Fitch Expects to Rate Raytheon's New Unsecured Notes 'A-'

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to rate Raytheon Company's (RTN) $1 billion of new unsecured notes 'A-'. Proceeds will be used mainly for discretionary pension contributions, but also for general corporate purposes. RTN's credit metrics and liquidity will remain consistent with the current ratings after the new debt is issued, but the current cushion to withstand negative developments at the 'A-' level will be reduced. Fitch notes that with today's transaction RTN's balance sheet debt will double from 2009 levels.

RTN's existing ratings are listed at the end of this release. The Rating Outlook is Stable. These ratings cover approximately $3.6 billion of outstanding debt, which will rise to approximately $4.6 billion after today's issuance.

Factors supporting the ratings include the company's competitive position in the defense industry, high levels of U.S. defense spending, international revenue growth, and a large backlog. The company's healthy credit metrics, financial flexibility, and liquidity also support the ratings. Concerns center on uncertainty about core U.S. defense spending beyond fiscal 2012; the pension deficit; large share repurchases; and to a lesser extent some pending legal issues.

For a negative rating action to be considered there would likely need to be a dramatic change in U.S. defense spending policies, poor execution on a number of key contracts, and/or a major change in the company's financial strategy. A positive rating action is unlikely in the near term given the company's cash deployment actions and the current uncertainty surrounding U.S. defense spending.

High levels of defense spending currently support RTN's ratings, but the Department of Defense (DoD) budget environment is highly uncertain after fiscal year (FY) 2012 because of large U.S. government budget deficits and the potential for large, automatic spending cuts beginning in fiscal 2013. RTN generated 85% of its revenues in 2010 from the U.S. DoD, (including foreign military sales [FMS]). Fitch believes that modest declines in defense spending would not lead to negative rating actions given RTN's current credit metrics, liquidity position, and diversified product portfolio.

The end of the 'Supercommittee' negotiations without an agreement increases the probability of Fitch's harshest DoD spending scenario ('sequestration'), but Fitch expects less severe and/or more orderly spending scenarios are possible because Congress could act to avoid or modify sequestration's automatic cuts beginning in January 2013. Fitch estimates that DoD spending reductions in the sequestration scenario would total nearly $1 trillion over 10 years. In Fitch's view, the most negative element of this scenario is an estimated 12%-13% decline in spending in fiscal 2013, which Fitch understands would be made across the board without consideration of program health or national security priorities.

Cuts in the sequestration scenario could affect RTN's credit profile, but the actual impact would depend on the timing of the cuts, RTN's cash deployment strategy, and the amount of growth realized in non-U.S. markets. If cuts were spread out or weighted toward the end of the period, RTN could have time to adjust its cost base to the lower revenue levels, but debt and pension obligations would be more difficult to reduce.

While defense spending in the U.S. is under pressure, RTN has grown the percentage of non-U.S. defense business in its revenue mix over the past few years. International sales in 2010 were $5.8 billion, or 23% of sales, and rose 10% versus 2009. International sales in 2011 are expected to be 25% of total sales. At the end of 2010, international orders accounted for 33% of RTN's total backlog.

The company's domestic pension plans were 81% funded at the end of 2010 ($3.3 billion deficit) based on a projected benefit obligation of $17.8 billion. Required cash funding is substantial, estimated at approximately $1 billion for each of the next two years. Government contract reimbursement offsets some of the required funding, so net cash funding over 2011 and 2012 combined should be about $500 million-$600 million. Given financial market performance this year and the low interest rate environment, it is likely that RTN's funding position could further deteriorate by the end of 2011.

As of Oct. 2, 2011, RTN had a liquidity position of $3.9 billion, consisting of $2.4 billion of cash and $1.5 billion of credit facility availability. RTN's credit facilities consist of a $500 million revolver which expires in November 2012 and a $1 billion revolver which also matures in November 2012. The company has no debt maturities until 2015.

For the latest 12 months (LTM) ending Oct. 2, 2011, RTN's gross leverage (debt to EBITDA) was 1.1 times (x) compared to 1.2x in 2010 and 0.7x in 2009. Leverage increased in 2010 because a large debt issuance raised outstanding debt by roughly 50%. Interest coverage was 21.4x for the LTM period compared with 24x in 2010. Fitch notes that the 2010 calculations include a $395 million adjustment for the termination of the e-Borders contract.

Free cash flow (FCF; cash from operations less capital expenditures and dividends) for the LTM period was only $651 million because of timing issues in the first half of 2011 and a $750 million discretionary pension contribution in late 2010. FCF was $1 billion in 2010, down from $1.9 billion in 2009 because of the discretionary pension contribution in 2010 and a $350 million tax refund in 2009. Fitch estimates that RTN will typically generate more than $1 billion of annual FCF.

Share repurchases have been a significant use of cash in the past several years, and Fitch expects this to continue. The company spent $1.45 billion on share repurchases in 2010 and $937 million in the first three quarters of 2011. Fitch's cash deployment expectations also include continued dividend increases, spending for bolt-on acquisitions, and discretionary pension contributions.

Fitch currently rates RTN as follows:

--Issuer Default Rating (IDR) 'A-';

--Senior unsecured debt 'A-';

--Bank facilities 'A-';

--Short-term IDR 'F2';

--Commercial paper programs 'F2'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Aerospace & Defense 2011 Midyear Credit Review and Outlook', July 11, 2011;

--'Rating Aerospace and Defence Companies: Sector Credit Factors', June 10, 2010.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Aerospace & Defense.2011 Midyear Credit Review and Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=636989

Rating Aerospace and Defence Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=529973

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch RatingsPrimary AnalystCraig FraserManaging Director+1-212-908-0310Fitch, Inc.One State Street PlazaNew York, NY 10004orSecondary AnalystDavid PetuDirector+1-212-908-0280orCommittee ChairpersonJason ParaschacSenior Director+1-212-908-0746orMedia RelationsBrian Bertsch+1-212-908-0549[email protected]

Source: Fitch Ratings

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