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SIGNS OF IMPROVEMENT IN US MAJORS RESULTS By Julian Nettlefold


SIGNS OF IMPROVEMENT IN U.S. MAJORS RESULTS

By Julian Nettlefold

28 Jan 15. Results from the big four US defense contractors this week signify an ongoing improvement in the market with a rise in expectations for the future. This message came across to the Editor during the recent Shot Show in Las Vegas, where sentiment was certainly on the rise with greater interest in new contracts and products. Certainly events in the Middle East have certainly helped to confirm the sentiment that ‘there is always a war somewhere in some form or other.’

boeing

The Boeing Company

28 Jan 15. Reuters reported that Boeing Co (BA.N), the world’s biggest planemaker, reported a 19 percent rise in quarterly profit, helped by booming demand for commercial aircraft. The company forecast operating cash flow, a metric closely watched by investors, of more than $9bn for 2015, up from $8.86bn reported for 2014. The company’s jetliner deliveries rose to 723 in 2014 from 648 the previous year, topping those by rival Airbus Group (AIR.PA).  Commercial aircraft deliveries rose 13 percent to 195 in the fourth quarter ended Dec. 31. Boeing’s net profit rose to $1.47bn, or $2.02 per share, in the quarter from $1.23bn, or $1.61 per share, a year earlier.  Core earnings, which exclude pension and other costs, rose to $2.31 per share from $1.88. Revenue increased by 3 percent to $24.47bn. Boeing forecast core earnings of $8.20-8.40 per share for 2015.

Up to Tuesday’s close, the stock had fallen 3.4 percent in the past 52 weeks, while the Dow Jones Industrial Average .DJI has risen 9.2 percent.

Results In Full

The Boeing Company [NYSE: BA] reported record fourth-quarter revenue of $24.5bn on higher deliveries (Table 1) and core earnings per share (non-GAAP) that increased 23 percent* to $2.31, reflecting strong performance across the company. Fourth-quarter 2014 core operating earnings (non-GAAP)* increased to $2.3bn and GAAP earnings from operations increased to $2.0bn. Fourth-quarter 2013 results included a $406m non-cash charge ($0.34 per share) related to the A-12 settlement.

Revenue rose 5 percent in the full year to a record $90.8bn and core earnings per share (non-GAAP) increased 22 percent* to $8.60 on record deliveries. Full-year 2014 GAAP earnings per share was $7.38.

Core earnings per share guidance for 2015 is set at between $8.20 and $8.40, while GAAP earnings per share guidance is established at between $8.10 and $8.30. Revenue guidance is between $94.5 and $96.5bn, including commercial deliveries of between 750 and 755. Operating cash flow is expected to be greater than $9.0bn.

“Strong operating performance in the final quarter of 2014 propelled us to some of our best-ever results and sealed a fifth consecutive year of core operating earnings growth. By responding to strong demand with market-leading and proven products and capabilities, and delivering them more efficiently, we are strengthening a powerful business platform that is providing increased returns for our shareholders,” said Boeing Chairman and Chief Executive Officer Jim McNerney. “Our Commercial Airplanes business successfully increased production rates and set an industry record for annual deliveries while also growing its backlog to new highs on record new orders for the year. Our Defense, Space & Security team navigated a challenging market environment to achieve solid revenue and healthy margins while also winning significant new contracts.”

Operating cash flow in the quarter was $5.0bn, reflecting commercial airplane production rates, strong operating performance and timing of receipts and expenditures. During the quarter, the company repurchased 7.8m shares for $1bn and paid $0.5bn in dividends. Based on the strong cash generation and outlook, in December, the board of directors increased the share repurchase authorization to a total of $12bn, replacing the authorization approved in 2013 of which approximately $4.8bn was remaining, and raised the quarterly dividend 25 percent. Share repurchases are expected to be made over the next two to three years.

Cash and investments in marketable securities totalled $13.1bn at quarter-end, up from $10.1bn at the beginning of the quarter. Debt was $9.1bn, up from $8.9bn at the beginning of the quarter, primarily due to the issuance of new debt.

Total company backlog at quarter-end was a record $502bn, up from $490bn at the beginning of the quarter, and included net orders for the quarter of $37bn. Backlog is up $61bn from prior year-end, reflecting $152bn of net orders in 2014.

Segment Results

Commercial Airplanes

Commercial Airplanes fourth-quarter revenue increased 15 percent to a record $16.8bn on higher delivery volume and mix. Fourth-quarter operating margin was 9.3 percent, reflecting higher planned period costs and the dilutive impact of 787 deliveries partially offset by the delivery volume. During the quarter, the company began production on the fuselage stringers of the first 737 MAX airplane. The 737 program has won over 2,600 firm orders for the 737 MAX since launch. Also during the quarter, the company began final assembly of the 787-9 Dreamliner at the South Carolina facility and broke ground on the 777X composite centers in Everett and St. Louis. Commercial Airplanes booked 432 net orders during the quarter with a record 1,432 orders in 2014. Backlog remains strong with nearly 5,800 airplanes valued at a record $440bn.

Defense, Space & Security

Defense, Space & Security’s fourth-quarter revenue was $7.6bn with an operating margin of 12.1 percent.  Boeing Military Aircraft (BMA) fourth-quarter revenue was $3.0bn, reflecting lower planned F-15 and C-17 deliveries. Operating margin increased to 12.3 percent, reflecting strong operating performance. During the quarter, BMA completed the first flight of the 767-2C test aircraft for the KC-46 tanker program and Congress approved funding for 15 EA-18G Growlers.

Network & Space Systems (N&SS) fourth-quarter revenue was $2.2bn, reflecting lower government satellite volume, and operating margin was 8.8 percent. During the quarter, N&SS completed the first two all-electric propulsion 702SP satellites.

Global Services & Support (GS&S) fourth-quarter revenue increased to $2.4bn on higher volume in maintenance, modification and upgrades (MM&U). Operating margin increased to 14.9 percent reflecting strong operating performance across the segment and mix within MM&U. During the quarter, GS&S was awarded a 25-year order from the Australian government to train navy and army rotary wing aircrew.

Backlog at Defense, Space & Security was $62bn, of which 36 percent represents orders with international customers.

Additional Financial Information

At quarter-end, Boeing Capital’s net portfolio balance was $3.5bn. Unallocated items, eliminations and other fourth-quarter revenue decreased from the same period in the prior year due to the timing of eliminations for intercompany aircraft deliveries.

Unallocated items, eliminations and other excluding unallocated pension/postretirement in the fourth quarter of 2013 included a $406m charge associated with the A-12 settlement. Total pension expense for the fourth quarter was $772m, up from $717m in the same period of the prior year. The company’s income tax expense was $464m in the quarter, compared to $201m in the same period of the prior year primarily due to higher earnings. Fourth-quarter 2014 results include the full year 2014 U.S. research and development tax credit of $188m; fourth-quarter 2013 results include a $212m benefit for a tax regulation change.

GENERAL DYNAMICS

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28 Jan 15. General Dynamics (NYSE: GD) reported 2014 fourth-quarter and full-year results. On revenues of $8.4bn, 2014 fourth-quarter earnings from continuing operations were $737m, an 18.1 percent increase over fourth-quarter 2013. Diluted earnings per share for the quarter was $2.19 compared to diluted earnings per share of $1.76 in fourth-quarter 2013.

Full-year earnings from continuing operations rose to $2.7bn from $2.5bn in 2013. Diluted earnings per share for the year was $7.83, compared to diluted earnings per share of $7.03 in 2013. Revenues for 2014 were $30.9bn.

Margins

Company-wide operating margins were 12.8 percent for the fourth quarter, 130 basis points higher than fourth-quarter 2013 margins.  For the full year of 2014, operating margins were 12.6 percent, 70 basis points higher than full-year 2013 margins.

Cash

Net cash provided by operating activities was $3.7bn for the full year. Free cash flow from operations, defined as net cash provided by operating activities less capital expenditures, was $3.2bn for the year.

Backlog

The company’s total backlog was $72.4bn at the end of 2014, up 58 percent from the end of 2013. The estimated potential contract value, representing management’s estimate of value in unfunded indefinite delivery, indefinite quantity (IDIQ) contracts and unexercised options, was $26.7bn. Total potential contract value, the sum of all backlog components, was $99.1bn at the end of the year.

The Aerospace group experienced increased demand, booking more aircraft orders than any quarter in more than three years. Significant awards received in the quarter from the company’s defense groups include $435m for the U.S. Navy’s Mobile Landing Platform (MLP) Afloat Forward Staging Base (AFSB), $325m from the Centers for Medicare & Medicaid Services for contact-center services, $90m from the Navy for design work on the next-generation ballistic missile submarine and $80m from the U.S. Army under a foreign military sales contract to upgrade Abrams tanks.

“General Dynamics’ performance in 2014 was very strong,” said Phebe N. Novakovic, General Dynamics chairman and chief executive officer. “We did what we said we would: increase operating earnings, margins and EPS through a relentless focus on operations and prudent capital deployment.

“In 2014, our earnings from continuing operations rose 7.5 percent, margins increased 70 basis points and EPS increased 11.4 percent compared to last year. We also had excellent free cash from operations of $3.2bn and grew our backlog to more than $72.4bn by year-end, a 58 percent increase over the end of 2013.”

Lockheed Martin

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27 Jan 15. Reuters reported that Lockheed Martin Corp (LMT.N), the Pentagon’s largest arms supplier, forecast 2015 earnings below analysts’ estimates due to lower pension income. Lockheed’s shares fell as much as 2.6 percent after the company also forecast revenue to decline by as much as 4.6 percent in 2015, larger than the “low single digit” percentage fall it had estimated in October. The maker of the F-35 fighter jet, satellites and coastal warships has been hurt as the Pentagon tries to cut about $1trn in projected spending from its budget over a decade as required by a 2011 law.  Lockheed’s profit was boosted last year by an increase in the discount rate used to calculate the company’s pension liabilities that led to large pension incomes. Lockheed, however, said on Tuesday it expects 2015 pension income of about $475m, down from its previous estimate of $650m, due to a lower discount rate. Lockheed said in October legislative changes would result in a “pension funding holiday” for the company from 2015 to 2017.

“The downside remains limited as Lockheed continues to generate significant cash, which enables plenty of flexibility for the company’s aggressive cash deployment strategy,” Sterne, Agee & Leach analyst Peter Arment said.

U.S. weapons makers have increased share repurchases and are paying strong dividends to boost stock prices. Lockheed bought back $1.9bn worth of shares in 2014, Arment said.

Up to Monday’s close, the company’s stock had risen about 33 percent in the past 52 weeks, compared with a 15 percent rise in the S&P 500 index (.SPX). Lockheed forecast 2015 earnings of $10.80-$11.10 per share on revenue of $43.50bn-$45.00 bn. Analysts on average were expecting earnings of $11.49 per share on revenue of $44.3bn, according to Thomson Reuters I/B/E/S. Revenue rose 8.6 percent to $12.53bn in the fourth quarter ended Dec. 31, topping the average analyst estimate of $11.89bn.

Results In Full

Lockheed Martin Corporation [NYSE: LMT] reported fourth quarter 2014 net sales of $12.5bn compared to $11.5bn in the fourth quarter of 2013. Net earnings from continuing operations in the fourth quarter of 2014 were $904m, or $2.82 per diluted share, compared to $488m, or $1.50 per diluted share, in the fourth quarter of 2013. Cash used in operations in the fourth quarter of 2014 was $(201)m after pension contributions of $1.0bn, compared to cash generated from operations of $938m after pension contributions of $750m in the fourth quarter of 2013.

Fourth quarter 2014 net earnings from continuing operations included a special charge for a non-cash goodwill impairment of $119m, which decreased net earnings by $107m, or $0.33 per diluted share, partially offset by a decrease in income tax expense due to the retroactive reinstatement of the U.S. research and development (R&D) tax credit for 2014, which increased earnings $45m, or $0.14 per diluted share. Fourth quarter 2013 net earnings from continuing operations included a special charge for a non-cash goodwill impairment of $195 m, which reduced earnings by $176 m, or $0.54 per diluted share; and a special charge for workforce reductions of $171 m, which reduced earnings by $111m, or $0.34 per diluted share. Net earnings from continuing operations for the fourth quarter of 2014 also included FAS/CAS pension income of $121 m, which increased net earnings by $75m, or $0.23 per diluted share, compared to FAS/CAS pension expense of $120m, which reduced net earnings by $74 m, or $0.23 per diluted share, for the fourth quarter of 2013.

Net sales for 2014 were $45.6bn compared to $45.4bn in 2013. Net earnings from continuing operations in 2014 were $3.6bn, or $11.21 per diluted share, compared to $3.0bn, or $9.04 per diluted share, in 2013. Cash from operations for 2014 was $3.9bn after pension contributions of $2.0bn, compared to cash from operations for 2013 of $4.5bn after pension contributions of $2.25bn.

Net earnings from continuing operations for 2014 included a special charge for a non-cash goodwill impairment of $119 m, which decreased net earnings by $107m, or $0.33 per diluted share; partially offset by a decrease in income tax expense due to the retroactive reinstatement of the R&D tax credit for 2014, which increased earnings $45m, or $0.14 per diluted share. Net earnings from continuing operations for 2013 included a special charge for a non-cash goodwill impairment of $195 m, which reduced earnings by $176m, or $0.54 per diluted share; and a special charge for workforce reductions of $201m which reduced earnings by $130m, or $0.40 per diluted share; partially offset by a decrease in income tax expense from the retroactive reinstatement of the R&D tax credit for 2012 and 2013, which increased earnings $76m, or $0.23 per diluted share. Net earnings from continuing operations for 2014 also included FAS/CAS pension income of $376m, which increased net earnings by $232m, or $0.72 per diluted share, compared to FAS/CAS pension expense of $482m, which reduced net earnings by $298m, or $0.91 per diluted share, for 2013.

 

“We delivered outstanding performance in the fourth quarter, which enabled us to end 2014 with sales growth and a backlog of nearly $81bn, while also returning more than $3.7bn to our shareholders,” said Marillyn Hewson, Chairman, President and CEO. “Our performance was the result of solid program execution by our team, strong international business growth and a continued focus on the affordability of our products and operations.”

2014 Special Charge – Goodwill Impairment Charge

During the fourth quarter of 2014, the Corporation recorded a non-cash goodwill impairment charge related to its Technical Services reporting unit within the Missiles and Fire Control business segment. The charge reflects the impact of market pressures on the Technical Services business, such as lower in-theater support as troop levels are drawn down and increased re-competition on existing contracts that are awarded primarily on the basis of price. The Corporation reviews its goodwill for impairment at least annually in the fourth quarter and more frequently upon the occurrence of certain events or significant changes in circumstances that indicate goodwill may be impaired. The Corporation’s goodwill has been allocated to and is tested for impairment at a level referred to as the reporting unit, which is the business segment level or a level below the business segment.

Cash Deployment Activities

The Corporation’s cash deployment activities for the quarter and year ended Dec. 31, 2014 consisted of the following:

* repurchasing 1.2 m shares for $224m and 11.5m shares for $1.9bn during the quarter and year ended Dec. 31, 2014, compared to 1.7m shares for $229 m and 16.2 m shares for $1.8bn during the quarter and year ended Dec. 31, 2013;

* paying cash dividends of $474m and $1.8bn during the quarter and year ended Dec. 31, 2014, compared to $428m and $1.5bn during the quarter and year ended Dec. 31, 2013;

* making contributions to its pension trust of $1.0bn and $2.0bn during the quarter and year ended Dec. 31, 2014, compared to $750 m and $2.25bn during the quarter and year ended Dec. 31, 2013;

* paying $276m and $898 m for acquisitions of businesses and investments in affiliates during the quarter and year ended Dec. 31, 2014, compared to $3m and $269m during quarter and year ended Dec. 31, 2013; and

* making capital expenditures of $389m and $845m during the quarter and year ended Dec. 31, 2014, compared to $345m and $836m during the quarter and year ended Dec. 31, 2013.

Segment Results

The Corporation operates in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST) and Space Systems. The Corporation organizes its business segments based on the nature of the products and services offered.

Aeronautics

Aeronautics’ net sales for the fourth quarter of 2014 increased $237m, or 6 percent, compared to the same period in 2013. The increase was primarily attributable to higher net sales of approximately$260m for F-35 production contracts due to increased volume and sustainment activities; and about $200m for the C-130 program due to increased deliveries (eight aircraft delivered in the fourth quarter of 2014 compared to six delivered in the same period in 2013) and sustainment activities. The increases were partially offset by lower net sales of approximately $255m for the C-5 program due to fewer deliveries (one aircraft delivered in the fourth quarter of 2014 compared to four delivered in the same period in 2013) and lower sustainment activities.

Aeronautics’ operating profit for the fourth quarter of 2014 increased $27m, or 7 percent, compared to the same period in 2013. The increase was primarily attributable to higher operating profit of approximately $40m for the F-22 program due to increased risk retirements; and about $40m for the C-130 program due to increased deliveries and risk retirements. The increases were partially offset by lower operating profit of approximately $50m for various programs due to decreased risk retirements. Operating profit was comparable for F-35 production contracts as higher volume was offset by lower risk retirements. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $25m lower for the fourth quarter of 2014 compared to the same period in 2013.

Aeronautics’ net sales for 2014 increased $797m, or 6 percent, compared to 2013. The increase was primarily attributable to higher net sales of approximately $790m for F-35 production contracts due to increased volume and sustainment activities; about $55m for the F-16 program due to increased deliveries (17 aircraft delivered in 2014 compared to 13 delivered in 2013) partially offset by contract mix; and approximately $45m for the F-22 program due to increased risk retirements. The increases were partially offset by lower net sales of approximately $55m for the F-35 development contract due to decreased volume, partially offset by the absence in 2014 of the downward revision to the profit booking rate that occurred in 2013; and about $40m for the C-130 program due to fewer deliveries (24 aircraft delivered in 2014 compared to 25 delivered in 2013) and decreased sustainment activities, partially offset by contract mix.

Aeronautics’ operating profit for 2014 increased $37m, or 2 percent, compared to 2013. The increase was primarily attributable to higher operating profit of approximately $85m for the F-35 development contract due to the absence in 2014 of the downward revision to the profit booking rate that occurred in 2013; about $75 m for the F-22 program due to increased risk retirements; approximately $50m for the C-130 program due to increased risk retirements and contract mix, partially offset by fewer deliveries; and about $25 m for the C-5 program due to the absence in 2014 of the downward revisions to the profit booking rate that occurred in 2013. The increases were partially offset by lower operating profit of approximately $130m for the F-16 program due to decreased risk retirements, partially offset by increased deliveries; and about $70m for sustainment activities due to decreased risk retirements and volume. Operating profit was comparable for F-35 production contracts as higher volume was offset by lower risk retirements. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $105m lower for 2014 compared to 2013.

Information Systems & Global Solutions

IS&GS’ net sales decreased $113m, or 5 percent, for the fourth quarter and $579 m, or 7 percent, for 2014 compared to the same periods in 2013. The decreases were primarily attributable to lower net sales of approximately $120m for the fourth quarter and about $645m for 2014 due to the wind-down or completion of certain programs, driven by reductions in direct warfighter support (including Joint Improvised Explosive Device Defeat Organization and Persistent Threat Detection System) and defense budgets tied to command and control programs; and approximately $145m for the fourth quarter and about $490m for 2014 due to a decline in volume for various ongoing programs, which reflects lower funding levels and programs impacted by in-theater force reductions. The decreases were partially offset by higher net sales of approximately $150m for the fourth quarter and about $550m for 2014 due to the start-up of new programs, growth in recently awarded programs and integration of recently acquired companies.

IS&GS’ operating profit decreased $14m, or 7 percent, for the fourth quarter and $60m, or 8 percent, for 2014 compared to the same periods in 2013. The decreases were primarily attributable to the activities mentioned above for sales, lower risk retirements and reserves recorded on an international program, partially offset by severance recoveries related to the restructuring announced on Nov. 14, 2013 of approximately $15m for the fourth quarter of 2014 and about $20m for the year ended Dec. 31, 2014. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $35m lower for the fourth quarter and about $30m lower for 2014 compared to the same periods in 2013.

Missiles and Fire Control

MFC’s net sales for the fourth quarter of 2014 increased $291m, or 17 percent, compared to the same period in 2013. The increase was primarily attributable to higher net sales of approximately $175 m for air and missile defense programs due to increased deliveries (primarily Patriot Advanced Capability-3 (PAC-3)); about $110m for tactical missile programs due to increased deliveries (primarily Guided Multiple Launch Rocket System (GMLRS) and Joint Air-to-Surface Standoff Missile (JASSM)); and approximately $50m for various other programs due to increased volume. The increases were partially offset by lower net sales of about $50m for technical services programs due to decreased volume reflecting market pressures.

MFC’s operating profit for the fourth quarter of 2014 decreased $30m, or 9 percent, compared to the same period in 2013. The decrease was primarily attributable to lower operating profit of approximately $15m for technical services programs due to reserves recorded on certain programs and decreased volume; and about $10 m for tactical missile programs due to decreased risk retirements, partially offset by increased deliveries. Operating profit was comparable for air and missile defense programs as increased deliveries for PAC-3 were offset by decreased risk retirements for Terminal High Altitude Area Defense (THAAD). Adjustments not related to volume, including net profit booking rate adjustments, were approximately $65m lower for the fourth quarter of 2014 compared to the same period in 2013.

MFC’s net sales for 2014 decreased $77m, or 1 percent, compared to 2013. The decrease was primarily attributable to lower net sales of approximately $385m for technical services programs due to decreased volume reflecting market pressures; and about $115m for tactical missile programs due to fewer deliveries (primarily High Mobility Artillery Rocket System and Army Tactical Missile System). The decreases were partially offset by higher net sales of approximately $180m for air and missile defense programs primarily due to increased volume for THAAD; about $115m for fire control programs due to increased deliveries (including Apache); and about $125m for various other programs due to increased volume.

MFC’s operating profit for 2014 decreased $73m, or 5 percent, compared to 2013. The decrease was primarily attributable to lower operating profit of about $45m for technical services programs due to decreased volume and reserves recorded on certain programs; about $20 m for tactical missile programs due to net warranty reserve adjustments for various programs (including JASSM and GMLRS) and fewer deliveries; and approximately $45 m for various other programs due to lower risk retirements. The decreases were partially offset by higher operating profit of approximately $20m for air and missile defense programs due to increased volume (primarily THAAD and PAC-3); and about $15m for fire control programs due to increased deliveries (primarily Apache), partially offset by lower risk retirements (primarily Sniper®). Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $100m lower for 2014 compared to 2013.

Mission Systems and Training

MST’s net sales for the fourth quarter of 2014 increased $214m, or 12 percent, compared to the same period in 2013. The increase was primarily attributable to higher net sales of approximately $160m for integrated warfare systems and sensors programs due to increased deliveries and volume (primarily radar surveillance programs) and the start-up of new programs (primarily Space Fence); and about $30m for training and logistics solutions programs due to increased deliveries.

MST’s operating profit for the fourth quarter of 2014 was comparable to the same period in 2013. Operating profit increased by approximately $35m for training and logistics solutions programs due to reduced reserves recorded in the fourth quarter of 2014 and increased deliveries; and by about $20m for integrated warfare systems and sensors programs due to increased risk retirements and deliveries (primarily radar surveillance programs). The increases were offset by lower operating profit of approximately $45m related to the settlements of contract cost matters on certain programs (including a portion of the terminated presidential helicopter program) in the fourth quarter of 2013 that were not repeated in the fourth quarter of 2014. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $10m higher for the fourth quarter of 2014 compared to the same period in 2013.

MST’s net sales for 2014 were comparable to 2013. Net sales decreased by approximately $85m for undersea systems programs due to decreased volume and deliveries; and about $55m related to the settlements of contract cost matters on certain programs (including a portion of the terminated presidential helicopter program) in 2013 that were not repeated in 2014. The decreases were offset by higher net sales of approximately $80 m for integrated warfare systems and sensors programs due to increased volume (primarily Space Fence); and approximately $40m for training and logistics solutions programs due to increased deliveries (primarily Close Combat Tactical Trainer).

MST’s operating profit for 2014 decreased $62m, or 7 percent, compared to 2013. The decrease was primarily attributable to lower operating profit of approximately $120m related to the settlements of contract cost matters on certain programs (including a portion of the terminated presidential helicopter program) in 2013 that were not repeated in 2014; and approximately $45m due to higher reserves recorded on certain training and logistics solutions programs. The decreases were partially offset by higher operating profit of approximately $45m for performance matters and reserves recorded in 2013 that were not repeated in 2014; and about $60m for various programs due to increased risk retirements (including MH-60 and radar surveillance programs). Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $50m lower for 2014 compared to 2013.

Space Systems

Space Systems’ net sales for the fourth quarter of 2014 increased $368m, or 19 percent, compared to the same period in 2013. The increase was primarily attributable to higher net sales of approximately $325m for the Orion program due to increased volume (primarily the first unmanned test flight of the Orion Multi-Purpose Crew Vehicle (MPCV)); and about $65m for government satellite programs due to increased risk retirements (primarily Mobile User Objective System (MUOS)) and volume (primarily Advanced Extremely High Frequency (AEHF), partially offset by Space Based Infrared System).

Space Systems’ operating profit for the fourth quarter of 2014 was comparable to the same period in 2013. Operating profit increased by approximately $25m for the Orion program due to increased volume; and about $35m for government satellite programs due to increased risk retirements (primarily MUOS). The increases were offset by lower operating profit of approximately $50m due to decreased equity earnings for joint ventures. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $20m higher for the fourth quarter of 2014 compared to the same period in 2013.

Space Systems’ net sales for 2014 increased $107m, or 1 percent, compared to 2013. The increase was primarily attributable to higher net sales of approximately $340m for the Orion program due to increased volume (primarily the first unmanned test flight of the Orion MPCV); and about $145m for commercial space transportation programs due to launch-related activities. The increases were offset by lower net sales of approximately $335m for government satellite programs due to decreased volume (primarily AEHF, Global Positioning System III (GPS III) and MUOS); and about $45m for various other programs due to decreased volume.

Space Systems’ operating profit for 2014 was comparable to 2013. Operating profit decreased by approximately $20m for government satellite programs due to lower volume (primarily AEHF and GPS-III), partially offset by increased risk retirements (primarily MUOS); and about $20m due to decreased equity earnings for joint ventures. The decreases were offset by higher operating profit of approximately $30m for the Orion program due to increased volume. Operating profit was reduced by approximately $40m for charges, net of recoveries, related to the restructuring action announced on Nov. 14, 2013. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $10m lower for 2014 compared to 2013.

Total equity earnings recognized by Space Systems (primarily ULA) represented approximately $40m, or 16 percent, and approximately $280m, or 27 percent, of this business segment’s operating profit for the quarter and year ended Dec. 31, 2014, compared to approximately $90m, or 35 percent, and approximately $300m, or 29 percent, for the quarter and year ended Dec. 31, 2013.

Income Taxes

The Corporation’s effective income tax rates were 28.1 percent and 31.3 percent for the fourth quarter and year ended Dec. 31, 2014, and 34.6 percent and 29.0 percent for the fourth quarter and year ended Dec. 31, 2013. The rates for all periods benefited from tax deductions for U.S. manufacturing activities, deductions for dividends paid to the Corporation’s defined contribution plans with an employee stock ownership plan feature, and the retroactive reinstatement of the R&D tax credit, which were partially offset by the unfavorable impacts of the non-cash goodwill impairment charges.

In the fourth quarter of 2014, the R&D tax credit was temporarily reinstated for one year, retroactive to the beginning of 2014. Accordingly, the effective income tax rates for both the fourth quarter and year ended Dec. 31, 2014 reflect the credit for all of 2014, which reduced the Corporation’s effective tax rates by 3.6 percentage points for the fourth quarter and 0.9 percentage point for 2014. In the first quarter of 2013, the R&D tax credit was temporarily reinstated for two years, retroactive to the beginning of 2012. As a result, the effective income tax rate for the fourth quarter of 2013 reflects the credit for the quarter only, while the effective income tax rate for 2013 reflects the credit for all of 2013 and 2012, which reduced the Corporation’s effective tax rates by 0.5 percentage point for the fourth quarter and 1.8 percentage points for 2013. Since the R&D tax credit again expired on Dec. 31, 2014, this benefit will not be incorporated into the Corporation’s 2015 outlook or results unless and until legislation is enacted.

A limited amount of the non-cash goodwill impairment charges will be deductible for tax purposes. Accordingly, the non-cash goodwill impairment charges increased the effective tax rates by 2.4 percentage points and 0.6 percentage point for the fourth quarter and year ended Dec. 31, 2014 and by 6.7 percentage points and 1.2 percentage points for the fourth quarter and year ended Dec. 31, 2013.

Northrop Grumman

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29 Jan 15. Reuters reported that Northrop Grumman Corp, maker of Global Hawk unmanned surveillance planes, forecast 2015 earnings above analysts’ estimates and said order backlog increased 3 percent. The U.S. weapons maker, which also makes the Triton unmanned system built for use over oceans, said it expected a profit of $9.20-$9.50 per share for 2015. Analysts on average were expecting $9.11 per share, according to Thomson Reuters I/B/E/S. U.S. arms suppliers are increasing their exposure to international markets to offset a decline in spending at home. The Pentagon is trying to cut $1trn in spending over a decade.

Results In Full

Northrop Grumman Corporation (NYSE: NOC) reported fourth quarter 2014 net earnings of $506m, or $2.48 per diluted share, compared to $478m, or $2.12 per diluted share, in the fourth quarter of 2013. Fourth quarter 2014 diluted earnings per share increased 17 percent and are based on 204.2m weighted average shares outstanding compared with 225.2 m shares in the fourth quarter of 2013, a decrease of 9 percent. The company repurchased 4.5m shares of its common stock in the fourth quarter of 2014 for $599m. As a result of the passage of the Tax Increase Prevention Act of 2014, which extended tax benefits that expired on Dec. 31, 2013, the company recognized a full year research and development tax credit of $38m, or $0.19 per diluted share, in the fourth quarter of 2014.

For 2014, net earnings totalled $2.1bn, or $9.75 per diluted share, compared to $2.0bn, or $8.35 per diluted share in 2013. Diluted earnings per share for 2014 increased 17 percent and are based on 212.1m weighted average shares outstanding compared with 233.9m shares in 2013. During 2014, the company repurchased 21.4m shares of its common stock for $2.7bn. As of Dec. 31, 2014, the company had repurchased 42.2 m shares toward its previously announced goal of retiring 60m shares of its common stock by the end of 2015, market conditions permitting.

“Our team delivered another year of strong performance in 2014. We are excited about our many future opportunities and remain committed to generating value through sustainable performance, a well-aligned portfolio and effective cash deployment,” said Wes Bush, chairman, chief executive officer and president.

Aerospace Systems

Aerospace Systems fourth quarter 2014 sales increased 4 percent principally due to the timing of volume across a number of programs. For 2014, sales were comparable to 2013 and include $75m realized for settlements of certain legal claims related to use of the company’s intellectual property and a terminated program. Excluding the settlements, sales were slightly lower than 2013 due to lower volume for unmanned, space and military aircraft programs.

Aerospace Systems fourth quarter 2014 operating income increased 7 percent and operating margin rate increased 30 basis points to 11.8 percent. Higher operating income and margin rate for the quarter are principally due to higher sales volume and improved performance. For 2014, operating income increased 8 percent and operating margin rate increased 110 basis points to 13.2 percent. Higher operating income and margin rate are principally due to the $75m realized for the settlements described above and to improved performance.

Electronic Systems

Electronic Systems fourth quarter and full year 2014 sales decreased 3 percent. Lower fourth quarter sales include lower volume for land and self protection programs, including infrared countermeasures and laser systems, and domestic intelligence, surveillance and reconnaissance (ISR) and targeting programs. These declines were partially offset by higher volume for international programs. For 2014, lower sales are principally due to lower volume for land and self-protection programs, including fewer deliveries of infrared countermeasures and laser systems; lower volume for domestic ISR and targeting programs, including fewer combat avionics deliveries; and lower volume for navigation and maritime programs. These declines were partially offset by higher volume for international programs.

Electronic Systems fourth quarter 2014 operating income decreased 6 percent, and operating margin rate decreased 60 basis points to 17.2 percent. Lower operating income and operating margin rate reflect lower sales and a lower level of net favorable adjustments than in the prior year period. For 2014, operating income decreased 6 percent, and operating margin rate decreased 60 basis points to 16.5 percent due to lower sales and a lower level of net favorable adjustments. In addition, 2013 operating income benefited from the reversal of a $26 m non-programmatic risk reserve.

Information Systems

Information Systems fourth quarter 2014 sales decreased 3 percent, principally due to lower volume for command and control programs as a result of reduced funding levels and in-theater force reductions. These declines were partially offset by higher volume for ISR and cyber programs. For 2014, sales decreased 6 percent, principally due to lower volume for command and control programs and communications programs due to in-theater force reductions, reduced funding levels and the wind-down of various programs.

Information Systems fourth quarter 2014 operating income decreased 8 percent and operating margin rate declined to 9.3 percent. Lower fourth quarter operating income and margin rate reflect lower sales and increased investments in international business. For 2014, operating income decreased 3 percent, and operating margin rate increased 20 basis points to 9.8 percent. Lower operating income reflects lower sales and the increase in operating margin rate is due to improved performance.

Technical Services

Technical Services fourth quarter 2014 sales decreased 2 percent principally due to lower volume for integrated logistics and modernization programs, including Hunter and ICBM, and the Combined Tactical Training Range (CTTR) program. Declines in these programs were partially offset by higher international sales. For 2014, sales decreased 2 percent principally due to lower volume for the ICBM, Hunter and CTTR programs, partially offset by higher international sales, principally due to the acquisition of Qantas Defence Services in the first quarter of 2014.

Technical Services fourth quarter and full year 2014 operating income and operating margin rate were comparable to the prior year periods.

Raytheon

RAYTHEON

29 Jan 15. Reuters reported that U.S. weapons maker Raytheon Co forecast 2015 revenue largely below average analyst expectation as orders fell for the first time in four quarters. The maker of Tomahawk and Amraam missiles said orders fell 5.4 percent to $7.11bn in the fourth quarter ended Dec. 31.

Results In Full

Raytheon Company (NYSE: RTN) announced fourth quarter 2014 EPS from continuing operations of $1.86 compared to $1.46 in the fourth quarter 2013. Fourth quarter 2014 Adjusted EPS was $1.71 per diluted share compared to $1.58 per diluted share in the fourth quarter 2013. Fourth quarter 2014 Adjusted EPS excluded a favorable FAS/CAS Adjustment of $0.15. Fourth quarter 2013 Adjusted EPS excluded an unfavorable FAS/CAS Adjustment of $0.12.

Full-year 2014 EPS from continuing operations was $6.97 compared to $5.96 for the full-year 2013. Full-year 2014 Adjusted EPS was $6.12 per diluted share compared to $6.38 per diluted share for the full-year 2013.

“Raytheon finished 2014 with strong fourth quarter operating performance, driven by continued global demand for our advanced solutions and solid execution from the Raytheon team,” said Thomas A. Kennedy, Raytheon Chairman and CEO. ” As we look to the year ahead, we will continue our focus on investing in innovative technologies, building on our capabilities to position the company for the future, and providing ongoing strong returns for shareholders.”

The Company had bookings of $7.1bn in the fourth quarter 2014, resulting in a book-to-bill ratio of 1.16. Full-year 2014 bookings were $24.1bn, resulting in a book-to-bill ratio of 1.05 for the year.

Net sales for the fourth quarter 2014 were $6.1bn, up 5 percent compared to $5.9bn in the fourth quarter 2013. Net sales in 2014 were $22.8bn, down 4 percent compared to $23.7bn in 2013. Net sales for both the fourth quarter and full-year 2014 were in-line with the Company’s prior financial guidance.

The Company generated strong operating cash flow for both the fourth quarter and full-year. Operating cash flow from continuing operations for the fourth quarter 2014 was $829m compared to $1.1bn for the fourth quarter 2013. Fourth quarter 2014 included a $600m pretax discretionary cash contribution to the Company’s pension plans compared to $300m in the fourth quarter 2013. For the full-year 2014 and 2013, the Company generated $2.1bn and $2.4bn of operating cash flow from continuing operations, respectively. For the full-year 2014, the Company repurchased 7.7m shares of common stock for $750m. In the fourth quarter 2014, the Company issued $600 m in long-term debt. The Company ended 2014 with $611m of net debt. Net debt is defined as total debt less cash and cash equivalents and short-term investments. As previously announced, in the fourth quarter 2014, the Company acquired Blackbird Technologies, which enhances the Company’s offerings in persistent surveillance, secure mobile communications and cybersecurity solutions in intelligence and special operations markets, and is now part of Raytheon’s Intelligence, Information and Services (IIS) business.

Backlog

Backlog at the end of 2014 was comprised of 40 percent international compared to 37 percent at the end of 2013.

Segment Results

The Company’s reportable segments are: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); and Space and Airborne Systems (SAS).

Integrated Defense Systems (IDS)

Integrated Defense Systems (IDS) had fourth quarter 2014 net sales of $1,627m, up 4 percent compared to $1,569m in the fourth quarter 2013. The increase in net sales was primarily due to higher sales on international Patriot programs. IDS had full-year 2014 net sales of $6,085m compared to $6,489m in 2013. The change in net sales was primarily due to the scheduled completion of production phases on certain international Patriot programs, a missile defense radar program, and a close combat radar program.

IDS recorded $299m of operating income in the fourth quarter 2014 compared to $241m in the fourth quarter 2013. The increase in operating income was primarily driven by improved operating performance and a change in program mix. IDS recorded $974m of operating income in 2014 compared to $1,115m in 2013. The change in operating income for the full-year 2014 was primarily driven by lower volume and a change in mix on international Patriot programs.

During the quarter, IDS booked $2,038m to provide advanced Patriot air and missile defense capability for Qatar and $355 m for the Air Warfare Destroyer (AWD) program for the Australian Navy. IDS also booked $192m to provide Consolidated Contractor Logistics Support (CCLS) and $154m for a radar sustainment contract for the Missile Defense Agency (MDA).

Intelligence, Information and Services (IIS)

Intelligence, Information and Services (IIS) had fourth quarter 2014 net sales of $1,538m, up 5 percent compared to $1,458m in the fourth quarter 2013. The increase in net sales was primarily driven by higher volume on classified programs. IIS had full-year 2014 net sales of $5,984 m compared to $6,045m in 2013.

IIS recorded $131m of operating income in the fourth quarter 2014 compared to $121m in the fourth quarter 2013. The increase in operating income was primarily driven by higher volume. IIS recorded $508 m of operating income in 2014 compared to $510m in 2013.

During the quarter, IIS booked $111 m on the Allied System for Geospatial Intelligence (ASG) program for the United Kingdom. IIS also booked $391m on a number of classified contracts.

Missile Systems (MS)

Missile Systems (MS) had fourth quarter 2014 net sales of $1,719m, up 5 percent compared to $1,638m in the fourth quarter 2013. The increase in net sales was primarily driven by higher volume on the Advanced Medium-Range Air-to-Air Missile (AMRAAM) and Evolved Sea Sparrow Missile (ESSM) programs. MS had full-year 2014 net sales of $6,309m compared to $6,599m in 2013. The change in net sales was primarily driven by lower sales on U.S. Army programs.

MS recorded $212m of operating income in the fourth quarter 2014 compared to $201m in the fourth quarter 2013. The increase in operating income was primarily due to higher volume. MS recorded $800 m of operating income in 2014 compared to $830m in 2013. The change in operating income for the full-year 2014 was primarily due to lower volume.

During the quarter, MS booked $509m for AMRAAM for the U.S. Air Force, U.S. Navy and international customers. MS also booked $146m for ESSM for the U.S. Navy and international customers and $102m for Tube-launched, Optically-tracked, Wireless-guided (TOW) missiles for the U.S. Army, U.S. Marines and international customers.

Space and Airborne Systems (SAS)

Space and Airborne Systems (SAS) had fourth quarter 2014 net sales of $1,660m, up 3 percent compared to $1,613m in the fourth quarter 2013. The increase in net sales was primarily driven by higher volume on an electronic warfare systems program. SAS had full-year 2014 net sales of $6,072m compared to $6,371m in 2013. The change in net sales for the full-year 2014 was primarily due to lower volume on intersegment sales and on classified programs.

SAS recorded $217m of operating income in the fourth quarter 2014 compared to $253m in the fourth quarter 2013. The change in operating income was primarily due to the timing of program efficiencies. SAS recorded $846m of operating income in 2014 compared to $920 m in 2013. The change in operating income for the full-year 2014 was primarily due to a change in program mix and lower volume.

During the quarter, SAS booked $105m for Advanced Targeting Forward Looking Infrared (ATFLIR) pods and spares for the U.S. Navy and international customers.  SAS also booked $76m on the Navy Multiband Terminal (NMT) program and $150m on a number of classified contracts.

 

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