LEXINGTON, Mass. — Raytheon Co., the No. 3 U.S. defense contractor, cut its earnings forecast for the third time since September as it struggles to digest more than $15 billion in acquisitions.
The company's shares tumbled 25%, the second-largest decline in at least two decades.
Raytheon said production delays on 19 aircraft and higher costs pushed fourth-quarter profit down to 20 cents to 25 cents a share, well below the 59-cent average estimate of analysts surveyed by First Call/Thomson Financial.
Like rival Lockheed Martin Corp., Raytheon has made a string of acquisitions in the last four years to win a bigger share of the shrinking U.S. defense budget. Both companies' profits have plummeted as they cut costs and streamlined operations. The situation isn't likely to improve this year, Raytheon warned.
"Raytheon's financial systems have been unable to handle the complexities brought on by the numerous acquisitions over the past few years," said Keith Patriquin, an analyst with Loomis Sayles & Co., which owns about 250,000 Raytheon shares.
Raytheon also blamed "further erosion in international opportunities" for its missile systems, such as the Patriot program, for the lower profit forecast.
The Lexington, Mass.-based company's Class B shares fell $6.38 to close at $19 on the New York Stock Exchange. The stock has dropped 66% in the last 12 months.
Raytheon's Oct. 12 warning that sales and profit would be less than forecast triggered a 44% stock drop.
"The outlook for Raytheon is dead money for a while," said Todd Ernst, an analyst at Prudential Securities Inc., who has a "hold" rating on the shares. "With a change in the earnings outlook, perhaps they take a look at divesting some non-core businesses."
Raytheon expects to report earnings of $1.15 to $1.20 a share in 1999, less than its earlier forecast of $1.40 to $1.50. Profit for 2000 is forecast at $1.60 to $1.75 a share, down from $2.10 to $2.25, the company said.
"This is part of an ongoing process of cleaning up a company that was sick," said John Hayes, an analyst at Boston-based Independence Investment Associates, which used to own Raytheon shares. "The solution is taking a lot longer at rebuilding this company than people had originally anticipated."
Besides production and shipment delays at its Raytheon Aircraft Co. unit, the company cited higher borrowing and banking costs resulting from a cut in its credit rating in November.
Companies whose ratings have been cut typically have to pay more for credit because of the implied greater risk in debt repayment. Raytheon has about $9.5 billion in debt.
Standard & Poor's Corp. cut Raytheon's corporate credit one notch in November from "BBB" to "BBB-," the lowest investment-grade rating. Moody's Investors Service Inc. reiterated Tuesday that it might cut its rating on Raytheon's debt because of the profit warnings.
"Investors are becoming increasingly concerned that the left hand doesn't know what the right hand is doing," said Robert Friedman, an equity analyst at Standard & Poor's, who has a "hold" rating on Raytheon.
Raytheon 7% bonds due in 2028 declined about 1 3/8 points, or $13.75 per $1,000 bond. The price drop widened the bond's yield spread over Treasuries by about 15 basis points to 177 basis points, traders said.
Raytheon also will restate results for the last three years to reflect a change in how it accounts for some revenue.
It will recognize revenue on all planes based on final delivery to the customer.
The move is expected to change Raytheon's revenue less than 1% and its earnings per share no more than 6 cents. The largest impact will be in the fourth quarter.
With the October warning, the company said it will take a pretax charge of $638 million this year and a $30-million charge next year to cut about 2,000 jobs, close plants, shed assets and write down investments.
Raytheon reorganized its defense-electronics business in November by eliminating a unit that oversees missile and weapons-systems production.
Lockheed Martin, the biggest U.S. defense company, halved its 2000 earnings forecast in October because of increased costs and delayed rocket deliveries.
"It seems to be pretty much localized in these two companies that have been the forerunners in consolidation," said JSA Research analyst Paul Nisbet, who lowered his ratings on Raytheon to "hold" from "buy."
Raytheon plans to release fourth-quarter results Tuesday.