RTX Corporation (RTX)

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10-Q: RAYTHEON CO/

10-Q: RAYTHEON CO/
Last Update: 11:49 AM ET Jul 26, 2007

(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements including information regarding our 2007 financial outlook, future plans, objectives, business prospects and anticipated financial performance including, without limitation, statements regarding the outcome of tax audits and other matters and our provision for tax positions; contributions to our pension plans; potential value of contracts; the impact of environmental contingencies, government investigations and other claims and legal proceedings; other entities satisfying their obligations which we have guaranteed; use of capital, including the proceeds from the sale of Raytheon Aircraft Company; expected capital and internal use software expenditures; compliance with debt covenants; funding for our operating, capital expenditure, and debt service requirements; and our exposure to changes in foreign exchange rates. You can identify these statements by the fact that they include words such as "will," "believe," "anticipate," "expect," "estimate," "intend," "plan," "outlook" or variations of these words, or similar expressions. These forward-looking statements are not statements of historical facts and represent only our current expectations regarding such matters. These statements inherently involve a wide range of known and unknown uncertainties. Our actual actions and results could differ materially from what is expressed or implied by these statements. Factors that could cause such a difference include, but are not limited to, those set forth under Item 1A. "Risk Factors" in our 2006 Annual Report on Form 10-K and other important factors disclosed previously and from time to time in our other filings with the Securities and Exchange Commission. Given these factors, as well as other variables that may affect our operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance, nor use historical trends to anticipate results or trends in future periods. We expressly disclaim any obligation or intention to provide updates to the forward-looking statements and the estimates and assumptions associated with them.

Overview

Raytheon Company, and its subsidiaries, is one of the world's largest defense contractors serving all branches of the U.S. military and other U.S. government agencies, the North Atlantic Treaty Organization (NATO) and many allied governments on every continent. We develop and provide technologically advanced, integrated products, services and solutions in our core defense markets:

As discussed in more detail below, in the second quarter of 2007 we completed the sale of Raytheon Aircraft.

We operate in six principal 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 2006 Annual Report on Form 10-K.
The following discussion should be read along with our 2006 Annual Report on Form 10-K and with the unaudited condensed consolidated financial statements included in this Form 10-Q.

Consolidated Results of Operations

As noted above in our Cautionary Note Regarding Forward-Looking Statements, our results of operations of an interim period, and period-to-period comparisons of such results, particularly at a segment level, may not be indicative of our future operating results. The following discussions of comparative results among periods should be viewed in this context. In addition, in our discussions of comparative results, changes in sales are typically expressed in terms of volume. Volume generally refers to increases (or decreases) in revenues incurred due to varying production activity levels, delivery rates or service levels on individual contracts. Volume changes will typically carry a corresponding margin change based on the margin rate for a particular contract. Segment operating margin reflects the performance of segment contracts and programs. In addition, in our discussions of comparative results, changes in segment operating margin are typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract margin rates. These changes typically relate to profit recognition associated with revisions to total estimated costs at completion of the contract that reflect improved (or deteriorated) operating or award fee performance on a particular contract. Changes in estimates of contract sales, costs and profits are recognized using a cumulative catch-up which recognizes in the current period the cumulative effect of the changes on current and prior periods.

Net sales were $5.4 billion in the second quarter of 2007 versus $5.0 billion in the second quarter of 2006. The increase in sales was primarily due to higher sales at NCS, IDS and MS. Sales to the U.S. Department of Defense (DoD) were 77% of sales in the second quarter of 2007 and 2006. Total sales to the U.S. government were 83% of sales in the second quarter of 2007 versus 85% of sales in the second quarter of 2006. Included in U.S. government sales were foreign military sales of $362 million and $295 million in the second quarter of 2007 and 2006, respectively. Total international sales, including foreign military sales, were $1,072 million or 20% of sales in the second quarter of 2007 versus $878 million or 18% of sales in the second quarter of 2006. Net sales in the first six months of 2007 were $10.3 billion versus $9.6 billion in the first six months of 2006. The increase in sales was primarily due to higher sales at NCS, MS and IDS. Sales to the DoD were 79% of sales in the first six months of 2007 versus 77% of sales in the first six months of 2006. Total sales to the U.S. government were 84% of sales in the first six months of 2007 and 2006. Included in U.S. government sales were foreign military sales of $702 million and $603 million in the first six months of 2007 and 2006, respectively. Total international sales, including foreign military sales, were $1,988 million or 19% of sales in the first six months of 2007 versus $1,723 million or 18% of sales in the first six months of 2006.

Gross margin, net sales less cost of sales, in the second quarter of 2007 was $1,093 million or 20.2% of sales versus $941 million or 18.9% of sales in the second quarter of 2006. Included in gross margin was the FAS/CAS Pension Adjustment, described below, of $63 million and $96 million of expense in the second quarter of 2007 and 2006, respectively. Gross margin in the first six months of 2007 was $2.0 billion or 19.7% of sales versus $1.8 billion or 18.6% of sales in the first six months of 2006. Included in gross margin was the FAS/CAS Pension Adjustment of $125 million and $181 million of expense in the first six months of 2007 and 2006, respectively.

The FAS/CAS Pension Adjustment represents the difference between our pension expense or income under Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions (SFAS No. 87), and our pension expense under Cost Accounting Standards (CAS) and is reported as a separate line item in our segment results. 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 of pension plans that are determined by other factors. CAS prescribes the allocation to and recovery of pension costs on U.S. government contracts and is a major factor in determining pension funding requirements. The results for each segment only include pension expense as determined under CAS that can generally be recovered through the pricing of products and services to the U.S. government.

Administrative and selling expenses were $367 million or 6.8% of sales in the second quarter of 2007 versus $345 million or 6.9% of sales in the second quarter of 2006. Administrative and selling expenses were $707 million or 6.8% of sales in the first six months of 2007 versus $664 million or 6.9% of sales in the first six months of 2006.

Research and development expenses were $138 million or 2.5% of sales in the second quarter of 2007 versus $135 million or 2.7% of sales in the second quarter of 2006. Research and development expenses were $235 million or 2.3% of sales in the first six months of 2007 versus $236 million or 2.4% of sales in the first six months of 2006.

Operating income was $588 million or 10.9% of sales in the second quarter of 2007 versus $461 million or 9.3% of sales in the second quarter of 2006. Operating income was $1,098 million or 10.6% of sales in the first six months of 2007 versus $894 million or 9.3% of sales in the first six months of 2006. The changes in operating income by segment are discussed below in Segment Results.

Interest expense in the second quarter of 2007 was $54 million versus $68 million in the second quarter of 2006. Interest expense in the first six months of 2007 was $114 million versus $137 million in the first six months of 2006. The decrease in interest expense in the second quarter of 2007 and the first six months of 2007 was primarily due to lower average debt and a lower weighted-average cost of borrowing.

Interest income in the second quarter of 2007 was $57 million versus $13 million in the second quarter of 2006. Interest income in the first six months of 2007 was $85 million versus $34 million in the first six months of 2006. The increase in interest income in the second quarter of 2007 and the first six months of 2007 was due to a higher average cash balance as a result of the proceeds from the sale of Raytheon Aircraft.

Other expense (income), net in the second quarter of 2007 was $56 million of expense versus $13 million of income in the second quarter of 2006. Other expense (income), net in the first six months of 2007 was $59 million of expense versus $39 million of income in the first six months of 2006. Other expense, net in the second quarter of 2007 and the first six months of 2007 included a $59 million loss on the repurchase of long-term debt. Other income, net in the second quarter of 2006 and the first six months of 2006 included a $34 million favorable adjustment resulting from the settlement of a class action lawsuit filed in 2003. Other income, net in the first six months of 2006 also included a $21 million gain on the sale of Space Imaging (in which we had an investment).

The effective tax rate from continuing operations was 33.5% and 34.1% in the second quarter of 2007 and 2006, respectively, reflecting the U.S. statutory rate adjusted for various permanent differences between book and tax reporting. The effective tax rate from continuing operations was 33.7% and 34.0% in the first six months of 2007 and 2006, respectively, reflecting the U.S. statutory rate adjusted for various permanent differences between book and tax reporting.

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The effective tax rate in the second quarter of 2007 and the first six months of 2007 was reduced by manufacturing tax benefits, ESOP dividend deductions and the research tax credit, and was increased by various non-deductible expenses. The effective tax rate in the second quarter of 2006 and the first six months of 2006 was reduced by manufacturing tax benefits, ESOP dividend deductions, and export-related tax benefits, and was increased by various non-deductible expenses. The effective tax rate excludes state taxes. The provision for state income taxes is generally accounted for as deferred contract costs and included in contracts in process until allocated to our contracts, as these costs can generally be recovered through the pricing of products and services to the U.S. government.

Income from continuing operations was $356 million in the second quarter of 2007, or $0.79 per diluted share on 448.8 million average shares outstanding versus income from continuing operations of $276 million in the second quarter of 2006, or $0.61 per diluted share on 450.9 million average shares outstanding. Income from continuing operations was $670 million in the first six months of 2007, or $1.49 per diluted share on 451.0 million average shares outstanding versus $548 million in the first six months of 2006, or $1.22 per diluted share on 450.3 million average shares outstanding.

Income from discontinued operations, net of tax, as discussed below in Discontinued Operations, was $979 million or $2.18 per diluted share in the second quarter of 2007 versus $34 million or $0.08 per diluted share in the second quarter of 2006.

Income from discontinued operations, net of tax, was $1,011 million or $2.24 per diluted share in the first six months of 2007 versus $49 million or $0.11 per diluted share in the first six months of 2006. Included in income from discontinued operations, net of tax, in the second quarter of 2007 and first six months of 2007 was $986 million related to the gain on sale of Raytheon Aircraft. (Loss) income from discontinued operations, net of tax, in the second quarter of 2007 and 2006 was $7 million of expense and $34 million of income, respectively. Income from discontinued operations, net of tax, in the first six months of 2007 and 2006 was $25 million and $49 million, respectively. The sale of Raytheon Aircraft was completed on March 26, 2007, the first day of the second quarter.

Net income in the second quarter of 2007 was $1,335 million, or $2.97 per diluted share versus net income of $310 million, or $0.69 per diluted share in the second quarter of 2006. Net income in the first six months of 2007 was $1,681 million, or $3.73 per diluted share versus $597 million, or $1.33 per diluted share in the first six months of 2006.


Segment Results
Net Sales Net Sales
Three Months Ended Six Months Ended
(In millions) June 24, 2007 June 25, 2006 June 24, 2007 June 25, 2006
Integrated Defense Systems $ 1,166 $ 1,038 $ 2,258 $ 2,001
Intelligence and Information Systems 666 633 1,254 1,244
Missile Systems 1,244 1,117 2,384 2,106
Network Centric Systems 1,052 880 1,981 1,671
Space and Airborne Systems 1,065 1,057 2,029 2,075
Technical Services 473 466 899 916
Other 217 202 398 392
Corporate and Eliminations (464 ) (420 ) (856 ) (772 )
Total $ 5,419 $ 4,973 $ 10,347 $ 9,633
Operating Income Operating Income
Three Months Ended Six Months Ended
(In millions) June 24, 2007 June 25, 2006 June 24, 2007 June 25, 2006
Integrated Defense Systems $ 212 $ 177 $ 411 $ 335
Intelligence and Information Systems 63 58 118 113
Missile Systems 134 122 254 232
Network Centric Systems 139 91 256 175
Space and Airborne Systems 133 152 262 297
Technical Services 29 30 50 61
Other 1 (10 ) (7 ) (23 )
FAS/CAS Pension Adjustment (63 ) (96 ) (125 ) (181 )
Corporate and Eliminations (60 ) (63 ) (121 ) (115 )
Total $ 588 $ 461 $ 1,098 $ 894


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Backlog consisted of the following at:

Funded Backlog(1) Total Backlog
(In millions) June 24, 2007 Dec. 31, 2006 June 24, 2007 Dec. 31, 2006
Integrated Defense Systems $ 3,879 $ 4,088 $ 7,958 $ 7,934
Intelligence and Information Systems 877 893 3,615 3,935
Missile Systems 5,071 5,135 9,356 9,504
Network Centric Systems 4,031 4,037 5,328 5,059
Space and Airborne Systems 2,968 2,770 5,115 5,591
Technical Services 996 1,020 1,701 1,572
Other 245 243 245 243
Total $ 18,067 $ 18,186 $ 33,318 $ 33,838


Gross Bookings(1)
Three Months Ended Six Months Ended
(In millions) June 24, 2007 June 25, 2006 June 24, 2007 June 25, 2006
Integrated Defense Systems $ 1,050 $ 850 $ 2,306 $ 1,704
Intelligence and Information Systems 564 784 1,099 1,141
Missile Systems 1,005 1,188 2,317 2,420
Network Centric Systems 1,165 639 2,129 1,562
Space and Airborne Systems 790 730 1,267 1,950
Technical Services 195 446 740 641
Other 204 200 397 386
Total $ 4,973 $ 4,837 $ 10,255 $ 9,804


Integrated Defense Systems
Three Months Ended Six Months Ended
($ in millions) June 24, 2007 June 25, 2006 % Change June 24, 2007 June 25, 2006 % Change
Net Sales $ 1,166 $ 1,038 12.3 % $ 2,258 $ 2,001 12.8 %
Operating Income 212 177 19.8 % 411 335 22.7 %
Operating Margin 18.2 % 17.1 % 18.2 % 16.7 %
Gross Bookings $ 1,050 $ 850 23.5 % $ 2,306 $ 1,704 35.3 %


Net Sales. The increase in sales in the second quarter of 2007 of $128 million was primarily due to volume growth of $43 million on a U.S. Navy combat systems program, $37 million on a joint battlefield sensor program and $29 million on several domestic and international missile defense programs.

The increase in sales in the first six months of 2007 of $257 million was primarily due to volume growth of $68 million on several international and domestic missile defense programs, $64 million on a U.S. Navy combat systems program and $53 million on a joint battlefield sensor program.

Operating Income and Margin. The increase in operating income of $35 million and margin improvement in the second quarter of 2007 were primarily due to higher volume and program performance improvements of $20 million on several domestic and international missile defense programs and $13 million on a U.S. Navy combat systems program.

The increase in operating income of $76 million and margin improvement in the first six months of 2007 were primarily due to higher volume and program performance improvements of $31 million on several international missile defense programs, $20 million on several domestic missile defense programs and $16 million on a U.S. Navy combat systems program.

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Bookings. During the quarter, IDS booked $298 million to provide system and software engineering for the Ballistic Missile Defense System (BMDS) program, $146 million related to the renewal of an international Patriot technical support contract and $113 million for the continued design, production, integration, and testing of Cobra Judy Replacement Mission Equipment (CJRME).

Intelligence and Information Systems
Three Months Ended Six Months Ended
($ in millions) June 24, 2007 June 25, 2006 % Change June 24, 2007 June 25, 2006 % Change
Net Sales $ 666 $ 633 5.2 % $ 1,254 $ 1,244 0.8 %
Operating Income 63 58 8.6 % 118 113 4.4 %
Operating Margin 9.5 % 9.2 % 9.4 % 9.1 %
Gross Bookings $ 564 $ 784 -28.1 % $ 1,099 $ 1,141 -3.7 %


Net Sales. The increase in sales in the second quarter of 2007 of $33 million was primarily due to increased activities on several programs with the U.S. Air Force as well as growth in certain classified programs.
Sales for the first six months of 2007 were relatively consistent with 2006.

Operating Income and Margin. Operating income and margin in the second quarter of 2007 and first six months of 2007 remained relatively consistent with the same periods in 2006.
Bookings. During the quarter, IIS booked $332 million on a number of classified contracts, including $157 million on a major classified contract.

Missile Systems
Three Months Ended Six Months Ended
($ in millions) June 24, 2007 June 25, 2006 % Change June 24, 2007 June 25, 2006 % Change
Net Sales $ 1,244 $ 1,117 11.4 % $ 2,384 $ 2,106 13.2 %
Operating Income 134 122 9.8 % 254 232 9.5 %
Operating Margin 10.8 % 10.9 % 10.7 % 11.0 %
Gross Bookings $ 1,005 $ 1,188 -15.4 % $ 2,317 $ 2,420 -4.3 %


Net Sales. The increase in sales in the second quarter of 2007 of $127 million was primarily due to $84 million of higher volume on the Standard Missile, AIM-9X and Phalanx programs.
The increase in sales in the first six months of 2007 of $278 million was primarily due to $214 million of higher volume on the Standard Missile, Phalanx and Advanced Medium-Range Air-to-Air Missile (AMRAAM) programs.

Operating Income and Margin. The increase in operating income of $12 million in the second quarter of 2007 and $22 million in the first six months of 2007 was primarily due to increased volume.

Bookings. During the quarter, MS booked $175 million for the production of AMRAAM for the U.S. Air Force. MS also booked $105 million for additional development on the Rolling Airframe Missile program for the U.S. Navy and $91 million for the production of Standard Missile-3.

Network Centric Systems
Three Months Ended Six Months Ended
($ in millions) June 24, 2007 June 25, 2006 % Change June 24, 2007 June 25, 2006 % Change
Net Sales $ 1,052 $ 880 19.5 % $ 1,981 $ 1,671 18.6 %
Operating Income 139 91 52.7 % 256 175 46.3 %
Operating Margin 13.2 % 10.3 % 12.9 % 10.5 %
Gross Bookings $ 1,165 $ 639 82.3 % $ 2,129 $ 1,562 36.3 %


Net Sales. The increase in sales in the second quarter of 2007 of $172 million and the increase in sales in the first six months of 2007 of $310 million were primarily due to growth in certain U.S. Army programs including an integrated ground combat surveillance program, a weapon locating radar program and increased production on the Improved Target Acquisition System program.

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Jul 26, 2007
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