Raytheon [RTN] on Thursday posted strong first quarter net income driven by a tax benefit and pension income, which combined to more than offset lower operating earnings in most of the company’s business segments.
Like its peers in the defense industry, Raytheon’s sales in the quarter fell but the company still found a way to increase its overall profits.
Net income increased 22 percent to $596 million, $1.89 earnings per share (EPS), from $488 million ($1.49 EPS) a year ago. Excluding results from discontinued businesses, earnings from continuing operations were $589 million ($1.87 EPS), which beat analysts’ expectations by 11 cents EPS.
The company’s income benefited from an $80 million (25 cents EPS) tax benefit, $57 million (18 cents EPS) of pension income, partially offset by the lapse of the federal research and development tax credit, which added $25 million (8 cents EPS) to earnings a year ago. Raytheon’s stock buy back program also reduced its number of outstanding shares, adding a nickel to per share earning in the quarter.
Adjusting for the tax and pension benefits and the R&D credit, operating margins were 12.7 percent in the quarter, down 50 basis points from a year ago.
Sales fell 6 percent to $5.5 billion from $5.9 billion, with domestic business off 7 percent and international down 4 percent. Classified work was 15 percent of sales.
Free cash flow was a strong $608 million in the quarter. Tom Kennedy, Raytheon’s new CEO, highlighted a range of priorities for the company’s investments and cash.
“Accelerating growth is a key priority for the company,” Kennedy said during Raytheon’s earnings call. The company will continue to invest in research and development to “support our drive for competitive advantage,” and in acquisitions, including building in the cyber domain. Most of the company’s acquisitions the past few years have been in the area of cyber security and Kennedy said that “Looking ahead, one of our key objectives is to continue unlocking the value of our cyber capabilities to meet the growing global demand in both defense and commercial markets.”
Currently, Raytheon’s commercial-related cyber security business is insignificant financially but the company sees opportunities for expansion, Dave Wajsgras, the company’s chief financial officer, said during the call. He said it wouldn’t be “prudent” to estimate how significant the company’s commercial cyber security business could become in the next few years.
Kennedy also said the company’s cash deployment strategy will continue to return value to shareholders through share repurchases and dividends.
All four of Raytheon’s operating segments saw revenue declines and only the Intelligence, Information and Services segment managed to post a higher profit, a scant 1 percent gain to $125 million. IIS did record a $195 million order for cyber security from an international customer.
Overall, orders were $4.3 billion, up $600 million from a year ago while total backlog stood at $32.2 billion, down from $33.7 billion from the end of 2013. International business represented 39 percent of both bookings and backlog, Kennedy said, adding that classified business was 19 percent of bookings.
As part of its ongoing affordability initiatives, Raytheon plans further facilities consolidations this year, with a plan to cut its real estate footprint by 2 percent compared to 2013, a year when it reduced its footprint by 3 percent versus 2012, Wajsgras said. The company has just initiated a move from Garland, Texas, to nearby Richardson, Texas to a more efficient facility that will result in a reduction of 600,000 square feet and begin to drive savings next year, he said.
Raytheon plans to reduce its facilities footprint by 10 percent in the next few years, company officials said.