Raytheon [RTN] on Thursday reported strong third quarter financial results driven by higher sales across its defense segments and improved operating performance and the company increased its outlook for the top and bottom lines this year.
Net income soared 34 percent to $860 million, $3.08 earnings per share (EPS), from $644 million ($2.25 EPS) a year ago, topping analysts’ expectations by 22 cents a share. Sales increased 9 percent to a record $7.4 billion from $6.8 billion a year ago.
Sales were higher on international air and missile defense programs, classified cyber and space programs in the Intelligence, Information and Services (IIS) segment, and classified programs in the Missile Systems, and Space and Airborne Systems (SAS) segments, and protected communications systems programs, and the Next Generation Overhead Persistent Infrared program.
The company also recorded impressive bookings of $9.4 billion, helping to generate a record backlog of $44.6 billion, up 5 percent since the end of 2018.
Classified work made up 21 percent of the sales and bookings in the quarter and international business accounted for 34 percent of the orders and 39 percent of the backlog.
At the operating level, the company’s earnings results were driven primarily by double-digit improvements at Integrated Defense Systems and SAS due to higher sales and program mix, and to a lesser extent at IIS, which benefited from higher sales and a gain on an investment.
Missile Systems was the only segment to report lower operating income, which was due to lower net program efficiencies. Operating income was down 15 percent in the quarter and down 5 percent year to date, while operating margin is 10.1 percent so far this year.
“We’re not happy about where the margins are right now,” Thomas Kennedy, Raytheon’s chairman and CEO, said on the company’s earnings call. Both he and Anthony “Toby” O’Brien, Raytheon’s chief financial officer, are “taking a lot of interest in this area,” Kennedy said.
Kennedy said the Missile Systems segment is on the “road to recovery,” citing leadership changes that have begun to show improvements, new contracts and others being negotiated on its Standard Missile product family, and classified business that is in development now and carrying low margins that will expand as the programs transition to production. He also said that productivity issues on some programs are also being fixed and that that production facilities are being leaned out and automated to drive improvements, all to help get the business to 13-plus percent margins.
Raytheon raised and narrowed its sales guidance for 2019 to between $29.1 billion and $29.4 billion from the prior range of between $28.8 billion and $29.3 billion. The outlook for orders was also increased $1.5 billion to between $32.5 billion and $33.5 billion.
Combined with record backlog and strong order flow, Raytheon expects sales in 2020 to be 6 to 8 percent higher than projected 2019 levels. All of the company’s segments are expected to contribute to the top line increase.
Earnings this year are now estimated to be between $11.70 and $11.80 EPS versus prior guidance of between $11.50 and $11.70 EPS, with the increase due to better than expected operating income and a pension adjustment tailwind, partially offset by an increase in expenses related to the pending acquisition of the company by United Technologies Corp. [UTX].
Orders in 2020 are projected to exceed sales and backlog to reach another record.
Raytheon’s Forcepoint commercial cyber security segment was the only business to post lower sales and operating income. The company’s joint venture partner in Forcepoint, Vista Equity Partners, has exercised its put option for its share of the business, requiring Raytheon to buy those shares, which will give it 100 percent ownership. A purchase price is being negotiated.
Forcepoint has underperformed since being acquired around two years ago. Asked by an analyst about selling Forcepoint, Kennedy said the company still expects to “monetize” the business and “create value for our shareholders,” saying Raytheon has a lot of options to do this.