Despite a modest decline in sales, Raytheon [RTN] on Wednesday posted a solid increase in third quarter earnings driven by favorable pension impacts, lower taxes, and a lower share count as a result of the company’s stock repurchase activity.
Each of the company’s four business segments had lower sales and only one, Space and Airborne Systems, managed an increase in operating profit. Still, operating margins were still strong at 13.2 percent, down a half percent from a year ago, excluding pension adjustments.
Net Income in the quarter increased 6 percent to $515 million, $1.65 earnings per share (EPS), from $487 million ($1.51 EPS), beating consensus estimates by a nickel. At the segment level, lower operating profits knocked off 17 cents EPS versus last year but the decline was more than made up by improvements of 31 cents EPS due to pension adjustments, the lower share count and tax reductions.
Sales slid 6 percent to $5.5 billion from $5.8 billion a year ago, with the Integrated Defense Systems and Missile Systems segments leading the decline with double-digit decreases in revenue. International business accounted for about 30 percent of sales, up just fewer than 4 percent from a year ago Dave Wajsgras, Raytheon’s chief financial officer, said on an investor call.
Raytheon’s bookings in the quarter were a robust $5.9 billion, 24 percent from international awards, continuing a book-to-bill streak above one. Wajsgras said that the company expects its strong orders to translate into growing sales beginning the back-half of 2016 into 2017.
While organic growth is Raytheon’s priority, it continues to assess acquisitions that make strategic and financial sense, Wajsgras said, adding that the company has agreed on a $400 million acquisition for its core defense business that is currently going through regulatory review and is expected to close next month. He said the deal is under a non-disclosure agreement and that he could not comment further on it.
Even though Raytheon has been relatively quiet on the acquisition front the past two years, Wajsgras said that the deal should not come as a surprise given its “healthy balance sheet,” continued strong cash flows, and desire for growth. Thomas Kennedy, Raytheon’s chairman and CEO, said the company is looking to take a disciplined approach toward acquisitions to fill gaps in core markets, including cyber security.
Based on year-to-date performance, the lower share count, lower tax rate, and pension adjustments, Raytheon raised the low end of sales guidance by $200 million to between $22.7 billion and $23 billion and narrowed its earnings outlook to between $6.77 and $6.87, which is three cents higher on the low end and two cents off the high end from the prior outlook.
Total backlog at the end of the quarter stood at $33.2 billion, $1 billion higher than a year ago, with $22.9 billion of it funded. Kennedy said that international business accounts for the 37 percent of the backlog and will exceed 40 percent by the end of this year.
Raytheon is expecting a big fourth quarter in terms of international bookings with two $2 billion deals expected to be finalized for Patriot air and missile defense systems, including one for Qatar.
Free cash flow in the quarter was $337 million. The company spent $200 million on share repurchases during the quarter.