Tags: defense | cuts | Raytheon | RTN

Defense Cuts May Steer Raytheon's Fate

By    |   Wednesday, 19 Oct 2011 11:06 AM

Defense and space contractor Raytheon (RTN) is cutting costs and brushing off the fallout from a lost business deal overseas, but any defense spending cuts in Washington could eat into the company financials down the road and ultimately steer its fate, analysts say.

So far, Raytheon's business has been solid. Second-quarter net sales came to $6.2 billion, up 4 percent from a year earlier. Sales at the company's intelligence and information systems unit were strong, hitting $752 million, up 59 percent from the same period a year earlier, which helped offset drops in missile sales, network-centric sales, and integrated defense system sales.

Raytheon's space and airborne systems unit posted second-quarter net sales of $1.3 billion, up 12 percent from the second quarter of 2010.

Net income from continuing operations for the quarter came to $438 million, up 107 percent from the same period a year earlier. Cost-cutting measures are paying off, and the company is recovering from business lost in the United Kingdom, which hit financials in 2010.

"Raytheon’s strong second quarter performance continues to reflect our focus on execution and cost reduction activities," company Chairman and CEO William H. Swanson says in an earnings statement.

"We also saw global demand for our technologies and innovative solutions, which resulted in robust bookings in the quarter."

Raytheon reported bookings for the second quarter of $7.4 billion compared to $5.9 billion in the second quarter 2010.

"During the second quarter 2011, the company booked $1.7 billion to upgrade the Patriot Air and Missile Defense System for the Kingdom of Saudi Arabia," Raytheon says in its earnings statement.

Washington watch

Ratings agencies say the company is a solid one, but of course military spending is subject to budget cuts, which can hurt companies like Raytheon.

Budget cuts are an especially sensitive issue these days, as Democrats and Republicans square off to determine how to narrow the country's gaping deficits. Defense spending cuts are automatic if the so-called Super Congress committee fails to find $1.2 trillion in reductions by Nov. 23.

"Defense spending remains high, but growth has slowed, and efforts by the U.S. military to reduce costs could put pressure on margins over the next few years," Standard and Poor's says in a note on the company, echoing the same sentiment it made earlier this year.

Fitch Ratings, which has assigned Raytheon a stable outlook, also is keeping an eye on defense spending.

Pension obligations could become an issue, too, especially if federal money thins.

"Factors supporting the ratings include the company's competitive position in the defense industry, high levels of U.S. defense spending, international revenue growth, and a large backlog," Fitch analysts write in a September review on company debt ratings, which they gave an A-.

"The company's healthy credit metrics, financial flexibility, and liquidity also support the ratings. Concerns center on uncertainty about core U.S. defense spending beyond fiscal 2012; the pension deficit; large share repurchases; and to a lesser extent some pending legal issues."

Wall Street brokerages tend to like Raytheon. Earlier this year, RBC Capital Markets upgraded the stock to outperform from sector perform while Oppenheimer reiterated a perform recommendation.

The company will unveil third-quarter results on Oct. 27.

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Defense and space contractor Raytheon (RTN) is cutting costs and brushing off the fallout from a lost business deal overseas, but any defense spending cuts in Washington could eat into the company financials down the road and ultimately steer its fate, analysts say. So...
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