Lower taxes combined with a pension tailwind powered Raytheon [RTN] to a huge boost in earnings in its second quarter and the company also posted solid top line growth.
Raytheon, like all the major defense companies that have reported second quarter results this week, benefited handsomely from the lower corporate tax rate that went into effect on Jan. 1, as lower taxes added 38 cents to earnings per share (EPS). On top of that, the company said that in September it will make a nearly $1.3 billion pretax discretionary pension contribution that contributed to the better earnings in the second quarter.
Net income increased 45 percent to $800 million ($2.78 EPS), from $553 million ($1.89 EPS) a year ago, smashing consensus estimates by 43 cents per share. The forthcoming pretax pension contribution provided a $95 million (33 cents EPS) tax benefit to the bottom line that wasn’t included in Raytheon’s prior guidance.
While earnings in the quarter were strong, at the segment level, the operational results were mixed. Overall segment operating profit was down as a loss at the Forcepoint commercial cyber security business and lower profits at the Space and Airborne Systems (SAS) and Missile Systems segments slightly more than offset higher operating income at the Intelligence, Information and Services and Integrated Defense Systems segments.
Segment operating margin declined 70 basis points in the quarter to 11.7 percent and overall corporate operating margin dipped 20 basis points to 16.6 percent.
Sales increased nearly 6 percent to $6.6 billion from $6.3 billion a year ago, driven by gains at four of the five operating segments, with revenue at SAS flat. Raytheon said a contract for a Patriot air and missile defense system in the first quarter with Poland, various classified programs, the Development, Operations, and Maintenance cyber security program for the Department of Homeland Security, and the Air and Space Operations Center Weapon System all contributed to the higher sales.
Raytheon said that 31 percent of the overall sales were to international customers. Thomas Kennedy, Raytheon’s chairman and CEO, said on the company’s earnings call that international demand remains strong.
Orders in the quarter were robust with the company booking $8.7 billion in business, driven by domestic customers. International orders accounted for 21 percent of the bookings.
Kennedy said that classified business made up over 30 percent of bookings, a new record and more than double the amount from the year ago second quarter. The classified bookings are surging because of the Defense Department’s demand for capabilities to catch up to peer threats, as called for in the National Defense Strategy, he said.
To accommodate growth in the classified business, in May the company’s Missile Systems segment dedicated new facilities in Arizona to include a new testing facility, engineering and manufacturing improvements, new laboratories and computing capabilities, Kennedy said.
Raytheon lifted sales and earnings guidance for 2018, with sales now forecast to be between $26.7 billion and $27.2 billion, $200 million higher than the prior outlook with the increase driven by domestic and international demand.
Earnings from continuing operations are now expected to be seven cents higher at between $9.77 EPS and $9.97 EPS. Raytheon said that in the third quarter it will take a $228 million (79 cents EPS) after-tax charge related to a group annuity contract some of its pension plans purchased this month for $923 million. Raytheon said the contract wasn’t included in prior guidance.
Backlog at the end of the quarter stood at a record $39.9 billion, up from $36.2 billion a year ago, with about 40 percent from international business.