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More trouble at Raytheon
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October 12, 1999: 7:36 p.m. ET
Stock plunges as defense contractor warns on profit, takes $668M in charges
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NEW YORK (CNNfn) - Defense contractor Raytheon Co. hit investors with a barrage of bad news Tuesday, saying it would take a charge of $638 million this year, almost double an earlier estimate, and then take another $30 million charge in 2000. The company also warned that pricing, profits and revenue growth at the company will all be hit. The news sent the stock of the nation's third largest defense contractor plunging.
Trading in the company's stock was halted for almost the entire day Tuesday as market makers struggled to find an opening price. Raytheon has two issues of stock and both finally opened at 3:34 p.m. down 42 percent from Monday's close, then fell slightly below that level.
Raytheon's lesser traded A stock (RTN.A) opened at 24-14, down from Monday's close of 42, and closed at 22-1/8.
The B stock (RTN.B) opened at 25, off from the close Monday at 43. It closed at 24-1/4. Both stocks are trading at less than one-third of the value of their 52-week highs.
Problems in performance
The company said it will take $320 million in charges related to contract performance, mostly defense contracts. That news was a major concern for analysts.
"First time around they were talking about charges that were purely restructuring, and now about half are operating charges," said Chris Mecray, analyst at Deutsche Banc Alex. Brown. "It indicates some severe problems that are creating a completely different picture at the company than we had been led to believe. It calls into question what's going to happen in following years."
Mecray downgraded the stock Tuesday to a "market perform" from a "buy." He said he thought the stock was near the bottom of pricing and may see a slight rise due to fundamentals, but didn't expect significant improvement from Tuesday's trading levels anytime soon.
Several other analysts also downgraded the stock, sometimes several steps. Sam Pearlstein of ING Barings downgraded the stock to a "hold" rating from a "strong buy" Tuesday.
Earnings take a hit
The defense contractor said its 1999 earnings per share will be between $1.40 and $1.50 per share including a $638 million pretax charge for restructuring and project problems. Excluding the charges, this year's earnings per share will be $2.70 to $2.80, well below Wall Street expectations of $3.56 per share.
For 2000, the company estimates earnings per share will be in the range of $2.10 to $2.25, compared to estimates of $3.91 per share.
Raytheon also warned that revenue will be $20 billion for 1999, about $600 million less than expected. The company had revenue of $19.5 billion last year.
Details on the charges
The company announced a series of restructuring efforts in its divisions in response to problems will cut about 2,400 jobs, most of them in the United States. Of the special charges, $274 million are for those job and space cuts, it said.
Another $74 million in charges is due to the write-down of certain assets, such as the company's investment in the bankrupt satellite-telephone company Iridium ($35 million), wireless networking inventory ($33 million), and its exit from the personal rapid transit business ($6 million).
Delay in sales and aggressive pricing
In a late afternoon conference call Daniel Burnham, Raytheon's chairman and chief executive, said pricing has gotten more competitive and that some orders, such as overseas orders for some defense systems, such as the Patriot Missile, have been pushed back further than expected. He also said that the depth of the problems took some time to discover partly because of turnover in top management of the company.
"We've been digging and digging and digging and the more we digging we did, the more we found," he said.
The company said the drop in revenue is "primarily attributable to delays in procurement decisions and a continuing shortage of software engineers to work on revenue-producing programs. Further, Raytheon believes annual revenue growth for 1999 and 2000 will be approximately 3 percent, instead of its earlier estimate of 6-8 percent per year."
"While Raytheon moved quickly and decisively to consolidate and integrate several new defense electronics businesses into the company's portfolio, this put a tremendous strain on people and systems," said Burnham's warning statement. "In retrospect, we tried to do too much too fast, given the size of the task, our state of readiness, and the depth and maturity of the management team."
In response to a reporter's question, Burnham said it is very unlikely that Raytheon would be sold, despite the problems announced Tuesday.
Raytheon disputes article
Despite the contract performance charges, company officials disputed that a recent review of its programs showed it was having trouble being behind schedule and over cost on defense contracts. A story in the Wall Street Journal Tuesday morning charged there were problems in the high-profile Tomahawk cruise missile and the P-3 Orion intelligence gathering aircraft, which the company denied.
Burnham said that a recent Pentagon review of its performance was generally positive and focused on only 30 of thousands of contracts.
The company got some backing from the Pentagon late Tuesday, as a spokesman there told Reuters that it did not consider Raytheon to be a troubled company.
"We consider Raytheon to be a good and reliable contractor, a contractor that brings considerable expertise and skill to its business and generally performs well. I think the vast majority of its programs are on schedule and within costs."
-- from staff and wire reports
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Raytheon Co.
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