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Raytheon Makes Missile Defense Progress

Raytheon (RTN), the Massachusetts based large defense contractor, is a key contributor to the U.S. missile defense systems. It manufactures the radar and other parts of the Army’s PATRIOT air and missile defense system. It provides the Navy’s STANDARD Missile (SM)-3 interceptor for their AEGIS Weapon System based ship board system and it is heavily involved in Research & Development for the next generation of weapons being planned. Recently it continued this contribution in different ways.

First, it was awarded a contract by the Missile Defense Agency (MDA) to produce more SM-3 missiles for the Navy and select U.S. allies who operate the AEGIS system. The contract modification was for about $285 million and will buy a further 23 SM-3 and associated engineering services and support. These are the Block IA variant of the missile. Raytheon also recently began construction of a new manufacturing facility at Redstone Arsenal, Huntsville, AL to build the SM-3 and the improved version of the STANDARD Missile called the SM-6.

Raytheon also announced that last month it continued testing its new radar for a competition that MDA and the Navy is having to develop a new radar that could ultimately replace the AEGIS’s SPY-1 made by Lockheed Martin (LMT). The Air and Missile Defense Radar (AMDR) will go on the DDG-1000 and DDG-51 destroyers. MDA had awarded contracts to Raytheon, Lockheed and Northrop Grumman (NOC) to do basic development of the radar. Raytheon said that new Gallium Nitrade transmit/receive modules had completed over 1,000 hours of testing in support of the program.

The AMDR will combine S and X band radars for search and fire control. The current AEGIS radar is S band with separate radars that provide illumination and terminal guidance for missile interception. Systems like the Army’s THAAD land based missile defense system utilize a X band radar for its missions. The higher wavelength provides better target discrimination and precision for the high velocity intercepts required by missile defense.

Despite the coming cuts in U.S. defense spending the combination of a new radar and interceptor for U.S. Navy air and missile defense will be developed and produced. The only question is how fast and in what numbers. The MDA is looking at making a land based version of the AEGIS / SM-3 combination and Raytheon has propose that over the years as well. There are also several countries that operate the system for air defense and they could be upgraded to carry out the missile defense mission. Japan already does but countries like Spain and Australia also could. This foreign market could help Raytheon offset U.S. market changes.

The AMDR winner is also looking at steady business for several decades. The AEGIS has been used now for almost forty years from one source. The company that gets the contract for the AMDR at the end of the development phase should expect a similar situation providing a steady stream of revenues and earnings.

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Are Raytheon’s Earnings a Trend or a Aberration?

Raytheon (RTN) released its most recent quarterly earnings statement last week and they showed a decline in year-to-year results. While sales were up slightly at $6.06 billion from $6.05 earnings were down fourteen percent. The company also adjusted its yearly projection down to $4.67 to $4.82 from $4.83 to $4.98. Perhaps a little more ominously backlog went down slightly as well.

The question of course is whether this report is a one time aberration or will it signal a trend that due to decreases in U.S. and Western defense spending the big defense contractors are finally going to see contraction in the market. In this quarter Raytheon is able to point to a charge related to a cancelled British homeland defense IT contract but a major contribution was Integrated Defense Systems decline of nine percent in net sales primarily related to an unidentified U.S. Navy program.

In 2010 adjusted earnings per share for the company were up fifteen percent at $5.58 a share. This was after the company made a discretionary payment to their pension plan of $750 million as. For the last quarter of that year net sales were almost $7 billion. The contrast to the first quarter of 2011 is quite stark.

The U.S. will have to begin reducing defense spending soon. The goal of deficit reduction and control of total spending means that the largest discretionary item will have to take some hits. The end of fighting in Iraq and probably return of some troops from Afghanistan will also reduce operating costs. The Defense Department will also begin turning away from systems used in this fighting to investing in new, advanced weapons to face a more conventional threat.

Raytheon because of its focus on missiles, radars and C4I systems should be able to exploit that market. It has stakes in missile defense through the PATRIOT and Navy programs as well as ship and tactical missile systems. It should maintain its share of the pie although how big a pie remains to be split up among contractors remains to be seen.

Photo from Nevada Tumbleweed’s flickr photostream.

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Raytheon Gets Two Significant Gulf State Contracts

The friendly states in the Persian Gulf have always been good customers of the United States. While they also due to their financial resources have purchased some items from the European defense industry due to ties with former colonial powers they have in recent times turned to the U.S. for their needs. This is especially true in the area of missile defense. Overseas sales have become more important as the expected downturn in U.S. domestic defense spending will require expansion in other areas to make up the revenue.

Raytheon (RTN) has been one of the biggest beneficiaries of this as they make the PATRIOT surface-to-air missile system that also engages ballistic missiles. They also make radars and other components of the larger THAAD system developed by the U.S. Army.

The U.A.E. and Kuwait have invested in PATRIOT and the U.A.E. has also been able to buy THAAD systems. The major concern of course at this time is Iran’s growing military power including short and medium ranged ballistic missiles with the potential for Weapon of Mass Destruction (WMD) warheads.

These nations have also been building up their conventional arms including new aircraft, ships and support equipment. American defense contractors have been able to get some of this business including Boeing (BA) and Lockheed Martin (LMT).

With this in mind Raytheon announced two large contracts this week to these customers.

Kuwait ordered $145 million of new GEM-T PATRIOT missiles to equip their launchers. They also recently received a $20 million technical support contract for the PATRIOT as well.

The Massachusetts based company also signed a contract with Saudi Arabia to provide Paveway guided bomb kits. This contract is worth almost $500 million. The kits add a sensor and guidance fins to a bomb to make it more precise as it homes in on a laser illuminating a target on the ground.

These contracts continue to illustrate the importance of this market to the U.S. defense industry. As long as these states feel threatened they will invest in weaponry. Their economies and political situation also means they will be willing to buy small quantities of advanced systems from across the Globe but with a large amount of sales going to America. Certainly the U.S. government is willing to support these sales and will help influence them if they are able.

Photo from Luhai Wong’s flickr photostream.

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Recent Raytheon Acquistion BBN Awarded Army Contract

In a continuing program to improve the defenses of vehicles in Iraq and Afghanistan the U.S. Army awarded BBN Technologies a contract for another thousand Boomerang Shooter Detection Systems. The contract for these systems and their mounting kits is worth about twenty-two million dollars. The system has already been installed on vehicles and detects incoming fire and tries to determine the location of the enemy.

BBN Technologies was recently acquired by Raytheon. This is a major M&A event and one of several that occurred recently. As with the other ones it may indicate that there will be significant consolidation of the defense industry as the larger companies move to shore up revenue and earnings through M&A.

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BAE Systems To Provide Night Vision Enhancement Systems To U.S. Army

BAE Systems following up on an announcement last week said that they were awarded two separate contracts by the U.S. Army to provide night vision systems and laser modules. The two contracts together are worth over $2 billion dollars. A formal press conference will be held today at their Lexington, MA plant.

The first contract is worth almost two billion itself and is for 338 Driver’s Vision Enhancers (DVE). These are installed on a variety of vehicles in use by the U.S. military to improve driving at night. The second contract is for 1,990 Laser Target Locator Modules (LTLM). These are used to point out targets. Both contracts will last five years.

The DVE contract illustrates that modern electronics are very expensive. Installing one of these on a truck adds tens of thousands of dollars to the cost of that system. It does though add significant capability through improving the ability to drive in reduced visibility.

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Army Buys Thermal Sights From BAE

The U.S. Army awarded BAE a contract to manufacture thermal weapon sights. writes that the contract is worth about $138 million. Over 16,000 systems will be purchased under this contract. The sights are made at the company’s Lexington, MA facility. These thermal sights are used for small arms and support weapons and support operations at night and during reduced visibility. The use of these systems along with night vision goggles gives U.S. troops a significant advantage over opponents as they maximize performance at night. BAE has been successfully selling such systems to the U.S. military for several years.

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Grant Thornton Corporate Finance LLC Releases New Report on Aerospace Component M&A

The Grant Thornton Corporate Finance LLC released a new report on M&A activities within the aerospace industry. It is titled, Sector outperforms: 2008 M&A activity matches prior-year record, the report details recent M&A transactions; discusses market trends and prospects; and reviews activity in the related segments of composites, MRO & distribution and defense systems.

For more information please contact the company. Their website is located here.

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Australia Buys Support for Jet Engines from GE

The Jacksonville Business Journal writes that Australia has awarded a contract worth over $300 million to provide parts, maintenance and overhaul of the engines for their F/A-18 fleet to General Electric. GE has several other of this type of contract with the U.S. armed forces that utilize their engines in a variety of platforms. Even though the contract is with a foreign country the parts will be shipped to the U.S. for work in Jacksonville, FL and Lynn, MA.

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Preparing for the downturn

The Boston Herald writes today about how the various defense companies in Massachusetts are planning for the expected cuts in the defense budget with the end of the fighting in Iraq. While it is certainly expected that the US defense budget will decline beginning in FY09 with either a Republican or Democrat administration, it will probably be slow. The biggest shift will be away from Operations & Maintenance (O&M) funding to more new systems. It will also be interesting to see if the Army and Marines will get smaller after several years of growth. Obviously the biggest player in Massachusetts is Raytheon, they may be cushioned a bit, as they tend to make high-tech weapon and C4ISR systems.

For more see the article “Massachusetts companies brace for wind down in Iraq”.

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Congress protests DDG-100 cancellation

Recently the US Navy announced that it was not going to continue the DDG-100 program. Two ships are under construction by Northrop-Grumman and General Dynamics. Not unexpectedly the Senators from the affected states, mainly Massachusetts and Maine, have protested. See an article here. The major recent the Navy cites is the continued cost growth of the program. The first two were projected at under $4 B each, but now the estimates are over $5.5 B. Other than the shipbuilders, Raytheon is the most affected company as it was building the combat system of sensors for the ship. The Navy intends to continue production of the DDG-51 class instead. Read more

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GD good to Massachusetts

According to this article, GD is rapidly expanding their facility in Pittsfield, MA due to several contracts from DoD. The Advanced Information Systems Division is responsible for developing weapon control systems and other electronic networks for Navy ships. They have recently built a new facility and have created over 140 jobs. This again illustrates how important the DoD budget is in creating high paid, high skilled jobs all over the country.

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Massachusetts thinktank reports state does well from defense

February 3, 2008 by · Comment
Filed under: Federal Budget Process, Massachusetts 

A report by the UMASS Donohue Institute calculates that Massachusetts receives almost $15 B from defense work in 2005. See an article here about this. This kind of puts to bed the lie that George Bush has been punishing the Red states. It also shows the strength of the state’s Congressional delegation.

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