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Raytheon Company (RTN - Analyst Report) announced fourth quarter and full year 2012 results. The company reported fourth-quarter adjusted earnings of $1.60 per share, beating the Zacks Consensus Estimate by 30 cents. However, results were lower than the year-ago quarterly earnings of $1.72 per share.

For full year 2012, the company reported adjusted earnings of $6.21 per share comfortably surpassing the Zacks Consensus Estimate of $4.94 per share and the year-ago figure of $5.85 per share. The results were driven by capital deployment actions and operational improvements.

Operational Performance

Revenue reported by Raytheon in the quarter under review was $6.44 billion, up marginally by 0.26% from $6.42 billion in the year-ago period. The top line also surpassed the Zacks Consensus Estimate by $19 million. Full year 2012 sales were $24.4 billion, down 1.5% year over year. However, full-year revenue was above the Zacks Consensus Estimate by $21 million.

In the fourth quarter of 2012, customer demand for advanced technologies and affordable solutions resulted in strong orders. The company reported strong bookings of $7.89 billion versus $7.15 billion in the year-ago period. As of Dec 31, 2012, backlog was $36.18 billion compared with $35.3 billion in the year-ago period.

In the fourth quarter of 2012, total operating expenses were $5.68 billion, up 1.99% year over year. Year-over-year higher operating expenses were not offset by higher revenues. Therefore, total operating income generated by the company in the reported quarter was $755 million, down 11.1% year over year.

Segment Performance

Integrated Defense Systems (IDS): Revenue increased 2.3% year over year to $1.32 billion in the quarter driven by higher sales on a missile defense radar program for an international customer. In the fourth quarter of 2012, the segment received $332 million for the production and sustainment of AN/TPY-2 radars, a $293 million contract to provide technical and logistics support for a Hawk and Patriot air and missile defense program.

It also received a $293 million contract on an Early Warning Surveillance Radar System (EWSRS) support program, a $251 million contract on the Zumwalt-class destroyer program and many other such contracts.

Intelligence and Information Systems (IIS): Segment revenue increased marginally by 0.26% year over year to $755 million in the quarter. The segment received $79.0 million contract on the Joint Polar Satellite System (JPSS) program for NASA and also booked $511.0 million on a number of classified contracts.

Missile Systems (MS): Revenue increased by 4.2% year over year to $1.54 billion. The upside reflects higher sales on the Standard Missile-3 (SM-3) and Rolling Airframe Missile (RAM) programs.

During the fourth quarter of 2012, the segment received $500 million contract for the production of Paveway, $303 million contract for the production and development of Tomahawk and a $175 million contract for Evolved Sea Sparrow Missile (ESSM). The segment also booked a $116 million contract for the Exoatmospheric Kill Vehicle (EKV).

Network Centric Systems (NCS): Revenue decreased only by 0.35% year over year to $1.13 billion in the quarter. During the quarter, the segment received a contract worth $650 million on an international Command, Control, Communications, Computers and Intelligence (C4I) program. It also received an order on the Navy Multiband Terminal (NMT) program worth $82 million.

Space and Airborne Systems (SAS): Revenue of $1.38 billion in the quarter increased 2.7% year over year driven by higher net sales on an international tactical airborne radar program. In the reported quarter, the segment received a contract worth $289 million for an international sensor program and $76 million for the production of the Multi-Platform Radar Technology Insertion Program surveillance system.

Technical Services (TS): Revenue decreased 6.2% year over year to $831 million in the quarter. The year-over-year decline reflects lower net sales on a National Science Foundation (NSF) Polar contract that was completed in the first quarter 2012.

Financial Update

As of Dec 31, 2012, Raytheon had cash and cash equivalents of $3.2 billion, down from $4 billion at the end of Dec 2011. Long-term debt increased to $4.7 billion from the year-end 2011 figure of $4.6 billion.

During the quarter, the company generated operating cash flow from continuing operations of $0.99 billion compared with $1.3 billion for the fourth quarter of 2011.

As a part of a previously announced share repurchase program, the company repurchased 1.8 million shares of common stock for $100 million in the fourth quarter of 2012. For full-year 2012, the company repurchased $15.9 million shares for $825 million.


During the quarter, the company made two important acquisitions: the Government Solutions business of SafeNet Inc. and Teligy, Inc. These acquisitions will help the company to serve the cybersecurity, enterprise architecture, encryption demand and systems engineering needs of its various customers.


Raytheon expects full-year 2013 net sales to be in the range of $23.6–$24.1 billion. The company expects 2013 adjusted earnings per share in the band of $5.65–$5.80. It expects operating cash flow from continuing operations to be in the range of $2 billion to $2.2 billion.

Our Take

Raytheon easily surpassed the Zacks Consensus Estimate. Apart from focusing on share buy backs, the company is playing well on a number of contracts. Going forward, revenue and earnings growth would continue to be driven by its strong and diversified presence in the areas of Intelligence, Surveillance and Reconnaissance (ISR); air traffic management; training and homeland security; and cyber security.

These positives are however offset due to the uncertainty related to the defense budgets, the fate of high-cost programs, risks related to key project executions and order cancellations. The company presently retains a short-term Zacks Rank #3 (Hold).

Other stocks to consider are Lockheed Martin Corporation (LMT - Analyst Report) and FLIR Systems, Inc. (FLIR - Analyst Report) that presently carry a short-term Zacks Rank #2 (Buy) and Alliant Techsystems Inc. (ATK - Analyst Report) that retains a short-term Zacks Rank #1 (Strong Buy).

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