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| RTN > SEC Filings for RTN > Form 10-Q on 23-Jul-2009 | All Recent SEC Filings |
23-Jul-2009
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, the North Atlantic Treaty Organization (NATO) and many allied governments.
We operate in six segments: Integrated Defense Systems, Intelligence and Information Systems, Missile Systems, Network Centric Systems, Space and Airborne Systems and Technical Services. 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, 2008.
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 and our unaudited consolidated financial statements (Financial Statements) included in this Form 10-Q.
Consolidated Results of Operations
As discussed 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 64 workdays in the second quarters of 2009 and 2008 and 125 workdays in the first six months of 2009 compared to 127 workdays in the first six months of 2008. The following discussions of comparative results among periods should be viewed in this context.
As discussed in Note 1, Basis of Presentation, we prepared the accompanying Financial Statements of Raytheon Company on the same basis as our annual audited Financial Statements, which included the adoption on January 1, 2008 of accounting standards related to the accounting for deferred compensation and postretirement aspects of endorsement split-dollar life insurance agreements and the accounting for collateral assignment split-dollar life insurance arrangements, except for the adoption of new accounting standards in the first six months of 2009 related to the following:
• Noncontrolling interests as discussed in Note 7;
• Fair value measurements as discussed in Note 8;
• Disclosure of derivative instruments and hedging activities as discussed in Note 9;
• The earnings per share (EPS) impact of instruments granted in share-based payment transactions as discussed in Note 11; and
• Business combinations, which we will apply prospectively to business combinations with acquisition dates after January 1, 2009.
In our discussions of comparative period results, we generally express changes in Net sales in terms of volume. 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 Operating income change based on the profit rate for a particular contract. In addition to volume, changes in segment Operating income are based on changes in segment operating margin, which we usually express in terms of program performance and contract mix. Changes in program performance typically relate to profit recognition associated with revisions to total estimated costs or revenues at completion that reflect improved or deteriorated operating performance or award fee rates. We record changes in estimates of contract sales, costs, including indirect cost allocations, 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. Changes in contract mix reflect changes in the composition of our sales from contracts with differing profit rates.
Selected consolidated results were as follows:
Three Months Ended % of Net Sales
(In millions, except percentages) June 28, 2009 June 29, 2008 June 28, 2009 June 29, 2008
Net sales $ 6,125 $ 5,870
Gross margin 1,286 1,206 21.0 % 20.5 %
Administrative and selling expenses 370 396 6.0 6.7
Research and development expenses 151 142 2.5 2.4
Operating income 765 668 12.5 11.4
Interest expense 31 34 0.5 0.6
Interest income (3 ) (17 ) - (0.3 )
Other income, net (13 ) (2 ) (0.2 ) -
Federal and foreign income taxes 246 221 4.0 3.8
Income from continuing operations 504 432 8.2 7.4
(Loss) income from discontinued
operations, net of tax (3 ) - - -
Net income 501 432 8.2 7.4
Less: Net income attributable to
noncontrolling interests 12 6 0.2 0.1
Net income attributable to Raytheon
Company 489 426 8.0 7.3
Six Months Ended % of Net Sales
(In millions, except percentages) June 28, 2009 June 29, 2008 June 28, 2009 June 29, 2008
Net sales $ 12,009 $ 11,224
Gross margin 2,473 2,302 20.6 % 20.5 %
Administrative and selling expenses 734 776 6.1 6.9
Research and development expenses 262 249 2.2 2.2
Operating income 1,477 1,277 12.3 11.4
Interest expense 63 68 0.5 0.6
Interest income (7 ) (40 ) (0.1 ) (0.4 )
Other (income) expense, net (8 ) 3 (0.1 ) -
Federal and foreign income taxes 468 413 3.9 3.7
Income from continuing operations 961 833 8.0 7.4
Income (loss) from discontinued
operations, net of tax - (2 ) - -
Net income 961 831 8.0 7.4
Less: Net income attributable to
noncontrolling interests 20 7 0.2 0.1
Net income attributable to Raytheon
Company 941 824 7.8 7.3
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The overall increase in Net sales in the second quarter of 2009 was primarily due to our Technical Services and Integrated Defense Systems segments as discussed below in Segment Results. Net sales to the U.S. Department of Defense (DoD) were 86% of total Net sales in the second quarter of 2009 compared to 85% of total Net sales in the second quarter of 2008, and Net sales to the U.S. Government were 90% of total Net sales in the second quarter of 2009 compared to 88% of total Net sales in the second quarter of 2008. Included in U.S. Government sales were foreign military sales of $624 million and $449 million in the second quarters of 2009 and 2008, respectively. Total international sales, including foreign military sales, were $1,239 million or 20% of total Net sales in the second quarter of 2009 compared to $1,122 million or 19% of total Net sales in the second quarter of 2008.
The overall increase in Net sales in the first six months of 2009 was spread across all segments, as discussed below in Segment Results. Net sales to the DoD were 85% of total Net sales in the first six months of 2009 compared to 83% of total Net sales in the first six months of 2008, and Net sales to the U.S. Government were 89% of total Net sales in the first six months of 2009 compared to 88% of total Net sales in the first six months of 2008. Included in U.S. Government sales were foreign military sales of $1,194 million and $847 million in the first six months of 2009 and 2008, respectively. Total international sales, including foreign military sales, were $2,393 million or 20% of total Net sales in the first six months of 2009 compared to $2,166 million or 19% of total Net sales in the first six months of 2008.
Gross margin included a FAS/CAS Pension Adjustment of $11 million of income compared to $34 million of expense in the second quarter of 2009 and 2008, respectively, and $22 million of income compared to $67 million of expense in the first six months of 2009 and 2008, 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 U.S. Generally Accepted Accounting Principles (GAAP) and our pension expense under U.S. Government cost accounting standards (CAS). For more information on the FAS/CAS Pension Adjustment, see our discussion below in Segment Results. The results of each segment only include pension expense under CAS that we generally recover through the pricing of our products and services to the U.S. Government.
In accordance with GAAP, 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, 2008. The pro-rated return on assets through June 28, 2009 has approximated our annual return assumption of 8.75% at December 31, 2008. If the actual rate of return on plan assets were to be below our assumed 8.75% rate of return through December 31, 2009, it would negatively impact our funded status at year-end and increase pension expense in future years. If the actual rate of return on plan assets were to be above our assumed rate of return through December 31, 2009, it would positively impact our funded status at year-end and decrease pension expense in future years. The corporate bond yield environment as of June 28, 2009 approximated our discount rate assumption of 6.5% at December 31, 2008. If the actual bond yield environment were to be above our assumed rate through December 31, 2009, it may result in a higher discount rate than our discount rate assumption of 6.5% at December 31, 2008 and positively impact our funded status at year-end. If the actual bond yield environment were to be below our assumed rate through December 31, 2009, it may result in a lower discount rate than our discount rate assumption at December 31, 2008 and negatively impact our funded status at year-end. The ultimate impact on our future pension expense and funded status will be based upon market conditions in effect when we perform our annual valuation for the December 31, 2009 financial statements.
The changes in Operating income by segment are described below in Segment Results.
The decrease in Interest expense in the second quarter and the first six months of 2009 compared to the second quarter and the first six months of 2008 was primarily due to $3 million and $5 million of amortization, in the second quarter of 2009 and the first six months of 2009, respectively, of the $37 million gain on the termination of all our interest rate swap agreements in the first quarter of 2009.
The decrease in Interest income in the second quarter and the first six months of 2009 compared to the second quarter and the first six months of 2008 was primarily due to a decrease in interest rates driven by a shift in our strategy to invest in U.S. Treasury bills.
The increase in Other income, net in the second quarter and the first six months of 2009 was primarily due to gains on investments held in Rabbi Trusts associated with certain of our non-qualified deferred compensation plans.
The effective tax rate from continuing operations was 32.8% and 33.8% in the second quarter of 2009 and 2008, respectively. The effective tax rate in the second quarter of 2009 was 1.0% lower than the second quarter of 2008 primarily due to the research and development tax credit which was not reinstated until the fourth quarter of 2008. The effective tax rate from continuing operations was 32.8% and 33.1% in the first six months of 2009 and 2008, respectively. The effective tax rate in the first six months of 2009 was 0.3% lower than the first six months of 2008 primarily due to the research and development tax credit, partially offset by tax benefits related to certain refund claims. The effective tax rate in the second quarter of 2009 and the first six months of 2009 was lower than the U.S. statutory tax rate due to various permanent differences between book and tax reporting, including manufacturing tax benefits, the research and development tax credit and certain dividend deductions, partially offset by various non-deductible expenses. The effective tax rate in the second quarter of 2008 was lower than the U.S. statutory tax rate due to manufacturing tax benefits and certain dividend deductions, partially offset by various non-deductible expenses. The effective tax rate in the first six months of 2008 was lower than the U.S. statutory tax rate due to manufacturing tax benefits, certain dividend deductions and tax benefits related to certain refund claims, partially offset by various non-deductible expenses.
Income from continuing operations was $504 million and $1.24 per diluted share on 397.3 million average diluted shares outstanding in the second quarter of 2009 compared to $432 million and $0.99 per diluted share on 430.0 million average diluted shares outstanding in the second quarter of 2008. The increase in Income from continuing operations of $72 million in the second quarter of 2009 compared to the second quarter of 2008 was due to $52 million of operational improvements (the change in pre-tax operating income net of the FAS/CAS Pension adjustment) and a $45 million lower FAS/CAS Pension Adjustment, both discussed below in Segment Results, and higher Other income, net of $11 million as discussed above. These were partially offset by $25 million of higher taxes related primarily to our higher income and higher net interest expense of $11 million as discussed above.
Income from continuing operations was $961 million and $2.35 per diluted share on 400.6 million average diluted shares outstanding in the first six months of 2009 compared to $833 million and $1.91 per diluted share on 432.3 million average diluted shares outstanding in the first six months of 2008. The increase in Income from continuing operations of $128 million in the first six months of 2009 compared to the first six months of 2008 was due to $111 million of operational improvements (the change in pre-tax operating income net of the FAS/CAS Pension adjustment) and $89 million lower FAS/CAS Pension Adjustment, both discussed below in Segment Results and higher Other (income) expense, net of $11 million as discussed above. These were partially offset by $55 million of higher taxes related primarily to our higher income and higher net interest expense of $28 million.
Net income was $501 million in the second quarter of 2009 compared to $432 million in the second quarter of 2008. Net income was $961 million in the first six months of 2009 compared to $831 million in the first six months of 2008.
Net income attributable to noncontrolling interests was $12 million in the second quarter of 2009 compared to $6 million in the second quarter of 2008. Net income attributable to noncontrolling interests was $20 million in the first six months of 2009 compared to $7 million in the first six months of 2008.
Net income attributable to Raytheon Company common stockholders was $489 million and $1.23 per diluted share in the second quarter of 2009 compared to $426 million and $0.99 per diluted share in the second quarter of 2008. Net income attributable to Raytheon Company common stockholders was $941 million and $2.35 per diluted share in the first six months of 2009 compared to $824 million and $1.91 per diluted share in the first six months of 2008.
Segment Results
We report our results in the following 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). The following provides some context for viewing the performance of our segments through the eyes of management.
Given the nature of our business, bookings, net sales and operating income (including operating margin percentage), which we disclose and discuss at the segment level, are most relevant to an understanding of management's view of our performance and often these measures have significant interrelated effects as discussed below. In addition, we disclose and discuss backlog, which represents future sales that we expect to recognize over the contract period, which is generally the next several years.
Bookings: We disclose the amount of bookings for each segment and notable contract awards. Bookings generally represent the dollar value of new contracts awarded to us during the reporting period and include firm orders for which funding has not been appropriated. We believe bookings are an important measure of future performance and are an indicator of potential future changes in net sales, since we cannot record revenues under a new contract without first having a booking in the current or preceding period (i.e., a contract award).
Net Sales: We generally express changes in net sales in terms of volume. Volume generally refers to increases or decreases in revenues related to varying amount of costs incurred on individual contracts (i.e., from performance against contractual commitments on our bookings related to engineering, production or service activity). Therefore, we discuss volume changes attributable principally to individual programs unless there is a discrete event (e.g., a major contract termination, natural disaster or major labor strike, etc.), or some other unusual item that has a material effect on changes in a segment's volume for a reported period. Due to the nature of our contracts, the amount of costs incurred and related revenues will naturally fluctuate over the life of the contracts. As a result, in any reporting period, the changes in volume on numerous contracts are likely to be due to normal fluctuations in our production activity or service levels.
Operating Income (and the related operating margin percentage): We generally express changes in segment operating income in terms of volume, changes in program performance or changes in contract mix. Changes in volume discussed in net sales typically drive corresponding changes in our operating income based on the profit rate for a particular contract. 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. Changes in contract mix refer to changes in operating margin due to a change in the relative volume of contracts with higher or lower fee rates such that the overall average margin rate for the segment changes. Because each segment has thousands of contracts, in any reporting period, changes in operating income and margin are likely to be due to normal changes in volume, program performance and mix on many contracts with no single change or series of related changes materially driving a segment's change in operating income or operating margin percentage.
Backlog: We disclose period ending backlog for each segment. Backlog represents the dollar value of contracts awarded for which work has not been performed. Backlog generally increases with bookings and generally converts into sales as we incur costs under the related contractual commitments. We therefore discuss changes in backlog, including any significant cancellations, for each of our segments, as we believe such discussion provides an understanding of the awarded but not executed portion of our contracts.
Segment financial results were as follows:
Three Months Ended Six Months Ended
Net Sales (In millions) June 28, 2009 June 29, 2008 June 28, 2009 June 29, 2008
Integrated Defense Systems $ 1,335 $ 1,257 $ 2,597 $ 2,449
Intelligence and Information Systems 812 829 1,596 1,521
Missile Systems 1,384 1,363 2,752 2,682
Network Centric Systems 1,197 1,173 2,351 2,240
Space and Airborne Systems 1,136 1,072 2,182 2,049
Technical Services 780 647 1,476 1,168
Corporate and Eliminations (519 ) (471 ) (945 ) (885 )
Total $ 6,125 $ 5,870 $ 12,009 $ 11,224
Three Months Ended Six Months Ended
Operating Income (In millions) June 28, 2009 June 29, 2008 June 28, 2009 June 29, 2008
Integrated Defense Systems $ 205 $ 209 $ 393 $ 420
Intelligence and Information Systems 66 67 127 119
Missile Systems 147 158 305 297
Network Centric Systems 170 151 333 275
Space and Airborne Systems 175 141 314 258
Technical Services 53 45 97 80
FAS/CAS Pension Adjustment 11 (34 ) 22 (67 )
Corporate and Eliminations (62 ) (69 ) (114 ) (105 )
Total $ 765 $ 668 $ 1,477 $ 1,277
Three Months Ended Six Months Ended
Bookings (In millions) June 28, 2009 June 29, 2008 June 28, 2009 June 29, 2008
Integrated Defense Systems $ 1,796 $ 981 $ 3,005 $ 2,087
Intelligence and Information Systems 589 776 1,092 1,795
Missile Systems 2,040 1,941 2,815 3,583
Network Centric Systems 783 895 2,017 2,487
Space and Airborne Systems 1,493 809 2,530 1,537
Technical Services 946 595 1,397 1,013
Corporate - 11 - 22
Total $ 7,647 $ 6,008 $ 12,856 $ 12,524
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We record bookings for not-to-exceed contract awards based on a reasonable estimate of expected contract definitization, which will generally not be less than 75% of the award. We subsequently adjust bookings to reflect the actual amounts definitized, or, when prior to definitization, when facts and circumstances indicate our previous estimate is no longer reasonable. The timing of awards that may cover multiple fiscal years influences bookings in each year. Bookings exclude unexercised contract options and potential orders under ordering-type contracts (i.e., indefinite delivery/indefinite quantity (IDIQ) type contracts), and are reduced for contract cancellations and terminations of bookings recognized in the current year. We reflect contract cancellations and terminations from prior year bookings, as well as the impact of changes in foreign exchange rates, directly as an adjustment to backlog in the period in which the cancellation or termination occurs.
Funded Backlog Total Backlog
(In millions) June 28, 2009 Dec. 31, 2008 June 28, 2009 Dec. 31, 2008
Integrated Defense Systems $ 5,776 $ 4,802 $ 10,342 $ 9,883
Intelligence and Information Systems 1,843 1,890 4,678 5,137
Missile Systems 6,288 6,082 7,644 9,937
Network Centric Systems 4,504 4,593 5,558 5,733
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