Strong performance at the segment level coupled with a handsome pension tailwind drove solid fourth quarter financial results at Raytheon [RTN], the company reported on Jan. 29.
Net income increased 10 percent to $582 million, $1.88 earnings per share (EPS), from $531 million ($1.66 EPS) a year ago. Excluding impacts from discontinued operations, earnings in the quarter jumped 23 percent to $576 million ($1.86 EPS) from $467 million ($1.46 EPS), beating consensus estimates by six cents per share.
Pension adjustments were the primary driver behind the higher income followed by the operating improvements, a lower stock count as a result of share repurchases, and the reinstatement of the federal research and development (R&D) tax credit for 2014.
At the operating level, three of Raytheon’s four segments posted higher profits, led by Integrated Defense Systems, which posted a 24 percent gain to $299 million on improved operating performance and a favorable program mix. Sales at IDS were also up 4 percent to $1.6 billion on international Patriot programs.
The Intelligence and Information Systems (IIS), and Missile Systems segments also touted higher operating profits, up 8 percent and 5 percent, respectively. IIS earnings of $131 million were driven by higher volume in classified programs, which drove a 5 percent increase in sales to $1.5 billion, while Missile Systems profit of $212 million benefited from a 5 percent boost in sales to $1.7 billion on the Advanced Medium Range Air-to-Air Missile and ship-fired Evolved Sea Sparrow Missile programs.
Raytheon’s Space and Airborne Systems segment was an outlier in terms of operating profits, down 14 percent to $217 million due to the timing of program efficiencies, the company said. SAS posted a 3 percent increase in sales to $1.7 billion due to an electronic warfare systems program.
Overall in the quarter, Raytheon’s sales increased 5 percent to $6.1 billion from $5.9 billion. International sales were up 6 percent and domestic 4 percent, Dave Wajsgras, Raytheon’s chief financial officer, said on the company’s earnings call.
Thomas Kennedy, Raytheon’s chairman and CEO, said that the company’s international customers are saying that “investing in national security remains a top priority [for them] given the global threat environment.”
Overall in 2014, sales slipped 4 percent to $22.8 billion from $23.7 billion, with international business up less than 2 percent and domestic revenue down nearly 6 percent, Wajsgras said.
Net income for the year increased 10 percent to $2.2 billion ($7.18 EPS) from $2 billion ($6.16 EPS) in 2013. Income from continuing operations rose 13 percent to $2.2 billion ($6.97 EPS) for the year.
For 2015 Raytheon expects sales to be flat to down 2 percent, with the forecast between $22.3 billion and $22.8 billion. Earnings from continuing operations are expected to be much lower, between $6.20 and $6.35 EPS, due to higher interest expense, lower pension income and a higher tax rate, partially offset by a lower share count. If the R&D tax credit is extended into 2015, that would add back 10 cents EPS to the forecast, Wajsgras said.
Raytheon expects its operating margin this year to be between 12.1 and 12.3 percent, excluding pension adjustments, versus 13 percent in 2014. The company plans to increase its internal R&D spending this year to nearly 3 percent of sales versus just over 2 percent of sales in 2014 to help position it for top and bottom line growth ahead, Wajsgras said.
Wajsgras is set to take over Raytheon’s IIS segment beginning in March and was to be succeeded by Toby O’Brien, who is CFO of IDS. O’Brien said on the earnings call that Raytheon’s approach to capital deployment will remain consistent with no “meaningful changes,” adding that the company will continue its active share repurchase program and recommend annual dividend increases to the board. Acquisitions that make sense economically and fill a gap in terms of technology, product or market channel will still be considered.
In 2016, Raytheon expects a return to growth, driven by a combination of domestic and international business, Kennedy said. The Defense Department’s budget projections beginning in 2016 support the renewed domestic increases, he said.
Orders in the fourth quarter and for the year were solid, $7.1 billion and $24.1 billion, respectively, representing book-to-bill rations greater than one in both periods. Orders in the fourth quarter would have been far higher because a $2 billion deal for Patriot systems for an undisclosed customer shifted to the first quarter of 2015, Kennedy said.
Despite the delayed Patriot order, international bookings were still up 27 percent in 2014 and accounted for 35 percent of all orders, Kennedy said. He added that classified bookings, which include both domestic and international customers, were up 29 percent in 2014.
Total backlog at the end of the year stood at $33.6 billion, down $100 million from 2013, while funded backlog increased nearly $100 million to $23.1 billion in 2014. Raytheon said that international business accounted for 40 percent of the total backlog in 2014, up from 37 percent at the end of 2013.