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Acquisitions, Dispositions, Goodwill and Other Intangible Assets | 9 Months Ended
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Sep. 30, 2020
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract] |
Acquisitions, Dispositions, Goodwill and Other Intangible Assets [Text Block] | Acquisitions, Dispositions, Goodwill and Other Intangible Assets Business Acquisitions. As noted above, on April 3, 2020, pursuant to the Agreement and Plan of Merger dated June 9, 2019, as amended (the Raytheon Merger Agreement) UTC and Raytheon Company completed their previously announced all-stock merger of equals, following the completion by UTC of the Separation Transactions and Distributions. Raytheon Company (previously NYSE:RTN) shares ceased trading prior to the market open on April 3, 2020, and each share of Raytheon common stock was converted in the merger into the right to receive 2.3348 shares of UTC common stock previously traded on the NYSE under the ticker symbol “UTX.” Upon closing of the Raytheon Merger, UTC’s name was changed to “Raytheon Technologies Corporation,” and its shares of common stock began trading as of April 3, 2020 on the NYSE under the ticker symbol “RTX.” Total consideration is calculated as follows:
(dollars, in millions, except per share amounts and exchange ratio) | Amount
Fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards | $ | 33,067 |
Fair value attributable to pre-merger service for replacement equity awards | 99 |
Total merger consideration | $ | 33,166 |
The fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards is calculated as follows:
(dollars and shares, in millions, except per share amounts and exchange ratio) | Amount
Number of Raytheon Company common shares outstanding as of April 3, 2020 | 277.3
Number of Raytheon Company stock awards vested as a result of the Raytheon Merger (1) | 0.4
Total outstanding shares of Raytheon Company common stock and equity awards entitled to merger consideration | 277.7
Exchange ratio (2) | 2.3348
Shares of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards | 648.4
Price per share of RTC common stock (3) | $ | 51.00 |
Fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards | $ | 33,067 |
(1) Represents Raytheon Company stock awards that vested as a result of the Raytheon Merger, which is considered a “change in control” for purposes of the Raytheon 2010 Stock Plan. Certain Raytheon Company restricted stock awards and Raytheon Company restricted stock unit (RSU) awards, issued under the Raytheon 2010 Stock Plan vested on an accelerated basis as a result of the Raytheon Merger. Such vested awards were converted into the right to receive RTC common stock determined as the product of (1) the number of vested awards, and (2) the exchange ratio. (2) The exchange ratio is equal to 2.3348 shares of UTC common stock for each share of Raytheon Company common stock in accordance with the Raytheon Merger Agreement. (3) The price per share of RTC common stock is based on the RTC opening stock price as of April 3, 2020. Preliminary Allocation of Consideration Transferred to Net Assets Acquired. We are accounting for the Raytheon Merger under the acquisition method and are required to measure identifiable assets acquired and liabilities assumed of the acquiree (Raytheon Company) at the fair values on the closing date. The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Raytheon Merger. As of September 30, 2020, the majority of the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed have been reviewed and finalized; however, our assessment of certain contingencies including loss contracts and environmental liabilities, pension and postretirement benefit obligations and taxes remain open for completion of the related valuation analyses. We expect to finalize the purchase price allocation process in the first quarter of 2021 when we finalize our valuations and reviews. Any potential adjustments made could be material in relation to the preliminary values presented below.
(dollars, in millions) |
Cash and cash equivalents | $ | 3,208 |
Accounts receivable | 1,997 |
Inventory | 705 |
Contract assets | 6,023 |
Other assets, current | 930 |
Future income tax benefits | 14 |
Fixed assets | 4,732 |
Intangible assets: | 19,130 |
Customer relationships | 12,900 |
Tradenames/trademarks | 5,430 |
Developed technology | 800 |
Other assets | 2,139 |
Total identifiable assets acquired | 38,878 |
Accounts payable | 1,455 |
Accrued liabilities | 3,237 |
Contract liabilities | 2,991 |
Long-term debt, including current portion | 4,700 |
Future pension and postretirement benefit obligation | 10,641 |
Other long-term liabilities | 3,455 |
Total liabilities acquired | 26,479 |
Total identifiable net assets | 12,399 |
Goodwill | 20,801 |
Redeemable noncontrolling interest | (34) |
Total consideration transferred | $ | 33,166 |
Fair value adjustments to Raytheon Company’s identified assets and liabilities included an increase in fixed assets of $1.1 billion and a preliminarily estimated increase to future pension and postretirement benefit obligations of $2.6 billion. The preliminarily estimated increase in future pension and postretirement benefit obligations primarily relates to remeasurement of the liability based on market conditions on the Raytheon Merger closing date. For further information, see “Note 10: Employee Benefit Plans.” In determining the fair value of identifiable assets acquired and liabilities assumed, a review was conducted for any significant contingent assets or liabilities existing as of such closing date. The preliminary assessment did not note any significant contingencies related to existing legal or government action. The fair values of the customer relationship intangible assets were determined by using an income approach. Under this approach, the estimated future cash flows attributable to the asset are adjusted to exclude the future cash flows that can be attributed to supporting assets, such as trade names or fixed assets. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant future cash flows included forecasted revenue growth rates, remaining developmental effort, operational performance including company specific synergies, program life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows are probability-adjusted to reflect the uncertainties associated with the underlying assumptions, including cancellation rates related to backlog, government demand for sole-source and recompete contracts and win rates for recompete contracts, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future cash flows are then discounted to present value, using an appropriate discount rate that requires judgment by management. The customer relationship intangible assets are being amortized based on the pattern of economic benefits we expect to realize over the estimated economic life of the underlying programs. The fair value of the tradename intangible assets were determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the tradename and discounted to present value, using an appropriate discount rate that requires judgment by management. The tradename intangible assets have been determined to have an indefinite life. The developed technology intangible assets are being amortized based on the pattern of economic benefits. The intangible assets included above consist of the following:
(dollars, in millions) | Estimated Fair Value | Estimated Life
Acquired customer relationships | $ | 12,900 |  | 25 years
Acquired tradenames | 5,430 |  | Indefinite
Acquired developed technology | 800 |  | 5 to 7 years
Total identifiable intangible assets | $ | 19,130 |  |
We also identified customer contractual obligations on loss making programs and recorded liabilities of $218 million related to these programs based on the difference between the actual expected operating loss and a normalized operating profit. These liabilities will be liquidated based on the expected pattern of expenses incurred on these contracts. We recorded $20.8 billion of goodwill as a result of the Raytheon Merger which primarily relates to expected synergies from combining operations and the value of the existing workforce. The Raytheon Merger creates a premier systems provider with advanced technologies to address rapidly growing segments within aerospace and defense. The Raytheon Merger offers complementary technologies and creates additional growth opportunities while delivering benefits to our shareowners, customers and employees. With our technological and research and development capabilities, Raytheon Technologies will deliver innovative and cost-effective solutions aligned with the highest customer priorities. The goodwill generated as a result of the Raytheon Merger is nondeductible for tax purposes. Merger-Related Costs. Merger-related costs have been expensed as incurred. In the quarter and nine months ended September 30, 2020, approximately $26 million and $125 million, respectively, of transaction and integration costs have been incurred which excludes $20 million of transactions costs related to the divestitures required for regulatory approval discussed further in the “Dispositions” section below. These costs were recorded in Selling, general and administrative expenses within the Condensed Consolidated Statement of Operations. Supplemental Pro-Forma Data. Raytheon Company’s results of operations have been included in RTC’s financial statements for the period subsequent to the completion of the Raytheon Merger on April 3, 2020. The following unaudited supplemental pro-forma data presents consolidated information as if the Raytheon Merger had been completed on January 1, 2019. The pro-forma results were calculated by combining the results of Raytheon Technologies with the stand-alone results of Raytheon Company for the pre-acquisition periods, which were adjusted to account for certain costs that would have been incurred during this pre-acquisition period. The results below reflect Raytheon Technologies on a continuing basis, in order to more accurately represent the structure of Raytheon Technologies after completion of the Separation Transactions and the Raytheon Merger.
| Quarter Ended September 30, |  |  |  | Nine Months Ended September 30, |  |
(dollars in millions, except per share amounts) | 2020 |  | 2019 |  | 2020 |  | 2019
Net sales | $ | 14,747 |  |  | $ | 18,752 |  |  | $ | 47,668 |  |  | $ | 54,790 |
Income (loss) from continuing operations attributable to common shareowners | 174 |  |  | 1,817 |  |  | (2,328) |  |  | 5,065 |
Basic earnings (loss) per share of common stock from continuing operations | $ | 0.12 |  |  | $ | 1.20 |  |  | $ | (1.54) |  |  | $ | 3.36 |
Diluted earnings (loss) per share of common stock from continuing operations | 0.11 |  |  | 1.20 |  |  | (1.54) |  |  | 3.34 |
The unaudited supplemental pro-forma data above includes the following significant adjustments made to account for certain costs which would have been incurred if the acquisition had been completed on January 1, 2019, as adjusted for the applicable tax impact. As the merger was completed on April 3, 2020, the pro-forma adjustments in the table below only include the required adjustments through April 3, 2020.
| Quarter Ended September 30, |  |  |  | Nine Months Ended September 30, |  |
(dollars in millions) | 2020 |  | 2019 |  | 2020 |  | 2019
Amortization of acquired Raytheon Company intangible assets, net (1) | $ | — |  |  | $ | (261) |  |  | $ | (270) |  |  | $ | (787) |
Amortization of fixed asset fair value adjustment (2) | — |  |  | (9) |  |  | (9) |  |  | (28) |
Utilization of contractual customer obligation (3) | — |  |  | 15 |  |  | 8 |  |  | 44 |
Deferred revenue fair value adjustment (4) | — |  |  | (8) |  |  | (4) |  |  | (25) |
Adjustment to non-service pension (income) expense (5) | — |  |  | 208 |  |  | 239 |  |  | 623 |
RTC/Raytheon fees for advisory, legal, accounting services (6) | 23 |  |  | 38 |  |  | 119 |  |  | (119) |
Adjustment to interest expense related to the Raytheon Merger, net (7) | — |  |  | 9 |  |  | 9 |  |  | 27 |
Elimination of deferred commission amortization (8) | — |  |  | 5 |  |  | 5 |  |  | 15 |
| $ | 23 |  |  | $ | (3) |  |  | $ | 97 |  |  | $ | (250) |
(1) Reflects the additional amortization of the acquired Raytheon Company’s intangible assets recognized at fair value in purchase accounting and eliminates the historical Raytheon Company intangible asset amortization expense. (2) Reflects the amortization of the fixed asset fair value adjustment as of the acquisition date. (3) Reflects the additional amortization of liabilities recognized for certain acquired loss making contracts as of the acquisition date. (4) Reflects the difference between prepayments related to extended arrangements and the preliminary fair value of the assumed performance obligations as they are satisfied. (5) Represents the elimination of unamortized prior service costs and actuarial losses, as a result of fair value purchase accounting. (6) Reflects the elimination of transaction-related fees incurred by RTC and Raytheon Company in connection with the Raytheon Merger and assumes all of the fees were incurred during the first quarter of 2019. (7) Reflects the amortization of the fair market value adjustment related to Raytheon Company. (8) Reflects the elimination of amortization recognized on deferred commissions that are eliminated in purchase accounting. Dispositions. As discussed further in “Note 3: Discontinued Operations,” on April 2, 2020, Carrier and Otis entered into a Separation and Distribution Agreement with UTC (since renamed Raytheon Technologies Corporation), pursuant to which, among other things, UTC agreed to separate into three independent, publicly traded companies – UTC, Otis and Carrier and distribute all of the outstanding common stock of Carrier and Otis to UTC shareowners who held shares of UTC common stock as of the close of business on March 19, 2020. UTC distributed 866,158,910 and 433,079,455 shares of common stock of Carrier and Otis, respectively in the Distributions. As a result of the Distributions, Carrier and Otis are now independent publicly traded companies. In May 2020, in order to meet the requirements for regulatory approval of the Raytheon Merger, we completed the sale of our airborne tactical radios business for $231 million in cash, net of transaction-related costs. The business was part of our RIS segment. As the transaction occurred subsequent to the Raytheon Merger, the gain of $199 million was not recorded in the Condensed Consolidated Statement of Operations, but rather was recorded as an adjustment to the fair value of net assets acquired in the preliminary allocation of consideration transferred to net assets acquired in the Raytheon Merger, as discussed further above. Income before taxes related to the disposed business for the period from the closing of the Raytheon Merger to disposal date was not material. In the third quarter of 2020, in accordance with conditions imposed for regulatory approval of the Raytheon Merger, we completed the sale of our Collins Aerospace military Global Positioning System (GPS) and space-based precision optics businesses for $2.3 billion in cash, resulting in an aggregate pre-tax gain, net of transaction costs, of $580 million ($253 million after tax), of which $608 million was included in Other income (expense), net partially offset by $20 million of aggregate transaction costs included in Selling, general and administrative costs and an $8 million expense included in Non-service pension (income) expense within our Condensed Consolidated Statement of Operations. Income before taxes for 2020, through the date of sale, and for full year 2019 for these businesses were $94 million and $153 million, respectively. Goodwill. Changes in our goodwill balances for the nine months ended September 30, 2020 were as follows:
(dollars in millions) | Balance as of January 1, 2020 |  | Acquisitions and Divestitures |  | Impairment Losses |  | Foreign Currency Translation and Other |  | Balance as of September 30, 2020
Collins Aerospace Systems(1) | $ | 35,025 |  |  | $ | (890) |  |  | $ | (3,183) |  |  | $ | 190 |  |  | $ | 31,142 |
Pratt & Whitney | 1,563 |  |  | — |  |  | — |  |  | — |  |  | 1,563 |
Raytheon Intelligence & Space | — |  |  | 8,781 |  |  | — |  |  | 2 |  |  | 8,783 |
Raytheon Missiles & Defense | — |  |  | 11,540 |  |  | — |  |  | 2 |  |  | 11,542 |
Total Segments | 36,588 |  |  | 19,431 |  |  | (3,183) |  |  | 194 |  |  | 53,030 |
Eliminations and other | 21 |  |  | 472 |  |  | — |  |  | 1 |  |  | 494 |
Total | $ | 36,609 |  |  | $ | 19,903 |  |  | $ | (3,183) |  |  | $ | 195 |  |  | $ | 53,524 |
(1) The change in Acquisitions and Divestitures is primarily driven by the sales of the Collins Aerospace businesses described above. The Company reviews goodwill for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. The Company has been monitoring the deterioration in general economic and market conditions primarily due to the COVID-19 pandemic. Beginning in the second quarter of 2020, we observed several airline customer bankruptcies, delays and cancellations of aircraft purchases by airlines, fleet retirements and repositioning of OEM production schedules. These factors contributed to a deterioration of our expectations regarding the timing of a return to pre-COVID-19 commercial flight activity, which further reduced our expectations regarding future sales and cash flows. We considered these factors to be a triggering event in the second quarter of 2020, requiring impairment evaluation of goodwill, intangible assets and other assets in our commercial aerospace businesses, Collins Aerospace and Pratt & Whitney. Impairment evaluations at Collins Aerospace and Pratt & Whitney resulted in several other charges as further discussed in “Note 1: Basis of Presentation and Summary of Accounting Principles.” These charges were primarily due to declines in expected future commercial air traffic, airline bankruptcies, or other impacts such as accelerated fleet retirements, announced program delays and expected changes to contract terms. We also evaluated amortizable intangible assets and identified no impairments. In the second quarter of 2020, we evaluated the Collins Aerospace and Pratt & Whitney reporting units for goodwill impairment and determined that the carrying values of two of the six Collins Aerospace reporting units exceeded the sum of discounted future cash flows, resulting in goodwill impairments of $3.2 billion. Collins Aerospace discounted future cash flow estimates were developed for three scenarios: a base case, a downside case, and an upside case. These scenarios included assumptions regarding future airline flight activity, out of warranty hours on original equipment, expected repairs, upgrades and replacements, future OEM manufacturing schedules and related environmental assumptions, including individuals’ desire to return to normal travel, business needs to travel, and potential cures or vaccines to prevent or reduce the effects of COVID-19. These estimates require a significant amount of judgment and are subject to change based upon factors outside our control. We weighted the three scenarios as follows: 50% for the base case, 40% for the downside case, and 10% for the upside case, and used these weightings, as we believe they reflect the risks and opportunities relative to our current estimates. Goodwill impairment was not indicated for any of the other reporting units evaluated for impairment in any of these scenarios. For these other reporting units, the reporting unit that was closest to impairment was a reporting unit at Collins Aerospace, with a fair value in excess of book value, including goodwill, of $1.4 billion or 19%. Material changes in these estimates could occur and result in additional impairments in future periods. If the discount rate used for the impairment analysis increased or decreased by 25 basis points, the impairments of the two Collins Aerospace reporting units would have increased by $1.2 billion or decreased by $1.3 billion, respectively. If the cash flows were decreased or increased by 10% the impairments would have increased by $2.5 billion or decreased by $2.1 billion, respectively. The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term revenue growth projections, profitability, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company’s market capitalization, and general industry, market and macro-economic conditions. In the third quarter of 2020, we updated our forecast assumptions for Collins Aerospace and determined that the resulting third quarter forecasts were in line with our second quarter forecasts. As such, we determined we did not have an additional goodwill impairment triggering event. It is possible that future changes in such circumstances, including a more prolonged and/or severe COVID-19 pandemic than originally anticipated, or future changes in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, would require the Company to record a non-cash impairment charge. Intangible Assets. Identifiable intangible assets are comprised of the following:
| September 30, 2020 |  |  |  | December 31, 2019 |  |
(dollars in millions) | Gross Amount |  | Accumulated Amortization |  | Gross Amount |  | Accumulated Amortization
Amortized: |  |  |  |  |  |  |
Patents and trademarks | $ | 47 |  |  | $ | (34) |  |  | $ | 47 |  |  | $ | (34) |
Collaboration assets | 4,982 |  |  | (1,001) |  |  | 4,862 |  |  | (920) |
Exclusivity assets | 2,476 |  |  | (281) |  |  | 2,386 |  |  | (275) |
Developed technology and other | 1,691 |  |  | (339) |  |  | 890 |  |  | (217) |
Customer relationships | 30,007 |  |  | (4,694) |  |  | 17,750 |  |  | (3,392) |
| $ | 39,203 |  |  | $ | (6,349) |  |  | $ | 25,935 |  |  | $ | (4,838) |
Unamortized: |  |  |  |  |  |  |
Trademarks and other | 8,710 |  |  | — |  |  | 3,376 |  |  | — |
Total | $ | 47,913 |  |  | $ | (6,349) |  |  | $ | 29,311 |  |  | $ | (4,838) |
Exclusivity assets represent payments made to our customers to secure certain contractual rights that are capitalized when distinct rights are obtained and sufficient incremental cash flows to support the recoverability of the assets have been established. Otherwise, the applicable portion of the payments is recorded as a reduction in revenue. Intangible assets are tested for impairment when events occur that indicate that the net book value will not be recovered over future cash flows. Given the deterioration in general economic and market conditions primarily due to the COVID-19 pandemic, we performed an assessment of our amortizable intangible assets and recorded $40 million and $17 million in the first and second quarters of 2020, respectively, related to the impairment of an indefinite-lived tradename intangible assets at Collins Aerospace, with no additional impairment of intangible assets identified in the quarter ended September 30, 2020. With the exception of this tradename, the intangible asset that was closest to impairment was another tradename at Collins Aerospace with a fair value in excess of book value of approximately $70 million, or 4%. We will continue to evaluate the impact on our customers and our business in future periods which may result in a different conclusion. Amortization of intangible assets for the quarters and nine months ended September 30, 2020 and 2019 were $599 million and $1,506 million and $318 million and $933 million, respectively. The following is the expected amortization of intangible assets for the years 2020 through 2025.
(dollars in millions) |  | Remaining 2020 |  | 2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025
Amortization expense |  | $ | 631 |  |  | $ | 2,523 |  |  | $ | 1,989 |  |  | $ | 2,101 |  |  | $ | 2,166 |  |  | $ | 2,030 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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