COO Chris Calio Says Raytheon Technologies Is Proving The Value Of The Merger

When the leaders of Raytheon and United TechnologiesUTX
first disclosed their plan to merge in June of 2019, they set forth a vision of an aerospace and defense enterprise with unprecedented market presence.

The combined company would be a first-tier player in commercial and defense markets, in domestic and foreign markets, in new equipment and the aftermarket. With thousands of programs and tens of thousands of engineers, the company would be able to cope easily with any shift in demand.

It did not take long for that vision to be tested. The new company had to integrate its operations during the worst global pandemic in living memory.

But three years after the merger was unveiled, the investment thesis behind Raytheon Technologies, the combined enterprise, is still intact. In fact, the company looks to be on a vector to preeminence in global aerospace and defense.

That’s what Chief Operating Officer Christopher Calio told me in an interview on June 30. I sat down with Calio at the site of the company’s new corporate headquarters in an office tower overlooking the capital; considering it was the final day of the worst first half the stock market has endured in over 50 years, Calio was surprisingly upbeat.

Calio, who previously ran the company’s Pratt & Whitney engine business before ascending to the COO’s job, says he is excited by the synergies the merger has unlocked—some of which were not even apparent when the combination was first proposed.

The initial years of operation haven’t gone quite the way management expected—defense has been a bigger part of the mix than anticipated, commercial a smaller part—but if anything, the business thesis driving the enterprise has proven to be even more powerful than its proponents claimed.

The company’s plan to nearly double net margin between 2020 and 2025 is on track, and its revenues this year of around $68 billion will be in the same league as those of Lockheed MartinLMT
(the biggest U.S. defense contractor) and BoeingBA
(the biggest U.S. commercial aerospace company).

ValueLine predicts that by 2027, Raytheon’s revenues will be about $96 billion, setting the stage for the company to become the first domestic aerospace enterprise that can sustain annual sales of $100 billion (Boeing hit that target once, but then fell back in the face of business reverses).

The company plans to invest heavily in its plant and personnel during the intervening period, but still expects it will be able to distribute $20 billion of excess cashflow to shareholders during the five-year period ending in 2025.

But Calio says achieving the company’s goals will require a different business model than the culture that prevailed at United Technologies during his early years in the sector. United Technologies was an industrial conglomerate in the old sense, subsuming unrelated products lines in which the synergies were mainly financial rather than functional.

Under the leadership of CEO Gregory Hayes, the company spun off its non-aerospace franchises at the same time that it merged with Massachusetts-based defense contractor Raytheon, so that the new enterprise is focused entirely on complementary aerospace and defense markets.

The company remains “business-unit centric,” to use Calio’s phrase, meaning the heads of the four business units have significant autonomy so long as they make their numbers, but there is much greater opportunity for collaboration across boundaries now. For instance, the company’s sprawling Collins Aerospace unit interacts continuously with both the commercial and defense operations of the other units.

Because so much of the company’s talent is embedded in the business units, there is no need for a large corporate headquarters. In fact, the move of top staff to the Washington suburbs that was announced on June 7 will require only part of a single floor in the aforementioned office tower.

Calio says he and Hayes spend much of their time out of the office visiting company sites from Columbus, Georgia to Singapore, and there is no need to have all staff functions concentrated at a single site. The digital revolution has provided organizational options that did not exist in the past.

One way the new company will differ from the old United Technologies, though, is that there will be more effort to brand the enterprise at the corporate level, as Raytheon Technologies, rather than at the business-unit level. That change will be apparent at the Farnborough Air Show later this summer. Management will not jettison the heritage and reputation of legacy businesses like Pratt & Whitney, but it wants to strengthen branding of the overall enterprise.

With regard to Pratt, the part of the enterprise where Calio spent the most time, he has some strong opinions about how the market will evolve. He firmly believes that the company’s geared turbofan is the technology of the future for commercial propulsion, and that rivals will have to migrate to that technology if they hope to compete on fuel efficiency and sustainability.

With regard to proposals for a successor to the F135 engine used on the F-35 fighter and B-21 bomber, Calio believes that is “the wrong move at the wrong time.” He says gains in performance can be achieved more safely and affordably by exploiting the considerable growth potential of the F135 than by starting over with an all-new engine.

Pratt is ready to compete if it comes to that, but he says the existing engine has made major gains in affordability and sustainability while remaining by far the safest single-engine military powerplant ever built.

Having now ascended to the number-two position below CEO Hayes, Calio has spent many of his early days on the job visiting the sites of business units with which he is less acquainted than Pratt. He says, though, that virtually everything he has seen confirms the logic of the merger that created Raytheon Technologies.

Whatever challenges lie ahead, he is convinced that the enterprise is on a path to preeminence, and that it will deliver on commitments to shareholders and stakeholders alike.

Raytheon’s corporate antecedents have contributed to my think tank.