Month-old Raytheon Technologies is slashing billions of dollars in costs and other retrenchments, including workforce cutbacks, as commercial OEM and aftermarket revenue could be halved this year in the wake of COVID-19.
“We’re taking immediate actions to reduce costs by $2 billion and preserve liquidity with $4 billion cash actions,” CEO and President Greg Hayes said May 7. Actions include cutting capital expenditures in investments, deferred salary increases across commercial businesses, and cutting discretionary spending. “While many of these measures have been difficult, it is the right thing to do for the business,” he said.
While layoffs and furloughs were not detailed, they were acknowledged during a teleconference over first-quarter earnings. “We’re furloughing folks, both at the corporate office and across the commercial businesses,” Hayes said. “Also, we’ve furloughed people in the factories, and I expect there will be further reductions as we sort through all of these volumes.
“The key is we don’t want to cut the talent so deep that when the recovery happens, we don’t have the right people,” the chief executive added. “We’re trying to be judicious.”
Sources inside Raytheon Technologies, which counted 195,000 employees when United Technologies and Raytheon merged at the start of April, have told Aerospace DAILY in recent weeks about pay freezes and layoffs at parts-maker Collins Aerospace and engine-maker Pratt & Whitney. The latter already was undergoing cost-cutting–before the novel coronavirus erupted–under new leadership that took over the unit at the start of the year.
While downsizing and cost-cutting were expected after the record merger that created Raytheon Technologies, it has taken on new urgency in the wake of the pandemic. With commercial passenger air traffic nearly zeroing out and almost two-thirds of the airliner fleet parked or barely used, aftermarket work–50% of Pratt’s business and 35% of Collins–will drop as shop visits fall by half and customers burn down their inventory before ordering more.
“So there’s a lot of pain to come yet, a lot of very tough decisions ahead of us in terms of production volumes,” Hayes told analysts. “But just generally speaking, think about 50 and 50 and you’re going to be in the ballpark.”
Still, the so-called super Tier 1 did not provide financial guidance for 2020 and will not do so until its summer earnings report. What is more, the first-quarter earnings report released May 7 was clouded with Otis and Carrier business units that are not part of Raytheon Technologies.
“Although we were expecting 1Q20 results for Raytheon Technologies, what we actually got were results for the old United Technologies, and some financials on what was Raytheon,” noted analysts at Vertical Research Partners. “What these pseudo-results have done, though, is give us a much more realistic feel for how the aerospace divisions are likely to be hit by coronavirus/recession, while defense [legacy Raytheon] does exactly what the merger intended.”
Indeed, initial evidence is depressing. Hayes said Pratt typically gets about 1,000 engine inductions a year for the V2500, for instance, and the company was seeing roughly 80 or so a month in January, February and even into March. “April–not so good,” he said, with about 25 or so engines inducted. “So we’ll see that revenue impact here in the second quarter because typically, as we repair these engines, they consume spare parts, we recognize the revenue. That’s going to be probably the biggest place where you’ll see the impact.”
At Collins, meanwhile, repair input–things that come back to the company’s shops around the world–for April was down about 55%. “Again, we think this is probably as bad as it gets, but it’s happened very, very quickly,” Hayes said.
By comparison, the Raytheon side of the company has about 2,000 open engineering positions that managers are eager to fill as government-guaranteed defense work remains a solid backdrop.
Raytheon Technologies is not suffering a liquidity crunch, managers stressed. The company had $8.5 billion in cash and equivalents when it started April 3, and net debt of $25 billion. There remain a $5 billion revolving credit facility, and another new $2 billion short-term revolver. The company still expects to issue $2 billion of proceeds to shareholders this year, and $18-20 billion in capital returns over four years.
