By Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.
With defense spending in decline, Raytheon has been pursuing international sales, tightening its structure, and pushing into growth opportunities, such as cybersecurity.
As the U.S. begins to pull back from its military commitments in the Middle East, defense spending has slowed. Exacerbating the situation is Congress’s implementation and then temporary rescission of spending cuts under sequestration. Seeking to adapt to this “new normal,” the company restructured its operations from six to four groups in 2013 and has since then focused on cutting costs from its core product lines.
The company also began intensifying its efforts in international markets. Sales abroad accounted for about 29 percent of Raytheon’s revenues in 2014. The company’s goal of 30 percent plus should be easily achievable this year. The company’s products are well regarded and battle-proven, giving it an edge as it seeks to expand its worldwide presence. Targets for international growth include India and Brazil, as well as the tumultuous Middle East. Furthermore, Raytheon is looking for upgrade and sales opportunities in the Asia-Pacific region – especially in South Korea and Taiwan with their large installed base of F-16 fighters in need of upgrades.
Yet, one roadblock facing this strategy is U.S. export restrictions, which many in the defense industry feel are too stringent, limiting opportunities for U.S. companies abroad. The Defense Department is moving to change this with a policy of erecting “higher fences around fewer items.” Such a shift would enable firms to export more types of equipment. However, as with all things that must go through Congress, progress is expected to be slow in coming.
One of the hottest markets for defense contractors is cybersecurity. While many have been tossing their hat into this ring, several firms have decided to reduce their exposure after jumping in. For example, General Dynamics sold its Fidelis cybersecurity business and Boeing announced it was selling its Narus cybersecurity unit.
Raytheon, however, continues to forge ahead in this market. Most recently, in early 2015 the company added Websense to its portfolio, building on earlier purchases of Sensintel and Blackbird Technologies. Most interestingly, the Websense purchase provides Raytheon a route to the commercial cybersecurity market. As high-profile data breaches continue to make news, many corporations will be tightening their digital security. Raytheon’s Cyber Products services may present an attractive alternative to these commercial clients thanks to its “Milspec” antecedents.
So far, this strategy has been working well for the firm. The company recently reported second-quarter 2015 sales of $5.8 billion, up three percent compared to $5.7 billion in the second quarter of 2014. Net income for the quarter was $503 million compared to $551 million a year ago, with the lower income attributed to Websense restructuring costs. Bookings were also up $7.6 billion for the quarter compared to $6.8 billion a year prior. Backlog at the end of the second quarter of 2015 was $34.5 billion, an increase of approximately $1.5 billion compared to the second quarter of 2014.
Unlike the downturn following the end of the Cold War in the 1990s, defense firms have had a long time to prepare for the present one. Overall, Raytheon, with its strong defense electronics portfolio, is weathering the new defense climate well. The company’s strength in missile defense and C4ISR should serve it well, as these are expected to be growth markets going forward.
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