Raytheon Earnings Disappoint on Lower Revenues, View Up

Raytheon Company (RTN) reported third-quarter 2014 adjusted earnings from continuing operations of $1.57 per share, missing the Zacks Consensus Estimate of $1.61 by 2.5%.

The reported number also decreased 1.9% from $1.60 per share in the year-ago quarter, mainly due to lower revenue generation. Yet, the world’s largest missile maker, Raytheon, experienced robust demand for its products, particularly from foreign customers.

Raytheon Company - Earnings Surprise | FindTheBest

Operational Performance

The company’s top line at $5,474 million registered a 6.3% fall year over year. The reported number also came in below the Zacks Consensus Estimate of $5,516 million by 0.8%.

New bookings in the third quarter were $5,878 million compared with $5,685 million in the year-ago period. Book-to-bill was 1.07x in the quarter. Total backlog at the end of the quarter was $33.2 billion (up 3.1% year over year) while funded backlog was $22.9 billion (up about 3.4%).

Total operating expenses were $4,711 million, down 7.4% year over year. Operating income of $763 million declined almost 1% year over year from $757 million.

Quarterly Segment Performance

Integrated Defense Systems (IDS): Segment revenues decreased 10.9% year over year to $1,428 million due to the completion of some production phases of international Patriot programs. Segment operating income also declined 19.6% year over year to $230 million.

Intelligence, Information and Services (IIS): Segment revenues were down 1.2% year over year to $1,478 million due to lower volume on training programs. Operating income in the reported quarter also dropped 6.7% to $125 million.

Missile Systems (MS): Segment revenues decreased 9.7% year over year to $1,477 million. Weak net sales were a function of lower sales on U.S. Army programs. Again, lower sales for the planned transition from development to production on the Standard Missile-3 (SM-3) program also impacted the quarterly results. Operating income also dropped 5.9% year over year to $190 million on lower volumes.

Space and Airborne Systems (SAS): Revenues in the quarter declined 3% year over year to $1,509 million. This was due to lower sales volume on intersegment sales. Operating income declined 5.8% year over year to $237 million due to lower volumes.

Financial Update

Raytheon ended the third quarter 2014 with cash and cash equivalents of $2,634 million, down from $3,296 million as of Dec 31, 2013. Long-term debt was $4,737 million, almost in line with outstanding debt of $4,734 million as of Dec 31, 2013.

Raytheon’s capital expenditure of $72 million in the reported quarter rose from $60 million a year ago.

In the reported quarter, Raytheon repurchased 2.1 million shares of common stock for $200 million as per its share repurchase program.

Guidance

For 2014, Raytheon adjusted its bottom-line projection to $6.77−$6.87 per share from its earlier expectation of $6.74−$6.89 per share. Adjusted earnings are expected to fall in the range of $5.91−$6.01 per share, up from its previous forecast of $5.76−$5.91.

The company expects adjusted operating margin in the 12.7%−12.8% range (prior expectation: 12.6%−12.8%).

Raytheon is optimistic about its 2014 top-line generation with revenues expected between $22.7 billion and $23.0 billion. Earlier, it had expected total revenues in the $22.5 billion to $23.0 billion range.

However, this defense major lowered its 2014 operating cash flow from continuing operations forecast to the range of $2.2 billion to $2.4 billion from $2.3 billion to $2.5 billion earlier.

At the Peers

Pentagon’s prime contractor, Lockheed Martin Corp. (LMT) reported quarterly earnings of $2.76 per share, comfortably surpassing the Zacks Consensus Estimate of $2.72 by 1.5%.

Northrop Grumman Corp. (NOC) reported third-quarter 2014 adjusted earnings of $2.32 per share, beating the Zacks Consensus Estimate of $2.16 by 7.4%. Earnings also increased 17.8% year over year.

General Dynamics Corp. (GD) reported third-quarter 2014 earnings from continuing operations of $2.05 per share, comfortably surpassing the Zacks Consensus Estimate of $1.91 by 7.3%. Earnings also increased 11.4% from the prior-year figure of $1.84.

Our Take

Raytheon is one of the largest aerospace and defense companies in the U.S. with a 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.

The company missed both the earnings and revenue Street estimates. Revenues took a beating across the board in a budget-constrained U.S. defense market.

Having said that, this defense major has been able to clinch quite a few modest deals during the September quarter. The 2014 fiscal budget had put emphasis on Raytheon’s prominent programs including Missile and Space Systems, which will boost the company’s revenue stream.

Also, rising demand from the Asia-Pacific region as well as from the Gulf countries will continue to drive Raytheon’s international sales. Contributions from foreign defense contracts are expected to touch 30% of total revenues in 2014, exceeding the 2013 level of 27%.

Raytheon aims to achieve total bookings of nearly $23.5 billion in 2014. Orders coming in from 80 countries from across the world, like the deal with Qatar for a Patriot missile defense system, will help Raytheon to meet this target.

Zacks Rank

Raytheon holds a Zacks Rank #4 (Sell).

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