January 31, 2019 / 12:53 PM / 6 months ago

UPDATE 3-Raytheon's mixed quarter, modest forecast hurt shares

(Recasts lead, adds details)

By Mike Stone and Rama Venkat Raman

Jan 31 (Reuters) - Tomahawk missile maker Raytheon Co disappointed investors on Thursday by forecasting conservative 2019 profit and revenue after reporting quarterly revenue below Wall Street expectations.

Revenue in the quarter rose to $7.36 billion from $6.78 billion a year earlier boosted by higher demand for its weapons from the United States and its allies, but it missed estimates of $7.46 billion, according to IBES data from Refinitiv.

Raytheon was the latest top U.S. defense contractor this week to reveal it wasn't growing as fast as Wall Street expected, suggesting an anticipated surge in defense spending under President Donald Trump had not directly translated into weapons contracts - at least not yet.

Chief Executive Tom Kennedy told analysts on the call that the Trump administration's recently released Missile Defense Review included several Raytheon programs including the Standard Missile-3 (SM-3) Block IIA and the ICBM interceptors that Raytheon is working on.

"All around I think the missile defense review is great for us," he said.

Shares were down about 2.2 percent to $167.63 in early trading.

The company said it expected 2019 net sales to range between $28.6 billion and $29.1 billion, marginally below analysts' average expectation of $29.01 billion, according to Refinitiv data.

The U.S. weapons maker forecast 2019 profit in the range of $11.40 to $11.60 per share, below analysts' average estimate of $11.78 per share, according to IBES data from Refinitiv.

Toby O'Brien, Raytheon's chief financial officer, told Reuters in an interview on Thursday that the approaching end of an Army training contract was holding back some of the 2019 growth.

"It's transitioning out, and winding down that program in and of itself dropped about a half a billion dollars year-over-year, so we're absorbing that headwind," he said, without providing an end date.

If that were ignored in 2019 "we'd be talking about, you know, eight to 10 percent growth instead of 6 to 8," he said. The contract is in the Intelligence, Information and Services business unit, which posted a 23 percent jump in operating income in the fourth quarter versus the same period a year earlier.

Rivals Lockheed Martin Corp, General Dynamics Corp and Northrop Grumman also forecast their 2019 profit below analysts' estimates this week.

Raytheon said operating cash flow from continuing operations is expected to be in the range of $3.9 billion to $4.1 billion in 2019, compared with $3.4 billion in the previous year. But the mid-point of the forecast fell short of analysts' average estimate of about $4.1 billion.

The company projected that 2020 cash flow would be $4.6 billion. O'Brien told analysts during a post-earnings call that the out-year cash flow projection came from operational improvements as well as international collections.

Raytheon reported higher sales across its five segments, led by its missile systems unit, where sales rose 6 percent to about $2.32 billion. The increase was driven by higher sales from "classified programs," for which the company does not provide detailed numbers.

Waltham, Massachusetts-based Raytheon and other U.S. weapons makers are expected to benefit from strong global demand for fighter jets and munitions as well as higher U.S. defense spending in fiscal 2020.

Operating margins of Raytheon's Integrated Defense Systems (IDS) unit, which makes the Patriot missile system, fell to 14.7 percent in the fourth quarter from 15.9 percent from a year earlier, due to higher investment in new business lines.

Operating margin in the missile systems unit, which makes Paveway smart bombs and advanced medium-range air-to-air missiles, fell to 11.8 percent in the quarter ended Dec. 31 from 12.7 percent a year earlier, due to a change in mix.

Raytheon's net income attributable to the company jumped to $832 million, or $2.93 per share, in the quarter, compared with $393 million, or $1.35 per share, a year earlier, benefiting from lower taxes related to the U.S. tax overhaul.

Sales at the space and airborne systems unit, which makes electronic warfare systems for tactical aircraft, helicopters and ships, rose 12.6 percent to $1.88 billion, but operating margins fell to 13.9 percent from 14.5 percent. (Reporting by Rama Venkat in Bengaluru and Mike Stone in Washington Editing by James Emmanuel, Frances Kerry and Sonya Hepinstall)

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