Raytheon [RTN] on Thursday reported strong fourth quarter financial results driven by gains across the company’s operating segments and the company said it expects to close its pending merger with United Technologies Corp. [UTC] early in the second quarter of 2020.
Thomas Kennedy, Raytheon’s chairman and CEO, also highlighted the company’s strong footprint in classified and international work, telling investors that bookings and sales in both categories hit annual records in 2019.
Net income in the quarter increased 6 percent to $885 million, $3.16 earnings per share (EPS), from $832 million ($2.93 EPS) a year ago, edging consensus estimates by 4 pennies per share. Combined business segment operating margin was 12.7 percent, up 70 basis points from a year ago.
Sales increased 7 percent to $7.8 billion from $7.4 billion a year ago, with international business representing 31 percent of the total for the quarter, Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the earnings call.
Raytheon’s Integrated Defense Systems segment was the only operating group to post double-digit sales gains driven by an international air and missile defense program and an international missile defense radar program. The company also benefited from work on classified cyber and space programs, classified work in the Missile Systems segment, and classified work in the Space and Airborne Systems segment along with the Next Generation Overhead Persistent Infrared missile warning satellite program and tactical communications systems.
The bottom line was aided by the higher sales, increased program efficiencies, a sales mix that favored higher margin programs in Missile Systems, and a real estate gain.
Forcepoint, Raytheon’s sixth reporting segment, which is largely a commercial-based cyber security business, also posted higher sales and operating income for the quarter and the year. During the quarter, Raytheon paid its former partner in Forcepoint,
Vista Equity Partners, $588 million to own 100 percent of the business.
Raytheon has frequently struggled to turn a profit at Forcepoint since it acquired an 80 percent stake from Vista Equity Partners in Websense in 2015 for $1.9 billion. Raytheon later made some smaller acquisitions and folded them into the commercial cyber business, which it renamed Forcepoint.
Asked by UBS aerospace and defense analyst Myles Walton regarding Raytheon’s plans for Forcepoint, O’Brien said at “the end of the day we still want to monetize the asset,” adding that the company will “evaluate all of our options. The whole software security market continues to trade pretty favorably here.”
Overall in 2019, sales increased 8 percent to $29.2 billion from $27.1 billion a year ago and net income increased nearly 15 percent to over $3.3 billion ($11.93 EPS) from $2.9 billion ($10.15 EPS). Segment operating income for the year was 12.1 percent, a 10-basis point improvement from 2018.
Kennedy and O’Brien said international sales in 2019 were a record $8.6 billion, representing 29 percent of the business, and marked 16 straight years of growth to overseas customers. Kennedy said classified work was up 15 percent and accounted for 20 percent of sales.
In the quarter, Raytheon booked $12.1 billion of orders and $36.3 billion for the year, with classified work nearly $8 billion, a record, Kennedy said. International orders were 28 percent of bookings in the quarter and the year, another record, he said.
Raytheon’s backlog at the end of 2019 stood at a record $48.8 billion, up 15 percent from $42.4 billion at the end of 2018, with 38 percent of the future work from international customers, O’Brien said.
Operating cash flow in the quarter was $2.8 billion and for the year, a record $4.5 billion.
Given the pending deal with UTC, Raytheon provided limited guidance for 2020, with sales expected to increase between 6 and 8 percent on gains across the company. Bookings are expected to exceed sales and backlog is forecast to increase.