Previewing last week's earnings announcement from defense contracting heavyweight Raytheon
- Operating margins ran to 9.1%, up from 7.9% last year and 7.3% in 2004.
- On the bottom line, Raytheon netted 6.3% out of each dollar of revenue (up from 4.6% last year and nearly three times better than 2004's 2.3% net profit margin.)
Keep those trunks on
One more thing Raytheon is swimming in: Cash. At year end, the balance sheet looked more than twice as green as it did this time last year, carrying $2.5 billion in cash and equivalents. Long-term debt declined, too, to $3.3 billion last week from $4 billion at year-end 2005. Granted, that's mainly due to $0.7 billion shifting from long-term to short-term debt as it comes due for payment, but it still leaves the firm with "net debt" of $1.5 billion, cut more than in half from last year's $3.2 billion.
Helping to achieve this feat: massive cash production. In Q4 alone, the business generated 30% more cash from operations than Q4 2005's $1 billion. For the full year, free cash flow (cash from operations minus capital expenditures) ran to $2.4 billion, up from last year's $2.2 billion.
So much for last year, and last quarter. What about the bigger picture? If you look at performance by segment, you'll notice that part of the integrated defense systems business' 14% sales growth was fueled by "higher volume and program performance improvements on ... international programs." Likewise in the missile systems segment, 17% sales growth came in part from a "ramp up on [the] international Advanced Medium-Range Air-to-Air Missile." I had the opportunity to speak with a Raytheon representative after earnings came out, and to ask how significant "international" was, in its business. Here's what I learned:
According to Raytheon, international outperformance paints a long-term -- and accelerating -- trend. International sales are up 25% over the past three years, or more than twice as fast as total sales growth. And next year, the company expects to see its international business grow another 14% -- again, twice as fast as growth overall.
The company says that international sales represent roughly 18% of its business now -- but don't bother checking on that. Perhaps out of political concerns, the major defense contractors shy away from publicizing how much business they do abroad. Researching the issue on Capital IQ, I found no U.S./international sales breakdown for any of the big names. Whereas non-military/defense firms like Coca-Cola show no reluctance to disclose the extent to which euros and yen make up their profits, Boeing
Pity. If investors knew what these companies were doing abroad -- as we now know about Raytheon -- they might well prefer the businesses with more broadly diversified revenue streams. In fact, because with a declining U.S. dollar foreign-currency profits become ever more valuable in dollar terms, investors might like the idea even more.
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Coca-Cola is an Inside Value recommendation.
Fool contributor Rich Smith does not own shares of any company named above.