Raytheon [RTN] on Thursday posted lower earnings in its fourth quarter stemming from provisions in a new tax law and to a lesser extent a voluntary payment into its pension plans but sales were higher and the company is projecting top and bottom line increases in 2018.
Net income tumbled 29 percent to $393 million, $1.35 earnings per share (EPS), from $555 million ($1.88 EPS) as the tax provision lopped $171 million (59 cents EPS) and a discretionary pension contribution chipped $25 million (9 cents EPS) from the bottom line. Excluding the tax and pension hits, per share earnings were $2.03, a penny above consensus estimates.
While the new tax law, which went into effect on Jan. 1, dented earnings in the fourth quarter, Raytheon expects to benefit from lower rates this year, around 19 percent versus 36 percent in 2017.
Anthony “Toby” O’Brien, the company’s chief financial officer, said on Thursday’s earnings call that Raytheon’s balanced approach to capital deployment won’t change, with about 80 percent of free cash flow still expected to be returned to shareholders. Still, spending on internal investments is expected to grow, he said.
In 2017, Raytheon spent $611 million on capital expenditures and software, an amount that will grow to between $910 million to $950 million this year, O’Brien said, “more than a 50 percent increase.” He added that, “Where we’re making those increases, we’re looking to invest in infrastructure, high-technology production facilities, demonstration capabilities, more factory automation, the combination of which helps position us better to grow and drive productivity improvements.”
Spending on company-funded research and development will hold at around 3 percent and with tax reform in place Raytheon will consider a discretionary contribution its pension plans by September, O’Brien said. The company made a $1 billion discretionary pension contribution in the fourth quarter that wasn’t anticipated in its earlier guidance for 2017.
Thomas Kennedy, Raytheon’s chairman and CEO, said that tax reform makes the company “more globally competitive.”
Sales in the quarter rose 8 percent to $6.8 billion from $6.3 billion on gains in all five operating segments, led by Missile Systems, which posted a 15 percent jump in revenue on the Advanced Medium Range Air-to-Air Missile, Standard Missile-3, and Paveway laser guided missile programs. Sales were also up on an international early warning radar program, Air Force and classified programs, airborne radars, and commercial cyber security products.
International business accounted for 32 percent of sales in the quarter.
Overall at the operating level, Raytheon’s segments turned in higher earnings, led by a 10 percent gain at Space and Airborne Systems on improved sales and a favorable contract mix, followed by Missile Systems, which benefited from the higher sales, and to a lesser extent Integrated Defense Systems. Earnings gains at these segments were partially offset by a loss at the Forcepoint cyber security products segment and a decline at Intelligence, Information and Services.
Kennedy said the company still expects Forcepoint to begin turning the corner in 2018 following a rebuilding year in 2017, which was marked by increased investments in the unit’s sales force as it targets large and very large enterprises. He also said that Forcepoint fits well into the company’s overall strategy in cyber security of offering a full suite of solutions for customers.
Raytheon’s total operating margin was down 120 basis points in the quarter to 12.8 percent.
For all of 2017, net income fell 9 percent to $2 billion ($6.95 EPS) from $2.2 billion ($7.55 EPS) while sales increased 5 percent to a record $25.3 billion from $24.1 billion, with 32 percent of sales coming from international customers. Kennedy said 2017 was the 14th straight year of international sales growth for Raytheon, exceeding $8 billion, a record for the company.
In 2018, Raytheon expects sales to be up between 4 and 6 percent to between $26.4 billion and $26.9 billion on the strength of increases from domestic and international customers. The Missile Systems segment is expected to lead the way on the revenue gains. Earnings are expected to be between $9.55 and $9.75 EPS.
Prospects for growth this year are founded in Raytheon’s backlog, which stood at $38.2 billion at the end of 2017, up 4 percent from a year ago, O’Brien said. The backlog is being driven by strong order intake, with bookings of $8.5 billion in the fourth quarter and $27.7 billion in 2017.
International orders made up 40 percent of bookings in the quarter and 31 percent for the year. About 40 percent of backlog at the end of 2017 was from international orders.
Operating cash flow for the year, after the $1 billion pension contribution, was $2.7 billion and in 2018 Raytheon expects to generate between $3.6 billion and $4 billion.