19 Oct 18. The US Defense Majors’ Reporting Season kicked off with strong showing across the board spurred by strong growth in civil aerospace markets. The wall of money in the US defense segment is due to hit the markets next year. A source told BATTLESPACE at AUSA that 6 companies are the recipients of 40% of the budget.
Boeing Reports Solid Third Quarter; Reaffirms Cash and Raises Revenue and EPS Guidance
- Revenue increased to $25.1bn driven by higher defense and services volume
- GAAP EPS of $4.07 and core EPS (non-GAAP)* of $3.58 on solid execution across the company
- Strong operating cash flow of $4.6bn; repurchased 7.0 m shares for $2.5bn
- Total backlog grew to $491 bn, including more than 5,800 commercial airplanes
- Cash and marketable securities of $10.0bn provide strong liquidity
- Reaffirmed cash guidance; raised revenue and EPS guidance; updated segment margin guidance
24 Oct 18. The Boeing Company [NYSE: BA] reported third-quarter revenue of $25.1 bn driven by higher defense volume and services growth (Table 1). GAAP earnings per share increased to $4.07 and core earnings per share (non-GAAP)* increased to $3.58 primarily driven by strong operating performance at Commercial Airplanes and a tax benefit related to a tax settlement ($0.71 per share). Results also reflect charges related to planned investments in the newly awarded T-X Trainer and MQ-25 programs ($0.93 per share). Boeing delivered strong operating cash flow of $4.6bn, repurchased $2.5 bn of shares, and paid $1.0bn of dividends.
The company’s revenue guidance increased $1.0bn to between $98.0 and $100.0bn, driven by defense volume and services growth, inclusive of the KLX acquisition. Operating cash flow guidance is reaffirmed at $15.0 to $15.5bn. Full year GAAP earnings per share guidance is increased to between $16.90 and $17.10 from between $16.40 and $16.60 and core earnings per share (non-GAAP)* guidance is increased to between $14.90 and $15.10 from between $14.30 and $14.50 driven by a lower-than-expected tax rate and improved performance at Commercial Airplanes.
“Our teams continued to perform at a high level during the quarter, driving solid operating performance and robust cash generation, and continuing to deliver on our One Boeing advantage by bringing the best of Boeing to our customers,” said Boeing Chairman, President and Chief Executive Officer Dennis Muilenburg. “During the quarter we captured important new defense business, winning and investing in the MQ-25 and T-X programs and securing the MH-139 contract, clearly demonstrating the value Boeing brings to customers while positioning us well for future growth opportunities. Within the Commercial Airplanes business, the 777X static test airplane was completed and moved into test setup and the team’s focus on execution across our production programs continued to drive outstanding performance and strong operating margins. Our Global Services business continues to deliver on total lifecycle value to our customers, with key wins in the quarter including P-8 Poseidon training contracts for the U.S. Navy and Royal Australian Air Force and an order from GECAS for 20 737-800 Boeing Converted Freighters. Additionally, we began integrating new data analytics tools, powered by Boeing AnalytX, into all Boeing Defence Australia support contracts, enhancing its position as a leading fleet services provider in the region. This strong underlying performance, along with growth across our businesses we’ve seen throughout the year, give us confidence to raise our 2018 revenue and earnings guidance and reaffirm our operating cash flow guidance.”
Operating cash flow in the quarter increased to $4.6bn, primarily driven by timing of receipts and expenditures as well as planned higher commercial airplane production rates and strong operating performance. During the quarter, the company repurchased 7.0 m shares for $2.5bn, leaving $9.6bn remaining under the current repurchase authorization which is expected to be completed over approximately the next 12 to 18 months. The company also paid $1.0bn in dividends in the quarter, reflecting a 20 percent increase in dividends per share compared to the same period of the prior year.
Cash and investments in marketable securities totaled $10.0bn, compared to $9.8bn at the beginning of the quarter. Debt was relatively stable at $11.9bn.
Total company backlog at quarter-end was $491bn, up from $488bn at the beginning of the quarter, and included net orders for the quarter of $28bn.
Commercial Airplanes third-quarter revenue of $15.3bn was relatively unchanged, reflecting lower deliveries largely offset by mix . Third-quarter operating margin increased to 13.2 percent, reflecting higher 787 margin and strong operating performance on production programs, partially offset by $112m of cost growth on the KC-46 Tanker program due to higher than expected effort to meet customer requirements to support delivery of the initial aircraft, as well as due to incremental delays in certification and testing.
During the quarter, Commercial Airplanes delivered 190 airplanes, including 57 737 MAX airplanes. The 777X program remains on track for delivery in 2020 as the static test airplane was completed and moved into test setup and the first two flight test airplanes were in production.
Commercial Airplanes booked 171 net orders during the quarter, valued at $13 bn. The 787 program has captured more than 100 orders in 2018 and nearly 1,400 orders since its launch. Backlog remains robust with more than 5,800 airplanes valued at $413 bn. Commercial Airplanes revenue guidance is reaffirmed at between $59.5 and $60.5 bn and margin guidance is increased to between 12% and 12.5% from greater than 11.5% on strong performance.
Defense, Space & Security
Defense, Space & Security third-quarter revenue increased to $5.7bn driven by increased volume across government satellites, KC-46 Tanker, F/A-18 and weapons (Table 5). Third-quarter operating margin was (4.3) percent, primarily reflecting $691m of charges related to planned investments in the T-X and MQ-25 programs and $64m related to cost growth on the KC-46 Tanker program.
During the quarter, Defense, Space & Security won key franchise program awards, including the T-X Trainer and MH-139 helicopter for the U.S. Air Force, the MQ-25 unmanned aircraft for the U.S. Navy, and the fourth KC-46 Tanker production lot. Significant milestones during the quarter included first flights of the Apache and Chinook for the Indian Air Force and receipt of Supplemental Type Certification for the KC-46 Tanker program, signifying completion of FAA certification. We also completed the acquisition of Millennium Space Systems, which will provide customers with advanced small-satellite technologies and flexible solutions.
Backlog at Defense, Space & Security was $58bn, of which 31 percent represents orders from customers outside the U.S. Defense, Space & Security revenue guidance increased to between $22.5 and $23.0bn from between $22.0 and $23.0bn driven by higher volume and margin guidance is adjusted to greater than 6.5% from between 10% and 10.5% primarily to account for the investments in the business.
Global Services third-quarter revenue increased to $4.1bn, primarily driven by higher parts volume (Table 6). Third-quarter operating margin was 13.3 percent reflecting mix and higher period costs.
During the quarter, Global Services was awarded P-8 training contracts for the U.S. Navy and Royal Australian Air Force, captured an order from GECAS for 20 737-800 converted freighters, and completed the first P-8A heavy maintenance check for the U.S. Navy. Global Services also secured contracts for F/A-18 spares for the Defense Logistics Agency and KC-46 Tanker services for Lots 3 and 4. In early October, Global Services completed the acquisition of KLX, which will enhance our services business and allow us to deliver greater value to customers.
Global Services revenue guidance increased to between $16.0 and $16.5bn from between $15.5 and $16.0bn driven by higher volume and margin guidance is reaffirmed at approximately 15.5%.
Additional Financial Information
At quarter-end, Boeing Capital’s net portfolio balance was $3.1 bn. Revenue in other unallocated items and eliminations decreased primarily due to the 2017 sale of aircraft previously leased to customers. The change in earnings from other unallocated items and eliminations is primarily due to timing of expense allocations. The effective tax rate for the third quarter decreased from the same period in the prior year primarily due to a $412 m benefit related to a 2013-2014 tax settlement and the reduction of the federal tax rate to 21%.
- Revenue up 20% year-over-year to $9.1bn
- Earnings from continuing operations up 13.1% to $864m
- Diluted EPS from continuing operations up 14.7% year-over-year to $2.89
24 Oct 18. General Dynamics (NYSE: GD) today reported third-quarter 2018 earnings from continuing operations of $864m, a 13.1 percent increase over third-quarter 2017. Revenue increased 20 percent to $9.1bn. While a large portion of the growth was attributed to the acquisition of CSRA, revenue in all segments grew.
Diluted earnings per share (EPS) from continuing operations were $2.89 compared to $2.52 in the year-ago quarter, a 14.7 percent increase.
“We took action this quarter to streamline our portfolio, drive out risk from our supply chain and deliver increasingly sophisticated products and services to our customers in an efficient and timely manner,” said Phebe Novakovic, chairman and chief executive officer. “We remain committed to generating steady and sustainable results from our businesses.”
Significant activities this quarter included the delivery of the Virginia-class submarine SSN 790 (future USS South Dakota), the keel-laying of the first John Lewis-class fleet replenishment oiler and the continued integration of CSRA.
Company-wide operating margin for the third quarter of 2018 was 12.5 percent, a 70 basis-point increase over second-quarter 2018.
Net cash provided by operating activities in the quarter totaled $790m, compared to $872m in the year-ago quarter. Free cash flow from operations, defined as net cash provided by operating activities less capital expenditures, was $622m, after a $255 m discretionary pension plan contribution.
The company repurchased 450,000 of its outstanding shares in the third quarter of 2018. Year-to-date, the company has repurchased 2.5m outstanding shares.
The company’s total backlog at the end of third-quarter 2018 was $69.5bn, up 4.9 percent from second-quarter 2018. The estimated potential contract value, representing management’s estimate of value in unfunded indefinite delivery, indefinite quantity (IDIQ) contracts and unexercised options, was $34.7bn. Total potential contract value, the sum of all backlog components, was $104.2bn at the end of the quarter, a new record.
Order activity was robust across the company with a 1.4-to-1 total book-to-bill ratio, defined as orders divided by revenue. Significant awards in the quarter included $3.9bn from the U.S. Navy for the construction of four Arleigh Burke-class (DDG-51) guided-missile destroyers; $580 from the Navy for surface ship maintenance and modernization work; $480 from the Navy to continue design and development work for the Columbia-class submarine program; $210 from the Centers for Medicare & Medicaid Services for benefits recovery services, cloud hosting and IT support; $170 from the Navy for combat and seaframe control systems for Littoral Combat Ships; and $150 from the U.S. Army for equipment to support the Army’s mobile communications network. In addition, the Army awarded a $3.9bn maximum-potential-value IDIQ contract for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.
19 Oct 18. Honeywell delivers third-quarter reported sales growth of 6%, operating cash flow growth of 33%
- Organic Sales up 7% Driven by Aerospace and Safety and Productivity Solutions
- Operating Income Margin up 40 Basis Points, Segment Margin up 70 Basis Points to 19.4%
- Reported Earnings per Share of $3.11; Adjusted EPS1 of $2.03, up 17%
- Adjusted Free Cash Flow2 up 51%, Conversion 119%
- Updated Guidance Reflects Broad-Based Strength in Business Outlook and Impact from Two Spin-Offs
Honeywell (NYSE: HON) today announced financial results for the third quarter of 2018 and revised its full-year 2018 guidance to reflect the impact of the spin-offs.
“Honeywell continued to build on its strong first-half performance, delivering exceptional results across the board. Organic sales were up 7 percent driven by continued double-digit growth in our warehouse automation business; strong growth across the Aerospace business; demand for Solstice® low global-warming materials and short-cycle Process Solutions software and services; and continued momentum in Homes and ADI global distribution. The increased volumes, coupled with our operational excellence initiatives, drove 70 basis points of segment margin expansion, which is 20 basis points above the high end of our guidance. This resulted in adjusted earnings per share of $2.03, up 17 percent year-over-year,” said Darius Adamczyk, Chairman and Chief Executive Officer of Honeywell. “In the third quarter, we generated more than $1.8bn of adjusted free cash flow, up 51 percent year-over-year, with conversion of 119 percent. We also repurchased approximately $600 m in Honeywell shares in the third quarter and increased our dividend by 10 percent – the ninth double-digit increase since 2010. Through the third quarter of 2018, we have committed more than $4.5bn in capital deployment through share repurchases, dividends and acquisitions. This has been an exciting year for Honeywell. The portfolio changes we announced at this time last year are nearly complete, and we recently announced the acquisition of Transnorm, a leading provider of warehouse automation solutions with a large and growing installed base and an attractive aftermarket. We are well positioned to deliver strong results in 2019 and are committed to delivering outstanding returns for our shareowners over the long term,” Adamczyk concluded.
The company revised its full-year guidance to reflect the strong operational performance in the first three quarters of 2018, the completion of the spin-off of Garrett Motion Inc. (NYSE: GTX), which separated from Honeywell on October 1, and the expected completion of the spin-off of Resideo Technologies, Inc. on October 29. Sales are now expected to be $41.7bn to $41.8bn; organic sales growth is now expected to be approximately 6 percent; segment margin expansion is now expected to be 50 to 60 basis points; and adjusted earnings per share4 is now expected to be $7.95 to $8.00. The new guidance range takes into account $0.27 of net earnings dilution from the separation of the Garrett and Resideo businesses, partially offset by a $0.07 increase to reflect the company’s improved fourth-quarter outlook.
Honeywell sales for the third quarter were up 6 percent on a reported basis and up 7 percent on an organic basis. The difference between reported and organic sales primarily relates to the impact of foreign currency translation. Third-quarter reported earnings per share was $3.11, which includes $233 m of separation costs (including net tax impacts) associated with the Garrett and Resideo spin-offs and a $1bn favorable adjustment to the charge the company took in the fourth quarter of 2017 related to U.S. tax legislation.
Aerospace sales for the third quarter were up 10 percent on an organic basis driven by robust demand from business aviation original equipment manufacturers, continued strength in the U.S. and international defense business, growth in the air transport and business aviation aftermarket, and demand for light vehicle gas turbochargers in Transportation Systems (which was spun-off as Garrett Motion Inc. effective October 1). Segment margin expanded 80 basis points to 22.1 percent, primarily driven by higher defense and aftermarket volumes, Commercial Excellence and lower customer incentives.
Home and Building Technologies sales for the third quarter were up 3 percent on an organic basis driven by continued strength in the ADI Global Distribution business, demand for commercial fire products and residential thermal solutions, and growth in Building Solutions. Segment margin expanded 10 basis points to 17.1 percent, primarily driven by Commercial Excellence and productivity (including benefits from previously funded and executed restructuring), largely offset by inflation and unfavorable mix.
Performance Materials and Technologies sales for the third quarter were up 4 percent on an organic basis driven by demand for Solstice® low global warming products in Advanced Materials; short-cycle products, services and software demand in Process Solutions; and growth in engineering sales in UOP. Segment margin contracted, as anticipated, by 70 basis points to 21.2 percent, primarily driven by unfavorable mix in UOP.
Safety and Productivity Solutions sales for the third quarter were up 12 percent on an organic basis driven by continued double-digit sales growth in the Intelligrated business, strong demand for new mobility solutions in productivity products, and higher volumes in sensing and industrial safety. Segment margin expanded 150 basis points to 16.6 percent, primarily driven by Commercial Excellence, productivity and higher sales volumes.
Lockheed Martin Reports Third Quarter 2018 Results
– Net sales of $14.3bn
– Net earnings of $1.5bn, or $5.14 per share
– Increased quarterly dividend rate to $2.20 per share
– Increased share repurchase authority by $1.0 bn
– Achieved backlog of $109bn
– Updates 2018 financial outlook and provides financial trend information for 2019
23 Oct 18. Lockheed Martin (NYSE: LMT) today reported third quarter 2018 net sales of $14.3 bn, compared to $12.3 bn in the third quarter of 2017. Net earnings in the third quarter of 2018 were $1.5bn, or $5.14 per share, compared to $963m, or $3.32 per share, in the third quarter of 2017. Cash from operations in the third quarter of 2018 was $361m after pension contributions of $1.5bn, compared to cash from operations of $1.8bn in the third quarter of 2017, with no pension contributions.
“Our team achieved another quarter of strong growth leading us to improve our expectations for our full-year financial results,” said Lockheed Martin Chairman, President and CEO Marillyn Hewson. “As we look ahead to 2019, we remain focused on providing innovative, essential solutions to customers, and continuing to generate growth and long-term value for shareholders.”
Adoption of New Accounting Standards
As previously reported, effective Jan. 1, 2018, the corporation adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606), which changed the way the corporation recognizes revenue for certain contracts. In addition, effective Jan. 1, 2018, the corporation adopted ASU 2017-07, Compensation-Retirement Benefits, which changed the income statement presentation of certain components of pension and other postretirement benefit plan expense. The financial results for all periods presented in this news release have been adjusted to reflect the new methods of accounting.
2019 Financial Trends
The corporation expects its 2019 net sales to increase by approximately 5.0 percent to 6.0 percent as compared to the 2018 outlook. Total business segment operating margin in 2019 is expected to be in the 10.5 percent to 10.8 percent range and cash from operations is expected to be greater than or equal to $7.0 bn. The preliminary outlook for 2019 assumes the U.S. Government continues to support and fund the corporation’s key programs. Changes in circumstances may require the corporation to revise its assumptions, which could materially change its current estimate of 2019 net sales, operating margin and cash flows.
The corporation expects the net 2019 FAS/CAS pension benefit to be approximately $1.5bn assuming a 4.125 percent discount rate (a 50 basis point increase from the end of 2017), a 1.00 percent return on plan assets in 2018, and a 7.00 percent expected long-term rate of return on plan assets in future years (a 50 basis point decrease from the end of 2017), among other assumptions. As a result of the $5.0bn in contributions to its qualified defined benefit pension plans in 2018 the corporation does not expect to make contributions to its qualified defined benefit pension plans in 2019. A change of plus or minus 25 basis points to the assumed discount rate, with all other assumptions held constant, would result in an incremental increase or decrease of approximately $120m to the estimated net 2019 FAS/CAS pension adjustment. A change of plus or minus 100 basis points to the return on plan assets in 2018 only, with all other assumptions held constant, would increase or decrease the net 2019 FAS/CAS pension adjustment by approximately $20m. The corporation will finalize the postretirement benefit plan assumptions and determine the 2018 actual return on plan assets on Dec. 31, 2018. The final assumptions and actual investment return for 2018 may differ materially from those discussed above.
The corporation’s cash activities in the third quarter of 2018 consisted of the following:
- making contributions to its pension trust of $1.5bn, compared to no contributions in the third quarter of 2017;
- paying cash dividends of $569m, compared to $522m in the third quarter of 2017;
- repurchasing 0.6 m shares for $216m, compared to 1.6m shares for $500m in the third quarter of 2017;
- making capital expenditures of $339m, compared to $222m in the third quarter of 2017 and;
- receiving net proceeds of $490m for issuance of commercial paper, compared to no net proceeds in the third quarter of 2017.
As previously reported on Sept. 27, 2018, the corporation increased its quarterly dividend by $0.20 per share, to $2.20 per share, beginning with the dividend payment in the fourth quarter of 2018. The corporation also increased its share repurchase authority by $1.0bn with $3.7bn in total remaining authorization for future common share repurchases under the program as of Sept. 30, 2018.
The corporation operates in four business segments organized based on the nature of products and services offered: Aeronautics, Missiles and Fire Control (MFC), RMS and Space. During the third quarter of 2018 the corporation realigned certain programs among the lines of business at MFC. The amounts discussed and presented for the MFC lines of business results reflect this realignment for all periods presented. The following table presents summary operating results of the corporation’s business segments and reconciles these amounts to the corporation’s consolidated financial results.
Net sales of the business segments exclude intersegment sales as these activities are eliminated in consolidation. Operating profit of the business segments includes the corporation’s share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of the corporation’s business segments. In addition, operating profit of the corporation’s business segments includes total pension costs recoverable on U.S. Government contracts as determined in accordance with CAS.
Operating profit of the business segments excludes the FAS/CAS operating adjustment, which represents the difference between the service cost component of pension expense recorded in accordance with FAS and CAS pension cost; the adjustment from CAS to the FAS service cost component for all other postretirement benefit plans; expense for stock-based compensation; the effects of items not considered part of management’s evaluation of segment operating performance, such as charges related to significant severance actions and certain asset impairments; gains or losses from significant divestitures; the effects of certain legal settlements; corporate costs not allocated to the corporation’s business segments; and other miscellaneous corporate activities. Changes in net sales and operating profit generally are expressed in terms of volume. Changes in volume refer to increases or decreases in sales or operating profit resulting from varying production activity or service levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking rate for a particular contract.
In addition, comparability of the corporation’s segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on the corporation’s contracts for which it recognizes revenue over a period of time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to fulfill the performance obligations and a reduction in the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions which are excluded from segment operating results; reserves for disputes; certain asset impairments; and losses on sales of certain assets.
The corporation’s consolidated net adjustments not related to volume, including net profit booking rate adjustments, represented approximately 34 percent of total segment operating profit in the third quarter of 2018, compared to approximately 28 percent in the third quarter of 2017.
Aeronautics’ net sales in the third quarter of 2018 increased $926m, or 20 percent, compared to the same period in 2017. The increase was primarily attributable to an increase of approximately $655 m for the F-35 program due to increased volume on production and sustainment, partially offset by lower volume on development activities; about $105m for other programs due to higher volume (primarily advanced development programs (ADP)); about $70m for the F-16 program due to increased volume on modernization contracts; and about $50m for the F-22 program due to increased sustainment volume.
Aeronautics’ operating profit in the third quarter of 2018 increased $87m, or 17 percent, compared to the same period in 2017. Operating profit increased approximately $155m for the F-35 program primarily due to increased volume on higher margin production contracts and new development activities, better performance on sustainment, and higher risk retirements on production contracts. This increase was partially offset by a decrease of about $50m for the F-16 program due to lower risk retirements. Adjustments not related to volume, including net profit booking rate adjustments, were about $10m lower in the third quarter of 2018 compared to the same period in 2017.
Missiles and Fire Control
MFC’s net sales in the third quarter of 2018 increased $316m, or 16 percent, compared to the same period in 2017. The increase was primarily attributable to higher net sales of approximately $295 m for tactical and strike missiles programs due to increased volume (primarily classified programs and precision fires) and about $115 m for sensors and global sustainment programs due to increased volume (primarily LANTIRN®, SNIPER®, and Apache). These increases were partially offset by a decrease of approximately $75 m for integrated air and missile defense programs due to lower volume (primarily Terminal High Altitude Area Defense (THAAD)).
MFC’s operating profit in the third quarter of 2018 increased $34m, or 11 percent, compared to the same period in 2017. Operating profit increased approximately $55m for sensors and global sustainment programs due to increased risk retirements and increased volume (primarily LANTIRN, SNIPER, and Apache); and about $45m for tactical and strike missiles programs due to reserves which were recorded in 2017 but did not recur in 2018 (primarily Joint Air-to-Ground Missile (JAGM)) and higher volume (primarily precision fires). These increases were partially offset by a decrease of approximately $50m for integrated air and missile defense programs due to lower volume and lower risk retirements (primarily THAAD). Adjustments not related to volume, including net profit booking rate adjustments, were about $90m higher in the third quarter of 2018 to the same period in 2017.
Rotary and Mission Systems
RMS’ net sales in the third quarter of 2018 increased $485m, or 14 percent, compared to the same period in 2017. The increase was primarily attributable to higher net sales of approximately $250 m for integrated warfare systems and sensors (IWSS) programs due to higher volume (primarily radar surveillance systems programs and Multi Mission Surface Combatant); about $115m for C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to higher volume on multiple programs; and about $100m for Sikorsky helicopter programs due to higher volume for CH-53K King Stallion helicopters and higher volume for mission systems programs, partially offset by lower volume for Black Hawk helicopters.
RMS’ operating profit in the third quarter of 2018 increased $104m, or 40 percent, compared to the same period in 2017. Operating profit increased approximately $85m for IWSS programs primarily due to a reduction in charges for performance matters (primarily vertical launching system (VLS)) and due to increased risk retirements (primarily radar surveillance systems programs); and about $20m for Sikorsky helicopter programs due to better cost performance across the Sikorsky portfolio and better performance on the Multi-Year IX contract. Adjustments not related to volume, including net profit booking rate adjustments, were about $50 m higher in the third quarter of 2018 compared to the same period in 2017.
Space’s net sales in the third quarter of 2018 increased $250m, or 11 percent, compared to the same period in 2017. The increase was primarily attributable to higher net sales of approximately $120m for government satellite programs due to higher volume (primarily Space Based Infrared System (SBIRS) and government satellite services); about $85 m for strategic and missile defense programs due to higher volume (primarily Fleet Ballistic Missiles and AWE Management Limited (AWE)); and about $50 m for the Orion program due to higher volume.
Space’s operating profit in the third quarter of 2018 increased $74 m, or 34 percent, compared to the same period in 2017. Operating profit increased approximately $80m for government satellite programs due to a reduction in charges and higher volume (primarily SBIRS and government satellite services). Adjustments not related to volume, including net profit booking rate adjustments, were about $50m higher in the third quarter of 2018, compared to the same period in 2017.
Total equity earnings recognized by Space (primarily ULA) represented approximately $45m, or 15 percent, of Space’s operating profit in the third quarter of 2018, compared to approximately $45m, or 21 percent, in the third quarter of 2017.
The corporation’s effective income tax rate was 6.5 percent in the third quarter of 2018, compared to 25.8 percent in the third quarter of 2017. The lower rate for the third quarter of 2018 was primarily due to the reduction of the federal statutory rate from 35 percent to 21 percent and the deduction for foreign derived intangible income, both as a result of the Tax Cuts and Jobs Act (the Tax Act) enacted in Dec. 2017. The rates for both periods benefited from tax deductions for dividends paid to the corporation’s defined contribution plans with an employee stock ownership plan feature, tax deductions for employee equity awards, and the research and development tax credit. The rate for the third quarter of 2018 benefited from the corporation’s change in a tax accounting method recorded discretely in this quarter, reflecting a 2012 Court of Federal Claims decision, which held that the tax basis in certain assets should be increased and realized upon the assets’ disposition. The rate for the third quarter of 2017 benefited from tax deductions for U.S. manufacturing activities, which the Tax Act repealed for years after 2017.
Northrop Grumman Reports Third Quarter 2018 Financial Results
- Q3 Sales Increase 23 Percent to $8.1 Bn
- Q3 Operating Income Increases 41 Percent to $1.2 bn
- Q3 Segment Operating Income Increases 29 Percent to $979 m
- Q3 EPS Increase 78 Percent to $6.54
- Backlog Increases to $52.6 bn
- 2018 EPS Guidance Increased to $18.75 to $19.00
- 2018 Free Cash Flow Guidance Range Increased to $2.5 – $2.7 Bn
24 Oct 18. Northrop Grumman Corporation (NYSE: NOC) reported third quarter 2018 sales increased 23 percent to $8.1bn. Third quarter 2018 net earnings increased 78 percent to $1.1bn, or $6.54 per diluted share, compared with $643m, or $3.67 per diluted share, in the prior year period. The third quarter includes the first full quarter of Innovation Systems results. These additional earnings were partially offset by pre-tax merger-related expenses of $97m. Third quarter 2018 earnings also include a pre-tax benefit of $223m resulting from the settlement of cost claims.
“Our third quarter results demonstrated solid growth and strong performance from our operations, including the first full quarter of Innovation Systems, as we continue to position the company for longterm profitable growth,” said Wes Bush, chairman and chief executive officer. “We’re pleased with this quarter’s results and excited about our company’s future. As we continue integrating Innovation Systems, we’re aggressively addressing the enhanced opportunity set resulting from our combination,” said Kathy Warden, president and chief operating officer.
Codification (ASC) Topic 606, Revenue from Contracts with Customers, and Accounting Standards Update (ASU) No. 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost, using the full retrospective method. Schedules 4 and 5 at the end of this release present comparable prior period consolidated and segment financial information recast to reflect the adoption of these standards.
Third quarter 2018 sales increased 23 percent, due to the acquisition of Innovation Systems and higher sales at Aerospace Systems and Mission Systems, partially offset by lower sales at Technology Services. Third quarter segment operating income increased $223m, and segment operating margin rate increased to 12.1 percent, reflecting the first full quarter of Innovation Systems and performance improvement at Mission Systems and Aerospace Systems.
Third quarter 2018 operating income and margin rate increased to $1.2bn and 14.6 percent, respectively, due to the 29 percent increase in segment operating income and a $112m decline in unallocated corporate expense. Lower unallocated corporate expense principally reflects the settlement of cost claims, partially offset by $97m in expenses principally related to the Innovation Systems acquisition, as well as $32m of higher deferred state taxes and legal expenses.
Third quarter interest expense increased $60m, which reflects the company’s issuance in October 2017 of $8.25bn of debt to finance the Innovation Systems acquisition. Other, net increased $41m and includes a $21m gain on the sale of an investment.
The company’s third quarter federal and foreign income tax expense declined to $93m, reflecting the benefit of the Tax Cuts and Jobs Act of 2017, which reduced the federal statutory tax rate to 21 percent from 35 percent, a $3 m benefit from pension contributions related to the filing of our 2017 tax return, and a $70m benefit recognized for additional research credits and manufacturing deductions related to prior years.
Third quarter 2018 cash provided by operating activities before the after-tax discretionary pension contribution increased to $975 m from $938 m in the prior year period. The company made a $250 m discretionary contribution to its pension plans in the third quarter of 2018. After capital expenditures of $282 m, third quarter 2018 free cash flow before the after-tax discretionary pension contribution was $693 m.
Year to date through Sept. 30, 2018, cash provided by operating activities before the after-tax discretionary pension contribution increased $607m to $1.6bn from $1.0 bn in the prior year. The increase is principally due to higher earnings and improved trade working capital performance. After capital expenditures of $786m, free cash flow before the after-tax discretionary pension contribution through Sept. 30, 2018 was $827m.
Aerospace Systems third quarter 2018 sales increased 5 percent, principally due to higher Manned Aircraft sales. Higher volume for restricted activities and the F-35 program were the primary drivers of higher Manned Aircraft volume. Autonomous Systems also had higher sales than in the prior year period, principally due to higher volume for the Triton program. Higher sales in these areas were partially offset by lower volume in Space.
Aerospace Systems third quarter 2018 operating income increased 9 percent, and operating margin rate increased to 11.5 percent. Higher operating income reflects higher sales and higher operating margin rate reflects improved performance for Manned Aircraft and Autonomous Systems programs.
Innovation Systems third quarter 2018 sales increased 16 percent, compared with $1.2bn pro forma sales in the third quarter of 2017 (see Note 2 to the financial statements in our quarterly report on Form 10-Q for the quarter ended Sept. 30, 2018 for consolidated pro forma information). The sales increase was due to higher volume on Defense Systems, Flight Systems and Space Systems programs.
Defense Systems sales reflect increased volume on armament systems and missile product programs. Flight Systems sales were primarily driven by higher volume on propulsion systems and launch vehicles programs. Space Systems sales increased primarily due to higher government satellite volume.
Innovation Systems third quarter 2018 operating income totaled $161m and operating margin rate was 11.4 percent.
Mission Systems third quarter 2018 sales increased 3 percent principally due to higher volume for Sensors and Processing programs, partially offset by lower volume for Advanced Capabilities and Cyber and ISR. Higher Sensors and Processing sales are primarily due to higher volume on restricted, electrooptical/infrared self-protection and communications programs, as well as on the F-35 program. Lower Advanced Capabilities sales reflect lower volume on the Joint National Integration Center Research and Development (JRDC) program and follow on activity, partially offset by higher volume on the Integrated Air and Missile Defense Battle Command System (IBCS) program. Lower Cyber and ISR sales reflect ramp-down on an ISR program.
Mission Systems third quarter operating income increased 11 percent, and operating margin rate increased to 13.7 percent. The increase in operating income reflects higher sales volume and improved performance across all three business areas.
Technology Services third quarter 2018 sales decreased 12 percent due to the completion of several programs, including JRDC, Virginia Information Technologies Agency (VITA), and KC-10. These declines were partially offset by higher volume on several other programs, principally in Global Logistics and Modernization, including the Special Electronic Mission Aircraft program. Technology Services third quarter 2018 operating income decreased 10 percent and operating margin rate increased to 10.7 percent. Lower operating income reflects lower sales volume, partially offset by improved performance.
Raytheon Reports Strong Third Quarter 2018 Results
– Strong bookings of $8.7bn; book-to-bill ratio of 1.28
– Net sales of $6.8bn, up 8.3 percent
– EPS from continuing operations of $2.25, up 14.2 percent
– Updated full-year 2018 guidance
25 Oct 18. Raytheon Company (NYSE: RTN) today announced net sales for the third quarter 2018 of $6.8bn, up 8.3 percent compared to $6.3bn in the third quarter 2017. Third quarter 2018 EPS from continuing operations was $2.25 compared to $1.97 in the third quarter 2017. The increase in the third quarter 2018 EPS from continuing operations was primarily driven by operational improvements, and lower taxes primarily associated with tax reform. This was partially offset by the previously disclosed non-operating expense associated with the pension plan annuity transaction, which had an unfavorable $0.80 per share impact.
“I’m pleased with the company’s operating performance in the third quarter. We delivered bookings, sales, EPS and cash flow ahead of our expectations,” said Thomas A. Kennedy, Raytheon Chairman and CEO. “Strong domestic and international bookings throughout the year drove record backlog and positions us well for continued growth in 2019.”
Operating cash flow from continuing operations for the third quarter 2018 was an outflow of $444m compared to an inflow of $382m for the third quarter 2017. The decrease in operating cash flow from continuing operations in the third quarter 2018 was primarily due to the previously disclosed $1.25 bn pretax discretionary pension contribution, partially offset by lower net cash taxes.
In the third quarter 2018, the company repurchased 0.6 m shares of common stock for $125m. Year-to-date 2018, the company repurchased 4.5 m shares of common stock for $925m.
The company had bookings of $8.7 bn in the third quarter 2018, resulting in a book-to-bill ratio of 1.28. Third quarter 2017 bookings were $7.0 bn.
Backlog at the end of the third quarter 2018 was a record $41.6 bn, an increase of $4.9 bn or 13.4 percent compared to the end of the third quarter 2017.
The company’s reportable segments are: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint™.
Integrated Defense Systems (IDS) had third quarter 2018 net sales of $1,493m, up 7 percent compared to $1,391 m in the third quarter 2017. The increase in net sales for the quarter was primarily driven by higher net sales from an international Patriot® program awarded in the first quarter 2018.
IDS recorded $241m of operating income in the third quarter 2018 compared to $231m in the third quarter 2017. The increase in operating income for the quarter was primarily driven by a favorable change in program mix and higher volume, partially offset by lower net program efficiencies.
During the quarter, IDS booked $1.3bn to provide advanced Patriot air and missile defense capabilities for Poland. IDS also booked $191m for the Forward Expeditionary Advanced Vehicle Radar (FEAVR) program for the U.S. Army and $75 m for a lightweight torpedo program for the U.S. Navy and international customers.
Intelligence, Information and Services (IIS) had third quarter 2018 net sales of $1,74 m, up 13 percent compared to $1,543m in the third quarter 2017. The increase in net sales for the quarter was primarily driven by higher net sales on classified programs in both the cyber and space business areas, the Development, Operations and Maintenance (DOMino) cyber program, and the Warfighter FOCUS program.
IIS recorded $149m of operating income in the third quarter 2018 compared to $112m in the third quarter 2017. The increase in operating income for the quarter was primarily driven by higher net program efficiencies and higher volume.
During the quarter, IIS booked $787m on a number of classified contracts. IIS also booked $299 m on domestic and foreign training programs in support of Warfighter FOCUS activities; $108 m to provide intelligence, surveillance and reconnaissance (ISR) support to the U.S. Air Force; and $99m on the Air and Space Operations Center Weapon System (AOC WS) program for the U.S. Air Force.
Missile Systems (MS) had third quarter 2018 net sales of $2,082 m, up 7 percent compared to $1,945 m in the third quarter 2017. The increase in net sales for the quarter was primarily driven by higher net sales on classified programs.
MS recorded $257 m of operating income in the third quarter 2018 compared to $280 m in the third quarter 2017. The decrease in operating income for the quarter was primarily due to lower net program efficiencies, partially offset by higher volume.
During the quarter, MS booked $499 m for Phalanx® Close-In Defense Systems (CIDS); $424 m for Standard Missile-6 (SM-6®); $115 m for Javelin; $113 m on the High-speed Unmanned Long-range Kinetic-kill (HULK) program; $89 m for Paveway™; $84 m for Horizontal Technology Integration (HTI) forward looking infrared kits; and $84 m for Rolling Airframe Missile (RAM™). MS also booked $155 m on a number of classified contracts.
Space and Airborne Systems
Space and Airborne Systems (SAS) had third quarter 2018 net sales of $1,695 m, up 6 percent compared to $1,597m in the third quarter 2017. The increase in net sales for the quarter was driven by higher net sales on surveillance and targeting systems programs.
SAS recorded $223m of operating income in the third quarter 2018 compared to $212 m in the third quarter 2017. The increase in operating income for the quarter was primarily due to higher volume.
During the quarter, SAS booked $282m on the Multi-Spectral Targeting System (MTS) for the U.S. Air Force; $136m on the Next Generation Jammer (NGJ) program for the U.S. Navy; $103m for Active Electronically Scanned Array (AESA) radars for the U.S. Air Force; and $92m for radar components for the U.S. Navy. SAS also booked $374m on a number of classified contracts.
Forcepoint had third quarter 2018 net sales of $173m, up 2 percent compared to $170m in the third quarter 2017.
Forcepoint recorded $18m of operating income in the third quarter 2018 compared to $23m in the third quarter 2017. As expected, the decrease in operating income for the quarter was primarily driven by higher operating costs.
United Technologies Reports Third Quarter 2018 Results; Raises 2018 Outlook
- Organic sales growth momentum continues in Q3; Raises sales and adjusted EPS outlook for 2018*
- Sales of $16.5 bn, up 10 percent versus prior year including 8 percent organic growth
- GAAP EPS of $1.54, down 8 percent versus prior year
- Adjusted EPS of $1.93, up 12 percent versus prior year
22 Oct 18. United Technologies Corp. (NYSE: UTX) today reported third quarter 2018 results and increased its full year sales and adjusted EPS outlook.
“Organic sales growth of 8 percent is further proof that our investments in innovation are paying off across all of our businesses,” said UTC Chairman and Chief Executive Officer Gregory Hayes. “We are well positioned to close out the year as we continue to execute on our strategic priorities. The acquisition of Rockwell Collins, once complete, will further strengthen our position as a premier systems supplier to the aerospace industry.”
“Based on the continued positive momentum year-to-date, we are again raising our adjusted EPS outlook range and now expect $7.20 to $7.30 for 2018.* We are also raising the low end of our 2018 sales outlook and now expect $64.0 to $64.5bn of sales on an improved organic growth outlook of 6 percent,”* Hayes concluded.
Third quarter sales of $16.5bn were up 10 percent over the prior year, including 8 points of organic sales growth, 3 points from the absence of the nonrecurring charge incurred at Pratt & Whitney in Q3 2017 and 1 point of foreign exchange headwind. GAAP EPS of $1.54 was down 8 percent versus the prior year and included 39 cents of net restructuring charges and other significant items. Adjusted EPS of $1.93 was up 12 percent.
Net income in the quarter was $1.2 bn, down 7 percent versus the prior year. Cash flow from operations was $1.8bn and capital expenditures were $413 m, resulting in free cash flow of $1.3bn.
In the quarter, commercial aftermarket sales were up 9 percent at Pratt & Whitney and up 12 percent at UTC Aerospace Systems. Otis new equipment orders were up 9 percent organically versus the prior year. Equipment orders at UTC Climate, Controls & Security increased 13 percent organically.
UTC updates its 2018 outlook* and now anticipates:
- Adjusted EPS of $7.20to $7.30, up from $7.10 to $7.25;
- Sales of $64.0to $64.5bn, up from $63.5 to $64.5bn;
- Organic sales growth of approximately 6 percent, up from 5 to 6 percent;
- There is no change in the Company’s previously provided 2018 expectations for free cash flow of $4.5to $5.0bn.
*Notes: Excludes the impact of the pending acquisition of Rockwell Collins. When we provide expectations for adjusted EPS, organic sales and free cash flow on a forward-looking basis, a reconciliation of the differences between the non-GAAP expectations and the corresponding GAAP measures generally is not available without unreasonable effort.