The one hiccup in Raytheon's hefty defense business

Returns of air traffic to pre-COVID levels has been a boost for Raytheon Technologies as its defense business is also a point of optimism with one exception.

Both domestic and global recoveries in commercial air travel are one half of the story of Raytheon Technologies, which continues to see a return of air traffic to pre-pandemic levels as coming in 2024.

For the record: Raytheon’s outlook on that front is getting more optimistic. The company also remains pleased regarding its defense and government businesses, though with one slight headwind.

During Raytheon’s second quarter earnings call Tuesday, CEO Greg Hayes told investors the international defense business has “seen a little bit of an impact this year with the pandemic and the havoc that's wreaked on budgets.”

Include travel restrictions as among those impacts too. Though the defense and government backlog was at around $66 billion as of the second quarter’s end. Hayes told analysts that helps boon Raytheon’s ambition to grow that business between 3 and 5 percent through 2025.

He stopped looking beyond 2025 “because who knows beyond that,” and because that growth ambition is how Raytheon laid out the four-year blueprint at its May investor day.

But the road map to 2025 and beyond that is clear to him.

“It's all about having the right technology for the next conflict, not the last conflict,” Hayes said. “That means having space-based technologies, it means hypersonic weapons, it means cyber weapons. All of those things are going to enable us to help the war fighter in whatever that next conflict might be.”

Hayes’ view of what the next conflict will look like, and how that feeds into Raytheon’s thinking, also came across pretty clearly during the call.

“You aren't going to see land wars in Asia or tank battles across Europe. What you are going to see is cyberattacks,” he said. “You're going to see attacks against strategic assets in space to compromise communications and sensing systems.

“Being able to defend those assets, being able to project and to replenish those assets is really what we're focused on across the RTX portfolio.”

During my conversation with Raytheon’s Roy Azevedo for our Project 38 podcast, the intelligence and space segment’s president touted how the company’s technology synergy goals are pretty much one and the same as the overall business strategy.

Azevedo broke down that segment’s technology focus areas as sensing and effects; command/control and communications; and cybersecurity, training and other services. But he also explained how Raytheon’s effort also emphasizes ways those can be shared with the other segments to create more integrated offerings for customers.

Integrated may also be an apt word to describe what the future defense technology posture looks like in Raytheon’s eyes.

“It’s complex battlefield as we think about it. There's no one single answer. It's not like we're going to replace all of the missiles we have with high-powered microwaves or high-powered lasers,” Hayes said. “It's going to be a layered defense, where you're still going to see SM3s and SM6s, and you're still going to need AMRAAM missiles as well as some things to deal with the emerging threat of hypersonics, which we think is primarily going to be high-powered microwave.”

Meanwhile, Raytheon raised the low end of its expected revenue range for this year by $500 million to $64.4 billion with the top end left at $65.4 billion. The company also lifted its post-merger gross cost synergy target by $200 million to $1.5 billion for the first four years following that deal.

Hayes said Raytheon is eyeing another $5 billion in total cost savings through 2025 by adopting a new core operating system, along with investments in digital technology and other strategic projects.

Second quarter revenue was $15.9 billion, which Raytheon said was up 10 percent on an organic basis compared to the same period last year. Raytheon’s intelligence and space segment recorded $3.8 billion in sales for the quarter, which the company said showed organic growth of 5 percent year-over-year.

Raytheon expects the business it calls RIS to show low-to-mid single digit sales growth this year and profit of between $150 million and $175 million.

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