Business context and reporting period
RTX Corporation (formerly Raytheon Technologies Corporation; legal name changed July 17, 2023) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. It supplies aerospace and defense products and services. Results are presented under the four-segment structure then in place: Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space (RIS), and Raytheon Missiles & Defense (RMD). Effective July 1, 2023, RIS and RMD were combined into a single Raytheon segment.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $18.315bn | $16.314bn | $35.529bn | $32.030bn |
| Operating profit | $1.458bn | $1.353bn | $3.110bn | $2.433bn |
| Operating margin | 8.0% | 8.3% | 8.8% | 7.6% |
| Net income attributable to common shareholders | $1.327bn | $1.304bn | $2.753bn | $2.388bn |
| Diluted EPS | $0.90 | $0.88 | $1.87 | $1.60 |
Sales rose 12% year over year in Q2 and 11% for the first half, led by commercial aerospace recovery and higher Collins, Pratt & Whitney, and RMD activity. Q2 product sales were $13.411bn and services sales $4.904bn. First-half operating cash flow was negative $144m, versus positive $1.762bn a year earlier; capital expenditures were $1.046bn. Management attributed the cash-flow decline principally to higher tax payments, payment timing, increased receivables, and contract asset/liability movements. Cash taxes paid were $1.4bn versus $0.5bn.
At June 30, cash and equivalents were $5.391bn; total debt was $35.353bn and debt-to-total-capitalization was 32%, versus 30% at year-end 2022. The company had $7bn of revolving credit capacity with no borrowings outstanding under those facilities, and $1bn of commercial paper outstanding. Backlog was approximately $185bn, including $73bn of defense backlog; remaining performance obligations were also $185bn, with about 30% expected to convert to revenue within 12 months.
Material changes versus comparable periods
- Q2 operating margin declined to 8.0% from 8.3%, despite higher sales and operating profit. For the first half, margin improved to 8.8% from 7.6%.
- Collins’ Q2 operating profit increased to $821m from $546m, with margin rising to 14.0% from 10.9%, benefiting from commercial aftermarket demand and favorable mix.
- Pratt & Whitney Q2 operating profit fell to $230m from $302m and margin to 4.0% from 6.1%, including a $181m customer-insolvency charge. First-half segment profit nevertheless increased to $645m from $453m.
- RIS Q2 operating profit decreased to $291m from $315m; RMD increased to $415m from $348m. First-half RIS profit declined to $615m from $693m, while RMD was broadly flat at $743m versus $735m.
- First-half operating cash flow reversed from a $1.762bn inflow to a $144m outflow. Debt increased, including $3bn of long-term notes issued during the period.
Outlook, commentary, risks and unusual items
The filing provides no specific full-year revenue, earnings, or cash-flow guidance. Management said the long-term aerospace outlook remained positive and expected the industry to return to or exceed pre-pandemic levels by the end of 2023, while noting uncertainty around supply chains, labor, inflation, and recovery.
- Pratt & Whitney powdered-metal issue: A rare condition in certain engine parts requires accelerated inspections of a significant portion of the PW1100G-JM fleet powering Airbus A320neo aircraft. RTX expected removals and inspections over the next 9–12 months, including about 200 accelerated removals by mid-September 2023. The financial impact remained uncertain and potential cost growth could materially affect results when recognized; engines currently in production are not affected.
- Customer and contract exposures: A $181m Pratt & Whitney customer-insolvency charge affected Q2. Contract liabilities include about $405m in advance payments from a Middle East customer on contracts RTX no longer believes it can execute or obtain approvals for; payments may be refundable if terminated.
- Legal and regulatory matters: RTX accrued approximately $295m for a DOJ investigation involving RMD financial accounting, controls, and contract cost reporting; it could not estimate any incremental loss. Pratt & Whitney also faces government cost-accounting claims it considers without merit. A separate tax-audit closure was said to possibly produce a $225m–$315m net income benefit; timing and outcome are uncertain.
- Other items: First-half net contract estimate-at-completion adjustments reduced operating profit by $154m, compared with a $5m reduction a year earlier. Acquisition-accounting adjustments reduced first-half operating profit by $982m. A July 20 agreement to sell Collins’ actuation systems portfolio for approximately $1.8bn cash is subject to approvals and closing conditions.
- Other risks include U.S. government budget and contract exposure, sanctions and export controls, supply-chain and labor constraints, foreign regulatory approvals, and ongoing investigations and litigation. Management stated disclosure controls were effective at June 30, 2023. The interim financial statements received a limited review, not an audit.
Important facts for investors to verify
- Timing, scope, customer impact, and ultimate cost of the PW1100G-JM inspections and removals.
- Whether operating cash flow recovers and how working-capital needs, taxes, debt, dividends, and repurchases affect liquidity.
- Developments in the Pratt & Whitney insolvency exposure, the $405m customer advances, and major government-contract investigations or claims.
- Progress and terms of the actuation portfolio sale, and reporting comparability after the segment realignment.
- Whether commercial aerospace demand and defense backlog convert to sales and profit at expected margins; backlog and RPO are not guarantees of revenue or earnings.