Raytheon [RTN] on Thursday reported strong first quarter results with the company’s earnings leading the way with a double-digit gain on operational performance, some pension tailwinds and other positives.
Despite beating its own and analysts’ expectations on earnings, Raytheon left its outlook for 2019 unchanged. Company officials on their investor call said that the outlook for earnings is the same because improvements in the Intelligence, Information and Services (IIS), and Space and Airborne Systems (SAS) segments will be offset by unexpected performance issues at the Missile Systems segment.
Net income surged 23 percent to $781 million, $2.77 earnings per share (EPS), from $633 million ($2.19 EPS), topping consensus estimates by 30 cents per share. Pension benefits led the improved earnings results followed by operational improvements, tax and other income benefits, and a reduced share count.
Operating income at IIS was up 60 percent on a shift to higher margin sales and performance, but the segment also benefited from a handsome gain from Raytheon boosting its equity stake in a joint venture giving it control of operations, and from an asset sale. Raytheon now owns 60 percent of Range Generation Next, LLC, a joint venture with the Information Technology segment of General Dynamics [GD] that operates the U.S. Air Force’s space launch ranges in Florida and California.
At SAS, the segment’s bottom line was buoyed by sales growth, including a shift toward higher margin revenue, and performance.
Missile Systems is suffering in part from winning more development work, which typically has lower margins than production programs, but the company said that overall performance was still short of its expectations and that new action plans to improve execution on production contracts are underway. Those plans include “leaning out the factory” and working on the supply chain to improve performance on existing production contracts, Thomas Kennedy, Raytheon’s chairman and CEO, said on the call.
Going back about nine months, Kennedy said that the company hasn’t been “seeing as much pick up on the production programs” at Missile Systems as in the past.
Margins at Missile Systems are expected to improve throughout 2019, Anthony “Tobey” O’Brien, the company’s chief financial officer, said on the call.
Kennedy said that Missile Systems is in a strong position overall, with existing franchise programs such as the Advanced Medium Range Air-to-Air Missile getting a technology refresh to add more capability so that customers continue acquiring it for decades to come. He also said that new franchise programs like the Naval Strike Missile that it won last year are already finding new customers with the Marine Corps and international partners.
Sales in the quarter grew 7 percent to $6.7 billion from $6.3 billion a year ago.
All five of the company’s business segments contributed to the topline growth, led by IIS and Missile Systems, followed by SAS and Integrated Defense Systems. Forcepoint, Raytheon’s smallest segment, posted strong growth.
Specific growth drivers include Patriot and naval radar programs, classified work in cyber and space, “numerous” missile programs, classified work at SAS, and commercial cyber security. Kennedy said that classified business was “strong” in the quarter, with bookings up 37 percent and sales up 22 percent.
Bookings in the quarter totaled $5.4 billion and backlog rose 8 percent to $41.1 billion from $38.1 billion a year ago. O’Brien said that 38 percent of backlog is business with international customers.
Free cash was more than a $700 million outflow in the quarter.