Raytheon Technologies Corporation (RTX) — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020. On April 3, 2020, UTC completed the spin-offs of Otis and Carrier and merged with Raytheon Company. Otis and Carrier are reported as discontinued operations; Raytheon results are included only from the merger date. Accordingly, reported comparisons with 2019 are not like-for-like: 2020 includes the acquired defense businesses for part of the year, while 2019 does not.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $14.747B | $11.373B | $40.168B | $33.655B |
| Operating profit (loss) | $434M | $1.430B | $(2.031)B | $3.958B |
| Operating margin | 2.9% | 12.6% | (5.1)% | 11.8% |
| Continuing-operations income (loss) attributable to common shareholders | $151M | $958M | $(3.255)B | $2.853B |
| Diluted continuing-operations EPS | $0.10 | $1.11 | $(2.48) | $3.31 |
- Sales and underlying trends: Reported Q3 sales rose 30%, largely reflecting the Raytheon merger. Organic sales fell $3.855B year over year. Commercial aerospace weakness drove declines at Collins Aerospace and Pratt & Whitney; defense sales from the acquired businesses partly offset the impact.
- Segment performance: Q3 Collins Aerospace sales were $4.274B, down 34%, with a 12.3% margin versus 19.4%. Pratt & Whitney sales were $3.494B, down 34%, and it posted a $615M operating loss versus $520M profit. Newly included Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD) reported sales of $3.674B and $3.794B, with margins of 9.5% and 11.9%, respectively.
- Unusual items and contract estimates: Nine-month results included a $3.183B goodwill impairment at Collins Aerospace. Net unfavorable estimate-at-completion (EAC) adjustments reduced operating profit by $462M in Q3 and $592M year to date. Q3 also included a $580M pretax gain on sales of Collins Aerospace businesses, partly offset by $523M of acquisition-accounting adjustments.
- Cash flow: Continuing-operations operating cash flow was $2.964B for the nine months, versus $4.496B in 2019. Capital expenditures were $1.172B. Investing cash flow from continuing operations was $4.152B, including $3.2B of cash acquired in the merger and proceeds from business sales.
- Liquidity and debt: September 30 cash and cash equivalents were $10.001B; total debt was $32.781B, versus $43.252B at year-end 2019. Debt-to-total-capitalization was 32%, compared with 49%. The company reported $6.84B available under credit facilities. Long-term debt had an average maturity of about 14 years.
- Other measures: Remaining performance obligations were $152.3B, with approximately 30% expected to be recognized as sales in the next 12 months, subject to substantial uncertainty. Total equity was $70.080B. Long-term pension and postretirement obligations were $14.688B, up from $2.487B at year-end, primarily due to the merger and plan remeasurement.
Changes, outlook, and risks
- COVID-19 sharply reduced air travel, flight hours, shop visits, aircraft deliveries, and commercial aftermarket demand. Management estimated 2020 revenue passenger miles could fall more than 60% year over year and said commercial aerospace operations would remain significantly affected. Its then-current estimate was that air-traffic recovery might occur in 2023 or 2024; timing and extent were uncertain.
- Management cited sufficient liquidity to withstand potential pandemic impacts, while taking cost and cash-preservation actions, including workforce reductions, spending cuts, and suspended share repurchases. The company recorded $685M of restructuring charges for the first nine months, expected $34M of further charges to complete 2020 actions, and targeted about $1.0B of annual recurring pretax savings within one to two years.
- Management reported no additional Q3 goodwill impairment trigger, but warned that a more prolonged or severe downturn could result in further impairment or other charges. Airline bankruptcies and customer payment extensions also contributed to credit-loss reserves; the allowance for expected credit losses on receivables rose to $530M from $254M at year-end.
- Defense bookings were $21.8B for the first nine months; defense backlog was approximately $70.2B at September 30. These figures include the acquired Raytheon businesses and are not directly comparable with the prior-year period.
- Risks include uncertain pandemic duration and air-travel recovery, execution and integration of the merger, contract cost and revenue estimates, airline and airframer customer credit exposure, government funding and approvals, supply-chain disruption, and pension obligations. The filing also describes unresolved government matters: Pratt & Whitney disputes three Cost Accounting Standards claims, including a $1.73B claim plus interest; SEC and DOJ inquiries involving Raytheon Company are ongoing, and RTX received a separate DOJ criminal subpoena in October 2020. Management said outcomes could not be predicted.
- The company said the Carrier and Otis distributions were intended to qualify as tax-free; failure to qualify could create significant liabilities. Certain Middle Eastern precision-munitions contracts also remain subject to U.S. government approvals.
Important facts for investors to verify
- Use merger-adjusted or pro forma comparisons when assessing sales, earnings, and margins; reported year-over-year growth includes a major change in the company’s perimeter.
- Track commercial aviation recovery, Collins Aerospace and Pratt & Whitney margins, customer credit losses, and further EAC adjustments or impairments.
- Assess the quality and timing of the $152.3B remaining performance obligations and the assumptions behind the 30% near-term conversion estimate.
- Monitor cash generation, debt repayment, restructuring execution and savings, and pension funding needs.
- Follow outcomes of the government investigations and claims, tax treatment of the separations, and outstanding export approvals. The interim financial statements received a limited review, not an audit.