Raytheon [RTN] on Thursday posted declines in its top and bottom lines due to continued sluggishness in domestic defense spending, but the results were generally better than the company’s and analysts’ expectations.
Net income fell 8 percent to $551 million, $1.78 earnings per share (EPS), from $596 million ($1.89 EPS), but still trumped consensus estimates by 36 cents per share.
The first quarter results benefited handsomely from the recent settlement with the United Kingdom on the eBorders security program, which added $181 million (42 cents EPS) to the bottom line. The company’s earnings also benefited from a pension adjustment. The results a year ago also benefited from a favorable tax settlement and pension adjustment.
Sales in the quarter fell 4 percent to $5.3 billion from $5.5 billion a year ago. International business accounted for 28 percent of the revenue.
Raytheon left its sales guidance intact for the year at between $22.3 billion to $22.8 billion but increased its outlook on earnings by 47 cents per share to between $6.67 to $6.82 EPS to reflect the eBorders settlement. The nickel difference between the 42 cents EPS contribution from the settlement versus the 47 cents for the guidance has to do with the timing of the tax rate, a company spokesman told Defense Daily.
The company’s pending $2 billion acquisition of commercial-oriented cyber security provider Websense, which will operate as a joint venture with current owner Vista Equity Partners, won’t be accretive to earnings for three to four years, Thomas Kennedy, Raytheon’s chairman and CEO, said on the company’s earnings call. The transaction is expected to close by the end of June.
Kennedy said that the domestic horizon appears to be brightening somewhat given that the Obama administration and Congress have “presented initial budget proposals that could exceed previously agreed caps.” He added that even if the Budget Control caps aren’t lifted, the Pentagon’s budget for 2016 “will be several billion dollars higher” than in 2015.
“The bottom line is the trajectory of the DoD base budget is finally starting to trend upward,” Kennedy said.
For the year sales related to DoD spending are expected to be down in the low single digits and will be partially offset by low to mid-single digit increases in international business, Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the call. However, he said, domestic receipts for the company will probably “flatten out towards the end of the year and we could start to see some improvement going forward.”
Raytheon already has garnered $3 billion in orders in the first few weeks of the second quarter, including a $2 billion booking for its Patriot air and missile defense system, which will boost the company’s sales profile in the second half of the year. The company’s orders in the first quarter were $4.5 billion with 34 percent of the bookings from international customers, Kennedy said.
Raytheon’s win this week of a Polish tender for Patriot air and missile defense systems will likely be booked in 2016, once the details of the eventual contract are worked out, Kennedy said.
Total backlog at the end of the first quarter stood at $32.5 billion versus $32.2 billion a year ago, while funded backlog was $23.7 billion versus $22.7 billion a year ago.
At the operating level, all four of Raytheon’s business segments posted lower sales and just the Intelligence, Information and Services posted higher operating profits, which was due entirely to the eBorders settlement. Profits at the Missile Systems segment were flat. The company’s operating margins improved 160 basis points to 15.9 percent.
Kennedy said that for now there are no more large acquisitions being targeted although the company could pursue smaller companies to “position” it for future growth and obtain technology that will help with market success.