with $218 million in the second quarter 2010, driven by the change in volume.
Intelligence and Information Systems (IIS): Segment revenue increased 59% year over year to $752 million in the quarter. IIS recorded $55 million of operating income compared with $330 million of operating loss in the second quarter 2010. Earlier, the UK Border Agency program adjustment reduced IIS’ second quarter 2010 net sales and operating income by $316 million and $395 million, respectively.
Missile Systems (MS): Revenue decreased 3% year over year to $1.37 billion. The change in net sales was primarily due to lower sales on Standard Missile-2 (SM-2). MS recorded $151 million of operating income compared with $162 million in the second quarter 2010, driven by change in volume.
Network Centric Systems (NCS): Revenue decreased 6% year over year to $1.14 billion in the quarter, largely due to lower sales on U.S. Army sensor programs. NCS recorded $170 million of operating income compared with $164 million in the second quarter 2010. The increase in operating income was primarily due to favorable contract mix.
Space and Airborne Systems (SAS): Revenue of $1.34 billion in the quarter increased 12% year over year. The improvement was largely driven by growth on intelligence, surveillance and reconnaissance (ISR) systems programs and higher net sales related to Raytheon Applied Signal Technology (RAST), which was acquired in the first quarter of 2011. SAS recorded $176 million of operating income compared with $169 million in the second quarter 2010.
Technical Services (TS): Revenue increased 2% year over year to $851 million in the quarter. TS recorded operating income of $72 million compared with $71 million in the second quarter 2010.
Financial Update
Raytheon ended the reported period with cash and cash equivalents of $2.12 billion versus $3.64 billion at fiscal-end 2010. Long-term debt remained flat at $3.61 billion with fiscal-end 2010. Operating cash flow from continuing operations for the second quarter 2011 was actually an outflow of $91 million compared with a positive $400 million for the second quarter 2010.
The change in operating cash flow from continuing operations was primarily due to one additional payroll period in the second quarter 2011 and higher cash tax payments in the second quarter 2011. In the reported quarter the company repurchased 6.4 million shares of common stock for $313 million. Year to date, the company repurchased 12.5 million shares of common stock for $625 million.
Outlook
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 strong bookings of $7.4 billion in the reported quarter compared with $5.9 billion in the year-ago period, resulting in a book-to-bill ratio of 1.2.
Raytheon narrowed its 2011 full-year guidance for net sales and increased guidance for operating cash flow from continuing operations. The company now expects its sales for 2011 to be in the range of $25.5 billion–$25.9 billion versus earlier guidance range of $25.5 billion–$26.3 billion.
Operating cash flow from continuing operations is now expected to be in the range of $2.1 billion–$2.3 billion versus earlier range of $2.0 billion–$2.2 billion. The company has also updated the EPS guidance to reflect a third quarter favorable tax settlement of $55 million, or $0.15 per diluted share, including interest. EPS from continuing operations for 2011 is now expected to be in the range of $4.82–$4.97 versus an earlier range of $4.67–$4.82.
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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