Raytheon [RTN] on April 27 reported strong earnings in the first quarter due to gains in each of its key operating segments and the company also posted a modest increase in sales.
Net income increased 18 percent to $506 million, $1.74 earnings per share (EPS), versus $428 million ($1.43 EPS) a year previously. Excluding discontinued operations, per share earnings were $1.73, 12 cents better than consensus estimates. Total operating margins were 12.4 percent, 1.8 percent higher than a year earlier.
Sales increased 3 percent to $6 billion from $5.8 billion a year earlier.
Raytheon attributed most of the income gains to operational improvements, with a lower share count, accounting adjustments and other factors making up the remainder of the increase. At the operating level, the Integrated Defense Systems (IDS), Space and Airborne Systems (SAS), and Missile Systems all posted double-digit increases in segment profit while the Intelligence, Information and Services (IIS) segment posted a strong single-digit rise.
The SAS, IDS and Missile Systems segments drove the top line growth on sales of an electronic warfare system, and an international early warning radar program.
Thomas Kennedy, Raytheon’s chairman and CEO, said on the company’s earnings call that sales to international customers increased nearly 8 percent in the quarter and accounted for 32 percent of total sales. He also said the company’s classified business with domestic customers rose more than 6 percent in the quarter, driven by record classified bookings in 2016.
Kennedy also highlighted a threat environment that is driving a “significant increase in demand signals from every one of our major global markets,” including strike, integrated air and missile defense, and long-range sensing capabilities.
There is a pipeline for a number of large international opportunities, Kennedy said, including a Patriot air and missile system deal for Poland that is being worked with the U.S. government that is worth up to $5 billion for Raytheon. He expects Poland to sign an agreement with the U.S. government later in 2017 for the Patriot, which would make it the 14th country to acquire the system.
Kennedy also said there are additional opportunities for Patriot in Europe. He added that Australia has selected the company as the sole bidder for a ground-based air defense system that represents a potential $1 billion opportunity. An award is expected around 2019, he said.
Customers in the Middle East and North Africa are also interested in long-range sensors, Kennedy said, in particular early warning radars and the company’s TPY-2 X-Band counter ballistic missile radar in the 2018 and 2019 period. During the first quarter Raytheon booked a $987 million order from Qatar for the Upgraded Early Warning Radar system.
He also outlined a robust outlook for Raytheon’s business supporting the surface and subsurface components of the U.S. Navy, which accounts for 18 percent of the company’s sales. These “domains” are “key areas” for future growth, Kennedy said.
Based on its strong opening quarter, Raytheon raised its sales and earnings guidance for the year. Sales are now expected to be between $24.9 billion and $25.4 billion, up $100 million from the prior outlook due to higher expectations in the Missile Systems segment. The company raised its earnings guidance by a nickel to between $7.25 and $7.40 EPS, driven by a lower tax rate, higher sales, and lower interest expense, partially offset by a forthcoming charge related to the early retirement of debt.
Orders in the quarter were $5.7 billion and the company raised its outlook for bookings in 2017 by $500 million to between $25.5 billion to $26.5 billion. International awards made up 33 percent of the bookings in the quarter, a 14 percent increase from a year earlier, Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the earnings call.
Backlog at the end of the quarter stood at $36.1 billion versus $34.2 billion a year earlier, with 41 percent booked with international customers, O’Brien said. He said that $24.6 billion of the backlog is funded.
Operating cash was an outflow of $41 million in the quarter reflecting timing of collections.