RTX Corp. (Raytheon Technologies) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Figures are unaudited and in U.S. dollars. The company operates Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space (RIS), and Raytheon Missiles & Defense (RMD). Comparisons are affected by the April 2020 Raytheon merger and the separation of Carrier and Otis, now reported as discontinued operations.
Financial highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $15.88B | $14.06B | $31.13B | $25.42B |
| Operating profit (loss) | $1.28B | $(3.76)B | $2.30B | $(2.47)B |
| Operating margin | 8.1% | (26.7)% | 7.4% | (9.7)% |
| Net income (loss) attributable to common shareowners | $1.03B | $(3.84)B | $1.79B | $(3.92)B |
| Diluted EPS | $0.68 | $(2.55) | $1.18 | $(3.20) |
| Operating cash flow, continuing operations | — | $2.05B | $1.34B |
- Revenue and segments: Q2 sales rose 13% year over year; management attributed the $1.58B organic increase principally to commercial aerospace recovery at Pratt & Whitney and Collins Aerospace, along with RMD growth. First-half sales increased 22% as reported, but organic sales declined $1.60B, mainly from lower commercial aerospace activity at Collins Aerospace and Pratt & Whitney. The merger added substantial RIS and RMD sales to the 2021 comparison.
- Profit and margins: The prior-year comparison includes a $3.18B goodwill impairment charge in Q2 2020. Q2 2021 segment operating profit was $1.57B, versus a $67M segment loss a year earlier. Segment margins were 11.1% at Collins, 2.6% at Pratt & Whitney, 10.9% at RIS, and 13.4% at RMD. Reported consolidated results also reflect acquisition-accounting charges and a FAS/CAS pension adjustment.
- Cash flow and investment: First-half continuing operating cash flow was $2.05B; capital expenditures were $747M. The company reported $239M of cash provided by continuing investing activities, including $1.07B of net proceeds from the Forcepoint sale. Continuing financing activities used $3.12B, including $1.46B of dividends and approximately $1.02B of share repurchases.
- Liquidity and debt: Cash and cash equivalents were $8.05B at June 30, down from $8.80B at year-end 2020. Total debt was $31.48B, compared with $31.82B at year-end; debt-to-total-capitalization was 30%. The company reported $6.84B available under credit facilities and no outstanding borrowings under its revolving credit agreements.
- Orders and backlog: Remaining performance obligations/backlog were $151.8B, versus $150.1B at year-end; about 30% was expected to be recognized as sales over the next 12 months, subject to uncertainty. Defense bookings were $20.4B for the first half, compared with $13.4B a year earlier.
Changes, outlook, and risks
- Commercial aerospace showed signs of recovery in Q2, including higher flight hours, aircraft utilization, shop visits, aftermarket sales, and engine deliveries. However, first-half commercial aerospace sales remained below the prior year. Management estimated a possible return of commercial air traffic to pre-pandemic levels in 2023 or 2024 and expected commercial aerospace results to remain below 2019 levels during the recovery.
- Management expected a full-year 2021 effective tax rate of approximately 16%, excluding restructuring and non-operational, nonrecurring items. It also expected a deferred tax benefit from planned legal-entity and operational reorganizations in Q3 2021.
- Restructuring actions were expected to generate approximately $115M of annual recurring pretax savings within one to two years; additional costs to complete the 2021 actions were estimated at $46M. The company also cited expected annual recurring savings of approximately $1.2B from 2020 actions within two years of initiation.
- COVID-19, uneven air-travel recovery, airline financial health, customer delays or cancellations, supply-chain disruptions, and commercial aerospace demand remained material uncertainties. Potential impairment of goodwill or other assets could result if recovery assumptions weaken.
- Approximately $440M of advances from a Middle East customer related to contracts the company no longer believed it could perform or obtain required approvals for may become refundable if the contracts are terminated.
- Legal and government matters include a DOJ investigation concerning RMD accounting, controls, and contract pricing; an SEC/DOJ inquiry into possible improper payments involving Thales-Raytheon Systems; and Pratt & Whitney Cost Accounting Standards claims totaling approximately $2.18B in asserted principal, plus interest. The company disputes the claims and says outcomes are uncertain; it reported aggregate accruals for the referenced matters were not material.
- The company stated that it did not expect the disclosed contingencies, individually or in aggregate, to materially affect its financial condition, results, or liquidity, while noting that outcomes remain uncertain. PwC performed a review of the interim statements, not an audit.
Important facts for investors to verify
- Separate organic operating trends from merger-related changes and the prior-year $3.18B impairment when assessing reported growth and earnings.
- Track commercial air-traffic recovery and its effect on Collins Aerospace and Pratt & Whitney sales, margins, cash generation, and asset valuations.
- Monitor cash conversion, working-capital movements, factoring activity, capital returns, and debt maturities against reported liquidity.
- Follow the Middle East contract approvals and potential refund of approximately $440M in customer advances.
- Review developments in the DOJ, SEC, and government contract-pricing matters, including possible financial, regulatory, or contracting consequences.
- Assess whether backlog conversion, expected restructuring savings, and the projected tax rate are realized as management anticipates.