Raytheon [RTN] on Thursday reported higher sales in the second quarter, due mainly to international business, while its earnings from continuing operations increased slightly due to a favorable tax settlement.
The company also raised its sales guidance for 2015, calling for potentially flat to a slight increase in revenue versus 2014. If Raytheon hits the upper end of its guidance range, it would mark the first time since 2010 that it has managed top line growth.
Raytheon’s net income fell 8 percent to $505 million, $1.65 earnings per share (EPS), from $551 million ($1.76 EPS), beatings consensus estimates by two pennies per share. Second quarter results in 2014 included $52 million (17 cents EPS) of income related to a pension adjustment for a business it divested more than a decade ago and was reported as discontinued operations.
Excluding discontinued operations, Raytheon’s earnings from continuing operations were basically flat at $502 million ($1.65 EPS) versus $501 million ($1.59 EPS) a year ago. Per share results were boosted by the favorable tax settlement, which added 29 cents EPS to the bottom line, and by a lower share count. Raytheon’s acquisition in late May of an 80 percent stake in the cyber security firm Websense knocked 9 cents EPS from earnings because of accounting adjustments and acquisition-related costs.
Raytheon’s top line grew nearly 3 percent to $5.8 billion from $5.7 billion a year ago, driven by sales on international Patriot programs at the integrated defense systems (IDS) segment and a slight increase in business at the missile systems segment. International customers accounted for 30 percent of sales in the quarter.
Raytheon’s international business prospects continue to brighten. The company’s total backlog at the end of the quarter stood at $34.5 billion, with a record 44 percent of the work for foreign customers. This is “monumental,” Thomas Kennedy, chairman and CEO of Raytheon, said of the international backlog on the company’s earnings call, adding that “I think the correlation goes right to this fact that the threat is not going away, it’s increasing, and we’re seeing it across three major regions of the world,” which are Europe, the Asia-Pacific, and the Middle East-North Africa.
The total backlog has grown $900 million since the start of 2015. Funded backlog stood at $25.3 billion, up $1.2 billion since the start of the year. Orders in the quarter totaled $7.6 billion, easily outpacing sales, with 46 percent of the bookings coming from international customers.
With the solid sales performance in the second quarter combined with the Websense acquisition, Raytheon forecasts sales this year to be in the range of $22.7 billion to $23.2 billion versus prior guidance of between $22.3 billion and $22.8 billion. In 2014 Raytheon had $22.8 billion in sales so it doesn’t have to beat the low end of its guidance range by much to generate top line growth this year.
International business is expected to continue to grow and late in 2016 or beginning in 2017 Raytheon expects renewed domestic growth, Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the analyst call. The near-term domestic growth will be driven by programs like the Standard Missile-3 1B for the Navy and allies transitioning to production, he said, while the strong international backlog sets the company up for revenue gains next year through its foreign customers.
In big picture terms, Kennedy said that it is encouraging to see the Obama Administration and Congress aligned in terms of the need to increase defense spending beyond the caps set forth in the 2011 Budget Control Act, although he noted the two sides are still hung up over how to go about achieving the increase. Still, Kennedy said, the “defense budget environment remains fluid” and says Congress and the administration may need more time to resolve their differences, increasing the “probability of another continuing resolution this fall.”
If there is a continuing resolution to start the federal government’s fiscal year 2016, Kennedy said it would be unlikely to significantly impact Raytheon’s financial results.
Raytheon lowered its core EPS guidance for the year by 20 cents to a range of between $6.47 and $6.62, less than originally expected from the dilutive effects of the purchase of Websense, which has been combined with the company’s Cyber Products business to create Raytheon/Websense, a joint venture with Vista Equity Partners that is being reported as a separate operating segment.
O’Brien said that Websense is expected to be accretive to Raytheon’s earnings in two to three years versus the three to four years originally expected. Kennedy said the nearly two-month old integration of Websense with Raytheon “makes us more excited” about the deal, despite the fact that the company’s defense industry peers are bailing out of the commercial cyber space.
Operating cash flow in the quarter was a robust $376 million, helped by timing related to pension contributions and collection of the eBorders settlement with the United Kingdom’s Home Office. Raytheon said it plans to repurchase $1 billion worth of its shares this year, a $250 million increase above the original expectation.