By Calvin Biesecker
An unfavorable pension adjustment combined with a charge related to a border security program for the United Kingdom led Raytheon [RTN] to post a double-digit drop in net income in its first quarter amid flat sales.
The $56 million after-tax charge for the e-Borders program was due to the U.K. Border Agency’s decision to draw down on letters of credit provided earlier by Raytheon. The validity of that drawdown is part of ongoing arbitration proceedings related to the program, which the U.K. Home Office canceled last July alleging breach of contract (Defense Daily, July 23, 2010).
Raytheon doesn’t expect to incur further charges on the e-Borders arbitration and believes the Border Agency’s drawdown on the letters of credit was inappropriate. Arbitration over the matter won’t be decided until 2013, William Swanson, Raytheon’s chairman and CEO, said on yesterday’s earnings call.
As for e-Borders, which Raytheon designed and developed to enable British customs officials to do background checks on persons entering and exiting the country, the Border Agency took over operation of the system on April 15, Dave Wajsgras, Raytheon’s chief financial officer, said.
E-Borders is screening over 120 million passengers per year, more than half of the traffic entering and exiting Britain, and delivering “actionable intelligence,” Wajsgras said.
Despite the charge and added pension costs, four of Raytheon’s six operating segments posted higher operating margins. And excluding those costs, adjusted operating margins edged up 10 basis points to 12.5 percent.
Swanson said that margins are “sustainable” and Raytheon’s customers have been saying they are “willing to pay for performance. In fact, we see more of our contracts incentivizing us to do much more and for me [that] gives us an opportunity to perform even better.”
Net income in the quarter fell 13 percent to $384 million, $1.06 earnings per share, from $445 million ($1.16 EPS), with the pension adjustment and e-Borders woes lopping 16 cents EPS each from the bottom line. Share repurchase activity by Raytheon mitigated the blow to earnings as the company reduced its overall share count by more than 20 million. Analysts had expected Raytheon’s earnings to be $1.09 EPS.
Excluding the e-Borders charge and pension adjustment, income from continuing operations rose 4 percent to $497 million ($1.38 EPS) from $480 million ($1.25 EPS). Wajsgras said the 10 percent jump in per share earnings was due to the reduced share count and operating improvements at the various segments.
Sales in the quarter remained level at $6.1 billion. Swanson estimated that the Continuing Resolution for the first half of the federal FY ’11 impacted the company by about $200 million in revenues and $500 million in bookings in the quarter.
With the federal government now operating with an FY ’11 budget, Swanson said that contracting activity is picking up.
Bookings in the quarter were down $1.4 billion to $5.1 billion, but Wajsgras said that the company remains on track to achieve a nearly 1.1 book to bill ratio for the year.
International business remains a critical component to Raytheon’s top line, accounting for 25 percent of sales, up 7 percent, Swanson said. The pipeline of international opportunities is “rich” and Swanson said that there are no delays or cancellations related to business it is pursuing overseas. International bookings accounted for 28 percent of the total, he said.
Swanson also said that classified work Raytheon does increased 26 percent, most of it organic.
Despite the lengthy Continuing Resolution, Raytheon maintained its sales guidance for the year at between $25.5 billion and $26.3 billion and cash flow between $2 billion and $2.2 billion. However, due to the e-Borders charge, Raytheon took 16 cents off per share earnings outlook and now estimates between $4.67 and $4.82 EPS for the year.
Raytheon’s backlog at the end of the quarter stood at $33.7 billion, down $900 million since the end of 2010.