Raytheon [RTN] on Thursday reported strong second quarter earnings due in large part a benefit from a recent modification to a joint venture with a French company as well as performance improvements, pension tailwinds and accounting changes.
Net income soared 40 percent to $709 million, $2.38 earnings per share (EPS) from $505 million ($1.65 EPS) a year ago, rocketing well above consensus estimates of $1.66 EPS, which appears to have excluded the benefit from the changes to the joint venture as Raytheon originally expected the gain to be recognized in the third quarter. Raytheon said the transaction with Thales in June related to their joint venture resulted in a $158 million (53 cents EPS) tax free gain. That gain was slightly higher than the $150 million Raytheon announced last month.
In addition to the tax free gain from the Thales modification, Raytheon said operational improvements added 20 cents EPS to the bottom line, pension adjustments another 14 cents EPS, accounting changes 10 cents EPS, and a reduced share count 4 cents EPS.
At the business level all of the company’s operating segments posted gains in income with Missile Systems leading the way with a double-digit increase. Integrated Defense Systems (IDS), absent the benefit from the joint venture, posted a modest increase in operating income.
Raytheon’s total operating margin in the quarter was 15.9 percent, up nearly 5 percent from a year ago, while segment operating margin rose more than 4 percent to 14.8 percent.
Sales in the quarter rose 3 percent to $6 billion from $5.8 billion a year ago.
The top line results were driven by sales increases at all of the company’s segments except IDS. Raytheon attributed the higher sales to the Paveway laser-guided bomb, classified programs, cyber security, special mission programs, and the acquisition last year of Websense.
Sales to customers in the United States were up “slightly” while international sales grew 8 percent, Thomas Kennedy, Raytheon’s chairman and CEO, said on the investor call. Overall, international business accounted for 32 percent of sales in the quarter, he said.
The key international growth drivers are counter-terrorism campaigns, which are driving precision munitions sales, and deterrence, which is spurring demand for integrated air and missile defense systems and C5ISR capabilities, Kennedy said. Demand for these systems is from Europe, the Asia-Pacific, and Middle East and North Africa, he said, adding that there is an “added sense of urgency” this year with the pipeline of opportunities more “robust” than ever.
Kennedy said the company sees a sustained “uptick” in its Missile Systems business for “at least the next five years. He also said that over the next few months one of the company’s largest opportunities is for an upgraded long-range early warning radar for Qatar that is worth $1 billion.
Given strong performance so far in the first half of the year coupled with a lower than expected tax rate and interest expense, Raytheon upped its earnings guidance by 20 cents EPS to between $7.13 to $7.33 per share. The company also raised its guidance for operating cash flow by $100 million to between $2.8 billion and $3.1 billion.
Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said the company also raised the year-end outlook for orders by $500 million to between $25.5 billion and $26.5 billion on “strong demand from our global customers.”
Kennedy said the financial forecasts bake in the likelihood that the U.S. government begins its new fiscal year in October under a continuing resolution that lasts beyond the presidential election in early November.
Orders in the quarter were a healthy $7.1 billion, with 31 percent of the bookings from international customers, Kennedy said. Backlog at the end of the quarter stood at $35.3 billion, 42 percent of it from international orders, with $26.1 billion funded. A year ago total backlog was $34.5 billion, $25.3 billion of it funded.