RTX Corp. (Raytheon Technologies) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing covers the year of the April 3, 2020 separation of Carrier and Otis and the merger of UTC with Raytheon. RTX’s 2020 results include Raytheon only from the merger date; Carrier and Otis are reported as discontinued operations. Consequently, year-over-year comparisons are not fully like-for-like.
Business context
RTX operates four principal segments: Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space (RIS), and Raytheon Missiles & Defense (RMD). Commercial aerospace activity was sharply affected by COVID-19, while the former Raytheon defense businesses experienced comparatively minor pandemic disruption.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $56.587 billion | $45.349 billion |
| Operating profit (loss) | $(1.889) billion | $4.914 billion |
| Operating margin | (3.3)% | 10.8% |
| Continuing-operations net income (loss) attributable to common shareowners | $(3.109) billion | $3.510 billion |
| Diluted EPS from continuing operations | $(2.29) | $4.06 |
| Operating cash flow from continuing operations | $4.334 billion | $5.821 billion |
| Capital expenditures | $1.795 billion | $1.868 billion |
| Cash and cash equivalents at year-end | $8.802 billion | $4.937 billion |
| Total debt at year-end | $31.823 billion | $43.252 billion |
| Total debt to capitalization | 30% | 49% |
| Backlog / remaining performance obligations | $150.119 billion | $111.665 billion |
Reported sales rose mainly because of the Raytheon merger; organic sales declined $10.438 billion. Commercial aerospace sales fell substantially, reflecting lower flight activity, OEM deliveries, aftermarket demand and shop visits. The operating loss included a $3.183 billion goodwill impairment, primarily non-deductible, at Collins Aerospace. RTX reported a $575 million income tax expense despite a pretax continuing-operations loss, contributing to a negative effective tax rate of 24.4%.
Liquidity included $6.84 billion available under credit facilities; the company also reported $7.0 billion of revolving agreements with no borrowings outstanding at year-end. Approximately 45% of year-end cash was held by foreign subsidiaries. Management stated it believed liquidity was sufficient to withstand estimated COVID-19 impacts.
Segment context: Collins Aerospace sales were $19.288 billion and operating profit was $1.466 billion, versus $26.028 billion and $4.508 billion in 2019. Pratt & Whitney sales were $16.799 billion and operating loss was $564 million, versus sales of $20.902 billion and operating profit of $1.801 billion. RIS and RMD contributed $10.841 billion and $11.660 billion in sales, respectively, but their 2020 results cover only the period after April 3 and have no comparable 2019 segment figures in this filing.
Material changes and unusual items
- The Raytheon merger materially changed company scale, segment mix, goodwill and intangible assets; 2020 includes Raytheon results only after April 3.
- Commercial aerospace demand deterioration drove lower Collins Aerospace and Pratt & Whitney sales and profits, higher credit-loss allowances, contract estimate adjustments and impairments.
- RTX recorded $777 million of restructuring charges, primarily related to workforce reductions and merger integration. For 2020 actions, management expected approximately $1.1 billion of annual recurring pretax savings within one to two years, with most actions targeted for completion in 2021.
- In the fourth quarter, RTX reversed $119 million of sales and related profit on certain precision-guided munitions contracts with a Middle East customer, recorded an additional $516 million unfavorable profit impact, and removed $755 million from backlog because required U.S. regulatory approvals were no longer considered probable. $405 million of customer advances may be refundable if the contracts are terminated.
- RTX sold Collins Aerospace military GPS and space-based precision optics businesses for approximately $2.3 billion in gross proceeds. It completed the $426 million net-of-cash acquisition of Blue Canyon Technologies in December and completed the $1.1 billion cash sale of Forcepoint in January 2021.
- Fourth-quarter 2020 net sales were $16.419 billion; continuing-operations income attributable to common shareowners was $146 million and diluted continuing-operations EPS was $0.10.
Outlook, risks and contingencies
Management expected commercial aerospace results, particularly at Collins Aerospace and Pratt & Whitney, to remain significantly negatively affected. It estimated commercial air traffic recovery could occur in 2023 or 2024, while emphasizing substantial uncertainty; the filing text does not provide clear consolidated FY2021 revenue or EPS guidance. Management described the long-term aerospace outlook as positive, based on underlying air-travel demand.
Key risks include the duration and severity of COVID-19 and its effects on airline customers, suppliers and flight activity; customer bankruptcies and collections; execution of merger integration and expected synergies; contract cost overruns and estimates-at-completion; government budget, audit and procurement outcomes; supply-chain constraints; product safety and reliability; and foreign-policy, export-control and geopolitical developments. Other exposures include approximately $13.4 billion of gross commercial aerospace financing and other contractual commitments before collaboration-partner shares, and $11.0 billion of notional offset obligations.
Pending matters include substantial Pratt & Whitney cost-accounting claims, SEC and DOJ inquiries, and litigation associated with a DOJ investigation of Raytheon Missiles & Defense accounting and controls. RTX stated it could not predict the outcomes of the inquiries and claims, while generally asserting that disclosed matters were not expected to have a material adverse effect. Environmental remediation reserves were $835 million. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- How much of the reported sales increase and backlog growth reflects the Raytheon merger rather than underlying organic growth; note that only about 30% of year-end RPO was expected to convert to sales in the next 12 months.
- Commercial aerospace recovery assumptions, subsequent airline demand and customer credit quality, and whether further impairment or credit-loss charges are needed.
- Delivery of the projected restructuring savings and the timing and costs of merger integration.
- Final regulatory and contractual outcomes for the Middle East precision-guided munitions contracts, including potential refunds of customer advances.
- Developments in government investigations, cost-accounting claims, and other contingencies, as well as the final Raytheon merger purchase-price allocation.