Raytheon RTN] recently posted strong second quarter earnings amid modest sales gains driven by growth and improved performance.
Net income increased 15 percent to $489 million, $1.23 earnings per share (EPS), compared to $426 million (99 cents EPS) a year ago. Earning from continuing operations increased 17 percent to $504 million ($1.24 EPS), beating analysts’ expectations by 11 cents.
Raytheon attributed the higher EPS to improved operating performance, a reduced stock share count, and a swing to pension income.
Sales rose 4 percent to $6.1 billion compared to $5.9 billion a year ago. Free cash flow was $440 million.
Unlike the big name defense companies that have already reported second quarter financials, Raytheon upped its sales and earnings guidance for the year. The top line is now expected to be between $24.5 billion and $25 billion, up $100 million from prior guidance due mainly to higher than expected revenues from training programs.
The outlook for the bottom line was raised a nickel to between $4.60 and $4.75 EPS. One of the drivers behind the improvement in expected earnings is an increase in the forecast for operating margins at the Space and Airborne Systems (SAS) segment.
All of the company’s operating segments except for Intelligence and Information Systems (IIS) increased revenues in the quarter, with Technical Services generating double-digit gains driven by growth in training programs, primarily the Warfighter Field Operations Customer Support and Air Traffic Control Optimum Training Solution programs. Sales dipped at IIS on lower volume related to the e-Borders program for the United Kingdom.
At SAS and Integrated Defense Systems sales grew 6 percent, respectively, on international airborne tactical radar, classified programs, and international Patriot programs.
On the earnings front, SAS led the way, boosting operating income over 30 percent on higher sales, improved program performance and a favorable contract settlement that had been expected later in the year. Technical Services increased its operating income nearly 20 percent on the strong sales in training programs. The Network Centric Systems was the third, and final, business segment posting double-digit income gains, up 13 percent on better program performance.
Operating margins improved 30 basis points to 12.3 percent.
The recent termination by the Obama administration of the Kinetic Energy Interceptor (KEI), a missile defense program aimed at knocking out ballistic missiles early in their flight, caused the company’s backlog to dip since the start of the year, although it remains healthy at $37.3 billion. That decline was offset largely by strong bookings, $7.6 billion in the quarter versus $6 billion a year ago, William Swanson, Raytheon’s chairman and CEO, said on last week’s earnings call.
Swanson also believes there is other missile defense work, particularly for more mature programs, that will eventually help offset the loss of the KEI program. He singled out a land-based version of the company’s Single Missile as a candidate for early missile intercept defense. Swanson also believes there will be more demand for the company’s over-the- horizon radars for missile defense. He expects to begin seeing more clarity in the FY ’11 budget process.
In addition, Swanson sees upside over time in other areas such as cyber security, product upgrades and improvements, civil and homeland defense, intelligence, surveillance and reconnaissance work, and international border security.