Hughes Says Lower Profit Projection Forced Cuts
The motive behind recent cost-cutting moves at Hughes Aircraft was an internal projection that Hughes’ profits over a four-year period would fall $532.8 million short of what it had projected when General Motors agreed to buy the company last year, Hughes officials said Thursday.
The cost-reduction strategy, including layoffs, reductions in travel and a policy of unpaid overtime for professionals, is expected to save $100 million a year, but Hughes Vice President Lee Pitt declined to say whether the company will now achieve the projected profit.
The company’s controller, J. Stanley Crum, recently estimated that Hughes would not meet the ambitious profit projection for the years 1986 through 1989 that it had disclosed to GM and other potential buyers in the spring of 1985.
A memo written by Crum on July 11, leaked to the Daily Breeze newspaper of Torrance this week, said Hughes would earn $336.9 million in the current year, down from the $414.5 million that was projected last year. Subsequently, the cost-cutting moves were announced.
Hughes, based in Culver City, does not publicly report its profits. They are reported as part of the financial results for General Motors Hughes Electronics Corp., which includes certain operations that were formerly part of GM.
The only public record of Hughes’ profits was made last November, when a prospectus was issued showing that Hughes earned $266.1 million in 1984 and $117.8 million in the first nine months of 1985.
The projection of such a sharp profit improvement in 1986 from the depressed levels of 1985 raises the question of whether the Howard Hughes Medical Institute, the previous owner of Hughes Aircraft, oversold Hughes to prospective buyers. Analysts said, however, that it does not appear that Hughes was unreasonable in its estimate.
“If you look at Hughes’ $5-billion revenue base and apply to it an average operating margin for the industry of 8%, then a $400-million profit does not seem out of line,” said a Wall Street securities analyst who asked that he not be identified.
GM spokesman Cliff Merriott said GM has no feelings that Hughes has not lived up to its billing. But since the acquisition, a number of developments have reduced prospects at Hughes.
The Defense Department has decided to seek second producers of several major Hughes products, including the Maverick, Phoenix and AMRAAM missiles.
The Army is also considering ending the longstanding and profitable TOW missile program in the 1988 budget year. In fiscal 1987, the Army has requested $134.6 million for 12,000 TOWS, and the Marines are seeking $33.5 million for 3,400 of the missiles.
