Raytheon [RTN] on Thursday posted lower earnings and sales in its fourth quarter driven primarily by international programs at one of its segments.
Net income slipped 5 percent to $544 million, $1.84 earnings per share (EPS), from $571 million ($1.89 EPS) a year ago, falling short of consensus estimates by two pennies, in part due to a discretionary pre-tax pension contribution that wasn’t in Raytheon’s forecast. Sales dipped one percent to $6.2 billion from $6.3 billion a year ago, with the results below the company’s previous guidance.
Raytheon’s bottom line in the quarter did benefit from a pension tailwind, which added 16 cents per share, and a lower share count, which chipped in another four pennies. These benefits were partially offset by a higher tax rate, which clipped nine cents from per share earnings. Operating margin fell 70 basis points to 13.1 percent.
At the segment level, the drop in income and sales was driven by Integrated Defense Systems (IDS), which posted double-digit top and bottom line declines on an international communications program and work on Australia’s Air Warfare Destroyer program. Anthony “Toby” O’Brien, Raytheon’s chief financial officer, said on the earnings call that some international business at IDS slipped into 2017, which is the reason sales in quarter missed the company’s projections.
Sales were down slightly at the company’s Intelligence, Information and Services (IIS), and Missiles Systems segments, and up slightly at Space and Airborne Systems, which benefited from work on an electronic warfare systems program and a classified international project. The Forcepoint commercial cyber security segment, the company’s smallest group, posted higher sales due to the acquisition of Stonesoft in the fourth quarter of 2015.
Operating income at IIS was up nearly 10 percent due to program efficiencies. Missile Systems eked out a slight rise in profit on the slight gain in sales, while profit at Forcepoint was flat and down at Space and Airborne Systems as both segments had sales that carried lower margins than a year ago.
The results at Forcepoint were lower than Raytheon expected but O’Brien and Thomas Kennedy, the company’s chairman and CEO, said the commercial cyber security business is essentially on track and has met expectations for orders. Forcepoint in 2017 will achieve low double-digit sales growth with margins around 10 to 11 percent, O’Brien said.
Longer-term Forcepoint is expected to continue generating double-digit sales and margin growth, O’Brien said.
In 2016, year sales increased nearly 4 percent to $24.1 billion from $23.2 billion on both domestic and international business, while net income rose 5 percent to $2.2 billion ($7.45 EPS) from $2.1 billion ($6.81 EPS) a year ago. Kennedy said that international business made up 31 percent of sales in 2016, noting revenue from foreign customers has grown 13 straight years.
In 2017 Raytheon expects sales between $24.8 billion and $25.3 billion and earnings between $7.20 and $7.35 EPS, well below consensus estimates of $7.48 EPS. Bookings are expected to exceed sales.
Kennedy said on the earnings call that the forecast for 2017 is based on the current Pentagon budget for FY ’17 and doesn’t factor in potential revisions from the administration of President Donald Trump. The outlook for these potential changes is “cloudy,” he said.
Orders in the quarter were robust, coming in at $7.6 billion, 38 percent from international business, and for the year $27.8 billion, 29 percent from international customers, pushing total backlog up 6 percent at year-end to $36.9 billion, 41 percent of which is from international customers. Funded backlog rose 2 percent through 2016 to $25.6 billion.
Bookings of government funded research and development were up 50 percent, Kennedy said, which gets Raytheon in with customers early in programs that eventually move to development and production and provide seed for growth.