Report Overview
The 27th of October 2020 saw the release of Raytheon Technologies end of third quarter report on the company’s health. The end of Q3 2020 came on the 30th of September and all information presented within this document expires on that date. Raytheon Technologies came into existence in 2020 as a merger between Raytheon and United Technologies Corporation. Raytheon Technologies CEO at the time of this report is Greg Hayes. The company is comprised of four components two homegrown and two acquired. The homegrown companies are segments of Raytheon and are termed Raytheon Intelligence & Space and Raytheon Missiles & Defence. Raytheon Intelligence and Defence’s projects are all commercial secrets, but the general specialism is in the production of advanced sensors and cyberwarfare solutions. Raytheon Missile & Defence produces missile hardware and missile defence systems. The two acquired components, Collins Aerospace and Pratt & Whitney specialize in aerospace production. Collins Aerospace manufactures avionics, aircraft interiors, mechanical flight systems, mission control systems and engine systems. Pratt & Whitney solely produce engines and provide aftermarket services to customers.
Raytheon Technologies CEO Statement for Q3 2020
“We delivered sales that were in line with our expectations as well as better than expected adjusted Earnings per Share (EPS) and free cash flow during the quarter as we achieved approximately $700 million of cost reduction and $1.9 billion of cash conservation actions, which was significantly better than our plan. We are delivering on our commitments to customers while taking the necessary actions that will equip us to weather the current environment and emerge as a stronger business.”
“The long-term business fundamentals and earnings power of Raytheon Technologies remain strong with our balanced portfolio, leading businesses and advanced technologies that combine the best of commercial aerospace and defence”
Greg Hayes CEO Raytheon Technologies
The key words whilst interrogating the content of the CEO statement is ‘expect’, ‘weather’ and ’emerge as a stronger business’. The phrase ‘current environment’ is also part of this family of points of interest. The character of these verbs go someway to give the statement a resigned element. The degree of resignation is an acknowledgement that the worrying state of financial affairs existing in Q3 2020 in comparison to Q3 2019 will inevitably stretch to Q4 and beyond. The key points of achievement which the statement is keen to stress lie in the execution of $700 million of cost reductions and $1.9 billion of cash conservation actions. The two stress points are not points which would typically be highlighted by a growing company but one worried about the future. The two actions are competent responses to external economic pressure and gives off the impression of competent management to investors and potential clients. The point to be most positive of for the company is their total sales revenue as seen in the image. Greg Hayes states that this sales revenue has met their predetermined target for the quarter. The achievement of this target cannot be overstated given the grave situation in the aviation sector. The overall tone of the statement is one of a company recognizing it might struggle to keep up a level of profit required to maintain a technical edge in a fast moving marketplace.
Raytheon Risk Forecast Moving Beyond Q3 2020
The Raytheon Company report for Q3 includes a forecast for the levels of risk assigned to Raytheon current activities for Q4 2020 and beyond. The forecast contained in Raytheon’s document highlighted 18 risks. The risks featured here have been curated from that list to highlight those which are unique to Raytheon and the sector in which they chiefly operate i.e. aviation.
- The ongoing government and civilian reaction to the COVID-19 crisis limiting demand for aviation products and services
2. The risk of ineptitude in merging the United Technologies Corporation with Raytheon in 2020
3. The risk of a change of administration in the US altering or cancelling current US government contracts
4. The benefits from the merger between UTC and Raytheon might not materialize leading to a loss on the merger
5. The risk of changing regulation affecting industrial output or the defence industry by a new US administration
6. The risk of a British departure from the European Union causing economic ripples sufficient to damage Raytheon Technologies’ company efficacy
7. The risk of COVID-19 causing disruption to hiring and firing of employees making it potentially difficult to keep up the required workforce for the company
Raytheon Company Health Q3 2020
Raytheon’s company health is assessed here by combining Raytheon’s assets in Q3 2020 with their liabilities. The assets to liabilities ratio is a good method for determining how great the company’s degree of leeway would be if hit by shocks or chronic economic pressure.
Raytheon Assets Q3 2020
| Actual Cash | $10.001bn |
| Accounts Receivable (net) | $10.115bn |
| Assets in Discontinued operations | $56mn |
| Customer Financing Assets | $3.314bn |
| Goodwill | $53.524bn |
| Fixed Assets (net) | $14.730bn |
| Future Income Tax Benefit | $699mn |
| Inventory (net) | $9.617bn |
| Intangible Assets | $41.564bn |
| Operating Lease Assets | $2.027bn |
| Other Assets (net) | $3.030bn |
| Other Assets (current) | $3.879bn |
| Total Assets | $162.399bn |
Raytheon Liabilities Sheet Q3 2020
| Accounts Payable | $8.143bn |
| Accrued Liabilities | $13.558bn |
| Contract Liabilities | $12.208bn |
| Discontinued Operational Liabilities | $118mn |
| Future Pension Obligations | $14.688bn |
| Long-Term Due Debt | $1.307bn |
| Long-Term Debt | $31.246 |
| Other Long-Term Liabilities | $9.142 |
| Operating Lease Liabilities | $1.651bn |
| Short Term Borrowing | $228mn |
| Total Current Liabilities | $35.562bn |
| Total Liabilities | $92.289bn |
Stock and Market Capitalization Comparison Q3 2020/2019
Raytheon Technologies’ share price as of the close of Q3 2020 i.e. 30th of September, stood at $47.73 per share. The company’s share price as of the close of Q3 2019 i.e. 30th of September, stood at $72.92 per share. The share price comparison does not bode well for Raytheon Technologies moving forward. The share price in one year has dropped by 34.5%, the drop is almost certainly a reflection of the global economic slow down, a slow down that has hit aviation incredibly hard. The market for aviation products and after services has plummeted and Raytheon’s share price is simply a reflection of a wider trend in aviation more broadly. The market capitalization has dropped in parallel with the share price, standing at $86.38bn in Q3 2020 compared to $113.87bn for the same period in 2019 a decline in company value of 24.1%. The downward trend is likely to continue into Q4 as governments across European and the American markets continue to restrict commercial flight. The only growth has been in the military sector, growth which is examined later in this document.
Orders and Booking Report for Q3 2020
The orders and bookings displayed in Raytheon’s third quarterly report for 2020 state a total backlog of $152.3 billion. The term ‘backlog’ refers to orders currently being executed but not yet completed and as such have not yet paid for totally. The presence of a large backlog typically indicates a healthy company with continual new orders, while a small backlog indicates a company with less orders than would be required to fully occupy the company. The backlog was divided into
$82.1 billion from commercial clients in the civilian aviation sector and $70.2 billion from the defence sector. The company received a series of new orders in Q3 2020 to add to this present backlog. The orders were placed with RIS, RMD and Pratt & Whitney. Collins Aerospace received no named contracts according to Raytheon’s report. The first reported contracts on the slide are those pertaining to Raytheon’s Intelligence & Space division, the details of which are classified by the company. The orders reported from Pratt & Whitney, shown in cost on the slide concerned the provision of F-135-PW100 & 600 engines and aftermarket services. The specifics of the bookings are not stated but since the F-135 series of engines powers the F-22 and F-35 Lightning II jet fighters, it is likely the bookings were for the USAF. The F-35 is shipped to 10 other nations so the company has also likely experienced international orders as well as domestic ones. The third specified order is a $186 million order to be fulfilled by Raytheon’s Missile Defence sector, for the AN/TPY-2 ballistic missile radar. Raytheon’s RIS Department also performed operations and maintenance contracts to maintain a USAF Launch and Test Range facility.
Raytheon Component Performance Q3 2020
The performance graph demonstrated on the right reflects the performance of each component. The performance is judged on operating profit. Collins Aerospace achieved a profit of $73 million, RIS achieved a profit of $348 million while RMD accrued a profit of $453 million. Pratt & Whitney are the poorest performers instead recording a loss of $43 million for Q3.
Pratt & Whitney 2020 Q3 Performance in Detail
The performance of Pratt and Whitney in Q3 2020’s status as the weakest link in the chain can be seen in their figures demonstrated on this slide. The sales for 2020 accounted for $3.4 billion in revenue. The profits taken out of that $3.4 billion was $615 million. The return on sales i.e. profit margins on 2020’s Pratt & Witney sales stands at 17.6%. The return on sales percentage is up from 2019’s 9.8% margin which resulted from $5.2 billion in sales providing a return of $520 million.
On the face of it it would then appear that Pratt & Whitney improved its position and would have been a greater return than that achieved by Collins Aerospace at 12.3% in 2020. The perception of Pratt & Whitney performing well is false. The adjusted figures presented for Q3 by Raytheon show that Pratt & Whitney’s profit margin was likely 1.1%. The result would see Pratt & Whitney return a mere $43 million on an adjusted sales revenue of $3.7 billion. The resultant facts would show Pratt & Whitney in a dire situation
2019 saw Pratt & Whitney achieve a profit margin of 9.8% in adjusted and reported. The exact correlation is indicative of a far more stable environment for the company. 2020’s poorly matched adjusted to reported ratio demonstrates that 2020 is an unusually poor year for the firm. The examination of Q1 – Q3 for Pratt & Whitney shows a three quarter 2.5% profit margin, making Q3’s 1.1% only 1.4% below the average for the tri-quarterly period.
The uniquely poor performance of the company in 2020 has been blamed, in Raytheon’s report, on the COVID triggered economic crisis. Pratt & Whitney’s place as a solely jet engine manufacturer has left it vulnerable for an aviation industry downturn. The commercial arm is the stronger element of the company providing 25% of the world’s passenger fleet. The company’s aftermarket services are also no longer in demand as they focused on the cleaning of engine parts. The cleaning of engines is not required if those engines are not used. The figures represent the consequences of being so commercially exposed in a single sector. The sale of original products was down by 30% while the aftermarket sector was down 51%. The only segment to increase was their military division increasing by 11%.
Collins Aerospace 2020 Q3 Performance in Detail
Collins Aerospace performs as the second weakest sector of Raytheon Technologies. The breakdown of the figures presents again a picture of a company for whom 2020 has been exceptionally poor. The reported figures, presented on the chart to the side sees Collins Aerospace report sales of $4.2 billion and operating profits of $526 million. The reported figures would lead to a profit margin for 2020 of 12.3%. The reported figures for 2019 show sales of $6.4 billion with an operating profit of $1.2 billion, granting a healthy19.4% profit margin.
Unfortunately the reported figures for 2020 are not reflected in reality. The adjusted figures, show reported 2020 sales of $4.2 billion again, the operating profits however, decline to $73 million, reducing the profit margin to 1.7%. The adjusted results for 2019 had a profit margin of 19.8% on sales of 6.4 billion. The conclusion is that 2020 has brought low a company with significant prior success.
According to the figures for the whole of Q1 – Q3 2020 for Collins Aerospace, $15 billion in sales was recorded achieving $1.3 billion in profits. The profit margin from these activities was 9.2% for 2020 so far this year. Q3’s languishing 1.7% profit margin has seen a rapid decline in the position of the company from the beginning of Q3 i.e. 1st of July. The period Q1 – Q3 as a whole then, sees profit margins down 10.1% with 2019’s margins standing at 19.3% for trading between Q1 and Q3.
Collins Aerospace has been performing better than its fellow acquisition, Pratt & Whitney from Q1 – Q2. The period Q1 – Q2 saw the company achieve a consistent adjusted profit margin of 9.2% in comparison to 2.5% from Pratt & Whitney. The results from Q3 however, put the company on an even footing with Pratt & Whitney with their 1.7% profit margin to Pratt & Witney’s 1.1% margin. Q3 therefore appears to have been particularly poor. The company has been hit considerably by COVID with a 44% decrease in the provision of machines market and a 52% decrease in the commercial aftermarket. The military sector again, is the only sector increasing its orders with its engagement with the company being up 8%.
Raytheon Core Companies: RIS & RMD 2020 Q3 Performance in Detail
Raytheon Intelligence & Space (RIS) and Raytheon Missile & Defence (RMD) are Raytheon Technologies core components. The reporting on the two companies is handicapped by a lack of information. The creation of Raytheon Technologies out of a merger this year, has meant that only a 2020 performance report is available with no 2019 report to create a comparison.
The companies also do not present a difference between reported or adjusted sales, profits and return on sales figures. RIS presented sales of $3.6 billion with operating profits of $348 million presenting a profit margin of 9.5%. RIS and its RMD twin are the two best performing components which together keep Raytheon Technologies financially healthy. The 9.5% profit margin on RIS operations is in far excess of the 1.1% and 1.7% for Pratt & Whitney and Collins respectively. The success of the two segments in contrast to its acquired businesses is likely to be due to Raytheon’s companies focus exclusively on defence contracts. The companies are therefore shielded from the negative fluctuations hitting commercial aviation.
The profit margin for the whole of the period Q1 – Q3 2020 also showed RMD & RIS’ role in maintaining the health of Raytheon Technologies. The profit margins for Q1 – Q3 stood at 11.5% for RMD and 11.9% for RIS, greater than Collins’ 9.2% margin while Pratt & Whitney’s margin stood at 2.5%. The two Raytheon companies are close to Collins but Pratt & Whitney are clear far behind. The comparison demonstrates an environment whereby Pratt and Whitney are exceptionally vulnerable while Collins is closer to already existing trends. The dual Raytheon owned and created companies on the other hand appear to be carrying both Pratt & Whitney and Collins. The financial health of RIS and RMD will be sustainable as long as military demand remains high. The retention of military demand will enable RIS and RMD to continue carrying Raytheon Technologies through the current economic downturn likely to continue beyond the next financial year.
Report Analysis Summary
Raytheon Technologies is managing to keep its head above water in an exceptionally challenging environment. The company’s difficulties of late owed to its vulnerabilities in being an aviation firm alone. The company has not diversified into naval or land and this will cost the company in the near to mid term. The lack of protection from the ebbs and flows of the aerospace sector, combined with continuing government lockdown measures amid a package of COVID related restrictions will contribute to a continued attack on Raytheon Technologies financial health. The continued attack is the product of a seriously deteriorating civilian aviation sector as the result of the twin engines of declining for leisure travel and plummeting for business travel. The effect will continue to be particularly acute for Pratt & Whitney whose engines are now being produced for planes which will likely not be bought. The aftermarket sales services offered by Pratt & Whitney are also not required if planes using their parts are not being flown.
Collins Aerospace will be effected by the same downward trend seen for the whole of 2020. The trend will not however, be as aggressive as that for Pratt & Whitney as shown by the similarity in their profit margins this year with the profit margins of RIS and RMD. The trajectory of Collins Aerospace is not exceptional and as such will likely decline in a slower manner linked to the trajectory of RIS and RMD. Collins Aerospace will only see its decline exacerbated over the decline of RIS and RMD by its significant investment in the civilian sector. The wholly military nature of RIS and RMD will shield them from the civilian sector’s woes whilst encasing it in the stable military aviation sector, the only sector showing any order growth for Raytheon. The company’s CEO, Greg Hayes is right to begin cutting costs whilst expecting the worst in coming months and perhaps maybe years. Greg Hayes accurate reading of the situation and an understanding of the coming challenges provides a kernal of confidence in a difficult situation.