By Calvin Biesecker
Raytheon [RTN] yesterday reported strong third quarter financial results as higher sales and improved operating margins, combined with lowered pension expense led to increased earnings.
Net income jumped 15 percent to $490 million, $1.25 earnings per share (EPS), versus $427 million ($1.00 EPS) a year ago. The percentage increase in per share earnings exceeded the growth in net income due to a lower share count, which was due to the company’s ongoing stock repurchase program.
Earnings from continuing operations climbed 14 percent to $499 million ($1.25 EPS), easily beating consensus estimates by nine cents. Sales rose 6 percent to $6.2 billion from $5.9 billion a year ago. Free cash flow was a strong $670 million.
The strong results were keyed by the Technical Services, Network Centric Systems, and Space and Airborne (SAS) segments, which each returned double-digit profit gains. The higher operating profits at these segments were attributed to a combination of factors, including higher sales, the timing of an award fee and a contract scope modification at Technical Services, improved program performance, and higher international sales at SAS.
Raytheon posted a record level of international sales in the quarter and overseas opportunities abound for missile defense, airborne radar, classified systems and other systems, William Swanson, Raytheon’s chairman and CEO, said during yesterday’s earnings call. The company’s prior guidance is for between 20 to 22 percent of sales this year to be from international customers. Raytheon booked $5.1 billion in new business in the quarter, 25 percent for international contracts, demonstrating that foreign markets remain a robust portion of its growth plans.
Overall strong and improving operating performance combined with a reduced share count led Raytheon to boost its earnings guidance for 2009 to between $4.70 and $4.80 EPS, from between $4.60 and $4.75, excluding pension related adjustments. Improved performance outweighs lower than expected pension income for the year, Dave Wajsgras, Raytheon’s chief financial officer, said during yesterday’s earnings call.
Sales are expected to come in on the high end of the guidance range, which is between $24.7 billion and $25 billion.
Raytheon’s overall backlog dipped by more than $2.6 billion to $36.2 billion due to the Obama administration’s termination of the Kinetic Energy Interceptor program during the second quarter. However, funded backlog increased nearly $2 billion to $23.8 billion by the end of the third quarter.
Swanson said that while there is downward pressure on defense spending, particularly in the United States, Raytheon is well positioned with a diverse portfolio to continue growing. Ultimately defense spending is driven by the threat environment, which shows no signs of letting up, he said. He pointed out that while the KEI program was terminated, funding and attention have shifted elsewhere in missile defense to areas where Raytheon is strong, such as radars and interceptors.
Sensors, classified programs, homeland security and cyber security are all areas where Raytheon is well positioned and seeing an uptick in business, Swanson said.
Regarding cyber security, Swanson believes that the larger opportunities are 12 to 18 months away. Right now smaller programs are in effect but as the federal government better understands the way ahead, it will begin bundling to create “bigger programs” to protect the “enterprise.”
For 2010, Raytheon expects sales to be in the range of $25.9 billion and $26.4 billion, an increase of between 4 to 6 percent over 2009 estimates. Earnings are expected to increase to between $4.75 and $4.90, aided in part by a lower tax rate. Pension costs are expected to become a headwind next year. The company continues to see strength in its operating margins, Wajsgras said.
One of the biggest challenges Swanson said he sees ahead with tightening defense budgets is “indecision,” which means there will be “timing” issues on some spending. Raytheon can help here by working with its customers and providing alternatives, he said.
Swanson doesn’t believe that a tougher budget environment is going to lead to a consolidation within the top tier of the defense industry. Customers want to maintain competition, he said. He said Raytheon isn’t changing its approach to acquisitions, which will be driven by its portfolio gaps and whether they can first be closed through internal investment or partnerships.
Swanson provided some color on Raytheon’s pending acquisition of BBN Technologies, which is still slated to close in the fourth quarter. For one, he said the purchase price is $350 million.
BBN also has technology that will prevent data from being lost while transmitted, is developing next-generation wireless networks, and is working on Military Network Protocol, which is basically a “makeover of the Internet for the military,” Swanson said. These technologies fit well with Raytheon’s projects, he said.