New York, November 28, 2012 -- Moody's Investors Service assigned A3 ratings to the new senior unsecured notes issued by Raytheon Company. Net proceeds from the offering are expected to be utilized to repay about $1 billion of existing notes due 2014-2015, either ahead of or upon their maturity, and for general corporate purposes. "Like others, the company is being both opportunistic and fiscally conservative in pre-funding and extending its debt maturity profile on an economically attractive basis while interest rates remain near historic lows," according to Russell Solomon, Moody's Senior Vice President and lead analyst for the company. The rating outlook remains stable.
Moody's Investors Service maintains the following ratings for Raytheon Company:
Senior Unsecured (domestic currency) ratings of A3
Commercial Paper (domestic currency) ratings of P-2
The A3 senior unsecured rating broadly reflects the company's large size and leading market position in the defense sector. We expect solid annual cash flow generation coupled with maintenance of strong liquidity provisions and key credit metrics in line with other comparably rated defense company peers (i.e., Debt-to-EBITDA of less than 3x, operating margins above 12%, both on a Moody's adjusted basis). Even with anticipated budgetary pressures (and ensuing cuts in outlays) and ongoing pension-related headwinds, Raytheon's outperformance relative to peers should be sustained. Raytheon's importance to the US Department of Defense (DoD) given its critical missile systems and electronic surveillance technologies, along with the perceived competitive barriers to entry, lend further support to the rating. With a technological commonality that tends to be more platform-neutral (i.e.; common interface, less program-specific) than most, the company is expected to be able to better withstand an environment of tighter DoD budgets. Share repurchase activity, while somewhat moderated from previous years, is expected to continue, although within the limits of anticipated free cash flow. Although acquisitions in related businesses are probable and there is some modest capacity within the rating to pursue them, we do not anticipate any sizeable transactions in the near-to intermediate-term.
The stable rating outlook is based largely on Moody's view that Raytheon's current financial profile is sustainable, notwithstanding acknowledged headwinds with respect to defense budgets and pension obligations over the forward period. Moody's anticipates measures of Free Cash Flow-to-Debt and Debt-to-EBITDA will approximate levels evidenced in similarly-rated defense companies.
A higher rating would likely require material incremental improvement in the company's cash flow and leverage metrics, such as Retained Cash Flow-to-Debt of 30% or better and Debt-to-EBITDA of 2x or lower, with maintenance of strong operating margins and solid liquidity. Reduction of the underfunded pension obligation, which has recently accounted for nearly 50% of total adjusted debt, remains a primary opportunity for further debt reduction, albeit likely at the requisite expense of shareholder initiatives given the expected free cash flow profile.
The rating and/or outlook could come under downward pressure if Retained Cash Flow-to-Debt is sustained below 20%, Debt-to-EBITDA is sustained near 3x and/or operating margins drop to single-digit levels. Any outsized shareholder-friendly initiatives (especially if funded with debt) or unexpected adverse developments with respect to liquidity, performance on key contracts, pension obligations and/or litigation could also warrant consideration for potential negative rating action (s).
The principal methodology used in rating Raytheon was Moody's Global Aerospace and Defense Industry Methodology published in June 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Waltham, Massachusetts, Raytheon Company is a prime defense contractor focused on defense and government electronics, space, information technology and technical services, with Missile Systems, Space and Airborne Systems and Integrated Defense Systems representing its largest of six business segments. The company generated approximately $25 billion of revenue over the twelve-month period ended 30 September 2012.
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Russell Solomon Senior Vice President Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael J. Mulvaney MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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