Raytheon [RTN] on Oct. 22 reported higher sales in its third quarter but earnings fell due to accounting adjustments related to the company’s acquisition this year of Websense, lower operating income, and tax related items.
Despite the decline in earnings, Raytheon maintained its earnings guidance for the year and increased its target for revenue.
Sales in the quarter increased 6 percent to $5.8 billion from $5.5 billion a year ago driven by increases in its Missile Systems and Integrated Defense Systems (IDS) segments and by the acquisition of Websense. International business grew 13 percent and accounted for 32 percent of sales, a record for the company, Thomas Kennedy, Raytheon’s chairman and CEO, said on the analyst call.
International demand is coming from customers in various regions of the globe in response to “rapidly evolving threats,” Kennedy said. Domestic growth was up 3 percent, he said. Those international demand “signals” are continuing, he said.
Organic drivers for the sales increase in the quarter were international Patriot missile defense programs, missile defense programs, and the TOW missile program
Net income fell 13 percent to $447 million, $1.47 cents earnings per share (EPS) from $515 million ($1.65 EPS), topping consensus estimates by four cents per share.
Accounting adjustments related to the Websense deal lopped $52 million (9 cents EPS) from income and the company’s operating segments posted a 3 percent drop in income to $714 million. Segment operating margin fell 120 basis points to 12.3 percent.
Raytheon also said tax-related impacts knocked 8 cents per share from net income.
Raytheon increased and narrowed the range for its sales outlook for the year to between $23 billion and $23.3 billion from a previous range of $22.7 billion to $23.2 billion. The increase is due to stronger outlooks at the IDS and Missile Systems segments. Guidance for earnings from continuing operations is unchanged at between $6.47 and $6.42 EPS despite an unexpected negative $12 million (3 cents EPS) pension adjustment.
Detailed expectations for 2016 will be outlined when Raytheon reports 2015 year-end results but the company offered high-level trend lines with top line growth of 3 to 4 percent over the mid-point of the 2015 guidance “driven in part by some new development awards we are expecting,” Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the call. Segment operating margins are expected to be flat to slightly up in 2016, he said.
Following its $1.9 billion acquisition in the second quarter of a majority stake in cyber security firm Websense, O’Brien said there are no $1 billion-plus deals on the table and instead the focus of any acquisition activity is the “more niche, targeted type…that fills technology gaps, or product gaps, or customer gaps.”
Bookings in the quarter were $5.3 billion with international orders accounting for 26 percent of the new business, and for 2015 are expected to be $25.5 billion, plus or minus $500 million, a $1 billion increase in the guidance from a quarter ago, Kennedy said, driven by “strong demand from our global customers.” These bookings also help drive the top line expectations for 2016, he said.
Early in 2016 Raytheon also expects to finalize a contract for an early warning radar system with Qatar valued at about $1 billion, Kennedy said.
Backlog at the end of the quarter stood at $33.6 billion, level with the end of 2014, and is expected to grow in the fourth quarter to between 4 and 8 percent higher than the close of 2014, O’Brien said. Funded backlog at the end of the quarter was $24.4 billion, $1.3 billion higher than at the end of 2014.
Free cash flow in the quarter was about $1 billion.