Raytheon Stock Plunges as Firm Warns of Shortfalls
Raytheon Co., buffeted by revenue shortfalls and a profit squeeze, saw its stock lose almost half its value Tuesday after warning that earnings and revenue this year and next will fall far below expectations.
Raytheon’s Class A shares, whose trading was halted for much of the day for reasons related to the announcement, plunged $19.50, or 46.4%, to close at $22.50 on the New York Stock Exchange. Raytheon’s dive dragged other major defense stocks sharply lower Tuesday.
The Lexington, Mass.-based defense and aerospace company slashed its revenue estimates for 1999 to roughly $20 billion, $600 million less than it originally projected, a change it blamed on delays in customer purchase decisions and a shortage of software engineers.
Raytheon said it will take a charge of $638 million for the year ending Dec. 31, 1999. The charge, which does not include a separate $30 million to be incurred in 2000, is far greater than the $350 million to $450 million the company told investors in September that it might incur.
The charge will include $170 million related to “performance issues” on Pentagon contracts, the company said, and $125 million on four contracts at the company’s Engineers & Constructors unit, which is involved with airports, rail lines and the like.
Raytheon also said its recent spate of acquisitions has put a strain on the company.
Raytheon cut its earnings estimates to $1.40 to $1.50 a share for 1999, which includes the charges, down radically from the most recent consensus estimate of $3.56 a share reported by First Call/Thomson Financial. Without the charges, the company said it would earn $2.70 to $2.80 a share. For 2000, Raytheon cut earnings projections to $2.10 to $2.25 a share, down from the consensus forecast of $3.91.
Raytheon said it expects revenue growth to slow to 3% on an annual basis for 1999 and 2000, down from the 6% to 8% a year called for in an earlier estimate. Profit margins at Raytheon Systems Corp., its defense and electronics unit, which accounts for about 75% of revenue, will be about 12% instead of the 15% widely expected.
Raytheon Chief Executive Daniel Burnham told analysts during a marathon conference call that he has been working to reform a culture at Raytheon in which managers tend to think in terms of what they hope to deliver rather than what is realistic. “We’ve told people: ‘Tell us what’s going on here. Don’t hide behind hope,’ ” Burnham said. “This has been clearly a big wake-up call to a lot of people.”
The Pentagon expressed support for the beleaguered 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,” Pentagon spokesman Ken Bacon said Tuesday in response to questions about a Wall Street Journal report that the firm was behind schedule and over cost on several programs including the Tomahawk Cruise Missile and P-3 Orion and RC-135 reconnaissance aircraft. He added, “the vast majority of its programs are on schedule and within cost.”
Analysts were harsh in their assessment of Raytheon’s problems.
“It is as ugly as they come,” analyst William Fiala said. Burnham can’t afford further slip-ups if he expects to keep his job, he said. “He can’t afford any setbacks from here. This has to be the bottom,” Fiala said.
Raytheon said its efficiency efforts have been effective but that they were being neutralized by pricing pressures and narrower-than-forecast margins on usually high-margin foreign business. Raytheon said it has seen a drop-off in its lucrative international business.
Raytheon is in the middle of a restructuring that would cut 15,400 positions by year-end, and the company said Tuesday that 2,380 more jobs will be eliminated. Raytheon now has 108,000 workers worldwide.
But Burnham also said the company was out $170 million in revenue this year because the 5,000 engineers it hired were not enough. “We needed to hire 6,000,” he said.
ING Barings analyst Sam Pearlstein, who downgraded the stock to “hold” from “strong buy,” said in a research note that despite an expected 3% to 5% increase in U.S. defense spending in coming years, performance issues and “management credibility will take time to restore.”
Raytheon had largely avoided the growing pains suffered by its competitors as the industry furiously consolidated after the end of the Cold War, and investors had rewarded the company accordingly until recently, bidding up its Class A shares to high as $75.38 over the last year.
