RTX Corp. (Raytheon Technologies) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The quarter followed the April 3 separation of Carrier and Otis and the merger with Raytheon Company. Raytheon’s results are included only from the merger close; Carrier and Otis are reported as discontinued operations. Accordingly, reported year-over-year comparisons are not fully comparable.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $14.1 billion | $11.3 billion | $25.4 billion | $22.3 billion |
| Operating profit (loss) | $(3.8) billion | $1.4 billion | $(2.5) billion | $2.5 billion |
| Net income (loss) attributable to common shareholders | $(3.8) billion | $1.9 billion | $(3.9) billion | $3.2 billion |
| Diluted EPS | $(2.55) | $2.20 | $(3.20) | $3.76 |
| Operating cash flow, continuing operations | Not stated for quarter | Not stated for quarter | $1.3 billion | $2.8 billion |
- Q2 reported sales increased largely because Raytheon was added. Excluding acquisition and divestiture effects, sales declined $4.1 billion, primarily from lower commercial aerospace OEM and aftermarket activity.
- The Q2 operating loss included a $3.2 billion goodwill impairment at two Collins Aerospace reporting units. Total acquisition-accounting adjustments were $3.7 billion.
- Q2 segment operating margins: Collins Aerospace (7.5%), Pratt & Whitney (13.1%), Raytheon Intelligence & Space 9.4%, and Raytheon Missiles & Defense 11.1%. The Raytheon segments’ reported results cover only the post-merger period and have no same-period 2019 comparison.
- At June 30, cash and cash equivalents were $7.0 billion; total debt was $32.8 billion, down from $43.3 billion at December 31, 2019. Debt was 32% of total capitalization, versus 49% at year-end. The company reported $6.84 billion available under credit facilities.
- Remaining performance obligations were $158.7 billion; management expected about 30% to be recognized as sales over the next 12 months, subject to pandemic-related uncertainty.
Changes, outlook and risks
- COVID-19 sharply reduced air travel, aircraft utilization, engine shop visits, commercial deliveries and related aftermarket demand. Management estimated 2020 revenue passenger miles could fall about 60% year over year and said commercial air traffic recovery might not occur until 2023 or 2024.
- Management expected continued significant negative effects, particularly at Collins Aerospace and Pratt & Whitney, but stated it believed liquidity was sufficient to withstand potential impacts. No comprehensive full-year revenue or earnings guidance is provided in the supplied filing text.
- Cost actions included spending and capital expenditure reductions, hiring and pay measures, furloughs and suspended share repurchases. Q2 restructuring charges were $427 million. Management expected about $780 million of annual recurring pre-tax savings from 2020 actions within one to two years; additional charges of $38 million were expected to complete those actions.
- The filing identifies risk of further impairments or charges if commercial aerospace recovery is slower or weaker than assumed. A 25-basis-point change in the discount rate or a 10% change in forecast cash flows could materially alter the recorded goodwill impairment.
- Other notable exposures include approximately $15.0 billion of commercial aerospace financing and other contractual commitments; $12.6 billion of notional offset obligations; and contested government cost-accounting claims against Pratt & Whitney totaling about $2.18 billion plus interest. The company says it believes the claims are without merit.
- The company disclosed SEC and DOJ inquiries concerning alleged improper payments involving Thales-Raytheon Systems; it said the outcome could not be predicted. It also warned that failure of the Carrier or Otis separations to qualify for intended tax-free treatment could create significant liabilities.
Important facts for investors to verify
- How much of sales, margins and cash generation reflects underlying performance versus merger timing, discontinued operations and acquisition accounting.
- Whether commercial aviation activity and customer payment behavior recover on management’s assumed timeline, and whether additional impairments or credit-loss charges arise.
- Cash conversion and working-capital trends, including the effect of receivables factoring on reported operating cash flow.
- Debt, committed liquidity and the funding needs associated with aerospace financing commitments, pensions and merger integration.
- Developments in disputed government claims, the SEC/DOJ inquiry, regulatory-required divestitures and tax treatment of the separations.