Raytheon Company (RTN)

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See all Bulls Reasons Bulls: Reasons To Buy Geopolitical instability means perpetual need for military modernization 0% agree Geopolitical instability means perpetual need for military modernization Threats from Iran, Russia, North Korea, and others instigate an arms race beyond just the scope of the Iraqi and Afghan wars and cause the perpetual need for military modernization, providing Raytheon with plenty of work. View or Edit Reason 0 votes 0% agree Middle East geopolitics pushes U.S. defense spending to all-time highs 0% agree Middle East geopolitics pushes U.S. defense spending to all-time highs The U.S.'s presence in Iraq and Afghanistan pushes defense spending to all-time highs, fueling Raytheon's balance sheet with a slew of defense electronics and missiles contracts. View or Edit Reason 0 votes 0% agree Raytheon diversifies its contracts better than any of its competitors 0% agree Raytheon diversifies its contracts better than any of its competitors Raytheon diversifies its contracts better than any of its competitors, limiting its exposure to government program cuts and eliminations and making Raytheon a stable, blue chip stock. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell "National deficit, increasing debt will increased cuts in defense spending" 0% agree "National deficit, increasing debt will increased cuts in defense spending" A troublesome national deficit and increasing national debt will cause even Republicans to support cuts in defense spending, withering away at Raytheon's key ally in government. View or Edit Reason 0 votes 0% agree National deficit, increasing debt will increased cuts in defense spending 0% agree National deficit, increasing debt will increased cuts in defense spending A troublesome national deficit and increasing national debt will cause even Republicans to support cuts in defense spending, withering away at Raytheon's key ally in government. View or Edit Reason 0 votes 0% agree Pension plan is a tremendous burden on revenues 0% agree Pension plan is a tremendous burden on revenues The company's pension plan is a tremendous burden on revenues and will limit growth in the future. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Raytheon Company (NYSE: RTN) is the fourth largest U.S. defense contractor ($21.3B revenue in 2007) and has a diverse business mix of attractive products with a focus in electronics. The company specializes in manufacturing radars and elector-optical sensors (airborne, naval and ground based), missiles, satellite sensors, radios and digital communication systems, and missile defense. Raytheon diversifies in smaller subcontracts and relies on international contracts more than any of its competitors. Some of its better known contracts include the DDG - 1000 (the latest Navy Destroyer model), the Tomahawk Cruise Missile, and the Patriot Missile.

Since the terrorist attacks of September 11, the price of Raytheon stock has been on a steady march upward, more than doubling from $24.85 to over $55.00. The company has benefited from the increased government spending on military technology that has accompanied a period of rising geopolitical conflict. The United States government is Raytheon's principal customer, accounting for nearly 80% of total sales. Such heavy reliance on one source for income is softened by the company's strong diversification in small contracts; the loss of one program would not significantly affect the company's business. However, Raytheon is still not immune to political changes. Traditionally, Raytheon has preferred Republican political victories since a Republic-led government has led to increased defense spending. The U.S. government continues to amplify its involvement in defense spending, creating a steady flow of income for Raytheon. Building high-tech weapon and electronics systems is an industry that few can compete in or even afford, creating a significant competitive moat for Raytheon and its competitors. Furthermore, it is in the U.S. government's interest to ensure that each of its contractors turns a profit and produces at the highest technological level, compelling the government to send plenty of contracts Raytheon's way.

Typical of the defense industry, Raytheon must negotiate extremely high operating costs. Not to mention, enormous pension obligations make the company susceptible to changes in the interest rate.

[edit] History and Structure

Headquartered in Waltham, Massachusetts, Raytheon Company was founded in 1922 by two college roommates with a knack for electronics. During World War II, Raytheon began manufacturing radar systems and missiles and became a contractor for the U.S. military.

In the 1980s and 1990s, the company made a host of acquisitions in aviation, electronics, and missile businesses and even tried its hand at the appliance, engineering, and construction markets. Raytheon quickly left the appliance, engineering, and construction markets, and recently sold its private jet aviation businesses, choosing to focus on its role as an electronics and missile specialist for the defense industry. Of the company's acquisitions in the 80s and 90s, its purchase of the defense portion of Hughes Electronics in 1997 has been the greatest contributor to Raytheon's emergence as the fourth largest U.S. defense contractor.

In 2007, the company generated $21.3 billion in revenue and $2.3 billion in operating income (10.8% margin) across six business sectors: Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS), and Technical Services (TS). Raytheon diversifies its business across thousands of contracts and acts primarily as a subcontractor, negotiating to place its systems on aircrafts, ships, and military vehicles. A complete listing of Raytheon's products and services can be found here. Below is a chart of Raytheon's better known programs.

In 2007, Raytheon posted excellent growth numbers: sales were up 8% and earnings per share climbed 26%. 2007 income from continuing operations was higher primarily due to operational improvements, combined with lower pension expense. Increased demand from the U.S. government due to the War in Iraq and War on Terror spear headed growth. Raytheon sold Flight Options and Raytheon Aircraft Company (RAC) in 2007, which together contributed $885 million to 2007 net income. The company ended the year with a record backlog of $36.6 billion, up 8 percent compared to $33.8 billion at the end of 2006. The Company reported full-year 2007 contract bookings of $25.5 billion, up 14 percent compared to 2006, an increase driven primarily by high U.S. military activity and two international multi-year programs, the Australian Air Warfare Destroyer program and the U.K. e-Borders contract^[1].

[edit] Customers

[edit] United States Government

Roughly 78% of Raytheon's revenue comes from the U.S. government. Broken down by military branch, the company is well diversified, with the Navy accounting for 25% of sales, the Army 20%, the Air Force 15%, and other government defense programs representing 17% of sales. Raytheon has facilitated a push by the military branches to be more agile and networked this push by expanding upon its four established areas of expertise: Homeland Security, Missile Defense, Precision Engagement, and Intelligence, Surveillance, & Reconnaissance.

As a leader in missile detection and guidance technology, Raytheon has cemented itself as a key player in developing a ballistic missile defense system for the United States and its allies. With extensive experience in developing precision munitions, missiles, radar systems, and other sensors, Raytheon continues to win contracts in the thousands of smaller programs that combine to form the bulk of the company's business. Cuts in large programs like the production of the F/A-22 have little impact on Raytheon due to its highly limited and specific role in large programs and strong diversification in smaller programs, such as the TOW program which contracts Raytheon to manufacture anti-armor missile weapon systems for Army vehicles.

[edit] Foreign Governments

Foreign governments, particularly U.S. allies, generate approximately 18% of Raytheon's revenue, giving the company the greatest exposure to international sales compared to its peers. Some sectors of the company's business sell more to international customers than others, with missile systems accounting for the bulk of international business. The AMRAAM missile, for example, is a beyond visual range air-to-air missile developed in the 90s that goes on the F-15, F-16, F-18, and several European fighters and generates a significant portion of its revenue abroad.

Recent large orders from Pakistan, Taiwan, Poland, and Chile should help revenue growth of the missile in upcoming years, despite its association with the diminishing F/A-22 fighter program. Furthermore, the Saudi Border Security program and E-Borders in U.K. should be the largest opportunities in 2007 as the company enters the final stages of the selection process for creating a system that analyzes passenger and crew data of incoming and outgoing travelers (E-borders) and a border security system equipped with radars and surveillance aircraft (Saudi).

[edit] Civilian and Non-Federal Organizations

Commercial programs constitute a minuscule 5% of the company's sales. Raytheon specializes in systems engineering work on satellites and other technical services involving electronics and security.

[edit] Trends and Forces

[edit] Government Defense Spending

With the bulk of the company's business coming from contracts awarded by the U.S. government, Raytheon's revenues are very much affected by changes in government defense spending and any turbulence in the company's relationship with the government. Even though no program accounts for more than 4% of total sales--making Raytheon the least vertically aligned of its peers--a general decline in the government's defense budget would surely impact many of the company's programs. Looking ahead, defense spending could flatten out due to pressures from a mounting federal deficit and the eventual withdrawal of troops from Iraq and Afghanistan. Furthermore, the government reserves the right to cut or eliminate any of Raytheon's programs at any time, especially if the program is under-performing or in violation of an agreement. Nonetheless, an arms race with Russia, North Korea or any other U.S. adversary, the perpetual modernization of the military, and the continuing presence of the U.S. in foreign nations will have a positive impact on revenues.

[edit] Foreign Markets

More so than any of its peers, Raytheon depends on foreign government contracts and the appropriate handling of their complexities. A variety of factors must be taken into consideration when the company does business abroad and each of these factors could negatively impact revenues if not properly addressed:

• The difficulty of complying with U.S. and foreign laws, regulations, license agreements, policies and other requirements regarding, among other things, investments, operations, and trade restrictions; fluctuations in foreign currency exchange rates
• The complexity and necessity of using foreign representatives and consultants; uncertainties and restrictions concerning the availability of funding credit or guarantees
• The difficulty of managing and operating an enterprise spread over various countries
• Economic and geopolitical developments and conditions, including acts of terrorism and government reactions, trade relationships, changes in alliances.

Conversely, smooth handling of the complexities combined with any military build up or conflict for U.S. allies, with all other factors held constant, yields an increase in the company's revenues.

[edit] US Politics

Traditionally, Republican control has led to increases in defense spending and Democrat control, decreases. With the Democratic Party taking the majority of both chambers in Congress, there has been some speculation as to what will happen to the defense industry, especially because Democrats have recently been strong advocates for a balanced government budget. Although missile defense, a major contributor to Raytheon's revenue, is a top-priority of the Bush administration, Democrats have indicated that the Missile Defense Agency (MDA) is an area of potential spending cuts. Additionally, defense aerospace spending and its growth rate have already been capped by the Democrats for the fiscal years 2008-2012. That said, it is very likely that Congress will still approve the purchase of additional aircrafts and ships, according to press releases by the Democrat-controlled House Appropriations Committee.

[edit] Pensions

Raytheon has generous pension plans covering the majority of its employees, including certain employees in foreign countries. As the life-expectancy of its employees increases, health care costs rise, and the baby boomer generation begins to retire in bulk, Raytheon must continually adjust its pension plan payment expectations, negatively affecting company revenue. In the last four years alone, the company has averaged $350 million in adjustments each year for the worse. Furthermore, as much of the company's pension funds are in risk free investments, declining interest rates will lower the return on the company's investment and increase its pension costs. Increasing interest rates, however, will lower its pension costs.

[edit] Adaptability

Because Raytheon takes part in a highly technologically driven industry, its ability to predict and adapt to ever-changing market demands has a tremendous impact on the number of contracts it will win. The company's future performance depends heavily on Raytheon identifying emerging technological trends, developing and maintaining competitive products and services that distinguish Raytheon from its competitors, developing, manufacturing and bringing products to market quickly at cost-effective prices, and making strategic alliances and acquisitions that will better position the company in its industry. The company's well-established presence as a top-five player in defense contracts suggests that Raytheon will continue to adapt to its surroundings and win the contracts it eyes.

[edit] Competitors

Raytheon and competitors in the defense and aerospace industry are blessed by unusually high barriers of entry, thus limiting the number of major defense contractors eligible to obtain market presence similar to Raytheon. The company has a superb reputation when it comes to innovations and meeting contract expectations and more, which positions Raytheon to win the smaller, subcontracting deals.

To the highest degree amongst its competitors, Raytheon mitigates its dependence on individual programs by competing as a subcontractor to puts its subsystems on full-scale systems like aircrafts, ships, and vehicles. Of Raytheon's 14,000 contracts, which are about equally divided between cost-plus and fixed-price deals, no single contract accounts for more than 4% of total sales. Raytheon competes primarily with General Dynamics on these smaller systems, while Lockheed Martin, Boeing, and Northrop Grumman use their greater capacity to compete to win the fewer, more lucrative contracts for full-scale systems. The Pentagon could be shifting away from the LSI (Lead System Integrator) concept that caused the company to lose some of its market share to competitors in the 90s, allowing Raytheon to reclaim much of this lost business.

In addition, international sales comprise a greater percentage of Raytheon's revenue than any of its competitors, yielding upswings for the company during tumultuous times for foreign countries like those in Asia and the Middle East with increasing cash reserves.

The recent selling of its under-performing aircraft division leaves Raytheon with no net debt and greater balance sheet flexibility than many of its peers.

 Raytheon Company

	Select All  |  Select None Metrics Revenue by Geography- Latin America Revenue by Geography - Europe Revenue by Geography - Asia Revenue by Geography - Africa Revenue by Geography - International Net Income Operating Income Revenue from the Department of Defense Revenue from Marine Contracts Revenue from Information Systems and Technology Revenue from Commercial Customers Revenue from Non-US Customers Contracts Awarded Bookings Funded R&D Expense Unfunded R&D Expense Revenue Revenue by Geography- United States Revenue from the Government Percentage of Revenue from Department of Defense Revenue from Aerospace Revenue from Integrated Defense Systems Backlog Cancel

	Select All  |  Select None Companies Boeing Company (BA) Raytheon Company (RTN) General Dynamics (GD) Lockheed Martin (LMT) Northrop Grumman (NOC) Cancel

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Company	Data From	Revenue	Revenue by Geography- United States	Revenue from the Government	Percentage of Revenue from Department of Defense	Revenue from Aerospace	Revenue from Integrated Defense Systems	Backlog
Boeing Company (BA)	2007	$66.4B[2]	$39.3B[3]	$26.9B[4]	40.6%[4]	$11.7B[5]	$32.1B[6]	$297B[6]
General Dynamics (GD)	2007	$27.2B[7]	$22.5B[8]	$18.8B[9]	67.7%[9]	$4.83B[8]	Add	$46.8B[10]
Lockheed Martin (LMT)	2007	$41.9B[11]	Add	$40.6B[12]	83.8%[12]	$8.2B[13]	Add	$76.7B[14]
Northrop Grumman (NOC)	2007	$32B[15]	Add	$28.7B[16]	89.6%[16]	$3.13B[17]	Add	$64.1B[18]
Raytheon Company (RTN)	2007	$21.3B[19]	$17.1B[20]	$18.3B[20]	80.8%[21]	$4.29B[22]	$4.7B[22]	$36.6B[23]

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[edit] Notes

1. ↑ Q407 Press Release.
2. ↑ BA, 2007 10-K, Item 8, Page 48
3. ↑ BA, 2007 10-K, Item 8, Page 104
4. ↑ ^{4.0 4.1} BA, 2007 10-K, Item 7, Page 28
5. ↑ BA, 2007 10-K, Item 7, Page 32
6. ↑ ^{6.0 6.1} BA, 2007 10-K, Item 6, Page 18
7. ↑ GD, 2007 10-K, Item 8, Page 36
8. ↑ ^{8.0 8.1} GD, 2007 10-K, Item 8, Page 58
9. ↑ ^{9.0 9.1} GD, 2007 10-K, Item 1, Page 10
10. ↑ GD, 2007 10-K, Item 6, Page 18
11. ↑ LMT, 2007 10-K, Item 8, Page 62
12. ↑ ^{12.0 12.1} LMT, 2007 10-K, Item 8, Page 94
13. ↑ LMT, 2007 10-K, Item 7, Page 45
14. ↑ LMT, 2007 10-K, Item 1, Page 17
15. ↑ NOC, 2007 10-K, Item 8, Page 62
16. ↑ ^{16.0 16.1} NOC, 2007 10-K, Item 6, Page 24
17. ↑ NOC, 2007 10-K, Item 8, Page 79
18. ↑ NOC, 2007 10-K, Item 7, Page 48
19. ↑ RTN, 2007 10-K, Item 8, Page 58
20. ↑ ^{20.0 20.1} RTN, 2007 10-K, Item 8, Page 93
21. ↑ RTN, 2007 10-K, Item 8, Page 93
22. ↑ ^{22.0 22.1} RTN, 2007 10-K, Item 8, Page 91
23. ↑ RTN, 2007 10-K, Item 6, Page 29