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An interesting article:Raytheon sees lower 1999-2000 profits

By Jeffry Bartash, CBS MarketWatch
Last Update: NewsWatch
Earnings Surprises

NEW YORK (CBS.MW) -- Defense contractor Raytheon slashed earnings estimates
for 1999 and 2000, blaming tougher competition, contract delays and
difficulties arising from the integration of several large acquisitions.

After the stock's nearly day-long trading halt ended, investors immediately
punished the company (RNTB: news, msgs), lopping 18 3/4 off its share price
to 24 1/4, a decline of more than 43 percent. Raytheon's market
capitalization fell about $4.5 billion to $5.8 billion. Other defense stocks
also fell Tuesday.

Raytheon said it will take $638 million in pretax charges in 1999 and $30
million in 2000, up sharply from earlier estimates. The charges relate to
internal restructuring efforts, a writedown in the value of some assets and
problems in fulfilling several big contracts.

As a result, Raytheon said it will now earn between $1.40 and $1.50 a share
in 1999, or $2.70 to $2.80 a share excluding the charges. The company had
been expected to earn $3.56 per share, according to the consensus estimate of
analysts surveyed by First Call.

For 2000, Raytheon said it will earn $2.10 to $2.25 a share, almost 50
percent below the previous consensus estimate of $3.91.

Revenue for 1999, meanwhile, will also fall short of previous projections.
The company said it will post sales of $20 billion, about $600 million less
than originally expected. For this year and next, annual revenue growth will
run about 3 percent, instead of an earlier estimate of 6 percent to 8 percent.

Worse, profit margins in the main defense business will decline to 12 percent
next from the 15 percent the company had been predicting.

"We are frustrated with this performance, but I can assure you we have dug
deeply to understand the issues and are dealing with the problems," said
Daniel P. Burnham, Raytheon's chief executive. "In the end, we will work to
re-establish our credibility and restore investor confidence through deeds,
not words."

Core of the problem

The plunge in Raytheon stock, meanwhile, caps off a deep slide that began
last summer after it touched a 52-week high of 76. And a rebound isn't likely
anytime soon.

"It's going to take awhile for total recovery," said Paul Nisbet of JSA
Research, a brokerage that specializes in defense stocks. "Clearly, this is
not a very pretty picture."

Much of Raytheon's problems stem from a bad case of indigestion -- $15
billion worth. Like other defense companies, Raytheon has been buying other
concerns amid an industrywide consolidation. And like others, such as
Lockheed Martin, it has had trouble integrating those new units.

"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," Burnham said. "In retrospect,
we tried to do too much too fast."

While Raytheon officials say the restructuring problems are largely behind
them, the company will still take $274 million in related charges to further
reduce its work force and shutter more plants, among other things.

"It's just a case of there being too complex a setup, with all the mergers
and acquisitions they had," Nisbet said. "I think they just plain lost

Raytheon will also take a charge of $35 million to write down its investment
in struggling satellite-phone provider Iridium and a charge of $33 million to
write down its wireless network inventory.

Most of the rest of the charges, $320 million, stems from the company's
inability to fulfill several big defense contracts.

The charges have put a further strain on the company's cash flow, raising its
debt to an expected $9.3 billion by year end. This year alone, Raytheon will
pay more than $700 million in interest.

"Clearly, our businesses can and should be large generators of cash, and
anything less is unacceptable performance," Burnham said. "We have taken
immediate action to redirect the entire company to improve our cash
management capability."

What do people think? Yes, I know the back-order situation is bad, and that recently awarded contracts are not in the bag yet. The debt is also a matter of great concern.

But will Dan Burnham turn things around? Even if it takes a while, can it be done?


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