Led by strong results in its businesses that produce missile and sensor systems, Raytheon [RTN] on Oct. 25 reported solid third quarter financial results with earnings and sales both higher.
Net income increased 5 percent to $572 million, $1.97 earnings per share (EPS), from $544 million ($1.84 EPS) in 2016, beating consensus estimates by six cents a share. Business segment margins remained level at 13 percent while overall operating margin slipped 10 basis points to 13.7 percent.
Sales were also up 5 percent to $6.3 billion from $6 billion in 2016 with growth in both domestic and international business. International customers accounted for 32 percent of the revenue.
Thomas Kennedy, Raytheon’s chairman and CEO, said on an earnings call that global demand for the company’s broad product portfolio remains strong.
The bottom line increase was driven by improved operating performance and higher sales at the Missile Systems and Integrated Defense Systems (IDS) segments. Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the call that Missile Systems benefitted from improved efficiencies and a favorable adjustment on an international contract.
The improved sales at Missile Systems were due to the Paveway laser guided bomb and Excalibur precision artillery projectile and at IDS on international early warning radar program.
Earlier in October, the Government Accountability Office rejected a protest by Northrop Grumman [NOC] of a more than $1 billion contract awarded by the Department of Homeland Security to Raytheon to operate and maintain a cyber security system for the federal civilian government. The GAO’s decision, which was rendered after DHS twice reviewed earlier awards of DOMino to Raytheon before re-awarding the company the contract, cleared the way for Raytheon to begin working with the cyber threat detection and prevention system, Kennedy said.
Raytheon is already doing similar work to DOMino for an international customer, Kennedy said, adding that given the company is now clear to begin work on the program gives it the “credentials” to generate more “cyber security work worldwide.”
Kennedy also highlighted a recent U.S. and NATO exercise of integrated air and missile defense capabilities that included the successful launch, detection, tracking and interception of a medium-range ballistic missile target using a Standard Missile-3 Block IB missile. That success cleared the way for full-rate production of the missile, he said.
Approval earlier in October by the U.S. government of a potential $15 billion sale of seven Lockheed Martin [LMT] Terminal High Altitude Area Defense anti-ballistic missile systems to Saudi Arabia would mean about $3 billion to $4 billion of the business goes to Raytheon, Kennedy said. That’s because the company makes the TPY-2 radar that goes with each THAAD fire unit, he said, adding the actual award for the company is expected in late 2018 or 2019.
Raytheon narrowed its sales guidance for 2017 on the low end of the previous range by $200 million to between $25.3 billion and $25.6 billion, with four of the company’s operating segments contributing to the change. There is no change in the sales guidance at Forcepoint, the operating segment that sells cyber network defense products to commercial and government customers.
The outlook for earnings was increased a dime on the low end and a nickel on the high end of the previous guidance to between $7.45 to $7.55 EPS, due to a lower tax rate, higher interest income, and improved operating performance at several business segments, partially offset by some pension expense headwinds.
Orders in the quarter were a robust $7 billion and the company’s total backlog at end of the reporting period was $36.7 billion, nearly $1 billion more than a year ago. The company also increased its bookings outlook by $500 million for 2017 to between $26.5 billion and $27.5 billion on strong order flow so far in 2017 and international demand, O’Brien said.
O’Brien provided directional guidance for 2018, saying that sales are expected to be 3 to 5 percent higher than the mid-point of the 2017 outlook with business segment margin up slightly on program mix. He also said that orders will exceed sales.
Raytheon in 2018 is pursuing 40 opportunities each worth more than $100 million with about one-third or orders expected to be from international customers, Kennedy said.