By Calvin Biesecker
Raytheon [RTN] yesterday said net earnings in the second quarter fell by more than 50 percent due to the United Kingdom Home Office’s sudden termination last week of watchlist screening program due to schedule delays.
The cancellation of the e-Borders packed a wallop, gutting $395 million, 71 cents earnings per share (EPS), from income before taxes and lopping $316 million from sales.
In its earnings announcement, Raytheon said it “performed well and delivered substantial capabilities” on the e-Borders program and that it “intends to pursue vigorously the collection of the unbilled receivables and damages and defend itself against the claims for losses and previous payments.”
The e-Borders system began initial operations in May 2009 and has resulted in the capture of “bad people,” William Swanson, Raytheon’s chairman and CEO, said on yesterday’s analyst call. This March the program turned on an interagency data center that he calls “state of the art” and contains “one of the largest databases in the world.” The next major deliverable was supposed to be a software drop in October, he said.
The U.K. Home Office last week said it was canceling the e-Borders contract due to a lack of “confidence” in Raytheon, saying the company was in breach of the contract and was at least a year behind schedule with certain elements of the program (Defense Daily, July 23). A Raytheon-led team won the potential $1 billion-plus project in 2007 over another team led by British Telecom.
The Home Office said it plans to seek other providers to complete e-Borders, which would allow British authorities to conduct watchlist checks of persons entering or exiting the country by air, sea or rail before boarding.
Swanson wouldn’t discuss his litigation strategy regarding the U.K. decision but said the way it was handled was the first he had seen in his nearly 40-year career at the company.
Raytheon called the event “unusual,” and Swanson said, “I’ll put it in a political bin rather than a performance bin.”
Despite the setback, Swanson said that homeland security on the global level remains a double-digit growth business.
“One of the things we see, even though there’s tough [fiscal] environments out there, people still need and want some kind of homeland border security or a way to tie it together,” Swanson said. “And you can almost pick a country and I can almost tell you something…that we’re doing in a particular country, whether it’s Asia, Australia, Europe, the Mid East; there’s something going on that fits in this world.”
Net income in the quarter was $208 million (55 cents EPS), down 57 percent from $489 million ($1.23 EPS) a year ago. In addition to losing sales and earnings associated with e- Borders, Raytheon also said that pension expenses clipped 9 cents from EPS.
Sales in the quarter were $6 billion, down 2 percent from $6.1 billion a year ago.
The impact of the e-Borders cancellation “obscured” an otherwise solid quarter, said Dave Wajsgras, Raytheon’s chief financial officer. Excluding the impact of e-Borders and the pension expense, Raytheon’s adjusted EPS from continuing operations was $1.36, well ahead of consensus estimates of $1.19 EPS.
Wajsgras also noted that absent the charge, Raytheon’s operating margins increased 30 basis points to 12.6 percent. Including the charge, margins were 5.8 percent.
Bookings in the quarter were $5.9 billion and total backlog was $36 billion, down about $1 billion since the end of 2009.
The program cancellation and unexpected pension expense also caused Raytheon to lower its sales and earnings guidance for the year. Sales are forecast to be $300 million lower, between $25.6 billion and $26.1 billion. Earnings from continuing operations are projected to be between $4 and $4.15 EPS, 75 cents lower that prior guidance. The earnings guidance assumes that Congress will retroactively extend a research and development tax credit that expired at the end of 2009.
In the quarter Raytheon pointed to a number of reasons that contributed to strong earnings absent the e-Borders setback, including international Patriot programs, improved program performance at the Missile Systems segment, and higher volume and improved program performance related to the Army Warfighter Field Operations Customer Support, which provides domestic and foreign training programs.
Swanson spent several minutes discussing the cybersecurity market, noting that while it had been slow to takeoff, the company is getting contracts now, with awards running between $10 million and $100 million. He expects larger awards to materialize in 2011. Longer-term he believes that cyber will grow in the double digits.