RTX Corp quarterly report, Q1 FY2020

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RTX Corp. (formerly United Technologies) — Q1 2020 Form 10-Q

Business context and reporting period. The quarter ended March 31, 2020, before the April 2–3 separation of Otis and Carrier and the April 3 merger with Raytheon. Accordingly, reported results are for legacy UTC, include Otis and Carrier, and exclude Raytheon. Future filings were expected to report Otis and Carrier as discontinued operations and reflect the combined aerospace and defense company. Amounts below are in U.S. dollars.

Financial performance and condition

  • Revenue: $18.21 billion, down 0.8% from $18.37 billion. Product sales fell to $12.43 billion from $12.88 billion; service sales rose to $5.78 billion from $5.49 billion.
  • Profit and margins: Operating profit was $1.81 billion, down from $2.05 billion; consolidated operating margin declined to 9.9% from 11.1%. Net loss attributable to common shareowners was $83 million, versus net income of $1.35 billion; diluted EPS was $(0.10), versus $1.56. Results included $660 million of debt-extinguishment costs and substantial separation-related charges and taxes.
  • Segment performance: Pratt & Whitney sales increased 11% to $5.35 billion and operating profit was $439 million (8.2% margin). Collins Aerospace sales declined 1% to $6.44 billion, while operating profit rose to $1.09 billion (17.0% margin). Otis sales declined 4% to $2.97 billion and operating profit fell 13% to $371 million (12.5% margin). Carrier sales declined 10% to $3.89 billion and operating profit fell 31% to $363 million (9.3% margin).
  • Cash flow: Operating cash flow was $661 million, compared with $1.50 billion a year earlier. Capital expenditures were $412 million, leaving operating cash flow less capex of $249 million, versus $1.14 billion. The filing notes approximately $730 million of cash payments for portfolio-separation costs and significant working-capital outflows; factoring activity also supported cash generation.
  • Liquidity and debt: Cash and equivalents were $8.00 billion. Total debt was $46.32 billion and net debt was $38.32 billion; debt to total capitalization was 52%, versus 50% at year-end 2019. Current assets were $38.88 billion and current liabilities $31.50 billion. Following the April 3 transactions, the company reported approximately $8.45 billion cash, $33.41 billion total debt and $24.96 billion net debt, plus access to a $5 billion revolving credit facility.
  • Other measures: Remaining performance obligations were approximately $132.8 billion, nearly unchanged from year-end; about 44% was expected to be recognized as sales over the next 24 months, subject to pandemic-related uncertainty. The quarterly common dividend was $0.735 per share; the board later declared $0.475 per share for payment in June.

Material changes and unusual items

  • Gross margin improved to 26.4% from 25.4%, mainly reflecting the absence of prior-year Rockwell Collins inventory step-up amortization and improvements at Collins Aerospace and Otis. Higher SG&A, separation expenses and other charges more than offset this benefit below gross profit.
  • The reported effective tax rate was 98.5%, versus 21.8%, principally because of separation-related tax charges, including deferred tax assets not expected to be used. Management reported an adjusted rate of 22.4% excluding restructuring and non-operational/nonrecurring items.
  • Separation-related costs totaled $1.437 billion in Q1, including $660 million debt-extinguishment costs, $500 million income tax expense, $271 million SG&A and $6 million interest expense. The company also recorded $144 million of aerospace asset write-downs, including a trade-name impairment and impacts from credit losses and lower estimated customer activity. No goodwill impairment was recorded.
  • Comprehensive loss attributable to common shareowners was $1.72 billion, substantially affected by foreign-currency translation and unrealized cash-flow hedge losses.

Outlook, risks and contingencies

  • COVID-19: Management said first-quarter operating results were not significantly affected, but expected a significant impact on aerospace results beginning in Q2. Reduced air travel was driving aircraft groundings, delayed or cancelled deliveries, lower production orders, and airline requests to defer maintenance and payments. IATA’s April 14 estimate cited in the filing projected 2020 revenue passenger miles down 48% year over year. The timing and scale of recovery, generally estimated at two or more years to regain pre-pandemic traffic, were highly uncertain; no quantified earnings guidance was provided.
  • Management described cost and cash-preservation steps including lower discretionary spending, capital expenditure and R&D reductions, hiring and merit-increase freezes, employee reassignment and furloughs. It said liquidity was sufficient to withstand potential pandemic impacts and would take further action if needed. The company stated it would not repurchase shares for the remainder of calendar 2020 due to COVID-19.
  • After the merger, the company expected to refinance approximately $3.5 billion of current maturities during Q2. It expected approximately $275 million of qualified pension contributions in 2020. A further $2 billion revolving credit facility was entered into on May 6, 2020; the two $500 million term loans were repaid in April and May.
  • Commercial aerospace financing and other contractual commitments were approximately $14.8 billion, with up to $1.2 billion potentially payable during the remainder of 2020. Customer distress could increase use of financing commitments and credit losses.
  • Pratt & Whitney disputed U.S. government cost-accounting claims seeking approximately $1.73 billion plus interest, $177 million plus interest, and $269 million plus interest. The company said it believed the claims were without merit. The filing also described a pending SEC/DOJ inquiry concerning alleged improper payments related to Raytheon contracts; the outcome could not be predicted.
  • Other matters include asbestos liabilities accrued at $325 million before insurance recoveries (with approximately $140 million of recovery receivable), tax exposures, government audits and investigations, and risks associated with the merger, separation, supply chain, airline demand and regulatory approvals. Management generally did not expect disclosed contingencies to have a material adverse effect, except where uncertainty or potential exposure is specifically noted.

Key facts investors should verify

  1. That Q1 financial statements reflect legacy UTC, not the post-merger RTX business, and include Otis and Carrier while excluding Raytheon.
  2. How Q2 and later filings quantify COVID-19 effects on aerospace demand, margins, cash flow, credit reserves and asset valuations.
  3. The final post-separation debt, cash, refinancing and liquidity position, and the treatment of Otis and Carrier debt and obligations.
  4. Whether the $132.8 billion of performance obligations convert to revenue on the expected schedule or are delayed, reduced or cancelled.
  5. Developments in the Pratt & Whitney government claims and Raytheon SEC/DOJ inquiry, as well as merger integration costs, divestitures and any further impairment charges.