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Acquisitions, Dispositions, Goodwill and Intangible Assets | 3 Months Ended
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Mar. 31, 2021
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 Intangible Assets Business Acquisitions. As described 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 New York Stock Exchange (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) | 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. Allocation of Consideration Transferred to Net Assets Acquired. We accounted 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. During the first quarter of 2021, based on the finalization of our valuation and internal reviews, we completed the purchase price allocation which resulted in a net increase to goodwill of $61 million during the quarter. The final purchase price allocation, net of cash acquired, for the acquisition was as follows:
(dollars in millions) |
Cash and cash equivalents | $ | 3,208 |
Accounts receivable | 1,997 |
Inventory | 705 |
Contract assets | 6,023 |
Other assets, current | 940 |
Fixed assets | 4,745 |
Operating lease right-of-use assets | 950 |
Intangible assets: | 19,130 |
Customer relationships | 12,900 |
Tradenames/trademarks | 5,430 |
Developed technology | 800 |
Other assets | 1,218 |
Total identifiable assets acquired | 38,916 |
Accounts payable | 1,477 |
Accrued employee compensation | 1,492 |
Other accrued liabilities | 1,921 |
Contract liabilities | 3,002 |
Long-term debt, including current portion | 4,700 |
Operating lease liabilities, non-current portion | 738 |
Future pension and postretirement benefit obligation | 11,607 |
Other long-term liabilities | 2,368 |
Total liabilities acquired | 27,305 |
Total identifiable net assets | 11,611 |
Goodwill | 21,589 |
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 an increase to future pension and postretirement benefit obligations of $3.6 billion, primarily related 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 the closing date. The assessment did not note any material contingencies related to existing legal or government action. The fair values of the customer relationship intangible assets were determined by using a discounted cash flow valuation method, which is a form of the 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, which require significant management judgement, 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 significant 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 forecasted revenue growth rate projections and a discount rate, respectively, that requires significant 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) | Fair Value | Useful 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 $222 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 $21.6 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 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 quarters ended March 31, 2021 and 2020, we recorded $17 million and $29 million, respectively, of transaction and integration costs, which are included 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 operations basis, in order to more accurately represent the structure of Raytheon Technologies after completion of the Separation Transactions, the Distributions and the Raytheon Merger.
|  |  |  | Quarter Ended March 31,
(dollars in millions, except per share amounts) |  |  |  |  |  |  | 2020
Net sales |  |  |  |  |  |  | $ | 18,451 |
Income from continuing operations attributable to common shareowners |  |  |  |  |  |  | 1,239 |
Basic earnings per share of common stock from continuing operations |  |  |  |  |  |  | $ | 0.82 |
Diluted earnings per share of common stock from continuing operations |  |  |  |  |  |  | 0.82 |
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.
|  |  |  | Quarter Ended March 31,
(dollars in millions) |  |  |  |  |  |  | 2020
Amortization of acquired Raytheon Company intangible assets, net (1) |  |  |  |  |  |  | $ | (270) |
Amortization of fixed asset fair value adjustment (2) |  |  |  |  |  |  | (9) |
Utilization of contractual customer obligation (3) |  |  |  |  |  |  | 8 |
Deferred revenue fair value adjustment (4) |  |  |  |  |  |  | (4) |
Adjustment to non-service pension (income) expense (5) |  |  |  |  |  |  | 239 |
RTC/Raytheon fees for advisory, legal, accounting services (6) |  |  |  |  |  |  | 35 |
Adjustment to interest expense related to the Raytheon Merger, net (7) |  |  |  |  |  |  | 9 |
Elimination of deferred commission amortization (8) |  |  |  |  |  |  | 5 |
|  |  |  |  |  |  | $ | 13 |
(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 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. The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings related to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition had been consummated on January 1, 2019, nor are they indicative of future results. 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, Carrier and Otis 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 October 2020, we entered into a definitive agreement to sell our Forcepoint business, which we completed on January 8, 2021, for proceeds of $1.0 billion, net of cash transferred. At December 31, 2020, the related assets of approximately $1.9 billion and liabilities of approximately $855 million were accounted for as held for sale at fair value less cost to sell; however, Forcepoint did not qualify for presentation as discontinued operations. These held for sale assets and liabilities are presented in Other assets, current and Other accrued liabilities, respectively, on our December 31, 2020 Condensed Consolidated Balance Sheet. Assets held for sale included $1.4 billion of goodwill and intangible assets. A further breakout of major classes of assets and liabilities has not been provided as the assets and liabilities held for sale are not material. We did not recognize a pre-tax gain or loss within the Condensed Consolidated Statement of Operations related to the sale of Forcepoint. The results of Forcepoint were included in Eliminations and other in our segment results. Goodwill. Changes in our goodwill balances for the quarter ended March 31, 2021 were as follows:
(dollars in millions) | Balance as of January 1, 2021 |  | Acquisitions and Divestitures |  |  |  | Foreign Currency Translation and Other |  | Balance as of March 31, 2021
Collins Aerospace Systems | $ | 31,571 |  |  | $ | — |  |  |  |  | $ | (98) |  |  | $ | 31,473 |
Pratt & Whitney | 1,563 |  |  | — |  |  |  |  | — |  |  | 1,563 |
Raytheon Intelligence & Space(1) | 9,522 |  |  | 30 |  |  |  |  | — |  |  | 9,552 |
Raytheon Missiles & Defense(1) | 11,608 |  |  | 52 |  |  |  |  | — |  |  | 11,660 |
Total Segments | 54,264 |  |  | 82 |  |  |  |  | (98) |  |  | 54,248 |
Eliminations and other | 21 |  |  | — |  |  |  |  | (4) |  |  | 17 |
Total | $ | 54,285 |  |  | $ | 82 |  |  |  |  | $ | (102) |  |  | $ | 54,265 |
(1) In connection with the previously announced January 1, 2021 reorganization of RIS and RMD, goodwill of $282 million was allocated from RMD to RIS on a relative fair value basis and is reflected in the revised balances at January 1, 2021. The Company reviews goodwill for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. In the first quarter of 2020, the company considered the deterioration in general economic and market conditions due to the COVID-19 pandemic to be a triggering event requiring us to reassess our goodwill and intangibles valuations as well as significant assumptions of future income from our underlying assets and potential changes in our liabilities, which resulted in no impairment to our goodwill at that time. We did not have a triggering event in the first quarter of 2021. The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining the fair value of goodwill, including long-term revenue growth projections, profitability, discount rates, including changes to U.S. treasury rates and equity risk premiums, recent market valuations from transactions by comparable companies, volatility in the Company’s market capitalization, and general industry, market and macro-economic conditions. It is possible that future changes in such circumstances, including significant future negative developments in the COVID-19 pandemic, or future changes in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, including the expected long-term recovery of airline travel to pre-COVID-19 levels, would require the Company to record a non-cash impairment charge. Intangible Assets. Identifiable intangible assets are comprised of the following:
| March 31, 2021 |  | December 31, 2020
(dollars in millions) | Gross Amount |  | Accumulated Amortization |  | Gross Amount |  | Accumulated Amortization
Amortized: |  |  |  |  |  |  |
Patents and trademarks | $ | 48 |  |  | $ | (36) |  |  | $ | 48 |  |  | $ | (35) |
Collaboration assets | 5,047 |  |  | (1,042) |  |  | 5,021 |  |  | (1,024) |
Exclusivity assets | 2,581 |  |  | (305) |  |  | 2,541 |  |  | (295) |
Developed technology and other | 928 |  |  | (364) |  |  | 906 |  |  | (316) |
Customer relationships | 30,237 |  |  | (5,804) |  |  | 30,241 |  |  | (5,262) |
| $ | 38,841 |  |  | $ | (7,551) |  |  | $ | 38,757 |  |  | $ | (6,932) |
Unamortized: |  |  |  |  |  |  |
Trademarks and other | 8,709 |  |  | — |  |  | 8,714 |  |  | — |
Total | $ | 47,550 |  |  | $ | (7,551) |  |  | $ | 47,471 |  |  | $ | (6,932) |
Intangible assets are tested for impairment when events occur that indicate that the net book value may not be recovered from 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 unamortized intangible assets in the first quarter of 2020 and recorded a charge of $40 million related to the impairment of a Collins Aerospace indefinite-lived tradename intangible assets. 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 ended March 31, 2021 and 2020 were $596 million and $307 million, respectively. The following is the expected amortization of intangible assets for the years 2021 through 2026.
(dollars in millions) |  | Remaining 2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |  | 2026
Amortization expense |  | $ | 1,862 |  |  | $ | 1,953 |  |  | $ | 2,078 |  |  | $ | 2,139 |  |  | $ | 2,034 |  |  | $ | 1,974 |

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