|By Business Wire||
|October 19, 2016 05:04 PM EDT|
Fitch Ratings has affirmed Raytheon Company's (RTN) Long-Term Issuer Default Rating (IDR) at 'A-' and Short-Term IDR at 'F2'. The Rating Outlook is Stable. These ratings cover approximately $5.4 billion of debt. See the full list of rating actions at the end of this release.
KEY RATING DRIVERS
RTN's ratings and Outlook are supported by the company's competitive position in the defense industry; good product diversification; large portion of revenues derived from international sales; adequate liquidity; and large backlog. The company's product portfolio is program-agnostic, reducing the risk of large program cuts by the U.S. Department of Defense (DoD). The majority of the company's large programs are well-aligned with DoD priorities.
Fitch views RTN's financial metrics as supportive of the company's ratings, though leverage (debt/EBITDA) is slightly elevated. The company's leverage has deteriorated to approximately 1.5x for the LTM ended July 3, 2016, up from 1.4x at the end of 2014, driven by a slight deterioration in RTN's EBITDA margins. Fitch expects the company's debt level and other credit metrics will be stable over the rating horizon and anticipates RTN's leverage will fluctuate between 1.4x and 1.6x over the next several years.
RTN has good operating discipline and generated solid EBITDA margins in the range of 14.6% to 16.5% over the past four years. The company reported 15.7% EBITDA margins in 2015, down from 16.5% in 2014 primarily due to a change in product mix and lower sales of Patriot programs for international customers. Fitch expects RTN will continue operating with EBITDA margin in the range of 15% to 16% over the rating horizon. In addition, RTN generates strong cash flows. The company's free cash flow (FCF) for the LTM ended July 3, 2016 was approximately $1.7 billion, up from $1.1 billion in 2015, driven largely by lower working capital requirements during the first-half 2016. Fitch estimates RTN will generate more than $1.2 billion FCF (excluding discretionary pension contributions) annually over the rating horizon.
Fitch's rating concerns include RTN's exposure to possible declines in U.S. and international defense spending. The concern is somewhat mitigated by large and increasing international sales and by RTN's demonstrated ability to reduce costs to manage lower revenue expectations. Fitch is also concerned with the impact on cash flows from the pension deficit upon expiration of the Highway and Transportation Funding Act of 2014 (HAFTA) and the completion of FAS/CAS harmonization in 2017. Cash deployment strategies that include increasing dividends and sizable share repurchases are also a concern, as well as the possibility of a sizable acquisition, although Fitch does not expect the company will engage in major acquisition activities in the near future.
RTN spent approximately $940 million on annual net share repurchases and distributed between 85% and 100% of its pre-dividend FCF to shareholders over the past four years. Fitch expects the company will spend approximately $1 billion on share repurchases in 2016. As of July 3, 2016 RTN has repurchased $602 million worth of shares. RTN has increased its dividend payout by an average of 10% annually over the past four years. Fitch expects RTN will maintain its shareholder-friendly cash deployment strategies; however, share repurchases could fluctuate based on available cash after any acquisition activities.
As of Dec. 31, 2015, RTN had a sizable pension deficit of $6.5 billion (74% funded), nearly unchanged from $6.4 billion (76% funded) at the end of 2014. The increase was primarily driven by the decrease in the discount rate and the adoption of updated mortality tables. The domestic pension benefit obligation was $25.4 billion at the end of 2015. Required cash contributions to the company's plans declined significantly in 2015 to $335 million from $650 million in 2014. The decline was primarily driven by HAFTA. RTN expects to make approximately $140 million of required contributions in 2016. Fitch anticipates deterioration in the funded status of the company's pension plans in 2016 due to lower prevailing interest rates and assumes the company will start making up to $500 million of annual discretionary pension contributions beginning 2017.
On May 29, 2015 RTN acquired Websense, Inc. from Vista Equity Partners (Vista) for $1.9 billion in cash and subsequently formed Forcepoint, a cybersecurity joint venture (JV) with Vista. RTN contributed Websense's assets to Forcepoint along with the RTN's existing commercial cyber platform valued at approximately $400 million. Vista invested approximately $343 million for a 19.7% equity stake in the new company. RTN retained cyber products offered to its global defense and intelligence customers.
Fitch views Forcepoint as a credit-neutral, albeit relatively high-risk, venture for the company because of the JV's commercial focus and the potential need for additional acquisitions to build scale to compete with larger enterprise security providers. Most defense contractors have not been successful in diversifying into commercial markets in the past. Additionally, several defense contractors have exited commercial cyberspace market over the past two years.
Vista has the ability to liquidate its ownership in Forcepoint through a put option exercisable at any time two years after May 29, 2015. In the event of a put option exercise, Vista could require RTN to purchase all (but not less than all) of its interest in the JV for cash at a price equal to a fair value of the enterprise as determined under the JV agreement. Additionally, at any time after three years following the closing date, RTN has the option to purchase all (but not less than all) of Vista's interest in Forcepoint at a price equal to a fair value also as determined under the JV agreement.
RTN recognizes Vista's put option as a $343 million redeemable non-controlling interest on its consolidated balance sheet at July 3, 2016. The $343 million was derived from the greater of the estimated redemption value ($343 million) or of the carrying value (estimated at $323 million). Fitch assumes Vista will exercise its put option and it will be in the range of $330 million to $370 million. Fitch recognizes the risk that the cash outlay related to the exercise of the Vista put option may be significantly higher depending on ongoing market valuation of cybersecurity businesses at the time of the put exercise.
U.S. Government Exposure
U.S. government spending trends are key drivers of RTN's financial performance, as the company generated approximately 68% of its 2015 revenues from the U.S. government, mostly from the DoD. As a result, defense spending is a significant driver of RTN's financial performance and credit quality.
Higher U.S. defense spending in fiscal year (FY) 2016 has supported Fitch's credit outlook for the U.S. Aerospace & Defense sector. Investment spending turned upward this year after a three-year trough, and Fitch expects continued solid spending levels in FY2017 and beyond, assuming budget caps are overridden. Although it has not yet been enacted, Fitch views the FY2017 budget request as a good indicator of spending trends. The investment accounts (procurement and R&D) are most relevant to the defense industry, and they have risen solidly from the trough years (FY2013-FY2015). Investment spending in the FY2017 request reaches $184 billion, up from $166 billion in FY2015, although down modestly from FY2016's $188 billion.
Despite higher U.S. defense spending in FY2016 and FY2017, budget caps continue to be a risk. Three agreements between the White House and Congress have provided relief from the Budget Control Act (BCA) of 2011, but projected spending beyond FY2017 is above the budget caps, so caps remain a risk through 2021. Fitch bases its defense ratings on the assumption that the caps will continue to be overridden, but at lower levels than those projected by the government after FY2017
A dramatic and unexpected change in U.S. defense spending policies could negatively impact RTN's credit profile, although Fitch does not see this spending scenario as highly likely. Fitch believes modest declines in defense spending would not necessarily lead to negative rating actions given RTN's current credit metrics, liquidity position and diversified product portfolio. The exposure to the U.S. military spending is also mitigated by the company's international sales at a 32% of total revenues in 2015. Fitch notes, 42% of the RTN's backlog at July 3, 2016 consisted of international programs.
Fitch's key assumptions within the rating case for RTN include:
--Low-single-digit revenue annual growth driven by higher international sales and improving U.S. military spending;
--Steady EBITDA margins in the range of 15% to 16%;
--Combined net share repurchases and dividend payments will be in the range of 70% to 95% of pre-dividend FCF, depending on acquisitions and discretionary pension contributions;
--Post-dividend FCF margin will decline and remain at approximately 3%, down from a historical range of 4% to 5%. Fitch expects FCF margin will decrease due to discretionary pension contributions;
--Capital expenditures will remain steady at 2% of revenues, annually;
--Debt level will remain steady and the company will refinance its maturities;
--The company will reduce share repurchases if it makes material acquisitions;
--Vista will exercise its put option in 2017 and it will be in the range of $330 million to $370 million;
--The company will make bolt-on small- to medium-sized acquisitions up to $500 million annually (Vista put option is included in the $500 million acquisition assumption in 2017);
--The funded status of pension plans will deteriorate in 2016 and the company will start making up to $500 million of annual discretionary pension contributions.
Fitch would consider a negative rating action if the company's leverage (debt to EBITDA) or FFO adjusted leverage deteriorate and remain within the ranges of 1.5x-1.7x and 2.7x-2.9x, respectively, driven by aggressive debt-funded acquisitions, share repurchases, or unsuccessful attempts to reduce costs in line with potential revenue reductions.
A positive rating action is unlikely unless the company modifies its cash deployment strategy which currently returns 85% to 90% of pre-dividend FCF to shareholders in the form of share repurchases and dividends.
At July 3, 2016, RTN had a liquidity position of $4 billion, consisting of $2.7 billion of cash and investments as well as $1.3 billion of credit facility availability. In November 2015 RTN replaced its $1.4 billion revolving credit facilities with a $1. 3 billion RCF that will mature in November 2020. RTN's liquidity declined significantly in 2015 due to cash outlays related to the Websense acquisition. The company maintained approximately $6 billion in liquidity prior to the acquisition, but Fitch expects liquidity will remain at or slightly above $4 billion over the rating horizon.
RTN's capital structure consists of senior unsecured credit facilities and senior unsecured notes. In addition, the company can issue up to $1.3 billion in commercial paper which would be backstopped by the RCF. The next large maturities are in March and December of 2018 when a total of $591 million of senior unsecured notes are due. Fitch believes the company will be able to repay these notes with cash on hand, but refinancing is more likely, as we expect the company will maintain its current leverage.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--IDR at 'A-';
--Senior unsecured debt at 'A-';
--Credit facilities at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.
SYS-CON Events announced today that IoT Now has been named “Media Sponsor” of SYS-CON's 20th International Cloud Expo, which will take place on June 6–8, 2017, at the Javits Center in New York City, NY. IoT Now explores the evolving opportunities and challenges facing CSPs, and it passes on some lessons learned from those who have taken the first steps in next-gen IoT services.
Feb. 19, 2017 06:15 PM EST Reads: 913
SYS-CON Events announced today that WineSOFT will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Based in Seoul and Irvine, WineSOFT is an innovative software house focusing on internet infrastructure solutions. The venture started as a bootstrap start-up in 2010 by focusing on making the internet faster and more powerful. WineSOFT’s knowledge is based on the expertise of TCP/IP, VPN, SSL, peer-to-peer, mob...
Feb. 19, 2017 06:00 PM EST Reads: 1,212
Containers have changed the mind of IT in DevOps. They enable developers to work with dev, test, stage and production environments identically. Containers provide the right abstraction for microservices and many cloud platforms have integrated them into deployment pipelines. DevOps and containers together help companies achieve their business goals faster and more effectively. In his session at DevOps Summit, Ruslan Synytsky, CEO and Co-founder of Jelastic, reviewed the current landscape of Dev...
Feb. 19, 2017 05:45 PM EST Reads: 5,180
SYS-CON Events announced today that delaPlex will exhibit at SYS-CON's @CloudExpo, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. delaPlex pioneered Software Development as a Service (SDaaS), which provides scalable resources to build, test, and deploy software. It’s a fast and more reliable way to develop a new product or expand your in-house team.
Feb. 19, 2017 05:45 PM EST Reads: 760
The security needs of IoT environments require a strong, proven approach to maintain security, trust and privacy in their ecosystem. Assurance and protection of device identity, secure data encryption and authentication are the key security challenges organizations are trying to address when integrating IoT devices. This holds true for IoT applications in a wide range of industries, for example, healthcare, consumer devices, and manufacturing. In his session at @ThingsExpo, Lancen LaChance, vic...
Feb. 19, 2017 05:00 PM EST Reads: 7,977
With billions of sensors deployed worldwide, the amount of machine-generated data will soon exceed what our networks can handle. But consumers and businesses will expect seamless experiences and real-time responsiveness. What does this mean for IoT devices and the infrastructure that supports them? More of the data will need to be handled at - or closer to - the devices themselves.
Feb. 19, 2017 05:00 PM EST Reads: 1,439
You think you know what’s in your data. But do you? Most organizations are now aware of the business intelligence represented by their data. Data science stands to take this to a level you never thought of – literally. The techniques of data science, when used with the capabilities of Big Data technologies, can make connections you had not yet imagined, helping you discover new insights and ask new questions of your data. In his session at @ThingsExpo, Sarbjit Sarkaria, data science team lead ...
Feb. 19, 2017 05:00 PM EST Reads: 7,873
The Internet of Things can drive efficiency for airlines and airports. In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect with GE, and Sudip Majumder, senior director of development at Oracle, discussed the technical details of the connected airline baggage and related social media solutions. These IoT applications will enhance travelers' journey experience and drive efficiency for the airlines and the airports.
Feb. 19, 2017 05:00 PM EST Reads: 754
SYS-CON Events announced today that Dataloop.IO, an innovator in cloud IT-monitoring whose products help organizations save time and money, has been named “Bronze Sponsor” of SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Dataloop.IO is an emerging software company on the cutting edge of major IT-infrastructure trends including cloud computing and microservices. The company, founded in the UK but now based in San Fran...
Feb. 19, 2017 04:15 PM EST Reads: 1,898
Building a cross-cloud operational model can be a daunting task. Per-cloud silos are not the answer, but neither is a fully generic abstraction plane that strips out capabilities unique to a particular provider. In his session at 20th Cloud Expo, Chris Wolf, VP & Chief Technology Officer, Global Field & Industry at VMware, will discuss how successful organizations approach cloud operations and management, with insights into where operations should be centralized and when it’s best to decentraliz...
Feb. 19, 2017 03:45 PM EST Reads: 1,246
In the first article of this three-part series on hybrid cloud security, we discussed the Shared Responsibility Model and examined how the most common attack strategies persist, are amplified, or are mitigated as assets move from data centers to the cloud. Today, we’ll look at some of the unique security challenges that are introduced by public cloud environments. While cloud computing delivers many operational, cost-saving and security benefits, it takes place in a public, shared and on-demand ...
Feb. 19, 2017 02:45 PM EST Reads: 874
In his session at 20th Cloud Expo, Mike Johnston, an infrastructure engineer at Supergiant.io, will discuss how to use Kubernetes to setup a SaaS infrastructure for your business. Mike Johnston is an infrastructure engineer at Supergiant.io with over 12 years of experience designing, deploying, and maintaining server and workstation infrastructure at all scales. He has experience with brick and mortar data centers as well as cloud providers like Digital Ocean, Amazon Web Services, and Rackspace....
Feb. 19, 2017 02:30 PM EST Reads: 2,064
In his session at @ThingsExpo, Sudarshan Krishnamurthi, a Senior Manager, Business Strategy, at Cisco Systems, will discuss how IT and operational technology (OT) work together, as opposed to being in separate siloes as once was traditional. Attendees will learn how to fully leverage the power of IoT in their organization by bringing the two sides together and bridging the communication gap. He will also look at what good leadership must entail in order to accomplish this, and how IT managers ca...
Feb. 19, 2017 02:30 PM EST Reads: 1,036
The financial services market is one of the most data-driven industries in the world, yet it’s bogged down by legacy CPU technologies that simply can’t keep up with the task of querying and visualizing billions of records. In his session at 20th Cloud Expo, Jared Parker, Director of Financial Services at Kinetica, will discuss how the advent of advanced in-database analytics on the GPU makes it possible to run sophisticated data science workloads on the same database that is housing the rich inf...
Feb. 19, 2017 02:15 PM EST Reads: 895
SYS-CON Events announced today that CA Technologies has been named “Platinum Sponsor” of SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY, and the 21st International Cloud Expo®, which will take place October 31-November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. CA Technologies helps customers succeed in a future where every business – from apparel to energy – is being rewritten by software. From ...
Feb. 19, 2017 02:00 PM EST Reads: 877