Business context and reporting period
Raytheon Technologies Corporation (NYSE: RTX) is a global aerospace and defense systems provider, with Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space (RIS), and Raytheon Missiles & Defense (RMD) segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; segment quarter dates for RIS and RMD follow their 4-4-5 fiscal calendars.
Financial performance
Amounts are in U.S. dollars; financial comparisons are with the corresponding 2021 periods.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $16.314B | $15.880B | $32.030B | $31.131B |
| Operating profit | $1.353B | $1.282B | $2.433B | $2.295B |
| Operating margin | 8.3% | 8.1% | 7.6% | 7.4% |
| Net income attributable to common shareowners | $1.304B | $1.032B | $2.388B | $1.785B |
| Diluted EPS | $0.88 | $0.68 | $1.60 | $1.18 |
| Operating cash flow from continuing operations | Not reported separately | Not reported separately | $1.762B | $2.049B |
Six-month capital expenditures were $918M, versus $747M a year earlier. Cash and equivalents were $4.767B at June 30, down from $7.832B at year-end 2021. Total debt was $31.413B and total debt to total capitalization was 30%. The company had $7B of revolving credit capacity available, with no outstanding revolver or commercial paper borrowings at quarter-end.
Six-month operating cash flow declined $287M year over year. Management cited higher inventory to support sales growth, partly offset by accounts payable and accrued liabilities. Receivables factoring increased operating cash flow by approximately $1.5B in the first half of 2022, compared with approximately $0.8B in the prior-year period. Financing cash outflow was $3.627B, including $1.779B of share repurchases and $1.543B of dividends.
Material changes and segment performance
- Q2 sales grew 2.7% year over year; first-half sales grew 2.9%. Commercial aerospace recovery supported growth at Collins and Pratt & Whitney, while RMD sales declined.
- Q2 segment sales and operating profit: Collins $5.011B and $546M; Pratt & Whitney $4.969B and $302M; RIS $3.570B and $315M; RMD $3.558B and $348M. Pratt & Whitney profit improved substantially; RIS and RMD profit fell.
- RMD’s first-half sales fell 9% and operating profit fell 29%, primarily reflecting lower Land Warfare and Air Defense activity, supply constraints, and unfavorable contract estimate adjustments. RIS first-half sales fell 6% and operating profit fell 14%.
- Q2 net contract estimate-at-completion adjustments reduced operating profit by $41M, versus a $27M increase in Q2 2021. The first-half net impact was a $5M reduction, versus a $39M increase in 2021.
- First-half effective tax rate was 10.1%, versus 26.5% in 2021, helped by tax benefits associated with FDII and capitalization of research expenditures. These tax effects contributed to the earnings improvement.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific full-year sales, earnings, or cash-flow guidance. Management said commercial air travel was recovering in some areas and described the aerospace industry’s long-term outlook as positive, while noting uncertainty about when traffic capacity will return to or exceed pre-pandemic levels.
- Backlog and remaining performance obligations were each approximately $161B at June 30; about 30% of RPO was expected to be recognized as sales over the next 12 months. Approximately 40% of RPO relates to long-term Pratt & Whitney commercial maintenance contracts. Defense bookings were $13B in Q2 and $22B for the first half.
- Russia sanctions and export controls led to $290M of first-quarter pretax charges, or $210M net of tax and noncontrolling interest, and the reversal of approximately $1.3B of Russia-related RPO/backlog. The company said further impacts could arise through operations, suppliers, customers, and business partners.
- Approximately $380M of advances from a Middle East customer relate to contracts the company no longer believes it can execute or obtain necessary approvals for; the advances may be refundable if the contracts are terminated. Some Russian customer advances may also be refundable.
- The company accrued approximately $290M for a DOJ investigation concerning RMD accounting, internal controls, and cost reporting; it cannot estimate any additional loss. Pratt & Whitney is contesting government Cost Accounting Standards claims, including a claim for approximately $1.73B plus interest. The filing also describes SEC/DOJ inquiries and antitrust litigation; management said it could not predict some outcomes and generally did not expect the matters to materially affect results, liquidity, or financial condition.
- If the tax-law requirement to capitalize research and experimental expenditures is not deferred legislatively, management estimated 2022 tax payments could rise by about $2B. Management also identified supply-chain and labor disruption, inflation, geopolitical developments, commercial aviation recovery, government spending, and regulatory approvals as risks.
- The unaudited interim statements received a limited review by PwC, not an audit opinion. Management reported disclosure controls were effective as of June 30, 2022.
Most important facts for investors to verify
- Whether operating cash flow improves and how much it continues to depend on receivables factoring, working-capital movements, and tax timing.
- Whether commercial aerospace recovery offsets continued supply-chain pressure and weakness in RIS and RMD; track RMD contract estimates and segment margins.
- Any changes to Russia-related charges, lost backlog, or potential refunds of customer advances, including the Middle East contracts.
- Potential incremental exposure from the DOJ investigation, government cost claims, and other legal proceedings beyond recorded accruals.
- Whether the potential additional 2022 tax payments materialize and the effect on cash, dividends, and planned repurchases; $4.1B of share-repurchase authorization remained at June 30.