Diversity may help Raytheon avoid cuts

Layoffs possible, but analysts like missile maker's wide product line
2012-07-08T00:00:00Z 2014-07-02T12:36:10Z Diversity may help Raytheon avoid cutsDavid Wichner Arizona Daily Star Arizona Daily Star
July 08, 2012 12:00 am  • 

Looming defense budget cuts - including the possibly of deep, automatic cuts come January - have raised the prospect of massive layoffs by defense contractors, including Tucson-based Raytheon Missile Systems.

But the diversity of Raytheon's military electronics and missile business makes the company less vulnerable to the budget ax than other defense companies, analysts say.

Raytheon Missile Systems makes most of the nation's guided missiles and munitions including the Tomahawk cruise missile, Standard Missile interceptors and Sidewinder and AMRAAM air-to-air missiles.

Other units of Waltham, Mass-.based Raytheon Co. make advanced radars and other military electronics. Companywide, Raytheon is involved in some 8,000 military programs.

"You can argue about whether we need a new fighter, or a new bomber, or a new tank, or a new submarine. No matter what you buy, it's going to be full of stuff that Raytheon makes," said Loren B. Thompson, founder and chief operating officer of Lexington Institute a nonprofit think tank based in Arlington, Va.

"I have more faith in Raytheon surviving than just about any other company, because it's so broadly based, and its skills can be applied to so many areas."

Michael O'Hanlon, senior fellow at the Brookings Institution agreed. Raytheon's expertise in electronics allows it to upgrade existing weapons to save costs, said O'Hanlon, who directs foreign-policy research at the Washington, D.C., think tank.

"These tend to be areas where you can upgrade or improve capability more inexpensively than replacing entire platforms," O'Hanlon said. "The general era we're in of defense modernization, is one that's electronics-driven."

Vote of confidence

Last fall, Credit Suisse issued a report saying Raytheon is well-positioned to weather Pentagon cuts because it gets about a quarter of its sales from outside the United States and another 15 percent from classified contracts - both of which remain growth areas.

Raytheon has a policy of not commenting on budget proposals, though executives have said the breadth of the company's programs should help it weather the impending budget cuts.

In recent comments in Huntsville, Ala., where Raytheon is readying a new, $75 million plant, Missile Systems President Taylor Lawrence said the company's major programs are well-funded overall in the Pentagon's budget proposal.

Indeed, the Obama budget would boost outlays for procurement of seven of Missile Systems' 10 biggest programs, while the others would experience small reductions. (See accompanying material.)

The House actually added money to the $525 billion Pentagon budget proposal (not including war costs). The Senate is not expected to act on the measure before the fall elections.

The Huntsville Times reported that Lawrence told a Huntsville business group that he worries that Congress will fail to cut the federal deficit sufficiently to avoid so-called sequestration - deep, automatic cuts required under the Budget Control Act.

If that happens, Lawrence told the audience, every defense program would be cut 8 to 12 percent, and every contract would be broken.

"It was put in as a draconian measure that would be so bad that Congress could never let it happen. But we're worried - because Congress can't really come together on any kind of compromise and act - that it's going to happen de facto," Lawrence told the group in late May.

Tucson could get hurt

Any significant contract losses could reverberate through the economy of Tucson and Southern Arizona, where Raytheon is the biggest private employer.

The company - Raytheon Co.'s biggest business unit in terms of sales - had revenues of $5.6 billion last year.

With about 10,500 employees, Raytheon Missile Systems accounted for about one in every 34 non-farm jobs in Pima County last year.

About half of the company's local workers are salaried engineers - many of them University of Arizona graduates - with annual pay of up to about $80,000, nearly twice the county's average annual income.

"They're clearly well-paid positions, and those high-paying jobs are the ones we work so hard to keep once we get them," said Marshall Vest, director of the UA's Eller College of Management Economic and Business Research Center.

If budget cuts of 10 percent resulted in commensurate layoffs of about 1,000 local workers at Raytheon, the local economy would take a hit.

But short of an outright plant closure, the effect of such on Tucson's overall economy would be relatively minor, Vest said.

Raytheon's local employment was flat last year at about 10,500 workers, after declining from a peak of more than 11,500 in 2009.

In 2010, Missile Systems laid off about 225 salaried workers, mainly engineers, citing the cancellation of three developmental weapons programs. Those cuts were the first mass layoffs since 2002, when the company axed 400 engineers in response to Pentagon program cuts.

New weapons in doubt

Raytheon expects relatively healthy funding of its procurement programs, which in almost every case include incremental upgrades in sensors and capabilities.

But entirely new weapons programs are on thinner ice amid the budget crunch, as Raytheon has learned.

One of the Pentagon's biggest future weapon programs, the Joint Air-to-Ground Missile (JAGM), is essentially on hold after the Pentagon stripped most of its funding out of the 2013 budget though an initial manufacturing contract was expected this year.

Raytheon is competing against Lockheed Martin to make the JAGM - once expected to be worth $5 billion over 20 years.

The JAGM is designed to replace three air-to-ground missiles that first entered service in the 1970s - Lockheed's Hellfire and the Maverick and an air-launched version of the TOW (Tube-launched, Optically tracked, Wire-guided, or Wireless) missile, both made by Raytheon.

But budget pressure has prompted the Pentagon to re-examine its needs, and as a replacement for existing, well-regarded weapons, the JAGM looks like low-hanging fruit for the budget trimmers.

"That's exactly the kind of weapon that's going to become vulnerable if you go through sequestration," Brookings' O'Hanlon said.

The program has won a reprieve of sorts.

In March, a senior Pentagon official signed an acquisition decision memorandum, granting new life to the program.

And the House Armed Services Committee, in its markup of the 2013 defense-authorization bill, noted that unspent funds from prior years could be used to continue JAGM development. It instructed the Pentagon to report back with a revised acquisition plan by Aug. 1.

At a defense conference in May, Raytheon JAGM business-development manager J.R. Smith estimated that there may be as much as $300 million in unspent program funds from fiscal 2011 and 2012 available. The company expects the Army to award both Raytheon and Lockheed continuing development contracts late this year, he said.

Raytheon has fared better with another developmental program designed to address a need for small, precision-guided weapons.

Raytheon quietly developed the Griffin, a 3 1/2-foot guided missile, with its own money, using precision-guidance technology borrowed from existing missiles.

Initially kept under wraps as a special-forces weapon, the Griffin has been adapted to a combat air-support plane used by the Marine Corps and is being developed for use on helicopters and combat drones.

In May, the company won an $85.5 million contract to produce Griffins for the Air Force.

Missiles may be safe

If sequestration happens, Raytheon certainly won't be immune to budget cuts.

"If we do suffer through that, the defense industry isn't going to be spared in any parts, and you'll start to see even broader pain than you've seen so far," Brookings' O'Hanlon said.

Thompson, of the Lexington Institute, said he doubts Congress would jeopardize Raytheon's crucial missile-making operation in Tucson.

"I don't know where the Senate is going to go, but because so much of the U.S. missile capability is concentrated at the Raytheon plant in Arizona, it's not likely that Congress is going to cut off those production lines," Thompson said.

"If the AMRAAM line were to close, then nobody in America would be making that kind of missile - I don't think Congress is going to take a chance like that."

by the numbers

8,000

Number of military projects Raytheon is involved in.

12%

Maximum amount defense programs would be slashed if Congress fails to cut the federal deficit sufficiently.

$5.6 billion

Raytheon revenues last year.

Raytheon procurements

A look at some major systems made by Tucson-based Raytheon Missile Systems, with fiscal year 2012 procurement budget totals and fiscal 2013 requests (not including research and development funding).

Standard Missile-3

• What: Missile interceptor developed from Raytheon's Standard Missile family of ship-defense weapons.

• User: U.S. Missile Defense Agency

• 2012 budget: $565 million (SM-3 Block IB)

• 2013 requested: $389 million (SM-3 Block IB)

• Status: Transitioning from the SM-3 Block IA (already deployed as part of initial U.S. missile-defense shield for Europe) to the more capable SM-3 Block IB, which is in production and developmental testing, for deployment by 2015.

Standard Missile-6

• What: Ship- and area-defense missile

• User: U.S. Navy

• 2012 budget: $463 million

• 2013 requested: $403 million

• Status: Continues production of longer-range, advanced version of the SM-2

Advanced Medium-Range Air-to-Air Missile (AMRAAM)

• What: Supersonic, air-to-air combat missile

• Users: Air Force, Navy, 36 allied nations

• 2012 budget: $389 million

• 2013 requested: $423 million

• Status: Raytheon continues to win new procurement contracts for the latest AMRAAM version, the AIM-120D, though the Pentagon is withholding more than $600 million due to delivery delays.

Tomahawk Cruise Missile

• What: Long-range cruise missile

• User: U.S. Navy

• 2012 budget: $306 million

• 2013 requested: $320 million

• Status: Last month, Raytheon was awarded a $338 million contract for the Tomahawk Block IV (Tactical Tomahawk), partly to replenish weapons used during the operation to enforce United Nations sanctions against Libya last year.

Sidewinder AIM-9X

• What: Short-range air-to-air missile

• Users: U.S. Navy, Air Force; 40 allied nations (including older versions)

• 2012 budget: $150 million

• 2013 requested: $200 million

• Status: The latest version, the AIM-9X Block II, adds additional targeting capabilities, a new fuze and a data link; a surface-attack version is under evaluation.

Small Diameter Bomb II

• What: Small, precision-guided glide bomb

• Users: Navy, Air Force

• 2012 budget: $182 million (SDB I)

• 2013 requested: $216 million

• Status: Boeing Co. made the original Small Diameter Bomb for use against fixed targets: Raytheon won the contract to build the next-generation SDB II (capable of hitting moving targets), which begins procurement in fiscal year 2013.

Rolling Airframe Missile (RAM)

• What: Ship-defense system of 21 small, guided missiles

• Users: U.S. Navy, Germany, Greece, Korea, Egypt, Turkey and the United Arab Emirates

• 2012 budget: $66 million

• 2013 requested: $67 million

• Status: Co-developed with Germany, the RAM is undergoing upgrades to maneuverability and range.

Source: Department of Defense

Contact Assistant Business Editor David Wichner at dwichner @azstarnet.com or 573-4181.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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