Portfolio transformation efforts are largely in the rear-view mirror for Raytheon Technologies, which is now turning toward what the defense giant is calling "operational transformation" of its internal muscle and external pursuits of defense and government business.
One year on from its creation, Raytheon Technologies is turning the page on portfolio transformation and is now looking at how to achieve what the company’s chief executive called “operational transformation.”
That second and “really just beginning” transformation as described by Greg Hayes was the overarching topic of Raytheon’s four-hour investor day event on Tuesday to share its four-year blueprint for success.
One more divestiture is on the horizon for Raytheon though as the company is planning to sell its global training and logistics unit that generates roughly $1 billion in annual sales, Hayes said.
Here are some broad themes from Tuesday that warrant consideration for Raytheon and its market peers.
Office of the future
Future of work is an item Raytheon and substantially all companies are looking hard at given the large number of employees not going to their offices regularly during the coronavirus pandemic.
Raytheon has been looking hard at its physical footprint to begin with given the push to achieve $1.3 billion in gross cost synergies by 2024.
Michael Dumais, Raytheon chief transformation officer, said the company’s envisioned “office of the future” will likely see less than half of employees be onsite full-time with the majority shifting to a hybrid model or be permanently remote.
Fifty projects are ongoing to help Raytheon figure out how to revamp its highest-cost sites whether they be factories, offices or other locations. But that is only just part of the review of Raytheon’s 32 million square feet of office space, according to Dumais.
“We see that generating $80 million in annual synergy, and that’s just about halfway on our plan to reduce 25 percent of all the office space across the company,” Dumais said.
Physical assets are one aspect of the integration process to help Raytheon make the most out of the merger. Dumais said Raytheon is also moving to common operating system and implementing digital twins of factories and products before breaking ground on a project.
Increased use of cloud computing infrastructures underpin those shifts. Dumais said the company is pushing to get half of its data into a cloud environment from the current rate of 25 percent.
One-stop tech shop
Perhaps the biggest rationale behind the merger to create what Wall Street calls “RTX” in shorthand is envisioned technology and revenue synergies across the defense-government and commercial aerospace businesses.
Raytheon recorded $65 billion in pro forma revenue last year and pegs its research-and-development spend at approximately $8 billion per year: $3 billion on the company’s own dollar and the other $5 billion customer-funded.
That government-commercial rationale has been put to the test during the pandemic that saw air travel plummet last year and slowly trickle back up since.
Hayes said that Raytheon sees “slow, steady growth” in global defense spending amid expectations the U.S. portion will remain large but hold flat.
“Whether it’s in space-based systems, whether it’s in joint command and control, sensing systems and propulsion, we think we’re in the right markets,” Hayes said.
To date, Raytheon has identified 300 separate projects they see as revenue synergy opportunities that feed into a potential $10 billion pipeline over the full lifetime. Hayes said Raytheon has booked $150 million in awards under that category with “more to come” on the pipeline front.
One early test of that thesis will come when the Federal Aviation Administration awards the recompete of its $3.5 billion telecommunications services contract known as FENS, which a team of Raytheon and MetTel is bidding for to try and unseat longtime incumbent L3Harris Technologies.
Right bets by RTX?
The longer-term test for Raytheon will see whether the company is indeed placing the right technology bets for itself amid expectations that U.S. defense budgets will not grow significantly over the next few years and perhaps decade.
Does that mean Raytheon may have to put more resources into advanced technology R&D so it can keep its defense business growth going, particularly with what the likes of Russia and China are doing?
Hayes believes Raytheon’s focus on the technologies that augment the larger platforms represents a good overall bet.
“As we think about the (2023) and out budget, I think the DOD is going to be forced to make some choices in terms of legacy programs versus future programs,” Hayes said.
“The good news is we don’t have a single program out there that is more than 3 percent of our total revenue. I think some of those old legacy programs will probably be cut to fund some of this newer technology that’s emerging.”
Raytheon’s plan is to see revenue growth of between 5 and 7 percent on a compound annual basis through 2025 from this year’s expectation of $63.9 billion-to-$65.4 billion in sales. Segment margin is seen as improving to between 13.4 and 14.4 percent by 2025, up from 7.9 percent last year.
All of that aided by expanding the defense business and riding the ongoing recovery in air travel, the latter of which you’ll have to go elsewhere for more.