Raytheon [RTN] on July 25 reported solid second quarter results, posting increases in sales and earnings due to growing international sales, operational improvements and capital deployment actions.
Net income increased nearly 4 percent to $488 million, $1.50 earnings per share (EPS), from $471 million ($1.41 EPS) a year ago, easily beating consensus estimates of $1.30 EPS. Per share earnings were up 6 percent as stock repurchases lowered the overall share count compared to a year ago. Operating margins improved 10 basis points to 12.5 percent.
Some of the operational improvements that contributed to the higher net income came from a restructuring in April of the company’s reporting segments from six to four. The expectations in 2013 were that the restructuring costs would offset efficiency gains but the realignment is ahead of schedule and contributed two cents to per share earnings in the quarter and is expected to add five cents for the year, Dave Wajsgras, the company’s chief financial officer, said on the earnings call.
The initial savings target from the segment consolidation was $85 million but now the company expects that number to be greater, Wajsgras said.
At the segment level, Raytheon said the increase in net income was driven by strong program execution. Two of the company’s four operating segments posted higher operating profits, Integrated Defense Systems (IDS) and Missile Systems. The Space and Airborne Systems, and Intelligence, Information and Services reported declines.
Sales increased 2 percent to $6.1 billion from $6 billion, with the increase due to expanding international sales.
William Swanson, Raytheon’s chairman and CEO, said on the July 25 call that international sales were up 10 percent in the quarter and accounted for 27 percent of overall revenues. Domestic sales were down 1 percent in the quarter, Wajsgras said.
As the company’s international business approaches 30 percent of revenues, Swanson said Raytheon needs “to think more globally” than internationally, meaning having a larger presence in countries that it does business with, including being integrated with “the culture and business climate.” He added that the company “will be making a shift in how we look at our international business.
Once 30 percent of Raytheon’s sales are international, the company will think about how to reach 35 percent, Swanson said. He added that with every 5 percent “increment” in international sales, the company has undertaken a “fundamental change” in the way it does its overseas business.
Sales growth among the segments was also led by IDS and Missile Systems on increases in various international air and missile defense program sales as well as gains on the Standard Missile-3 missile defense program and an international Paveway air-to-ground missile program.
For the year Raytheon expects its sales to be down between 3 to 4 percent and the company narrowed its guidance by adding $300 million to the low end of its expectations to between $23.5 billion and $23.7 billion on the strength of its international business, Wajsgras said. Sales momentum will slow in the second half of the year due to the impacts of the budget sequester and the likelihood that the federal government will begin its fiscal year in October under a continuing budget resolution, he said.
The combination of the unexpected early savings from the business restructuring, a lower than expected tax rate, and continued efforts to buy back stock and lower the share count, led Raytheon to boost its earnings expectations for 2013 to between $5.51 and $5.61 from prior guidance of $5.26 to $5.41, Wajsgras said.
Backlog at the end of the second quarter stood at $32.4 billion, down $500 million from a year ago, with 37 percent of it international. Raytheon said it had $5.3 billion in orders in the quarter, 26 percent of which was international. The orders were lighter than expected, as some awards slipped into the second half of the year.
One of those awards was for the Navy’s next-generation radar jammer, a contract won by Raytheon in June but is under protest by at least one of the losing bidders. While the Navy issued a stop work order on the jammer contract, Swanson said he’s confident the outcome will favor Raytheon because of how thorough Naval Air Systems Command is in managing competitions.
Swanson also said that the jammer contract solidifies Raytheon’s position in electronic warfare, adding that it’s the kind of long-term program that someone can start and end their career with. The jammer will initially be deployed on the Navy’s fleet of EA-18G Growler electronic attack aircraft.