Raytheon's Strategy: Guns And Lots More Butter

These days, most defense executives are trying to salvage their companies with dramatic shifts in strategy. Their tactics range from putting every business on the block for the right price (General Dynamics Corp.), to buying more arms assets (Loral Corp.) to working to convert defense technologies to civilian businesses (just about everyone else). In this crowd, Dennis J. Picard, chairman of Raytheon Co., the No. 5 defense contractor, has a novel philosophy: Stay the course.

Since 1965, the Lexington (Mass.) company has tried to keep its business about evenly divided between defense and commercial operations. The nation's largest missile maker also owns Beech commercial aircraft, three appliance units, and four energy and environmental construction operations. This eclectic mixture has produced high single-digit sales and earnings increases for seven years. And through the first nine months of 1992, profits are up 7%, to $465 million, though sales dropped 3%, to $6.7 billion, mainly because of falling orders for the Patriot missile of gulf war fame. Cowen & Co., the Boston broker, figures that commercial business now accounts for 42% of total sales (chart).

SCOUTING MISSION. It's true that Raytheon still earns 70% of its profits from defense. To boost nonmilitary margins, analysts have long urged the company to sell its flagging appliance operation--the nation's fifth-largest with brands that include Amana, Caloric, and Speed Queen--and reinvest the proceeds in more profitable businesses. But Raytheon argues that improvement lies just ahead. "We're looking for diversity built over 25 years to now pay off," says Senior Vice-President George W. Sarney. Investors aren't impressed: At $43 a share, the stock is at a modest eight times estimated 1993 earnings.

Picard's response: Keep making guns and churn butter out faster. His five-year plan is to double the size of the $1.7 billion energy and environmental-services unit, which specializes in cleaning up power plants, a booming field because of new clean-air rules. He also thinks he can nearly double Beech's $1.1 billion in revenues by increasing sales to commuter airlines. And he plans to boost appliance sales by 60% based on big investments in products and plants.

The thinking is that profits must inevitably follow. Raytheon has poured $173 million into new appliance plants and equipment in the past three years. Robert L. Swam, a former Black & Decker Corp. executive who recently took control of the unit, says this spending, plus consolidation and cost-cutting at Caloric, will help boost operating margins from 1.7% to nearly 5% by 1997.

Meanwhile, Raytheon is scouting acquisitions, including, says Sarney, a "modest-sized" engineering firm that analysts speculate will add about $500 million to sales in the energy and environmental group. If the deal is done, Sarney adds, it will meet Raytheon's conservative criteria that acquisitions must immediately boost profits--without adding to the company's manageable $1 billion debt.

`AGILE.' Picard isn't giving up on arms making, of course. He's looking for acquisitions there, too, but is wary of overpaying. Raytheon lost a bid earlier this year for General Dynamics' missile and commercial-aircraft businesses.

Failing a major acquisition, Picard hopes that higher foreign-arms orders can balance out lower domestic sales. For example, he is close to completing a Patriot-missile deal with Saudi Arabia that could mean $1.7 billion in business through 1996. Picard expects foreign sales to increase to 40% of Raytheon's defense business over the next five years, from 20% now. At home, he is counting on the unit's strength in defense electronics--a strong business because the services constantly upgrade components of older weapons--to cushion the blow of government cuts. "Raytheon is an agile company that will

handle this transition better than most defense companies," agrees Gordon Adams, director of the Defense Budget Project, a Washington research group.

A number of critics wonder if Raytheon isn't being too sanguine about its challenges. Whirlpool and Maytag also are investing heavily in upgrading their appliance plants. As for defense, says Robert Paulson, McKinsey & Co.'s director of aerospace consulting, "the ground underneath them is shaking." Some consultants argue that Raytheon should downsize sharply before defense cuts bite deeper.

It should be clear soon who is right. Raytheon diversified on the theory that a balance would help when defense orders dropped. They have. And now, the commercial businesses will have to show what they've got.

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