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| RTN > SEC Filings for RTN > Form 10-Q on 23-Oct-2008 | All Recent SEC Filings |
23-Oct-2008
Quarterly Report
Overview
We develop technologically advanced, integrated products, services and solutions in four core defense markets: Sensing; Effects; Command, Control, Communications and Intelligence (C3I); and Mission Support. We serve all branches of the U.S. Military and numerous other U.S. Government agencies, as well as the North Atlantic Treaty Organization (NATO) and many allied governments.
We operate in six business segments: 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). For a more detailed description of our segments, see "Business Segments" within Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2007.
The following discussion should be read in conjunction with our Form 10-K for the year ended December 31, 2007 and our Financial Statements included in this Form 10-Q.
Consolidated Results of Operations
As described in our Cautionary Note Regarding Forward-Looking Statements on page 3 of this Form 10-Q, our interim period results of operations and period-to-period comparisons of such results, particularly at a segment level, may not be indicative of our future operating results. Additionally, we use a fiscal calendar, which may cause the number of workdays in the current and comparable prior interim period to differ and could affect period-to-period comparisons. There were 63 workdays in the third quarters of 2008 and 2007, and 190 workdays in the first nine months of 2008, as compared to 186 workdays in the first nine months of 2007. The following discussions of comparative results among periods should be viewed in this context.
We generally express changes in sales in terms of volume in our discussions of comparative period results. Volume generally refers to increases or decreases in revenues related to varying production activity or service levels on individual contracts. Volume changes will typically drive a corresponding margin change based on the profit rate for a particular contract. We generally express changes in segment operating income in terms of volume or changes in program performance. Segment operating margin reflects the performance on programs and changes in contract mix. Changes in program performance typically relate to profit recognition associated with revisions to total estimated costs at completion that reflect improved or deteriorated operating performance or award fee rates. We record changes in estimates of contract sales, costs and profits using a cumulative catch-up, which recognizes in the current period the cumulative effect of the changes in estimates on current and prior periods.
Three Months Ended % of Net Sales
(In millions, except percentages) Sept. 28, 2008 Sept. 23, 2007 Sept. 28, 2008 Sept. 23, 2007
Net sales $ 5,864 $ 5,219
Gross margin 1,190 1,069 20.3 % 20.5 %
Administrative and selling expenses 380 355 6.5 6.8
Operating income 680 572 11.6 11.0
Interest expense 29 41 0.5 0.8
Interest income 16 42 0.3 0.8
Income from continuing operations 427 380 7.3 7.3
Income (loss) from discontinued
operations, net of tax - (81 ) - -1.6
Net income 427 299 7.3 5.7
Nine Months Ended % of Net Sales
(In millions, except percentages) Sept. 28, 2008 Sept. 23, 2007 Sept. 28, 2008 Sept. 23, 2007
Net sales $ 17,088 $ 15,301
Gross margin 3,485 3,101 20.4 % 20.3 %
Administrative and selling expenses 1,156 1,042 6.8 6.8
Operating income 1,950 1,682 11.4 11.0
Interest expense 97 155 0.6 1.0
Interest income 56 127 0.3 0.8
Income from continuing operations 1,253 1,059 7.3 6.9
(Loss) income from discontinued
operations, net of tax (2 ) 921 - 6.0
Net income 1,251 1,980 7.3 12.9
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The overall increase in sales in the third quarter of 2008 was spread across all segments as discussed below in Segment Results. Sales to the U.S. Department of Defense (DoD) were 83.1% of sales compared to 81.8% of sales in the third quarter of 2008 and 2007, respectively, and total sales to the U.S. Government were 86.7% of sales in the third quarter of 2008 compared to 86.2% of sales in the third quarter of 2007. Included in U.S. Government sales were foreign military sales of $494 million and $446 million in the third quarter of 2008 and 2007, respectively. Total international sales, including foreign military sales, were $1,175 million or 20.0% of sales in the third quarter of 2008 compared to $1,098 million or 21.0% of sales in the third quarter of 2007.
The overall increase in sales in the first nine months of 2008 was spread across all segments as discussed below in Segment Results. Sales to the U.S. DoD were 83.2% of sales compared to 81.1% of sales in the first nine months of 2008 and 2007, respectively, and total sales to the U.S. Government were 87.2% of sales compared to 86.3% of sales in the first nine months of 2008 and 2007, respectively. Included in U.S. Government sales were foreign military sales of $1,341 million and $1,148 million in the first nine months of 2008 and 2007, respectively. Total international sales, including foreign military sales, were $3,341 million or 19.6% of sales in the first nine months of 2008 compared to $3,099 million or 20.3% of sales in the first nine months of 2007.
Gross margin reflects a FAS/CAS Pension Adjustment of $26 million and $67 million of expense in the third quarter of 2008 and 2007, respectively, and $93 million and $192 million of expense in the first nine months of 2008 and 2007, respectively. The FAS/CAS Pension Adjustment, which we report as a separate line item in our segment results, represents the difference between our pension expense or income under Statement of Financial Accounting Standards (SFAS) No. 87, Employers' Accounting for Pensions (SFAS No. 87), and our pension expense under Cost Accounting Standards (CAS). SFAS No. 87 outlines the methodology used to determine pension expense or income for financial reporting purposes, which is not necessarily indicative of the funding requirements for pension plans that we determine by other factors. CAS prescribe the allocation to and recovery of pension costs on U.S. Government contracts and are a major factor in determining our pension funding requirements. Our segment results only include pension expense as determined under CAS that we generally recover through the pricing of our products and services to the U.S. Government.
In accordance with the requirements of SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 87, pension and other postretirement benefit assets and liabilities are valued annually at the end of the year for purposes of determining funded status and future year pension expense. Our long-term return on assets and discount rate assumptions are key variables in making such determinations and are discussed in more detail under "Critical Accounting Estimates" within Item 7 of our Form 10-K for the year ended December 31, 2007. There has been a negative return on pension assets through September 28, 2008 compared to our assumption of a positive annual return of 8.75% at December 31, 2007. If the actual rate of return on our plan assets continues to be below our assumed 8.75% rate of return through December 31, 2008, it would negatively impact our funded status at year-end and increase pension expense in future years. In addition, if the current corporate bond yield environment as of September 28, 2008 continues through December 31, 2008, it may result in a higher discount rate than our discount rate assumption of 6.5% at December 31, 2007 and positively impact our funded status at year-end. The ultimate impact on our future pension expense and funded status will be determined based upon market conditions in effect when we perform our annual valuation for the December 31, 2008 financial statements.
Included in operating income is Corporate and Eliminations. Corporate and Eliminations includes Corporate expenses and intersegment profit eliminations. Corporate expenses represent unallocated costs and certain other corporate costs not considered part of management's evaluation of reportable segment operating performance, including the net costs associated with our residual commuter aircraft portfolio. We describe below the changes in operating income by segment and from Corporate and Eliminations.
The decrease in interest expense in the third quarter of 2008 and the first nine months of 2008 compared to the third quarter of 2007 and the first nine months of 2007 was primarily due to lower average outstanding debt.
The decrease in interest income in the third quarter of 2008 and the first nine months of 2008 compared to the third quarter of 2007 and the first nine months of 2007 was primarily due to a decrease in interest rates.
Included in income from continuing operations was other expense, net of $18 million in the third quarter of 2008 and $9 million in the third quarter of 2007. Included in other expense, net in the third quarter of 2008 was an $18 million loss on investments held in certain rabbi trusts which are used to fund certain of our non-qualified deferred compensation plans. Included in income from continuing operations was other expense, net of $21 million in the first nine months of 2008 and $68 million in the first nine months of 2007. Other expense, net in the first nine months of 2007 included a $59 million loss on the repayment of long-term debt.
The effective tax rate from continuing operations was 34.2% and 32.6% in the third quarter of 2008 and 2007, respectively, and 33.6% and 33.2% in the first nine months of 2008 and 2007, respectively, reflecting the U.S. statutory rate adjusted for various permanent differences between book and tax reporting. The effective tax rate in the third quarter of 2008 was lower than the statutory rate due to manufacturing tax benefits and certain dividend deductions, and was partially offset by various non-deductible expenses. The effective tax rate in the first nine months of 2008 was lower than the statutory rate due to manufacturing tax benefits, certain dividend deductions and tax benefits related to certain refund claims, and was partially offset by various non-deductible expenses. The effective tax rate in the third quarter of 2007 and the first nine months of 2007 was lower than the statutory rate due to manufacturing tax benefits, certain dividend deductions and the research and development tax credit, and was partially offset by various non-deductible expenses. The effective rate in the third quarter of 2008 was 1.6% higher than the third quarter of 2007 primarily due to the expiration of the research and development tax credit in 2007. The effective tax rate in the first nine months of 2008 was 0.4% higher than the first nine months of 2007 primarily due to the research and development tax credit expiration in 2007 partially offset by the tax benefits related to certain refund claims in the first quarter of 2008. On October 3, 2008, the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 was enacted. This legislation retroactively reinstated the research and development tax credit, which had expired in 2007, for 2008. As a result, we will record a benefit of approximately $18 million in the fourth quarter of 2008 representing the benefit of the research and development tax credit for the full year.
Income from continuing operations was $427 million or $1.01 per diluted share on 421.6 million average shares outstanding in the third quarter of 2008 compared to $380 million or $0.86 per diluted share on 443.0 million average shares outstanding in the third quarter of 2007. The increase in income from continuing operations of $47 million in the third quarter of 2008 compared to the third quarter of 2007 was primarily due to $67 million of volume, net of program performance, discussed below in Segment Results, lower FAS/CAS expense of $41 million, and lower interest expense of $12 million, offset by higher taxes of $38 million related primarily to our higher income and lower interest income of $26 million.
Income from continuing operations was $1,253 million or $2.93 per diluted share on 427.2 million average shares outstanding in the first nine months of 2008, as compared to $1,059 million or $2.36 per diluted share on 448.2 million average shares outstanding in the first nine months of 2007. The increase in income from continuing operations of $194 million in the first nine months of 2008 compared to the first nine months of 2007 was primarily due to $169 million of volume, net of program performance, discussed below in Segment Results, lower FAS/CAS expense of $99 million, lower interest expense of $58 million, and lower other expense, net of $47 million primarily related to the loss on repurchases of debt noted above, offset by higher taxes of $108 million related primarily to our higher income and lower interest income of $71 million. Included in the $169 million of volume, net of program performance, in the first nine months of 2008 is a $17 million decrease in Corporate and Eliminations compared to the first nine months of 2007 driven primarily by a decrease in Corporate expenses in the first quarter of 2008.
Included in income (loss) from discontinued operations, net of tax, in the first nine months of 2007 was $986 million related to the gain on sale of Raytheon Aircraft.
Net income decreased in the first nine months of 2008 primarily due to the gain on the sale of Raytheon Aircraft partially offset by increased income from continuing operations as noted above.
Segment Results
Segment financial results were as follows:
Net Sales
Three Months Ended Nine Months Ended
(In millions) Sept. 28, 2008 Sept. 23, 2007 Sept. 28, 2008 Sept. 23, 2007
Integrated Defense Systems $ 1,276 $ 1,147 $ 3,725 $ 3,405
Intelligence and Information
Systems 801 680 2,322 1,934
Missile Systems 1,351 1,247 4,017 3,631
Network Centric Systems 1,145 1,036 3,385 3,017
Space and Airborne Systems 1,092 1,016 3,183 3,045
Technical Services 689 554 1,857 1,531
Corporate and Eliminations (490 ) (461 ) (1,401 ) (1,262 )
Total $ 5,864 $ 5,219 $ 17,088 $ 15,301
Operating Income
Three Months Ended Nine Months Ended
(In millions) Sept. 28, 2008 Sept. 23, 2007 Sept. 28, 2008 Sept. 23, 2007
Integrated Defense Systems $ 206 $ 206 $ 626 $ 617
Intelligence and Information
Systems 67 64 186 182
Missile Systems 145 139 438 393
Network Centric Systems 143 123 411 379
Space and Airborne Systems 147 121 412 383
Technical Services 45 37 125 92
FAS/CAS Pension Adjustment (26 ) (67 ) (93 ) (192 )
Corporate and Eliminations (47 ) (51 ) (155 ) (172 )
Total $ 680 $ 572 $ 1,950 $ 1,682
Funded Backlog(1) Total Backlog
(In millions) Sept. 28, 2008 Dec. 31, 2007 Sept. 28, 2008 Dec. 31, 2007
Integrated Defense Systems $ 4,334 $ 4,781 $ 7,943 $ 9,296
Intelligence and Information
Systems 2,199 2,325 5,518 5,636
Missile Systems 5,514 5,218 9,949 9,379
Network Centric Systems 4,045 3,957 5,498 5,102
Space and Airborne Systems 3,164 3,037 5,246 5,276
Technical Services 1,889 1,200 2,831 1,925
Total $ 21,145 $ 20,518 $ 36,985 $ 36,614
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Bookings(1)
Three Months Ended Nine Months Ended
(In millions) Sept. 28, 2008 Sept. 23, 2007 Sept. 28, 2008 Sept. 23, 2007
Integrated Defense Systems $ 516 $ 1,625 $ 2,603 $ 3,931
Intelligence and Information
Systems 698 1,441 2,493 2,540
Missile Systems 1,098 965 4,671 3,282
Network Centric Systems 1,090 1,034 3,577 3,163
Space and Airborne Systems 1,091 917 2,638 2,184
Technical Services 1,273 341 2,286 1,137
Corporate - 4 22 80
Total $ 5,766 $ 6,327 $ 18,290 $ 16,317
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(1) Bookings in each period are influenced by timing of awards that may cover multiple fiscal years and excludes contract cancellations and terminations and the impact of foreign exchange.
Integrated Defense Systems
Three Months Ended Nine Months Ended
(In millions, except percentages) Sept. 28, 2008 Sept. 23, 2007 % Change Sept. 28, 2008 Sept. 23, 2007 % Change
Net Sales $ 1,276 $ 1,147 11.2 % $ 3,725 $ 3,405 9.4 %
Operating Income 206 206 - % 626 617 1.5 %
Operating Margin 16.1 % 18.0 % 16.8 % 18.1 %
Bookings $ 516 $ 1,625 -68.2 % $ 2,603 $ 3,931 -33.8 %
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Net Sales. The increases in sales of $129 million in the third quarter of 2008, and $320 million in the first nine months of 2008 was primarily due to $91 million and $224 million, respectively, of higher volume from two joint battlefield sensor programs and a U.S. Navy combat systems program.
Operating Income and Margin. Operating income was $206 million in the third quarter of 2008, the same as the third quarter of 2007, which reflects increased volume partially offset by a change in contract mix driven primarily by the completion of certain programs and program performance adjustments. The decline in operating margin was primarily due to this change in contract mix and program performance adjustments. IDS also benefited from the sales of certain software licenses in the third quarter of 2007.
The increase in operating income of $9 million in the first nine months of 2008 was primarily due to increased volume, partially offset by favorable performance adjustments recorded on certain programs in the first nine months of 2007 and the change in contract mix. The decline in operating margin was primarily due to favorable program performance adjustments in the first nine months of 2007 and the change in contract mix.
Backlog and Bookings. Backlog was $7,943 million at September 28, 2008 compared to $9,296 million at December 31, 2007. The decrease in backlog was primarily due to higher bookings in the first nine months of 2007. Bookings in the third quarter of 2008 were $1,109 million lower than the third quarter of 2007, primarily due to a booking of $958 million in the third quarter of 2007 for the production phase of mission support equipment for the two lead Zumwalt-class destroyers for the U.S. Navy.
Bookings in the first nine months of 2008 were $1,328 million lower than the first nine months of 2007, primarily due to bookings in the first nine months of 2007 of $1,187 million for the U.S. Navy's Zumwalt Class Destroyer program and $513 million for certain Patriot programs including an international technical support program, an engineering services support program, the Patriot Pure Fleet program and a Guidance Enhanced Missile-Tactical (GEM-T) upgrade program, partially offset by the Patriot awards described below. In the first nine months of 2008, IDS booked $510 million on certain contracts for the design, development and support of the Patriot system for international customers, including $285 million for South Korea, $140 million for Kuwait and $85 million for Taiwan. IDS also booked $133 million to provide engineering services support for a Patriot air and missile defense program and $143 million for the Rapid Aerostat Initial Deployment (RAID) program, both for the U.S. Army.
Intelligence and Information Systems
Three Months Ended Nine Months Ended
(In millions, except percentages) Sept. 28, 2008 Sept. 23, 2007 % Change Sept. 28, 2008 Sept. 23, 2007 % Change
Net Sales $ 801 $ 680 17.8 % $ 2,322 $ 1,934 20.1 %
Operating Income 67 64 4.7 % 186 182 2.2 %
Operating Margin 8.4 % 9.4 % 8.0 % 9.4 %
Bookings $ 698 $ 1,441 -51.6 % $ 2,493 $ 2,540 -1.9 %
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Net Sales. The increases in sales of $121 million in the third quarter of 2008 and $388 million in the first nine months of 2008 were primarily due to $65 million and $226 million, respectively, of higher volume from an advanced border control and security program.
Operating Income and Margin. The increases in operating income of $3 million in the third quarter of 2008 and $4 million in the first nine months of 2008 were primarily due to increased volume, partially offset by certain acquisition costs and other investments in cyber operations and information security capabilities. The decline in operating margin in the third quarter of 2008 and the first nine months of 2008 was primarily due to the acquisition costs and investments noted above.
Backlog and Bookings. Backlog was $5,518 million at September 28, 2008 compared to $5,636 million at December 31, 2007. Bookings in the third quarter of 2008 were $743 million lower than the third quarter of 2007, primarily due to bookings of $781 million in the third quarter of 2007 on the National Polar-orbiting Operational Environmental Satellite System (NPOESS) program. In the third quarter of 2008, IIS booked $294 million on a number of classified contracts and $119 million on the Consolidated Field Services (CFS) contract to provide support to the U.S. Air Force.
Bookings in the first nine months of 2008 were $47 million lower than the first nine months of 2007. In the first nine months of 2008, IIS booked $1,347 million on a number of classified contracts, including $379 million and $171 million on two major classified programs.
Missile Systems . . . |
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