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US Majors Report Results In Line with Expectations By Julian Nettlefold

 

US Majors Report Results In Line with Expectations

By Julian Nettlefold

The Reporting Season kicked off again with results from the majors broadly in line with expectations.

Boeing

General Dynamics

Honeywell

Lockheed Martin

Northrop Grumman

Raytheon

United Technologies

Boeing

boeing26 Oct 16. The Boeing Company [NYSE: BA] reported third-quarter GAAP earnings per share of $3.60 and core earnings per share (non-GAAP)* of $3.51 reflecting overall solid execution on production programs and services, favorable tax items ($0.98 per share), and timing of aircraft deliveries.

Revenue guidance has been increased $500m to between $93.5 and $95.5bn on higher commercial deliveries. GAAP earnings per share guidance for 2016 has been increased to between $7.10 and $7.30 from $6.40 and $6.60 and core earnings per share (non-GAAP)* guidance has been increased to between $6.80 and $7.00 from $6.10 and $6.30 to reflect a favorable $0.70 per share tax basis adjustment. The third quarter favorable tax adjustment for a 2011-2012 tax settlement of $0.28 per share was previously announced in the second quarter of 2016 and was reflected in prior guidance.

“Solid operating performance across our commercial and defense and space businesses in the third quarter again generated strong cash flow for Boeing, which continues to fuel investments in our future and enable us to deliver compelling returns to our shareholders,” said Chairman, President and Chief Executive Officer Dennis Muilenburg. “We also captured key orders, reinforcing the strength of our large and diverse order backlog.”

“We achieved key milestones on the 737 MAX, 787-10 and other development programs, including the first KC-46 production contracts. Our teams remain focused on completing these development efforts and delivering better capabilities and economics to customers around the world.”

“We remain on track to deliver on our full-year commitments. At the same time, we are positioning Boeing for further growth through our intense focus on productivity, quality and safety across the company.”   

Operating cash flow in the quarter was $3.2bn, reflecting solid operating performance. During the quarter, the company repurchased 7.6m shares for $1.0bn, leaving $7.5bn remaining under the current repurchase authorization. The company also paid $0.7bn in dividends in the quarter, reflecting an approximately 20 percent increase in dividends per share compared to the same period of the prior year.

Cash and investments in marketable securities totaled $9.7bn, up from $9.3bn at the beginning of the quarter. Debt was $10.5bn, down from the beginning of the quarter, due to repayment of debt.

Total company backlog at quarter-end was $462bn, down from $472bn at the beginning of the quarter, and included net orders for the quarter of $15bn.

Segment Results

Commercial Airplanes

During the quarter, we began production of the 500th 787 Dreamliner, completed service ready validation of the 737 MAX 8, and began production of the 737 MAX 9. The 737 program has captured more than 3,300 orders for the 737 MAX since launch and the company remains on track to raise the production rate to 47 per month in the third quarter of 2017. During the quarter, we continued to grow our services business through an agreement with Japan Airlines to provide spare parts solutions.Commercial Airplanes third-quarter revenue decreased to $17.0bn on lower planned delivery volume. Third-quarter operating margin was 9.4 percent, reflecting delivery volume and mix, partially offset by lower period costs.

Commercial Airplanes booked 107 net orders during the quarter. Backlog remains strong with more than 5,600 airplanes valued at $409bn.

Defense, Space & Security

Defense, Space & Security’s third-quarter revenue was $7.5bn. Third-quarter operating margin was 10.4 percent, reflecting solid execution and the impact of the Commercial Crew program.

Boeing Military Aircraft (BMA) third-quarter revenue was $3.3bn, reflecting fewer C-17 deliveries and volume on F-15. Operating margin increased to 13.3 percent, reflecting program mix. During the quarter, BMA was awarded a contract from the U.S. Air Force for low-rate initial production of 19 KC-46 Tanker aircraft and received an agreement from the U.K. Ministry of Defence to purchase 50 Apache attack helicopters and nine P-8 Poseidon aircraft.

Network & Space Systems (N&SS) third-quarter revenue decreased to $1.7bn with an operating margin of 2.1 percent, primarily reflecting the charge on the Commercial Crew development program. The charge includes a $124m reversal of cumulative pre-tax earnings recorded in prior periods and a $38m pre-tax reach-forward loss, and was largely driven by delays in completion of engineering and supply chain activities. During the quarter, N&SS announced an award for a 702MP satellite with a new digital payload offering twice the capacity of previous designs.

Global Services & Support (GS&S) third-quarter revenue increased to $2.5 bn, reflecting higher volume in Aircraft Modernization & Sustainment and Training Systems & Government Services. Operating margin was 12.4 percent largely reflecting contract mix. During the quarter, GS&S was awarded contracts from the Defense Logistics Agency for F/A-18 spare parts.

Backlog at Defense, Space & Security was $53bn, of which 38 percent represents orders from international customers.

Additional Financial Information

At quarter-end, Boeing Capital’s net portfolio balance was $3.7bn, up from the beginning of the quarter. Total pension expense for the third quarter was $453m, down from $529 m in the same period of the prior year. Other unallocated items and eliminations revenue decreased from the same period in the prior year primarily due to the elimination of intercompany revenue for three aircraft delivered under operating leases. The effective tax rate for the third quarter decreased from the same period in the prior year primarily due to the favorable $440 m tax basis adjustment and the previously announced $177 m for the 2011-2012 tax settlement.

Outlook

The company’s 2016 updated financial and delivery guidance reflects higher commercial deliveries and the impact of the tax basis adjustment.

Free Cash Flow

Free cash flow is defined as GAAP operating cash flow without capital expenditures for property, plant and equipment additions. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders, debt repayment, and acquisitions after making the capital investments required to support ongoing business operations and long term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures as it excludes certain mandatory expenditures such as repayment of maturing debt. Management uses free cash flow as a measure to assess both business performance and overall liquidity.

General Dynamics

gdlogo26 Oct 16. General Dynamics (NYSE: GD) today reported third-quarter 2016 earnings from continuing operations of $767m, a 4.6 percent increase over the year-ago quarter, on revenue of $7.7bn. Diluted earnings per share from continuing operations were $2.48 compared to $2.28 in third-quarter 2015, an 8.8 percent increase.

Net earnings for third-quarter 2016 were $683m, with fully diluted earnings per share of $2.21. Net earnings included an $84m charge in discontinued operations related to the A-12 settlement reached with the U.S. Navy in 2013.

“General Dynamics had a very strong quarter, clearly demonstrated by our operating earnings, margin and return on sales,” said Phebe N. Novakovic, chairman and chief executive officer. “Our businesses are performing exceptionally well as we remain focused on operating excellence and continuous improvement.”

Margin

Company-wide operating margin for the third quarter of 2016 was 13.8 percent, a 90 basis-point increase when compared to 12.9 percent in third-quarter 2015. Three of the company’s four business groups expanded margins over the year-ago period, with the Aerospace group achieving record-setting margins in the third quarter.

Cash

Net cash provided by operating activities in the quarter totaled $499 m. Free cash flow from operations, defined as net cash provided by operating activities less capital expenditures, was $389m.

Capital Deployment

The company repurchased 2.3m of its outstanding shares in the third quarter. Year-to-date, the company has repurchased 11.2 m outstanding shares.

Backlog

General Dynamics’ total backlog at the end of third-quarter 2016 was $62bn. There was solid demand in the quarter across the company’s portfolio. The estimated potential contract value, representing management’s estimate of value in unfunded indefinite delivery, indefinite quantity (IDIQ) contracts and unexercised options, was $25.2bn. Total potential contract value, the sum of all backlog components, was $87.2bn at the end of the quarter.

 Honeywell

honeywell21 Oct 16. Honeywell Reports Third Quarter 2016 Sales Of $9.8bn, Up 2%; Earnings Per Share Of $1.60.

“The third-quarter results came in as we outlined on our October 7 conference call. We are well-positioned for double-digit earnings growth in the fourth quarter, leading to 8%-9% earnings growth in 2016,” said Honeywell Chairman and CEO Dave Cote. “It was a quarter of important changes in many areas. We split the former Automation and Control Solutions business into two new reporting segments; closed the acquisition of Intelligrated and sold Honeywell Technology Solutions, Inc.; and spun off our Resins and Chemicals business as a freestanding publicly-traded company named AdvanSix Inc. (ASIX). We also funded approximately $250m in restructuring and other actions from a $0.07 increase in first- and second-quarter EPS caused by an accounting standard adoption, and the $0.14 gain related to the sale of our government services business. These actions will drive more than $175m of benefits in 2017 alone. We also intend in the fourth quarter to refinance outstanding debt maturing in 2017-2019, which will lower interest expense by approximately $60m annually beginning in 2017.”

“Combined with our ongoing productivity initiatives driven by the Honeywell Operating System, and the strength of our underlying portfolio, the actions we announced this quarter position Honeywell for future outperformance,” continued Cote. “Moving ahead, we are targeting low single-digit core organic sales growth, continued segment margin improvement, and a double-digit increase in EPS in 2017. Darius Adamczyk, Chief Operating Officer, and Tom Szlosek, Chief Financial Officer, will provide more details about 2017 during our annual outlook call in December.”

“We are committed to creating sustainable long-term shareowner value,” concluded Cote. “We remain focused on disciplined capital deployment, aggressive organic sales growth, seed planting for new products and technologies, penetrating High Growth Regions, and executing on our key process initiatives. 2017 will be an inflection year for several core business units: growing demand for our UOP catalysts and modular equipment, Jetwave™ and other products and services tied to connected aircraft, further turbo penetration, and strong sales growth from Solstice® (HFOs), our line of low-global-warming refrigerants and blowing agents. Revenue and earnings from the nearly $8bn in M&A investments during the past two years should also be a significant contributor to 2017 performance. We are confident in our position and expect to continue to outperform.”

The Company’s current 2016 full-year guidance, which reflects our October 6, 2016 announcement, is as follows:

* Sales for the third quarter were down (6%) on a reported and core organic basis. The decrease was primarily driven by the unfavorable impact of third-quarter OEM incentives, lower volumes in Business and General Aviation, program completions in the U.S. Space and international Defense businesses, and continued weakness in the commercial helicopter business. This was partially offset by increased Air Transport OE deliveries and repair and overhaul activities, and new turbo platform launches on passenger vehicles in Transportation Systems.

* Segment profit was down (20%) and segment margin declined (340) bps to 18.4%, due to higher Aerospace OEM incentives and lower volumes in Business Jet and Defense, partially offset by productivity net of inflation and commercial excellence.

Home and Building Technologies                               

* Sales for the third quarter were up 17% reported and up 5% on a core organic basis. The increase was primarily driven by continued strength in our Distribution and Building Solutions businesses, and Products growth in Environmental & Energy Solutions and in China. The difference between reported and core organic sales was due to the favorable impact from acquisitions, primarily Elster.

* Segment profit was up 8% and segment margin declined (130) bps to 16.3%, driven by acquisition amortization and integration costs, continued growth investments in salespeople and research and development, and the unfavorable mix impact of increased sales in Building Solutions and Distribution, partially offset by benefits from previously-funded restructuring, higher sales volumes, and commercial excellence.

Performance Materials and Technologies                                

* Sales for the third quarter were up 2% reported. Core organic sales were down (3%) primarily driven by declines in UOP gas processing, licensing, and engineering, partially offset by strong catalyst shipments and conversion of global mega projects in Process Solutions. The difference between reported and core organic sales was due to the favorable impact from acquisitions, partially offset by the unfavorable impact of foreign currency and market pricing headwinds in Resins & Chemicals.

* Segment profit was up 6% and segment margins expanded 80 bps to 21.6%, driven by productivity net of inflation, higher catalyst volumes, and acquisition integration excellence, partially offset by continued investments for growth.

Safety and Productivity Solutions    

* Sales for the third quarter were down (2%) reported. Core organic sales were down (8%) in the quarter as a result of lower volume in Productivity Solutions associated with the USPS contract (which was completed in the third quarter of 2015), continued channel headwinds, and lower volumes in our Safety business. The difference between reported and core organic sales was due to the favorable impact from acquisitions, primarily Intelligrated.

Segment profit was down (11%) and segment margin contracted (140) bps to 14.7%, primarily driven by lower volumes and acquisition amortization and integration costs, partially offset by restructuring benefits and commercial excellence. (Source: Yahoo!/PRNewswire)

Lockheed Martin

locklogo

25 Oct 16. Lockheed Martin (NYSE: LMT) today reported third quarter 2016 net sales from continuing operations of $11.6bn, compared to $10.1bn in the third quarter of 2015. Net earnings from continuing operations in the third quarter of 2016 were $1.1bn, or $3.61 per share, compared to $756 m, or $2.42 per share, in the third quarter of 2015. Cash from operations in the third quarter of 2016 was $1.3bn, compared to $1.5bn in the third quarter of 2015.

“The corporation achieved a quarter of strong operational and financial results, while also completing our strategic disposition of IS&GS,” said Lockheed Martin Chairman, President and CEO Marillyn Hewson. “Looking ahead to 2017, we are focused on providing innovative solutions to our customers, while executing on our realigned business portfolio to generate growth and value to shareholders.”

Divestiture of Information Systems & Global Solutions

On Aug. 16, 2016, the Corporation completed the previously announced divestiture of its Information Systems & Global Solutions (IS&GS) business segment, which merged with Leidos Holdings, Inc. (Leidos) in a Reverse Morris Trust transaction (the Transactions). The Transactions were the culmination of the Corporation’s strategic review of its government information technology (IT) business and its technical services business performed in 2015 to explore whether these businesses could achieve greater growth and create more value for customers and stockholders outside of Lockheed Martin. As part of the Transactions, the Corporation also completed an exchange offer that resulted in a reduction of Lockheed Martin common stock outstanding by approximately 9.4m shares (approximately three percent). Both the exchange offer and merger qualified as tax-free transactions to the Corporation and its stockholders, except to the extent that cash was paid to the Corporation’s stockholders in lieu of fractional shares. Additionally, Lockheed Martin received a one-time special cash payment of $1.8 bn, which is reported under financing activities in the consolidated statements of cash flows.

The Corporation recognized a $1.2bn gain as a result of the Transactions, which represents the $2.5bn fair value of the shares of Lockheed Martin common stock tendered and retired as part of the exchange offer, plus the $1.8bn one-time special cash payment, less the $3.0bn net book value of the IS&GS business segment at Aug. 16, 2016 and other adjustments of $100m. The final gain is subject to certain post-closing adjustments, including final working capital and tax adjustments, which the Corporation expects to complete in the fourth quarter of 2016 or the first quarter of 2017. The operating results of the IS&GS business segment and the gain on the Transactions have been classified as discontinued operations. However, the cash flows of the IS&GS business segment have not been classified as discontinued operations, as the Corporation retained this cash as part of the Transactions.

Consolidation of Atomic Weapons Establishment Venture

On Aug. 24, 2016, the Corporation’s ownership interest in the AWE Management Limited (AWE) venture, which operates the United Kingdom’s nuclear deterrent program, increased by 18%. As a result of the increase in ownership interest, the Corporation now holds a 51% controlling interest in the AWE venture. The operating results and cash flows of AWE have been included in the Corporation’s consolidated results since Aug. 24, 2016, the date it obtained a controlling interest. AWE has been aligned under the Corporation’s Space Systems business segment. Previously, the Corporation accounted for its investment in AWE using the equity method of accounting. The Corporation recognized a $127m non-cash gain as a result of this transaction, which represents the fair value of the Corporation’s 51% interest in AWE, less the net book value of the previously held investment in AWE. The gain increased net earnings from continuing operations $104m ($0.34 per share) in the third quarter of 2016.

Summary Financial Results

2016 Financial Outlook

The Corporation’s 2016 financial outlook for sales, operating profit, and earnings per share have been updated to exclude the operating results of the IS&GS business segment for the full year, which was divested on Aug. 16, 2016. However, the 2016 financial outlook for cash from operations includes cash flows generated by the IS&GS business segment through the closing of the divestiture on Aug. 16, 2016, as the Corporation retained this cash as part of the divestiture.

The Corporation also adjusted its 2016 financial outlook to include sales of $400m from the AWE venture, which has been consolidated since Aug. 24, 2016 as a result of obtaining a controlling interest, and the $127m gain recognized in operating profit of the Corporation’s Space Systems business segment in the third quarter of 2016 as a result of the AWE transaction. The AWE venture has been aligned under the Corporation’s Space Systems business segment.

The financial outlook for cash from operations is likely to be impacted by a delay in collections on the F-35 program. Any delay in 2016 customer payments on the F-35 program will increase the Corporation’s cash from operations in 2017.

The Corporation may determine to fund customer programs itself pending government appropriations. If the Corporation incurs costs in excess of funds obligated on a contract, it is at risk for reimbursement of the excess costs. In 2014 and 2015, the Corporation received customer authorization and initial funding to begin producing F-35 aircraft to be acquired under low-rate initial production (LRIP) 9 and 10 contracts, respectively. The Corporation continues to negotiate these contracts with its customer. Throughout the negotiation process, the Corporation has incurred costs in excess of funds obligated and has provided multiple notifications to its customer that current funding is insufficient to cover the production process.  Despite not yet receiving funding sufficient to cover its costs, the Corporation continued work in an effort to meet the customer’s desired aircraft delivery dates. Currently, the Corporation has approximately $950 m of potential cash exposure and $2.3 bn in termination liability exposure related to the F-35 LRIP 9 and 10 contracts.

2017 Financial Trends

The Corporation expects its 2017 net sales to increase by approximately 7 percent as compared to 2016. Total business segment operating margin is expected to be in the 10.0 percent to 10.5 percent range. Depending on the timing of F-35 collections, 2017 cash from operations will be greater than or equal to $5.0bn or greater than or equal to $5.7bn. The preliminary outlook for 2017 assumes the U.S. Government continues to support and fund the Corporation’s key programs, consistent with the continuing resolution funding measure through Dec. 9, 2016, and Congress approves budget legislation for government fiscal year 2017 soon. Changes in circumstances may require the Corporation to revise its assumptions, which could materially change its current estimate of 2017 net sales, operating margin and cash flows.

The Corporation expects the 2017 FAS/CAS pension benefit to be approximately $800 m assuming a 3.625 percent discount rate, a 75 basis point decrease from the end of 2015, a 5.0 percent return on plan assets in 2016, revised longevity assumptions (described below), and other assumptions. The Corporation does not expect to make contributions to its legacy qualified defined benefit pension plans in 2017. 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 $125m to the estimated 2017 FAS/CAS pension benefit. On Oct. 20, 2016, the Society of Actuaries published revised longevity assumptions that are used to estimate the life expectancy of plan participants during which they are expected to receive benefit payments. Actuarial studies have recently been updated and would have the resultant impact of decreasing the total number of benefit payments to plan participants. These actuarial studies have not yet been reflected or incorporated in the postretirement benefit plan obligation recognized at Sept. 25, 2016 or the FAS expense and CAS cost for 2016. The new longevity assumptions, which the Corporation expects to adopt at the Dec. 31, 2016 measurement date, currently are expected to decrease the amount of the Corporation’s postretirement benefit plan obligation and increase the Corporation’s 2017 net earnings. The Corporation will finalize the postretirement benefit plan assumptions and determine the 2016 actual return on plan assets on Dec. 31, 2016. The final assumptions and actual investment return for 2016 may differ materially from those discussed above.

Cash Deployment Activities

The Corporation’s cash deployment activities in the third quarter of 2016 consisted of the following:

  • repurchasing 1.2m shares for $278m, compared to 4.1m shares for $823m in the third quarter of 2015;
  • paying cash dividends of $484m, compared to $462m in the third quarter of 2015;
  • repaying $500m of long-term debt upon scheduled maturity, compared to no repayments in the third quarter of 2015; and
  • making capital expenditures of $241m, compared to $191m in the third quarter of 2015.

Segment Results

The Corporation operates in four business segments organized based on the nature of products and services offered: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space Systems.

The discussion and presentation of the operating results of the Corporation’s business segments in this news release have been impacted by the following recent events:

  • The Corporation completed the previously announced divestiture of its IS&GS business segment on Aug. 16, 2016, which merged with Leidos. The discussion and presentation of the Corporation’s segment results for all periods presented in this news release exclude the results of the IS&GS business segment.
  • The Corporation’s ownership interest in the AWE venture increased by 18% on Aug. 24, 2016. As a result of the increase in ownership interest, the Corporation now holds a 51% controlling interest in AWE and is required to consolidate the AWE venture. AWE has been aligned under the Corporation’s Space Systems business segment. Accordingly, the discussion and presentation of net sales, operating profit and operating margin of the Corporation’s Space Systems business segment include the operating results of AWE since Aug. 24, 2016. Previously, the Corporation accounted for its investment in AWE using the equity method of accounting. Under the equity method, only 33% of AWE’s net earnings was included in operating profit and operating margin of the Space Systems business segment.
  • During the third quarter of 2016, the business segment formerly known as Mission Systems and Training was renamed Rotary and Missions Systems (RMS) to better reflect a broader range of products and capabilities subsequent to the acquisition of Sikorsky Aircraft Corporation (Sikorsky) on Nov. 6, 2015. The portfolio also reflects the realignment of certain programs from the former IS&GS business segment to RMS in the fourth quarter of 2015. While RMS was renamed to more accurately reflect the expanded portfolio, there was no additional change to the composition of the portfolio in connection with the name change. The information for this segment for all periods included in this news release has been labeled using the new name. Additionally, the discussion and presentation of the operating results of the RMS business segment include the operating results of Sikorsky since its Nov. 6, 2015 acquisition date and alignment under the RMS business segment.
  • During the fourth quarter of 2015, the Corporation realigned certain programs among its business segments in connection with the strategic review of its government IT and technical services businesses. The discussion and presentation of the Corporation’s segment results for all periods presented in this news release reflect the program realignment.

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. United Launch Alliance (ULA), which is part of the Space Systems business segment, is the Corporation’s primary equity method investee. Operating profit of the Corporation’s business segments excludes the FAS/CAS pension adjustment, which represents the difference between total pension expense recorded in accordance with U.S. generally accepted accounting principles (FAS) and pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government Cost Accounting Standards (CAS); 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 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 levels, deliveries 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 accounted for using the percentage-of-completion method of accounting. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs 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 complete 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. Favorable items may include the positive resolution of contractual matters, cost recoveries on 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 assets.

The Corporation’s consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, represented approximately 28 percent of total segment operating profit in the third quarter of 2016, compared to approximately 31 percent in the third quarter of 2015.

Aeronautics

Aeronautics’ net sales in the third quarter of 2016 increased $267m, or 7 percent, compared to the same period in 2015. The increase was primarily attributable to higher net sales of approximately $300m for the F-35 program due to increased volume on aircraft production and sustainment activities. This increase was partially offset by lower net sales of approximately $50 m for the C-5 program due primarily to decreased sustainment activities, while aircraft deliveries were comparable in the third quarter of 2016 compared to the same period in 2015 (two aircraft delivered in each period).

Aeronautics’ operating profit in the third quarter of 2016 increased $19m, or 5 percent, compared to the same period in 2015. Operating profit increased approximately $25 m for the F-35 program due to increased volume on aircraft production and sustainment activities; and about $35m for aircraft support and maintenance programs due to reserves recorded in the third quarter of 2015 that were not repeated in the third quarter of 2016 and increased volume. These increases were partially offset by lower operating profit of approximately $45m for the C-130 program due to contract mix and lower risk retirements. Adjustments not related to volume, including net profit booking rate adjustments, were comparable in the third quarters of 2016 and 2015.

Missiles and Fire Control

MFC’s net sales in the third quarter of 2016 decreased $32m, or 2 percent, compared to the same period in 2015. The decrease was primarily attributable to lower net sales of approximately $40m as a result of lower volume on certain fire control programs (Longbow, LANTIRN® and SNIPER®); and about $25m for air and missile defense programs (primarily Terminal High Altitude Area Defense) due to lower volume. These decreases were partially offset by higher net sales of approximately $45m for tactical missiles programs due to increased deliveries (primarily Hellfire).

MFC’s operating profit in the third quarter of 2016 decreased $27 m, or 9 percent, compared to the same period in 2015. Operating profit decreased approximately $20 m for certain fire control programs due to lower risk retirements (Apache) and program mix; approximately $10m for tactical missiles programs (including Javelin) due to lower risk retirements; and about $20m on other programs primarily due to lower risk retirement. These decreases were partially offset by higher operating profit of approximately $25m for air and missile defense programs due to higher risk retirements (Patriot Advanced Capability-3). Adjustments not related to volume, including net profit booking rate adjustments, were approximately $30 m lower in the third quarter of 2016 compared to the same period in 2015.

Rotary and Mission Systems

RMS’ net sales in the third quarter of 2016 increased $1.2bn, or 55 percent, compared to the same period in 2015. The increase was primarily attributable to net sales of approximately $1.2bn from Sikorsky, net of adjustments required to account for the acquisition of this business which occurred in the fourth quarter of 2015.

RMS’ operating profit in the third quarter of 2016 was comparable to operating profit in the same period in 2015. Operating profit from Sikorsky was approximately $25m, inclusive of the favorable impacts of risk retirements, which were offset by intangible asset amortization and other adjustments required to account for the acquisition of this business. The net profit from Sikorsky was offset by lower operating profit of approximately $25m from various programs due primarily to decreased risk retirements. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $20m higher in the third quarter of 2016 compared to the same period in 2015.

Space Systems

Space Systems’ net sales in the third quarter of 2016 increased $72m, or 3 percent, compared to the same period in 2015. The increase was primarily attributable to net sales of approximately $100m from AWE following the consolidation of this business in the third quarter of 2016. This increase was partially offset by lower net sales of approximately $40m for the Orion program due to decreased volume.

Space Systems’ operating profit in the third quarter of 2016 increased $185m, or 70 percent, compared to the same period in 2015. The increase was primarily attributable to a non-cash, pre-tax gain of approximately $127m related to the consolidation of AWE; and approximately $30m for government and commercial satellite programs due to higher risk retirements (primarily Space Based Infrared System and Advanced Extremely High Frequency). Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $25m higher in the third quarter of 2016 compared to the same period in 2015.

Total equity earnings recognized by Space Systems (primarily ULA) represented approximately $70m, or 16 percent, of this business segment’s operating profit in the third quarter of 2016, compared to approximately $70m, or 26 percent, in the third quarter of 2015.

Unallocated items

Consistent with the manner in which the Corporation’s business segment operating performance is evaluated by senior management, certain items are excluded from the business segment results and are included in “Unallocated items.” See the Corporation’s 2015 Annual Report on Form 10-K for a description of “Unallocated items.”

As a result of the divestiture of the IS&GS business segment on Aug. 16, 2016, the operating results of the IS&GS business segment have been reclassified as discontinued operations for all periods presented. Certain corporate overhead costs and certain defined benefit pension costs that were historically allocated to and included in the operating results of the IS&GS business segment have been reclassified into “Unallocated items” and included in the results of the Corporation’s continuing operations because the Corporation will continue to incur these costs subsequent to the divestiture of the IS&GS business segment.

Corporate overhead costs incurred by the Corporation and previously allocated to and included in the operating results of the IS&GS business segment were comprised of expenses related to senior management, legal, human resources, finance, accounting, treasury, tax, information technology, communications, ethics and compliance, corporate employee benefits, incentives and stock-based compensation, shared services processing and administration and depreciation for corporate fixed assets. The amount of corporate overhead costs previously included in the operating results of the IS&GS business segment that have been reclassified to and included in the results of the Corporation’s continuing operations were $17m and $82m in the quarter and nine months ended Sept. 25, 2016 and $40m and $133m in the quarter and nine months ended Sept. 27, 2015. These costs are included in “Other, net” within “Unallocated items.”

Prior to the divestiture of the IS&GS business segment, certain IS&GS salaried employees participated in various defined benefit pension and other post-employment benefit plans administered and sponsored by the Corporation. Pension costs related to benefits earned by these employees were historically allocated to and included in the results of operations of the IS&GS business segment. Subsequent to the divestiture, IS&GS salaried employees that transferred to Leidos will no longer earn additional benefits under the Corporation’s defined benefit pension and other post-employment benefit plans, but remain entitled to the benefits earned through the closing of the divestiture. The Corporation retained all obligations related to the benefits earned by the IS&GS salaried employees through the closing of the divestiture and the related assets of the plans. Therefore, the Corporation will continue to incur the non-service portion of pension costs (interest cost, actuarial gains and losses and expected return on plan assets) for IS&GS salaried employees that transferred to Leidos. Accordingly, these costs have been reclassified to and included in the results of the Corporation’s continuing operations. The non-service portion of pension costs previously included in the operating results of the IS&GS business segment that have been reclassified to and included in the results of the Corporation’s continuing operations were $11m and $54m in the quarter and nine months ended Sept. 25, 2016 and $17m and $53 m in the quarter and nine months ended Sept. 27, 2015. These costs are included in “FAS/CAS pension adjustment” within “Unallocated items.” The service portion of pension costs related to IS&GS salaried employees that transferred to Leidos remains in the operating results of the IS&GS business segment classified as discontinued operations because such costs will no longer be incurred by the Corporation subsequent to the divestiture of IS&GS.

The Corporation allocates certain corporate overhead costs and defined benefit pension costs to its business segments because under U.S. Government contracting regulations such costs are allowable in establishing prices for contracts with the U.S. Government. Although the corporate overhead costs and defined benefit pension costs that were historically allocated to and included in the operating results of the IS&GS business segment have been reclassified to and included in the results of the Corporation’s continuing operations for financial reporting purposes, the Corporation will allocate similar costs incurred in future periods to its remaining business segments and expects to recover a substantial amount of these costs through the pricing of its products and services to the U.S. Government and other customers in future periods.

Significant severance charges related to the IS&GS business segment were historically recorded at the Lockheed Martin corporate office. These charges have been reclassified into the operating results of the IS&GS business segment classified as discontinued operations and excluded from the results of the Corporation’s continuing operations. The amount of severance charges reclassified were $19 m in the nine months ended Sept. 25, 2016 and $20m in the quarter and nine months ended Sept. 27, 2015.

Income Taxes

The Corporation’s effective income tax rate from continuing operations was 23.7 percent in the third quarter of 2016, compared to 30.6 percent in the third quarter of 2015. The rates for both periods benefited from tax deductions for U.S. manufacturing activities and for dividends paid to the Corporation’s defined contribution plans with an employee stock ownership plan feature. The rate in the third quarter of 2016 also benefited from the research and development tax credit, which was permanently extended and reinstated in the fourth quarter of 2015, and from the nontaxable gain recorded in connection with the increase in AWE ownership.

In addition, the rate in the third quarter of 2016 benefited from the additional tax benefits related to employee share-based payment awards, which are now recorded as income tax benefit or expense in earnings effective with the adoption of an accounting standard update in the second quarter of 2016. The Corporation early adopted the accounting standard update during the second quarter of 2016 and was therefore required to report the impacts as though the accounting standard update had been adopted on Jan. 1, 2016. Accordingly, the Corporation recognized additional income tax benefits of $22m and $137 m during the quarter and nine months ended Sept. 25, 2016. The adjustments for the third quarter include only the quarterly impacts, whereas the adjustments for the first nine months of 2016 include the second and third quarter impacts and the reclassification of income tax benefits of $104m originally recognized in additional paid-in capital in the first quarter of 2016.

Northrop Grumman

northlog26 Oct 16. Northrop Grumman Corporation (NYSE: NOC) reported third quarter 2016 sales of $6.2bn, a 3 percent increase over sales of $6.0bn in the third quarter of 2015. Third quarter 2016 net earnings increased 17 percent to $602m, or $3.35 per diluted share, from $516m, or $2.75 per diluted share, in the third quarter of 2015. As previously disclosed, third quarter results include a federal tax benefit of $42m, or $0.23 per diluted share. The company also recorded pre-tax benefits totaling $55m, or $0.20 per diluted share, for two unallocated corporate items. Third quarter 2016 diluted earnings per share are based on 179.6 m weighted average diluted shares outstanding compared with 187.9 m in the prior year period, a 4 percent decline. The company repurchased 2.2 m shares of its common stock in the third quarter of 2016. As of Sept. 30, 2016, $3.1bn remained on the company’s share repurchase authorization.

“Our third quarter results demonstrate that we continue to build a strong foundation for profitable growth over the long term. Congratulations to our entire team for another solid quarter,” said Wes Bush, chairman, chief executive officer and president.

Third quarter 2016 cash provided by operating activities totaled $738m compared to $557m provided in the third quarter of 2015. Third quarter 2016 free cash flow totaled $601m after capital expenditures of $137m. Year to date through Sept. 30, 2016, cash provided by operations improved to $1.3bn from $529 m in 2015, and free cash flow improved to $674m from $195m in 2015. In the first quarter of 2015 the company made a $500m discretionary pension contribution, which reduced cash from operations and free cash flow by $325m on an after-tax basis.

Year-to-date changes in cash and cash equivalents include the following for cash from operating, investing and financing activities through Sept. 30, 2016: Operating • $1.3bn provided by operations Investing • $608m for capital expenditures including $239m for the purchase of facilities previously leased by Mission Systems Financing • $1.1bn for repurchase of common stock • $482m for dividends • $107m for repayment of long-term debt

2016 Guidance

The company’s 2016 financial guidance is based on the spending levels provided for in the Bipartisan Budget Act of 2015 and the Consolidated Appropriations Act of 2016. The guidance assumes no disruption to or cancellation of any of our significant programs and no disruption to or shutdown of government operations. Guidance for 2016 also assumes adequate appropriations and funding for the company’s programs in the first quarter of the U.S. government’s fiscal year 2017.

Business Results

Effective Jan. 1, 2016, the company realigned from four to three segments: Aerospace Systems, Mission Systems and Technology Services. Operating results for all periods presented have been recast to reflect this realignment. Third quarter 2016 operating income increased 4 percent due to a $34 m improvement in corporate unallocated expenses and higher segment operating income, partially offset by a lower net FAS/ CAS pension adjustment. For the third quarter of 2016, federal and foreign income tax expense declined to $167 m from $213 m in 2015; the company’s effective tax rate decreased to 21.7 percent from 29.2 percent due to a $42 m federal tax benefit recognized in connection with resolution of the Internal Revenue Service examination of the company’s 2007-2011 tax returns as well as the extension of the research tax credit.

Aerospace Systems

Aerospace Systems third quarter 2016 sales increased 9 percent due to higher volume for Manned Aircraft and Autonomous Systems, partially offset by lower volume for Space programs. Manned Aircraft sales rose due to higher volume for restricted activities and the F-35 and E-2D programs, partially offset by fewer F/A-18 deliveries. Higher sales in Autonomous Systems reflects higher volume across a number of programs, primarily Triton and Global Hawk, partially offset by lower volume on NATO Alliance Ground Surveillance as that program ramps down. The decline in Space sales is due to lower volume on the Advanced Extremely High Frequency program, partially offset by higher volume on several other programs. Aerospace Systems third quarter 2016 operating income increased 4 percent and operating margin rate declined to 11.2 percent. Higher operating income is due to increased sales volume, and margin rate reflects a lower margin rate in Manned Aircraft due to changes in contract mix, partially offset by improved performance on Autonomous Systems programs.

Mission Systems

Operating margin rate 13.0% 13.0% 13.1% 13.0% Mission Systems third quarter 2016 sales decreased 1 percent due to lower volume for Sensors and Processing programs and Advanced Capabilities programs, partially offset by higher volume for Cyber and ISR programs. Sensors and Processing sales decreased primarily due to lower volume on international and combat avionics programs, partially offset by higher volume on communications programs. Lower Advanced Capabilities sales reflect lower volume on navigation and maritime programs, partially offset by higher volume for restricted activities. The sales increase for Cyber and ISR is due to higher volume on cyber solutions programs. Mission Systems third quarter 2016 operating income decreased 1 percent, consistent with lower sales volume, and operating margin rate was unchanged at 13.0 percent.

Raytheon

RAYTHEON27 Oct 16.  Reports Strong Third Quarter 2016 Results. Raytheon Company (NYSE: RTN) today announced net sales for the third quarter 2016 of $6.0bn, up 4 percent compared to $5.8bn in the third quarter 2015.

Third quarter 2016 EPS from continuing operations was $1.79 compared to $1.47 in the third quarter 2015. Third quarter 2016 EPS from continuing operations included a favorable FAS/CAS Adjustment of $0.23 compared to a favorable FAS/CAS Adjustment of $0.09 in the third quarter 2015.

“The Company’s strong operating performance in the third quarter reflects our continued focus on driving global growth and creating value for our customers and shareholders,” said Thomas A. Kennedy, Raytheon Chairman and CEO.

Operating cash flow from continuing operations for the third quarter 2016 was $0.6bn compared to $1.1bn for the third quarter 2015. Operating cash flow from continuing operations in the third quarter 2016 was lower than the third quarter 2015, as expected, primarily due to the timing of collections and payments. Year-to-date operating cash flow from continuing operations was $1.7bn in 2016 versus $1.5bn for the comparable period in 2015. The increase in operating cash flow from continuing operations in 2016 was primarily due to the timing of cash taxes.

The Company had bookings of $6.9bn in the third quarter 2016, resulting in a book-to-bill ratio of 1.15 in the quarter. Third quarter 2015 bookings were $5.3bn. Year-to-date 2016 bookings were $20.3bn, resulting in a book-to-bill ratio of 1.14. Year-to-date 2015 bookings were $17.4bn.

In the third quarter 2016, the Company repurchased 1.4m shares of common stock for $198m. Year-to-date 2016, the Company repurchased 6.2m shares of common stock for $801m.

Backlog

Backlog at the end of the third quarter 2016 was $35.8bn, an increase of approximately $2.2bn compared to the end of the third quarter 2015. Funded backlog was $25. bn, an increase of approximately $1.3bn compared to the end of the third quarter 2015.

Outlook

The Company has updated its financial outlook for 2016 and increased guidance for EPS. Charts containing additional information on the Company’s 2016 outlook are available on the Company’s website at www.raytheon.com/ir.

Segment Results

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 (FP).

IDS recorded $209 m of operating income in the third quarter 2016 compared to $198 m in the third quarter 2015. The increase in operating income for the quarter was primarily driven by higher net program efficiencies, partially offset by lower volume in the third quarter 2016.Integrated Defense Systems (IDS) had third quarter 2016 net sales of $1,334m compared to $1,417m in the third quarter 2015. The change in net sales for the quarter was primarily driven by lower net sales on various radar production programs and on an international communications program due to scheduled completion of certain production phases on these programs.

During the quarter, IDS booked $265 m to provide advanced Patriot air and missile defense capabilities for an international customer. IDS also booked $92 m for the Engineering and Manufacturing Development (EMD) phase on the competitively awarded Enterprise Air  Surveillance Radar (EASR) program for the U.S. Navy.

Intelligence, Information and Services (IIS) had third quarter 2016 net sales of $1,541m, up 1 percent compared to $1,519m in the third quarter 2015.

IIS recorded $122m of operating income in the third quarter 2016 compared to $118m in the third quarter 2015.

During the quarter, IIS booked $255m on the Joint Precision Approach and Landing System (JPALS) program for the U.S. Navy, $286m on domestic and foreign training programs in support of Warfighter FOCUS activities, $107m to provide intelligence, surveillance and reconnaissance (ISR) support to the U.S. Air Force, and $101m to provide a common ground station for unmanned vehicles for the U.S. Air Force. IIS also booked $435m on a number of classified contracts.

Missile Systems

Missile Systems (MS) had third quarter 2016 net sales of $1,800m, up 9 percent compared to $1,645m in the third quarter 2015. The increase in net sales for the quarter was primarily driven by higher sales on the Paveway™ and Advanced Medium-Range Air-to-Air Missile (AMRAAM®) programs.

MS recorded $241m of operating income in the third quarter 2016 compared to $219m in the third quarter 2015. The increase in operating income for the quarter was primarily driven by higher volume.

During the quarter, MS booked $538m for Standard Missile-3 (SM-3®), $376m for Phalanx weapon systems, and $176m for Tube-launched, Optically-tracked, Wireless-guided (TOW®) missiles, all for both U.S. and international customers.

Space and Airborne Systems (SAS)

Space and Airborne Systems (SAS) had third quarter 2016 net sales of $1,590m, up 10 percent compared to $1,446m in the third quarter 2015. The increase in net sales for the quarter was primarily driven by higher sales on an international classified program.

SAS recorded $210m of operating income in the third quarter 2016 compared to $213m in the third quarter 2015. The decrease in operating income for the quarter was primarily due to a change in program mix partially offset by higher volume.

During the quarter, SAS booked $164 m to provide integrated Sentinel support services for the U.K. Royal Air Force. SAS also booked $922m on a number of classified contracts.

Forcepoint (FP)

Forcepoint (FP) had third quarter 2016 net sales of $149m, up 31 percent compared to $114m in the third quarter 2015. The increase in net sales for the quarter was primarily driven by higher sales in Federal products and services, and the acquisition of Stonesoft in the first quarter of 2016.

FP recorded $19m of operating income in the third quarter 2016 compared to $20 m in the third quarter 2015. The decrease in operating margin for the quarter was primarily due to a change in product mix and an increase in commissions expense due to higher bookings.

United Technologies

UTC25 Oct 16. United Technologies Corp. (NYSE: UTX) today reported third quarter 2016 results. All results in this release reflect continuing operations unless otherwise noted.

Third quarter GAAP EPS of $1.74 was up 8 percent versus the prior year and included 2 cents of net restructuring and other significant items. Adjusted EPS of $1.76 was up 5 percent versus the prior year. Net income in the quarter was $1.4bn, up 1 percent versus the prior year. Sales of $14.4bn were up 4 percent, driven by 5 points of organic growth partially offset by 1 point of adverse foreign exchange.

“United Technologies delivered another quarter of strong financial performance,” said UTC Chairman & Chief Executive Officer Gregory Hayes. “Organic growth across the aerospace units and solid cash generation across all businesses, even with continuing investments in the aerospace related ramp-up, give us high confidence in meeting our commitments to shareholders. Based on our year-to-date performance, we now expect slightly higher organic sales growth and we are raising the low end of our adjusted EPS outlook by ten cents and now expect 2016 EPS of $6.55 to $6.60 per share*.

“We continue to focus on innovation and execution in each of our businesses and this focus is starting to pay off.  Otis new equipment orders in the quarter increased 2 percent over the prior year at constant currency and grew 8 percent excluding China. Our Geared Turbofan Engine continues to perform exceptionally well and is now in service with eight operators around the world.  Dispatch reliability on the GTF powered A320neo is 99.9% and fuel burn is meeting – and in some cases exceeding – our targets.  Customer demand for the Geared Turbofan Engine also remains strong and our order book has grown to 8,400 engines, including announced and unannounced firm and option engines.”

*Note: When we provide expectations for adjusted EPS and organic sales 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.  See “Use and Definitions of Non-GAAP Financial Measures” below for additional information.

Cash flow from operations for the quarter was $2.0 billion (135 percent of net income attributable to common shareowners) and capital expenditures were $394 million.  Free cash flow of $1.6 billion in the quarter was 108 percent of net income attributable to common shareowners.

Commercial aftermarket sales were up 11 percent at Pratt & Whitney, and up 2 percent at UTC Aerospace Systems. While equipment orders at UTC Climate, Controls & Security were flat on an organic basis, commercial and residential HVAC orders in the Americas were up 10 and 11 percent, respectively.

Hayes added, “In the quarter, we completed our $6 billion accelerated share repurchase and we are on track to return $22 billion in cash to shareholders from 2015 through 2017. With our focused portfolio of industry leading franchises, we remain confident in our ability to create significant long-term value for our shareholders.”

UTC updates its 2016 outlook and now anticipates:

  • Adjusted EPS of $6.55 to $6.60 up from $6.45 to $6.60*;
  • Total sales unchanged ($57 to $58 billion, year over year growth of 2 to 3 percent) including organic sales growth of 2 to 3 percent up from 1 to 3 percent;
  • There is no change in the company’s previously provided 2016 expectations for free cash flow, share repurchases, and the placeholder for acquisitions.

*Note: When we provide expectations for adjusted EPS and organic sales 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.  See “Use and Definitions of Non-GAAP Financial Measures” below for additional information.

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