By Calvin Biesecker
Raytheon [RTN] yesterday reported strong second quarter financial results driven by strong earnings at its missiles, and mission and training support businesses coupled with improved operating performance, lower pension expenses and growth at each of its segments.
The strong results, combined with expectations for continued strong performance the rest of the year, led Raytheon to increases its sales, earnings and cash flow guidance for 2008.
Income from continuing operations increased 20 percent to $426 million, $1.00 earnings per share (EPS), from $355 million (79 cents EPS), a year ago, beating analysts’ estimates by seven cents EPS. Net income actually fell from $1.3 billion ($2.97 EPS) a year ago, although results from the second quarter of 2007 benefited from a $980 million gain related to the sale of the company’s former business jet and general aviation aircraft business.
Raytheon’s sales in the quarter rose 11 percent to $5.9 billion from $5.3 billion a year ago. The growth was across the board and was led by the Intelligence and Information Systems (IIS) segment’s work on the United Kingdom’s e-Borders program. Other drivers included the Technical Services segment, which is benefiting from work on military training programs, and the Missile Systems segment’s sales of Phalanx, Paveway and Advanced Medium-Range Air-to-Air Missiles.
Technical Services, the smallest of Raytheon’s six operating segments, had the biggest percentage increase in operating profits, up 41 percent to $45 million on higher sales and improved program performance. Missile Systems turned in a 16 percent profit gain to $156 million on higher sales and improved program performance.
IIS turned in a solid earnings performance despite additional costs related to an acquisition and other investments in cyber and information security. Raytheon views cyber security as a significant growth area, not only in the United States but internationally, and the company is making it “a core element of what we’re doing,” William Swanson, Raytheon’s chairman and CEO, said during yesterday’s earnings call.
“We want to be the go-to company” for cyber security, Swanson said.
Integrated Defense Systems was the only segment posting lower profits, which was due to program mix and adjustments taken a year ago on certain programs, which helped boost profits then.
Asked about the Navy’s reported interest in terminating the DDG-1000 next generation destroyer program, which Raytheon has significant electronic warfare content on, in favor of continuing to build more DDG-51 destroyers, Swanson reminded investors that the DDG-1000 remains the program of record. The Navy “hasn’t discussed” any new shipbuilding plans with Raytheon and any new plans haven’t been “flushed out,” he said.
This is part of the annual budgeting process, which is always more “dynamic” in an election year, Swanson said.
Swanson also said that given the Navy’s movement towards open architecture, it makes sense to continue with the DDG-1000 because new software will be able to be plugged into that ship’s electronic warfare suite. On the other hand, he said the DDG-51 has a federated computer architecture which will make it more difficult to plug in new capabilities, he said.
Swanson said that the electronic warfare capabilities Raytheon is developing for the DDG-1000 will be under contract for several more years. Moreover, the plan is to integrate some of those technologies onto existing and future Navy ships so the technology will have “long legs,” he said.
In the end, if the Navy moves out in favor of additional DDG-51s, Swanson said that Raytheon’s engineering talent could bring key DDG-1000 electronic warfare systems like the SPY-3 radar to the table.
“It’s a doable do,” Swanson said of developing the SPY-3 for the DDG-51, which has a smaller footprint than the DDG-1000.
As for the new financial guidance for 2008, Raytheon increased its sales expectation by $200 million to between $22.6 billion and $23.1 billion. EPS guidance was raised 15 cents to between $3.80 and $3.95. Just over half of the earnings gain is coming from improved operating performance throughout the year.
Raytheon’s backlog at the end of the quarter stood at $37.5 billion, about $900 million higher than a year ago.