RTX Corp (Raytheon Technologies) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; compared with the corresponding 2021 periods. Amounts are U.S. dollars. The interim financial statements were reviewed by PwC, not audited.
Business context and financial performance
The company operates Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space (RIS), and Raytheon Missiles & Defense (RMD), serving commercial aerospace and government and defense markets.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $16.95B | $16.21B | $48.98B | $47.34B |
| Operating profit | $1.48B | $1.34B | $3.91B | $3.64B |
| Operating margin | 8.7% | 8.3% | 8.0% | 7.7% |
| Net income attributable to common shareowners | $1.39B | $1.39B | $3.78B | $3.18B |
| Diluted EPS | $0.94 | $0.93 | $2.54 | $2.10 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.54B | $3.98B |
Q3 sales rose about 5% year over year and operating profit about 10%; nine-month sales rose about 3% and operating profit about 8%. Q3 net income was nearly flat, while nine-month earnings increased. The nine-month comparison includes differing tax and other special items.
Commercial aerospace recovery lifted Collins and Pratt & Whitney: Q3 sales increased 11% and 14%, respectively, and operating margins improved to 12.1% and 5.9%. RIS and RMD sales and profits declined; RMD’s nine-month operating profit fell 25%, with supply-chain constraints, lower program volumes and unfavorable contract estimate changes cited among the factors.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $2.54B, down $1.44B year over year. The company cited higher tax payments and inventory investment; receivables factoring increased cash provided by operations by about $1.5B versus minimal impact in 2021.
- Capital expenditures were $1.43B, versus $1.18B in 2021. Cash and cash equivalents were $5.38B at September 30, down from $7.83B at year-end 2021.
- Total debt was $33.45B, up from $31.49B at year-end; this included $2.1B of commercial paper outstanding at a 3.6% weighted-average rate. Debt was 32% of total capitalization, compared with 30% at year-end.
- The company reported $7.0B of revolving credit capacity with no borrowings under those facilities. It said cash, future operating cash flow, commercial paper access and credit facilities should be sufficient for future operating needs.
- Nine-month cash returned to shareholders included $2.34B of dividends and $2.40B of share repurchases. About $3.5B remained authorized under the repurchase program at September 30.
Material changes, outlook and risks
- Commercial aerospace: Management cited ongoing recovery in air travel, flight hours and aftermarket demand, while noting uncertainty about when traffic will return to or exceed pre-pandemic levels. No specific company-wide financial guidance is provided in the supplied filing text.
- Russia sanctions: The company recorded $290M of pretax charges in Q1, primarily in Collins and Pratt & Whitney, and reversed about $1.3B of Russian-related remaining performance obligations. Sanctions, export controls and related supply-chain impacts may continue.
- Contract backlog: Total backlog/RPO was approximately $168B; about 30% was expected to be recognized as sales over the next 12 months, while about 40% related to long-term Pratt & Whitney maintenance contracts generally extending up to 15 years.
- Tax and unusual items: Nine-month 2022 results included a $210M after-tax impact from Russia-related charges and a $159M tax benefit associated with capitalization of research and experimental expenditures. The 2021 comparison included significant reorganization tax benefits and other tax items. Nine-month net tax payments rose to $2.17B from $906M, including about $1.5B of incremental payments tied to the tax-law capitalization requirement; management expected additional payments in Q4.
- Contingencies: The company accrued about $290M for a DOJ investigation involving RMD accounting, controls and contract-cost reporting, but could not estimate any additional loss. Pratt & Whitney disputes government Cost Accounting Standards claims. Approximately $355M of Middle East customer advances could become refundable if affected contracts are terminated or approvals are not obtained.
- Other exposures include government audits and investigations, litigation, supply-chain and labor constraints, foreign-exchange movements, geopolitical and regulatory risks, and potential disruptions related to China or Turkey. Management said it did not expect the disclosed matters, other than as specifically noted, to materially adversely affect results, financial condition or liquidity.
Most important facts for investors to verify
- Whether commercial-aircraft recovery and aftermarket growth persist, and whether supply-chain and labor constraints ease, particularly at RMD.
- Underlying cash generation excluding the sizable year-over-year increase in receivables factoring, and the timing and full-year impact of tax payments.
- Progress on the DOJ investigation and disputed government claims, including whether additional liabilities beyond recorded accruals emerge.
- Whether the $355M of Middle East advances becomes refundable and whether regulatory approvals allow the related contracts to proceed.
- Backlog conversion, particularly the timing and economics of long-term maintenance obligations and defense awards.