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Raytheon Company (RTN - Analyst Report) reported first quarter 2013 adjusted earnings of $1.56 per share, beating the Zacks Consensus Estimate of $1.28. Earnings were also higher than the year-ago figure of $1.48 per share.  The upside was driven by strong program execution.

Operational Performance

Reported quarter revenue was $5.9 billion, down approximately 1% year over year. The top-line surpassed the Zacks Consensus Estimate by $175 million. Total backlog at the end of the reported period was $33.5 billion, down 2.2% year over year.

Research and development expenses were down 4.76% year over year to $160 million. Total operating expenses were $5.2 billion, down 1.1% year over year. Operating income during the quarter was $706 million, flat year over year.

Segment Performance

Integrated Defense Systems (IDS): Segment revenue increased 3.5% year over year to $1.26 billion driven by higher sales on a missile defense radar program for an international customer. During the quarter, the segment received a contract worth $208 million to provide advanced Patriot air and missile defense capability. It also received a contract worth $160 million to provide Patriot engineering services support.

Intelligence and Information Systems (IIS): Segment revenue was down 2.7% year over year to $743 million. During the quarter, the segment booked $266 million on a number of classified contracts.

Missile Systems (MS): Segment revenue increased 7.5% year over year to $1.5 billion. The increase was driven by higher sales on the Standard Missile-3 and Rolling Airframe Missile (“RAM”) programs. In first quarter of 2013, the segment booked $156 million for the production of RAM and $85 million on Miniature Air-Launch Decoy.

Network Centric Systems (NCS): Segment revenue decreased 6.9% year over year to $931 million. The decline reflects lower sales on sensor production programs. During the reported quarter, the segment received a $126 million contract on the Wide Area Augmentation System program.

Space and Airborne Systems (SAS): Revenue in the quarter declined 4.1% year over year to $1.2 billion. During the quarter, the segment booked a contract worth $90 million for the production of Active Electronically Scanned Array radars. The segment also booked $184 million on a number of classified contracts.

Technical Services (TS): Revenue fell 5.9% year over year to $755 million. The decline reflects lower net sales on a National Science Foundation Polar contract that was completed in the first quarter of 2012. During the quarter, the segment booked $135 million on foreign training programs and $64 million on domestic training programs in support of Warfighter FOCUS activities.

Financial Update

Raytheon ended the reported period with cash and cash equivalents of $3.1 billion versus $3.5 billion as of Apr 1, 2012. Long-term debt was $4.7 billion versus $4.6 billion at the end of Apr 1, 2012.

The company generated operating cash flow from continuing operations of $422 million billion, significantly up from $111 million in the year-ago quarter. The increase reflects working capital improvements and the timing of tax payments.

As a part of its previously announced share repurchase program, the company repurchased 4.2 million shares for $225 million. Also, during the quarter, Raytheon increased its quarterly dividend by 10%, bringing the annualized dividend to $2.20 per share from the previous payout of $2.00 per share. Following the hike, the company will now pay a quarterly dividend of 55 cents as against the 50 cents paid earlier.

Restructuring

In Mar 2013, Raytheon Company announced that it has decided to reorganize its business through segment realignment, announcement of key executive roles and job cuts. The restructuring would aim to streamline operations, increase productivity and achieve stronger alignment with customers’ preferences. The restructuring will be effective from Apr 1, 2013.

Currently, Raytheon’s operations are classified into six business segments: Integrated Defense Systems, Intelligence and Information Systems, Missile Systems, Network Centric Systems, Space and Airborne Systems, and Technical Services. However, post re-alignment, this number will come down to four.

Intelligence and Information Systems and Raytheon Technical Services businesses will combine to form a new segment called Intelligence, Information and Services. Parts of the Network Centric Systems business will be added to Integrated Defense Systems, Missile Systems, Space and Airborne Systems and the newly formed Intelligence, Information and Services. Therefore, effective Apr 1, 2013, the company began operating through four business segments, namely, Intelligence, Information and Services, Integrated Defense Systems, Missile Systems, and Space and Airborne Systems. It will begin reporting its second quarter 2013 results on the basis of this new structure.

Guidance

Raytheon lowered its 2013 sales guidance to the range of $23.2 billion to $23.7 billion versus its prior expectation in the range of $23.6 billion to $24.1 billion. The company raised its adjusted earnings per share guidance to a range of $5.75 to $5.90 from $5.65 to $5.80 earlier.

The company expects operating cash flow from continuing operations in the range of $2.1 billion to $2.3 billion for full-year 2013.

At the Peers

Recently, Northrop Grumman Corp. (NOC - Analyst Report) reported first quarter 2013 results. Adjusted earnings per share of $1.94 easily surpassed the Zacks Consensus Estimate of $1.73 and the year-ago figure of $1.88. Previously, the world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT - Analyst Report) posted first quarter 2013 adjusted earnings of $2.48 per share, comfortably surpassing the Zacks Consensus Estimate of $2.01 by 23.4%.

Outlook

Raytheon’s top and bottom line results succeeded in surpassing the Zacks Consensus Estimate. Going forward, with its newly realigned segments, effective cash deployment strategy and growing cash flow and operational improvements, we expect the company to continue to do well.

However, we remain concerned about apprehensions over the future growth of the U.S. defense budget, 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).

In the near term, we would advise investors to accumulate its short-term Zacks Rank #1 (Strong Buy) peer FLIR Systems, Inc. (FLIR - Analyst Report).

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