Raytheon [RTN] on Thursday posted strong first quarter financial results, driven by lower taxes, and improved operating performance, and the company increased its guidance this year for sales and earnings.

Lower taxes that went into effect on Jan. 1 have helped underpin solid to strong results for all the major defense companies that reported first quarter financials this week.

Net income at Raytheon increased 25 percent in the quarter to $633 million, $2.19 earnings per share (EPS), from $506 million ($1.74 EPS) a year ago. Excluding discontinued operations, the company reported $2.20 EPS, beating consensus expectations by 9 cents.

Raytheon Chairman and CEO Tom Kennedy. Photo: Raytheon
Raytheon Chairman and CEO Tom Kennedy. Photo: Raytheon

Raytheon said that lower taxes were the biggest driver behind the higher earnings, followed by the higher sales and better performance. A lower share count was a small factor in helping lift the per share results.

At the operating level, the Integrated Defense Systems segment powered the higher earnings through a combination of higher margin sales, efficiencies and risk retirements on some programs. The Intelligence, Information and Services, and Space and Airborne Systems segments also contributed to the better earnings.

Raytheon’s Forcepoint segment, which is its commercial cyber security business, swung to an operating loss due to continued investments aimed at generating longer-term growth.

Operating margin at the segment level ticked up 10 basis points to 11.9 percent and corporate-wide operating margin was up 80 basis points to 16.6 percent.

Sales increased nearly 5 percent to $6.3 billion from $6 billion a year ago as all of the company’s segments except its commercially-focused cyber security business contributed to the top line gain. An international Patriot missile defense order, classified work and training programs, all helped lift sales.

Raytheon raised its guidance for 2018 for sales and earnings, based on better than expected results in the first quarter and a lower tax rate for the year than it had assumed in January. Sales are forecast to be between $26.5 billion and $27 billion, up $100 million from earlier projections with IDS delivering the boost. Per share earnings are now expected to be between $9.70 and $9.90, a 15 cent increase from the prior outlook.

Thomas Kennedy, Raytheon’s chairman and CEO, said on the company’s earnings call that the fiscal year 2018 Omnibus appropriations bill that was approved in March and handsomely increases defense spending, should lead to positive “meaningful impact” for Raytheon in 2019. Kennedy also said he expects budget control caps that were raised for fiscal years 2018 and 2019, to be revised upward in 2020 and 2021, paving the way for further growth in defense spending.

Kennedy, in response to one analyst’s question, pointed out that the Pentagon’s latest Future Years Defense Program shows demand growth out to fiscal year 2022, “so, we’re seeing some clear demand signals from the customer.” The “biggest area that we’re seeing the uptick in” is for “new technologies to be able to counter what they’re calling the peer threat,” he said.

In his scripted remarks at the outset of the earnings presentation, Kennedy reminded investors that Raytheon this year is still committed to increasing its capital expenditures by 50 percent and internal research and development (IRAD) by 15 percent “to support our future growth and productivity initiatives.” He noted that in the first quarter 38 percent of bookings were from contractor funded R&D, which combined with the IRAD, is “integral to the long-term growth of our new franchises and production awards.”

Kennedy listed several areas of planned capital investments, including in demonstration capabilities to position the company for new awards, high-technology facilities, and more automation and test equipment to drive efficiencies. Raytheon is expanding facilities in its Missile Systems segment to accommodate people and testing in support of classified programs.

Investment priorities for IRAD spending line up with customer priorities, Kennedy said. These include high-energy lasers, high-power microwaves, hypersonic technology, next-generations sensors, cyber security, and others. In the area of hypersonic technology, Kennedy said later in the call that Raytheon is working with customers on advanced technologies for offensive applications and counter-hypersonic systems as well.

Raytheon had $6.3 billion in bookings in the quarter, 45 percent from international customers and 16 percent of which was classified. Kenned said that the classified orders were up nearly 19 percent from a year ago and include work from domestic and international customers.

Of the $6.3 billion in sales in the quarter, Kennedy said 19 percent was for classified work, up 10 percent from a year ago.

Backlog at the end of the quarter stood at $38.1 billion, up from $36.1 billion a year ago. Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said 42 percent of the backlog represents international orders.

Free cash flow in the quarter was about $53 million.