OREANDA-NEWS. Fitch Ratings has affirmed Raytheon Company's (RTN) Issuer Default Rating (IDR) and long-term ratings at 'A-' and the short-term IDR and commercial paper ratings at 'F2'. The Rating Outlook is Stable. These ratings cover approximately $5.4 billion of debt. A full list of rating actions appears at the end of this release.

KEY RATING DRIVERS
RTN's ratings are supported by the company's competitive position in the defense industry; good product diversification; a 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.

The ratings and Outlook are also supported by strong cash generation and effective cost management that resulted in consecutive margin improvements from 2010 to 2014 despite annual revenue declines. Fitch's concerns regarding RTN's large pension deficit and corresponding funding requirements have lessened due to the expected net cash impact of pension funding over the next few years driven by FAS/CAS harmonization and the Highway and Transportation Funding Act of 2014 (HATFA), which temporarily altered the discount rate calculation formula and consequently lowered the minimum required contributions for qualified U.S. pension plans.

Rating concerns include RTN's exposure to U.S. military spending uncertainty and the application of sequestration cuts in fiscal 2016 and beyond. 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. Additional concerns include the impact on cash flows from the pension deficit upon expiration of HATFA and the completion of FAS/CAS harmonization in 2017; cash deployment strategies that include increasing dividends and sizable share repurchases; and the possibility of a sizable acquisition, although Fitch does not expect the company will engage in major acquisition activities in the near future.

Fitch views RTN's purchase of Vista Equity Partners' Websense (a provider of global commercial cyber solutions) and the subsequent formation of a new cybersecurity joint venture (JV) as credit neutral, albeit a relatively high risk venture for the company. The JV's commercial focus, high valuation, and the potential need for additional acquisitions to build scale to compete with larger enterprise security providers are risk contributors. Despite the risks, if RTN successfully executes the JV's business plan, it could add substantial value to the enterprise given the likely growth in the cybersecurity market. RTN combined its recently developed commercial cybersecurity SureView platform with the Websense's Triton platform, enabling the company to leverage the Websense's existing commercial distribution channel. Additionally, the combination of RTN's expertise in providing defense-grade cyber solutions with the Websense's commercial offerings could result in new technological solutions and supplemental sales.

Fitch views RTN's financial metrics as adequate for the ratings, but the company has a small cushion to withstand negative developments at the 'A-' level. RTN's leverage (debt to EBITDA) is elevated for the ratings and has deteriorated to approximately 1.5x for the last 12 month period (LTM) ended June 30, 2015, up from 1.4x at the end of 2013 driven by the issuance of $600 million of unsecured notes. RTN utilized the proceeds to make a discretionary contribution to its qualified U.S. pension plans. Fitch expects the company's debt level will be stable over the next several years. Fitch anticipates the company's leverage will fluctuate in the range of 1.5x to 1.6x over the next several years with possible improvements to FFO adjusted leverage driven by anticipated pension related cash inflows.

RTN's free cash flow (FCF - cash from operations less capital expenditures and dividends) for the LTM was approximately $600 million, down from $1.8 billion in the prior year largely driven by high working capital requirements during the first half of 2015 and the timing of capital expenditures. Fitch estimates RTN will generate more than $1.2 billion FCF annually over the next several years.

U.S. government spending trends are key drivers of RTN's financial performance as the company generates approximately 70% of its 2014 revenues from the U.S. government, mostly from the DoD. As a result, DoD spending is a key driver of company's financial performance and credit quality.

The U.S. defense spending environment has been uncertain and under pressure for the past several years. However, the fiscal 2015 budget was likely the trough (base budget and wartime spending), and it should begin rising in fiscal 2016, even under a scenario in which the Sequester (which is still law) is not overridden. The President' base budget request is for $534 billion in fiscal 2016, $34-$35 billion above the Sequester cap. There appears to be support in Congress for spending in line with the President's budget, although passage of a budget was not achieved before the start of the fiscal year. Fitch's forecasts still incorporate the Sequester.

On Sept. 28, 2015, the U.S. Senate voted to support a continuing resolution to keep federal agencies funded at fiscal 2015 levels until Dec. 11, 2015. A further extension of the continuing resolution remains a possibility, but Fitch does not expect it would have a negative credit impact on RTN. In addition, there is a potential for a shutdown of the U.S. government should the U.S. Congress fail to increase the U.S. debt limit, which could reach the existing cap in early November. Fitch does not view a prolonged shutdown of the U.S. government a high probability event but believes RTN has sufficient liquidity to withstand a shutdown for several months.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for RTN include:

--Low single digit revenue annual growth beginning in 2015 driven by the Websense acquisition, higher international sales and improving U.S. military spending;
--Steady EBITDA margins in the range of 14.5% to 15.5%;
--Combined net share repurchases and dividend payments will be in the range of 70% to 90% of pre-dividend FCF, depending on acquisitions;
--Post dividend FCF margin will remain within the range of 5% to 6%;
--Capital expenditures will remain steady at 1.8% 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;
--The company will make annual small to medium sized acquisitions in the range of $500 million to $1 billion;
--Pension contributions will be a smaller portion of the company's cash deployment in the near future and will range between 15% to 20% of funds from operations (FFO). Fitch does not anticipate RTN will make discretionary contributions in 2015.

RATING SENSITIVITIES
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 or 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.

LIQUIDITY
At June 28, 2015, RTN had a liquidity position of $3.9 billion, consisting of $2.5 billion of cash and investments as well as $1.4 billion of credit facility availability. In December 2011, RTN replaced its $500 million and $1 billion revolving credit facilities with a $1.4 billion revolving credit facility which will mature in late 2016. Fitch expects the company will renew its credit facilities before maturity. RTN's liquidity declined significantly from the end of 2014 due to cash outlays related to the Websense acquisition. The company maintained approximately $6 billion liquidity over the past several years, but Fitch expected liquidity to decline and remain at or slightly above $4 billion with the stabilization of U.S. military spending in 2015.

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 Fitch expects the company will maintain its current leverage.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Raytheon Company
--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.