Raytheon Company Meets Q2 Earnings Estimates, Reaffirms View

Raytheon Company RTN reported second quarter 2014 earnings from continuing operations of $1.59 per share, on par with the Zacks Consensus Estimate.

Earnings increased 6.0% from $1.50 per share in the year-ago quarter, mainly driven by efficient program execution. The world's largest missile maker, Raytheon experienced robust demand for its products, particularly from foreign customers.

Operational Performance

The company's top line at $5,701 million registered a 6.8% fall year over year. The reported number, however, came above the Zacks Consensus Estimate of $5,587 million by 2.0%.

New bookings in the second quarter were $6.8 billion versus $5.3 billion in the year-ago period. Book-to-bill was 1.19x in the quarter. Total backlog at the end of the quarter was $33.0 billion (up 1.8% year over year) while funded backlog was $23.6 billion (up about 6.4%).

Total operating expenses were $4,942 million, down 7.6% year over year. Operating income of $759 million declined almost 1% year over year from $766 million.

Quarterly Segment Performance

Integrated Defense Systems (IDS): Segment revenues decreased 10% year over year to $1,549 million due to the completion of some production phases of two international Patriot programs. This was accompanied with soft sales on a combat tactical radar program and the Australian Air Warfare Destroyer (AWD) program.

Segment operating income also declined 33% year over year to $219 million.

Intelligence, Information and Services (IIS): Segment revenues were down 3% year over year to $1,518 million due to lower volume on training programs. Operating income in the reported quarter also dropped 3% to $127 million.

Missile Systems MS: Segment revenues decreased 9% year over year to $1,539 million. Weak net sales were a function of lower sales on U.S. Army programs. Operating income also dropped 11% year over year to $190 million on lower volumes.

Space and Airborne Systems (SAS): Revenues in the quarter declined 7% year over year to $1,505 million. This was due to lower sales volume on classified as well as tactical communications systems programs. Operating income declined 6% year over year to $202 million due to lower volumes.

Financial Update

Raytheon ended the second quarter 2014 with cash and cash equivalents of $3,261 million versus $3,296 million as of Dec 31, 2013. Long-term debt was $4,736 million, almost in line with outstanding debt of $4,734 million as of Dec 31, 2013.

Raytheon's capital expenditure of $62 million in the reported quarter rose from $56 million a year ago.

In the reported quarter, Raytheon repurchased 2.6 million shares of common stock for $250 million as per its share repurchase program.

Guidance

For 2014, Raytheon reaffirmed it top-line projection in the range of $22.5–$23.0 billion. The company's adjusted earnings per share guidance was also maintained in the $5.76 to $5.91 range. Earnings from continuing operations are expected in the range of $6.75–$6.89 per share.

The defense major expects operating cash flow from continuing operations in the range of $2.3 billion to $2.5 billion for 2014.

At the Peers

Pentagon's prime contractor, Lockheed Martin Corp. LMT posted impressive second quarter 2014 earnings before the opening bell in spite of the uncertain budget environment. The company reported quarterly earnings of $2.76 per share, comfortably surpassing the Zacks Consensus Estimate of $2.66 by 3.8%.

Another defense major, Northrop Grumman Corp. NOC reported second-quarter 2014 adjusted earnings of $2.04 per share, lagging the Zacks Consensus Estimate of $2.20 by 7.3%. However, earnings were 3.6% higher year over year.

General Dynamics Corp. GD reported second-quarter 2014 adjusted earnings of $1.58 per share, missing the Zacks Consensus Estimate of $1.76 by 10.2%. The bottom line also decreased 12.7% year over year.

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.

Although the company met the earnings consensus its top line came above the Street estimate. Yet, revenues took a beating year over year in a budget-constrained U.S. defense market.

In spite of budget pressure, this defense major has been able to clinch quite a few modest deals during the June 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 will help Raytheon to meet this target.

Zacks Rank

Raytheon holds a Zacks Rank #3 (Hold). However, Northrop Grumman, Lockheed Martin and General Dynamics hold a more bullish Zacks Rank #2 (Buy) and are worth accumulating at current levels.