Raytheon realigns for challenging economy

Raytheon Co. was well prepared for the seismic shifts that have occurred at the Defense Department this year—the most publicized of which is the budget sequestration that might extract $500 billion from the Pentagon’s budget over the next 10 years.

“We have been preparing for this environment for some time,” said Scott Whatmough, vice president of integrated communication systems at Raytheon Space and Airborne Systems. “Raytheon has effectively managed its business during a range of periods of defense spending, including downturns, and we are confident we will continue to do so.”

The company is ranked No. 4 on the 2013 Top 100 with $6.1 billion in prime contracts.

To prepare itself for streamlined operations in the ever-shifting defense market, Raytheon streamlined its business operations in March by consolidating its number of business lines from six to four, Whatmough said. The consolidation “is intentionally forward looking and supports our goals of addressing future market opportunities,” he said.

In an economy where unchecked defense spending is a thing of the past, Raytheon plans to focus on its strengths, while also identifying areas for internal improvement and cost savings, said Kevin DeSanto, managing director of the investment firm KippsDeSanto.

“In an environment where topline expansion or even maintenance may be difficult to achieve, Raytheon…is taking proactive measures to pursue inorganic growth, drive efficiencies, and bring enhanced value to its customers,” DeSanto said.

The company’s four business lines are Intelligence, Information and Services (IIS); Integrated Defense Systems; Missile Systems; and Space and Airborne Systems. To achieve the consolidation, two pre-existing business lines were consolidated to form the new IIS business, and the other three business were augmented by components of the former Network Centric Systems business line.

In January, the company reported 2012 annual revenue of $24.4 billion, which was down from $24.9 billion in 2011. “Raytheon’s slight decline in revenue from 2011 to 2012 was not particularly alarming or unusual, as the industry as a whole is facing headwinds due to uncertainty and budget cuts, with several prime contractors reporting lower revenue for 2012 and lowering topline guidance for 2013,” DeSanto said.

Raytheon has positioned itself from a technology standpoint to assist the Pentagon in the near term with its continuing shift of forces and equipment from Afghanistan to the Asia-Pacific region and high-priority investments in missile defense, electronic warfare and cybersecurity, Whatmough said.

In this context, Raytheon is poised to address the U.S. military’s needs in the realm of satellite communications and also the growing emphasis on anti-access, area denial (A2D2) technologies. A2D2 refers to the challenge of controlling an area during a conflict primarily through the use of aerial and space technologies.

“To that end, we have a valuable opportunity to leverage our position in the protected Advanced Extremely High Frequency (AEHF) satellite communications market,” Whatmough said.

Raytheon is cognizant of the Pentagon’s need to spend scarce funding efficiently. For example, it is helping the Air Force drive down costs on a key satellite terminal program known as Family of Advanced Beyond Line of Sight Terminals (FAB-T), Whatmough said.

Raytheon in 2012 won a $70 million Air Force alternate contract to develop and produce capabilities for the multibillion dollar FAB-T program, which seeks to enable military aircraft to communicate with the Air Force’s new AEHF satellite constellation. The purpose of the FAB-T alternate contract is to offer a backup to the prime contract Boeing won more than a decade ago to develop and produce the capability. Although Raytheon lost that competition to Boeing, it has rebounded and now it has a chance to win the full-scale production contract.

Whatmough noted that Raytheon is currently producing three terminals for the U.S. military that communicate using the complex anti-jam AEHF waveform used for transmitting data securely.

“By introducing competition into FAB-T, the service will reduce production costs, advance manufacturing readiness and reduce the timeline for delivery of this important nuclear command and control effort,” Whatmough said.

Whatmough said that Raytheon is leveraging its leading position in the AEHF market with two big efforts, which he identified as the FAB-T production competition and the Global Aircrew Strategic Network Terminal program for nuclear command and control. He said Raytheon has the credentials and expertise to win those future procurements.

Although Raytheon prefers to look forward rather than backward, Whatmough cited two key wins for the company in 2012. One was a $650 million contract to deliver a command, control, communications, computers and intelligence system to the Kingdom of Saudi Arabia. Another was a $925 million contract to develop the Standard Missile-3 Block IIA variant, which is a co-development effort by the United States and Japan.

Whatmough also said that Raytheon intends in the year ahead to use its diversified and broad portfolio of technologies, products and services to win new projects at home and abroad. He said that one thing that he believes distinguishes the company from other large, U.S. defense and aerospace contracts is the breadth and depth of its international business.

DeSanto agrees. “Raytheon is unique amongst defense primes for its relatively large proportion of international sales and less platform-centric approach, which hedges exposure to domestic and platform uncertainty, and provides diversification as the global threat environment evolves,” DeSanto said, adding, “Raytheon has built its reputation as a technology leader and positioned itself within mission-critical and well-funded areas of the budget, even as cuts take effect.”