Raytheon [RTN] yesterday reported third quarter earnings and sales that were essentially flat compared to a year ago, but operating results were solid and the company raised its earnings guidance for the year.
Stripping out improvements in pension and other costs, Raytheon’s operating segments overall boosted their profits, driven by strong gains at the Integrated Defense Systems (IDS), Space and Airborne Systems, and Missile Systems segments.
Net income was $500 million, $1.50 earnings per share (EPS), compared to $501 million ($1.43 EPS) a year ago. The results were aided in part by lower pension expenses versus a year ago and margin improvements. Earnings from continuing operations in the quarter were $501 million ($1.51 EPS) compared to $498 million ($1.42 EPS), well above consensus estimates of $1.27 EPS.
Operating margins, including the lower pension expenses, improved by 120 basis points to 13 percent in the quarter. Margins increased due to improved operating performance and contract mix as the company is reaping gains from reduced administrative costs, manufacturing efficiencies, and strategic supply chain initiatives, Dave Wajsgras, Raytheon’s chief financial officer, said on yesterday’s earnings call.
Sales in the quarter were down 1 percent to just over $6 billion compared to just over $6.1 billion a year ago. Revenue declines at IDS, Network Centric Systems (NCS) and Technical Services more than offset growth at the other segments.
Given strong operating performance so far this year and lower than expected pension expense, Raytheon increased and narrowed its EPS guidance from continuing operations to between $5.36 and $5.46. The company lowered and slightly narrowed its sales guidance to between $24.3 billion and $24.7 billion from between $24.5 billion and $25 billion due to postponements in expected international awards at NCS and delays in training and logistics programs at Technical Services.
The earnings forecast includes a potential $30 million charge in the fourth quarter that Raytheon is including due to issues with a supplier, Wajsgras said. He says the potential charge is a “worst case scenario…and we are working hard to not have this happen.”
Operating cash flow for the year is also expected to be higher than prior guidance by $100 million to between $1.8 billion and $2 billion. Operating cash flow in the quarter was $1.1 billion.
The company plans to maintain its balanced approach to cash deployment, Swanson said. Despite the threat of budget sequestration and the federal government operating under a continuing resolution, Swanson said that it is business as usual for Raytheon’s federal customers regarding award activity.
Bookings in the quarter were strong at $7.3 billion, 20 percent higher than sales, and Raytheon remains on track to achieve a 2012 book to bill ratio above one, Wajsgras said. Swanson added that he still expects international business to account for between 25 to 28 percent of total bookings for the year.
The international pipeline of opportunities remains strong, Swanson said. There have been no cancellations, he said.
Backlog at the end of the quarter stood at $35 billion, with $22.9 billion of that funded, compared to backlog of $35.3 billion a year ago, $22.5 billion of which was funded.