Raytheon's Profits Leap On Aircraft, Navy, and International Work

Defense Daily, Oct 27, 2006

By Calvin Biesecker

Raytheon [RTN] yesterday posted strong third quarter financial results led by sales and earnings gains at its Integrated Defense Systems (IDS) segment and Raytheon Aircraft Co. (RAC) and lower interest and pension expense.

Net income increased 41 percent to $321 million, 71 cents earnings per share (EPS) versus $228 million (50 cents EPS) a year ago. Income from continuing operations was $323 million (72 cents EPS) versus $231 million (51 cents EPS) a year ago, a comfortable 8 cents EPS above consensus estimates. Free cash flow was $682 million.

Sales increased 7 percent to $5.7 billion, also led by growth at IDS and RAC.

The strong earnings combined with lower interest expense and other corporate items led Raytheon to increases its earnings outlook for this year by 10 cents EPS to between $2.70 and $2.80 EPS. Sales are still forecast to be between $23.1 billion and $23.6 billion.

In July Raytheon said it was reviewing its strategic alternatives for RAC, which it says isn't a core business. RAC designs and manufactures business jets and general aviation aircraft. Company officials on yesterday's earnings said they haven't finalized their thinking on how to divest RAC.

Sales at RAC increased 18 percent to $758 million on higher aircraft deliveries while operating earnings more than doubled to $70 million. Margins increased nearly 4 percent to 9.2 percent on improved operating performance, favorable aircraft volume and mix and an adjustment for warranty expense.

Raytheon's government and defense businesses increased sales 5 percent overall, led by IDS. All of the company's segments had higher sales except Intelligence and Information Systems, which saw some classified work slip into the fourth quarter due to timing issues. Overall margins in the segments inched up 20 basis points to 11.9 percent on the higher sales and improved operating performance.

IDS sales increased 12 percent to $1 billion on growth in the Navy's DDG- 1000 destroyer program and international programs. Sales are expected to be a little higher next year for DDG-1000, David Wajsgras, Raytheon's chief financial officer, said on the earnings call.

Regarding the upcoming mid-term congressional elections, Bill Swanson, Raytheon's chairman and CEO, said whatever the outcome, whoever is in charge cares about national security. If the election outcome eventually causes a shift in security priorities, whether its homeland security, missile defense or something else, Swanson said he views it as an opportunity that Raytheon can respond too.

Swanson pointed to new work and contract wins this year that have positioned Raytheon in "adjacent markets" based on the company's core technologies. In homeland security the company has won work on next generation radiation portal monitors, perimeter intrusion detection systems for four airports in New York and New Jersey, and further development of a ground-based aircraft protection system among other things. He also highlighted a recent $230 million contract to supply electronic toll collection systems in Florida over the next 10 years.

There are opportunities in international markets for these types of systems as well, Swanson added. Raytheon is competing for work on Britain's e- Borders program, which is based on electronic processing of information about travelers to and from the United Kingdom.

Raytheon also provided initial guidance for 2007. Sales are expected to be around $25 billion and earnings from continuing operations between $2.95 and $3.05 EPS, a below consensus estimates of $3.09 EPS.

[Copyright 2006 Access Intelligence, LLC. All rights reserved.]

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