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Item 7. Management’s Discussion and Analysis

2023-02-07 compared with 2022-02-11 · 392 added, 384 removed, 612 unchanged (56% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to the reader in understanding our consolidated financial statements and notes thereto included in Item 8.

Financial Statements and Supplementary Data of this Form 10-K, the changes in certain key items in those financial statements between select periods and the primary factors that accounted for those changes.

In addition, we discuss certain accounting principles, policies and critical estimates that affect our financial statements.

Our discussion also contains some additional context regarding our business, including industry considerations and the business environment, as well as certain forward-looking statements related to future events and expectations.

This MD&A should be read in conjunction with the other sections of this Form 10-K, including Item 1A.

“Risk Factors.”

BUSINESS OVERVIEW

We are a global premier systems provider of high technology products and services to the aerospace and defense industries.

We operate in four principal business segments:

Collins Aerospace Systems (Collins Aerospace), Pratt & Whitney, Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD).

On April 3, 2020, United Technologies Corporation (UTC) (since renamed Raytheon Technologies Corporation) completed the separation of its business into three independent, publicly traded companies – UTC, Carrier Global Corporation (Carrier) and Otis Worldwide Corporation (Otis) (the Separation Transactions).

UTC distributed all of the outstanding shares of Carrier common stock and all of the outstanding shares of Otis common stock to UTC shareowners who held shares of UTC common stock as of the close of business on March 19, 2020 (the Distributions).

Immediately following the Separation Transactions and Distributions, on April 3, 2020, UTC and Raytheon Company completed their all-stock merger of equals transaction (the Raytheon Merger), pursuant to which Raytheon Company became a wholly-owned subsidiary of UTC and UTC was renamed Raytheon Technologies Corporation (RTC).

UTC was determined to be the accounting acquirer in the Raytheon Merger, and as a result the financial statements of Raytheon Technologies for year ended December 31, 2020 include Raytheon Company’s financial position and results of operations for the period subsequent to the completion of the Raytheon Merger on April 3, 2020.

The historical results of Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

Discontinued Operations” within Item 8 of this Form 10-K for additional information.

Unless the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” “Raytheon Technologies,” and “RTC” mean United Technologies Corporation and its subsidiaries when referring to periods prior to the Raytheon Merger and to the combined company, Raytheon Technologies Corporation, when referring to periods after the Raytheon Merger.

Unless the context otherwise requires, the terms “Raytheon Company,” or “Raytheon” mean Raytheon Company and its subsidiaries prior to the Raytheon Merger.

We operate in four principal business segmen ts:

Collins Aerospace (Collins), Pratt & Whitney, Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD).

The Company recently announced its intention to streamline the structure of its core businesses into three principal business segments:

Collins Aerospace, Pratt & Whitney and Raytheon.

The Company plans to determine the exact composition of each segment and implement the reorganization in the second half of 2023.

All segment information included in this Form 10-K is reflective of the existing four segments of Collins, Pratt & Whitney, RIS and RMD in accordance with the management structure in place as of December 31, 2022.

Unless the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” “Raytheon Technologies,” and “RTC” mean Raytheon Technologies Corporation and its subsidiaries.

Industry Considerations

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Our customers are in the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization.

Government legislation, policies and regulations, including regulations related to global warming, carbon footprint and fuel efficiency, can have a negative impact on our worldwide operations.

Government and industry-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, government imposed travel restrictions, and government procurement practices can impact our businesses.

Collins Aerospace and Pratt & Whitney serve both commercial and government aerospace customers.

Collins and Pratt & Whitney serve both commercial and government aerospace customers.

Revenue passenger miles (RPMs), available seat miles and the general economic health of airline carriers are key barometers for our commercial aerospace operations.

Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits.

Many of our aerospace operations’ customers are covered under long-term aftermarket service agreements at both Collins Aerospace and Pratt & Whitney, which are inclusive of both spare parts and services.

RIS, RMD, and the defense operations of Collins Aerospace and Pratt & Whitney are affected by U.S.

Department of Defense (DoD) budget and spending levels, changes in demand, changes in policy positions or priorities and the global political environment.

Business Transformation and Operational Excellence

We are leveraging the Raytheon Merger to undertake various strategic initiatives to transform the Company and increase our existing focus on operational excellence.

These initiatives include our new Customer Oriented Results Excellence (CORE) operating system, significant investments in digital technologies across our business to enhance our products and services, and structural cost reduction initiatives.

We are also continuing to develop advanced technologies, including through specific technology-focused business acquisitions.

Many of our aerospace customers are covered under long-term aftermarket service agreements at both Collins and Pratt & Whitney, which are inclusive of both spare parts and services.

RIS, RMD, and the defense operations of Collins and Pratt & Whitney are affected by U.S.

Department of Defense (DoD) budget and spending levels, changes in demand, changes in policy positions or priorities, the domestic and global political environment and the evolving nature of the global and national security threat environment.

In addition, our defense businesses engage in both direct commercial sales, which generally require U.S.

government licenses and approvals, as well as foreign military sales, which are government-to-government transactions initiated by, and carried out at the direction of, the U.S.

Changes in these budget and spending levels, policies, or priorities, which are subject to U.S.

domestic and foreign geopolitical risks and threats, may impact our defense businesses, including the timing of and delays in U.S.

government licenses and approvals for sales, the risk of sanctions or other restrictions.

Government legislation, policies and regulations can impact our business and operations.

Changes in environmental and climate change laws or regulations, including regulations on greenhouse gas emissions, carbon pricing, and energy taxes, could lead to new or additional investment in product designs and facility upgrades and could increase our operational and environmental compliance expenditures, including increased energy and raw materials costs and costs associated with manufacturing changes.

In addition, government and industry-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, government-imposed travel restrictions and limitations, and government procurement practices can impact our businesses.

Business Environment

Global economic and political conditions, changes in raw material and commodity prices and supply, labor availability and costs, inflation, interest rates, international and domestic tax law changes, foreign currency exchange rates, energy costs and

supply, levels of air travel, the financial condition of commercial airlines, and the impact from natural disasters and weather conditions create uncertainties that could impact our businesses.

Global Supply Chain and Labor Markets.

Global supply chain and labor markets are continuing to experience high levels of disruption, causing significant materials and parts shortages, including raw material, microelectronics and commodity shortages, as well as delivery delays, labor shortages, distribution problems and price increases.

Current geopolitical conditions, including sanctions and other trade restrictive activities and strained intercountry relations, are contributing to these issues.

We have had difficulties procuring necessary materials, including raw materials, components and other supplies, and services on a timely basis or at all.

We have also had difficulties hiring qualified personnel, particularly personnel with specialized engineering experience and security clearances.

Our suppliers and subcontractors have been impacted by the same issues, as well as ongoing pandemic-related issues, compounding the shortages for us because we rely on them, sometimes as sole-source providers.

In addition, as the ongoing recovery in commercial air travel continues, the anticipated increase in new aircraft deliveries and increased demand for our products and services will add to these supply chain and labor market challenges.

We work continuously to mitigate the effects of these supply chain and labor constraints through targeted activities and ongoing programs.

We work with our suppliers and subcontractors to assist in mitigation, arrange supply source alternatives, increase our inventory of available materials and parts, and regularly pursue cost reductions through a number of mechanisms.

We also continuously monitor labor market conditions and trends and work to mitigate constraints through talent acquisition, partnership, sourcing and recruiting arrangements, workforce succession planning, and initiatives to attract, retain and rehire former employees.

Coronavirus Disease 2019 (COVID-19) Pandemic.

The COVID-19 pandemic continues to negatively affect the global economy, our business and operations, supply chains, and the industries in which we operate.

For a discussion of the risk factors associated with the COVID-19 pandemic, refer to Item 1A.

Risk Factors within Part I of this Form 10-K.

As a result of all of these factors, we expect our future operating results, particularly those of our Collins Aerospace and Pratt & Whitney businesses, to continue to be negatively impacted when compared to pre-COVID-19 (2019) results.

Our RIS and RMD businesses, although experiencing some negative impacts, primarily from supply chain pressures and labor shortages, have not experienced significant business disruptions as a result of the COVID-19 pandemic.

While we believe that the long-term outlook for the aerospace industry remains positive due to the fundamental drivers of air travel demand, there continues to be uncertainty with respect to the point at which commercial air traffic capacity will return to and/or exceed pre-COVID-19 levels.

We have seen indications that commercial air travel is recovering in certain areas of demand;

however, other areas continue to lag.

In addition, while global vaccination rates have increased, infection from COVID-19 variants have continued, which may impact the pace of the commercial aerospace recovery.

Further, the commercial air travel recovery is tied to general economic conditions and may be impacted by inflation or government budget deficits, among other factors.

However, we continue to estimate that a full recovery may occur in 2023 or 2024.

As our commercial aerospace business recovers, we have seen increases in certain employee-related and discretionary costs, which had decreased in the aftermath of COVID-19 due to one-time cost reduction actions in 2020.

A recovery may also impact our judgments around credit risk related to estimated credit losses.

In addition, in March 2021, Congress passed the American Rescue Plan Act of 2021 (ARPA) which included pension funding relief provisions.

For further discussion, refer to the “FAS/CAS operating adjustment” subsection under the “Segment Review” section below.

We continue to monitor for any further government guidance related to COVID-19 that may be issued.

On September 24, 2021, in furtherance of an executive order, the U.S.

Safer Federal Workforce Task Force issued guidance requiring federal contractors and subcontractors to comply with COVID-19 safety protocols, including requiring certain employees to be fully vaccinated against COVID-19 except in limited circumstances.

The implementation of this mandate may result in attrition, including attrition of critically skilled labor and difficulty in securing future labor needs, for our workforce, as well as the workforces of our subcontractors, suppliers and customers.

The mandate is currently subject to various legal proceedings.

As a result, the impact of mandate on our operations and performance, as well as on our subcontractors, suppliers and customers, is uncertain.

However, if ultimately required, the mandate could affect our performance on contracts, particularly due to disruptions in subcontractor or supplier performance or deliveries, and have a material adverse effect on our results of operations.

The COVID-19 pandemic continues to negatively affect the global economy, our business and operations, the labor market, supply chains, inflation, and the industries in which we operate, although we continue to see signs of ongoing recovery in commercial air travel.

While we believe that the long-term outlook for the aerospace industry remains positive due to the fundamental drivers of air travel demand, uncertainty continues with respect to when commercial air traffic capacity will fully return to and/or exceed pre-COVID-19 levels.

The pace of the commercial aerospace recovery is tied to general economic conditions and may be impacted by inflation, an economic downturn, or government budget deficits, among other factors, and may also be impacted by a resurgence of the pandemic and corresponding travel restrictions and protocols.

Our expectations regarding the COVID-19 pandemic and ongoing recovery and their potential financial impact are based on available information and assumptions that we believe are reasonable at this time;

however, the actual financial impact is highly uncertain and subject to a wide range of factors and future developments.

New information may continue to emerge concerning the scope, severity and duration of the COVID-19 pandemic, as well as any worsening of the pandemic, the effect of additional variants, the efficacy, acceptance, distribution and availability of vaccines, new or continued actions to contain the pandemic’s spread or treat its impact, and governmental, business and individual actions taken in response to the pandemic (including restrictions and limitations on travel and transportation, and changes in leisure and business travel patterns and work environments) among others.

Some of these actions and related impacts may be trends that continue in the future even after the pandemic no longer poses a significant public health risk.

Other Matters

Global economic and political conditions, changes in raw material and commodity prices, labor costs, interest rates, foreign currency exchange rates, energy costs, levels of air travel, the financial condition of commercial airlines, and the impact from natural disasters and weather conditions create uncertainties that could impact our businesses.

With regard to political conditions, in July 2019, the U.S.

government suspended Turkey’s participation in the F-35 Joint Strike Fighter program because Turkey accepted delivery of the Russian-built S-400 air and missile defense system.

has imposed, and may impose additional, sanctions on Turkey, as well as contractual restrictions on the use of Turkish sources on certain military programs, as a result of this or other political disputes.

Turkish companies supply us with components, some of which are sole-sourced, primarily in our aerospace operations for commercial and military engines and aerospace products.

Depending upon the scope and timing of U.S.

sanctions or contractual prohibitions on Turkey and potential reciprocal actions, if any, such sanctions or actions could impact our sources of supply and could have a material adverse effect on our results of operations, cash flows or financial condition.

In addition, in October 2020, the People’s Republic of China (China) announced that it may sanction RTC in connection with a possible Foreign Military Sale to Taiwan of six MS-110 Reconnaissance Pods and related equipment manufactured by Collins Aerospace.

Foreign Military Sales are government-to-government transactions that are initiated by, and carried out at the direction of, the U.S.

To date, the Chinese government has not imposed

sanctions on RTC or indicated the nature or timing of any future potential sanctions or other actions.

Geopolitical Matters.

In response to the Russian military’s invasion of Ukraine on February 24, 2022, the U.S.

government and the governments of various jurisdictions in which we operate, including Canada, the United Kingdom, the European Union, and others, have imposed broad economic sanctions and export controls targeting specific industries, entities and individuals in Russia.

The Russian government has implemented similar counter-sanctions and export controls targeting specific industries, entities and individuals in the U.S.

and other jurisdictions in which we operate, including certain members of the Company’s management team and Board of Directors.

These government measures, among other limitations, restrict transactions involving various Russian banks and financial institutions and impose enhanced export controls limiting transfers of various goods, software and technologies to and from Russia, including broadened export controls specifically targeting the aerospace sector.

These measures have adversely affected, and could continue to adversely affect, the Company and/or our supply chain, business partners or customers.

In the quarter ended March 31, 2022, we reversed $1.3 billion of backlog, which would have been recognized over a span of approximately 10 years, and recorded certain impairment charges and increases to reserves related to operations at our Pratt & Whitney and Collins businesses, as discussed further in “Note 1:

Basis of Presentation and Summary of Accounting Principles” within Item 8 of this Form 10-K.

These adverse impacts have been mitigated in part by the identification of alternative suppliers and an increase in the global demand for our products as a result of the current geopolitical environment.

Based on information available to date, we do not currently expect these issues will have a material adverse effect on our financial results.

China previously announced that it may take measures against RTC in connection with certain foreign military sales to Taiwan.

In addition, China has indicated that it decided to sanction our Chairman and Chief Executive Officer Gregory Hayes, in connection with another potential foreign military sale to Taiwan involving RTC products and services.

RTC is not aware of any specific sanctions against Mr.

Hayes or RTC, or the nature or timing of any future potential sanctions or countermeasures.

If China were to impose sanctions or take other regulatory action against RTC, our suppliers, affiliates or partners, it could potentially disrupt our business operations.

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These advance payments may become refundable to the customer if the contracts are ultimately terminated.

Risk Factors within Part I of this Form 10-K for further discussion of these items.

“Risk Factors” within Part I of this Form 10-K for further discussion.

New Legislation.

In August 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Sciences Act and the Inflation Reduction Act were signed into law, each effective as of January 1, 2023.

These new pieces of legislation include the implementation of a new corporate alternative minimum tax, an excise tax on stock buybacks, and tax incentives for energy and climate initiatives, among other provisions.

We are evaluating the legislation and currently do not expect the legislation to have a material impact on our operations, financial condition or liquidity.

FINANCIAL SUMMARY

We use the following key financial performance measures to manage our business on a consolidated basis and by business segment, and to monitor and assess our results of operations:

– Net Sales — a growth metric that measures our revenue for the current year;

– Operating Profit (Loss) — a measure of our profit (loss) for the year, before non-operating expenses, net and income taxes;

– Operating Profit (Loss) Margin — a measure of our Operating profit (loss) as a percentage of Total Net Sales.

a growth metric that measures our revenue for the current year;

• Operating Profit (Loss):

a measure of our profit (loss) for the year, before non-operating expenses, net and income taxes;

• Operating Profit (Loss) Margin:

a measure of our Operating profit (loss) as a percentage of Total Net Sales.

(dollars in millions) 2022 2021 2020

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Backlog, which is equivalent to our remaining performance obligations (RPO) for our sales contracts, represents the aggregate dollar value of firm orders for which products have not been provided or service has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ) type contracts).

Segment backlog does not include intercompany backlog.

Backlog generally increases with bookings and/or orders and generally decreases as sales are recognized on these bookings and is affected by changes in foreign exchange rates, as well as contract cancellations and terminations, and cost underruns on cost-type contracts.

In addition, we maintain a strong focus on program execution and the prudent management of capital and investments in order to maximize operating income and cash.

We focus on adjusted earnings per share (EPS) and measures to assess our cash generation and the efficiency and effectiveness of our use of capital, such as free cash flow (FCF), both of which are not defined measures under U.S.

We focus on adjusted earnings per share (EPS) and measures to assess our cash generation and the efficiency and effectiveness of our use of capital, such as free cash flow, both of which are not defined measures under U.S.

GAAP and may be calculated differently by other companies.

Considered together, we believe these metrics are strong indicators of our overall performance and our ability to create shareowner value.

We feel these measures are balanced among long-term and short-term performance, efficiency and growth.

We also use these and other performance metrics for executive compensation purposes.

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RESULTS OF OPERATIONS

As described in our “Cautionary Note Concerning Factors That May Affect Future Results” in this Form 10-K, our period-to-period comparisons of our results, particularly at a segment level, may not be indicative of our future operating results.

following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context.

As discussed further above in “Business Overview,” the results of RIS and RMD reflect the period subsequent to the completion of the Raytheon Merger on April 3, 2020.

As such, the results of RIS and RMD for the second quarter of 2020 exclude results prior to the date of completion of the Raytheon Merger, the estimated impact of which is approximately $400 million of sales and approximately $45 million of operating profit.

As described in our “Cautionary Note Concerning Factors That May Affect Future Results” of this Form 10-K, our period-to-period comparisons of our results, particularly at a segment level, may not be indicative of our future operating results.

The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context.

The results of RIS and RMD reflect the period subsequent to the completion of the Raytheon merger on April 3, 2020.

As such, the results of RIS and RMD for the second quarter of 2020 exclude results prior to the date of completion of the

Raytheon merger, the estimated impact of which is approximately $400 million of sales and approximately $45 million of operating profit.

These amounts, in addition to the first quarter of 2021 results, have been excluded from the organic changes for the year ended December 31, 2021 disclosed throughout our Results of Operations discussion.

In addition, as a result of the Separation Transactions and the Distributions, the historical results of Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

In addition, as a result of the separation of United Technologies Corporation’s (UTC’s) business into three independent, publicly traded companies – UTC, Carrier Global Corporation (Carrier) and Otis Worldwide Corporation (Otis) (the Separation Transactions) and the Distributions, the historical results of Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

We provide the organic change in Net sales and Cost of sales for our consolidated results of operations as well as the organic change in Net sales and Operating profit (loss) for our segments.

We believe that these non-GAAP measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability.

The organic change in Net sales, Cost of sales and Operating Profit (loss) excludes acquisitions and divestitures, net, and the effect of foreign currency exchange rate translation fluctuations and other significant non-recurring and non-operational items (“Other.”).

We believe that these non-Generally Accepted Accounting Principles (non-GAAP) measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability.

The organic change in Net sales, Cost of sales and Operating profit (loss) excludes Acquisitions and divestitures, net, and the effect of foreign currency exchange rate translation fluctuations and other significant non-operational items and/or significant operational items that may occur at irregular intervals (Other).

Additionally, the organic change in Cost of sales and Operating profit (loss) excludes restructuring costs, the FAS/CAS operating adjustment and costs related to certain acquisition accounting adjustments.

Acquisition accounting adjustments include the amortization of acquired intangible assets related to acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through acquisitions and the amortization of customer contractual obligations related to loss making or below market contracts acquired.

Restructuring costs generally arise from severance related to workforce reductions and facility exit costs.

We are continuously evaluating our cost structure and have implemented restructuring actions in an effort to keep our cost structure competitive.

Acquisition accounting adjustments include the amortization of acquired intangible assets related to acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through acquisitions, the amortization of customer contractual obligations related to loss making or below market contracts acquired, and goodwill impairment.

(dollars in millions) 2022 2021 2020

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Acquisitions and divestitures, net (676) 6,961

Other (298) 116

Total change $ 2,686 $ 7,801

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GAAP amounts is provided in the table above.

Net sales increased $0.7 billion organically in 2021 compared to 2020 primarily due to higher organic sales of $1.3 billion at Pratt & Whitney, partially offset by lower organic sales of $0.6 billion at Collins Aerospace.

The $7.0 billion sales increase in Acquisitions and divestitures, net in 2021 compared to 2020, was primarily driven by the Raytheon Merger on April 3, 2020, partially offset by the sale of the Collins Aerospace military Global Positioning System (GPS) and space-based precision optics businesses in the third quarter of 2020 and the sale of our Forcepoint business in the first quarter of 2021.

Net sales decreased $10.4 billion organically in 2020 compared to 2019 primarily due to lower sales of $6.6 billion at Collins Aerospace and $4.1 billion at Pratt & Whitney all principally driven by the economic and operating environment primarily due to the COVID-19 pandemic.

The $21.7 billion sales increase in Acquisitions and divestitures, net in 2020 compared to 2019, is primarily driven by the Raytheon Merger on April 3, 2020.

Included in the change in Acquisitions and divestitures, net was the sale of the Collins Aerospace military GPS and space-based precision optics businesses sold in the third quarter of 2020, as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K.

Net sales increased $3.7 billion organically in 2022 compared to 2021 primarily due to higher organic sales of $2.5 billion at Pratt & Whitney and $2.4 billion at Collins, partially offset by lower organic sales of $0.6 billion at RMD.

The $0.7 billion decrease in net sales related to Acquisitions and divestitures, net in 2022 compared to 2021, was primarily driven by the sale of our global training and services business within our RIS segment in the fourth quarter of 2021 .

The decrease in other net sales of $0.3 billion in 2022 compared to 2021 represents the impact of foreign exchange.

The $7.0 billion sales increase in Acquisitions and divestitures, net in 2021 compared to 2020, was primarily driven by the Raytheon merger on April 3, 2020, partially offset by the sale of the Collins military Global Positioning System (GPS) and space-based precision optics businesses in the third quarter of 2020 and the sale of our Forcepoint business in the first quarter of 2021.

See “Segment Review” below for further information by segment.

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Segment Financial Data” within Item 8 of this Form 10-K for the composition of external net sales by products and services by segment.

Net products sales grew $6.0 billion in 2021 compared to 2020 primarily due to an increase in external products sales of $3.7 billion at RMD and $3.0 billion at RIS, both primarily due to the Raytheon Merger on April 3, 2020, and an increase in external products sales of $1.0 billion at Pratt & Whitney, partially offset by a decrease in external products sales of $1.3 billion at Collins Aerospace.

Net services sales grew $1.9 billion in 2021 compared to 2020 primarily due to an increase in external services sales of $0.8 billion at RIS and $0.4 billion at RMD, both primarily due to the Raytheon Merger on April 3, 2020, and an increase in external services sales of $0.4 billion at Pratt & Whitney and $0.3 billion at Collins Aerospace.

Net products sales grew $10.3 billion in 2020 compared to 2019 primarily due to an increase in external products sales of $18.4 billion due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external products sales of $5.3 billion at Collins Aerospace and $2.8 billion at Pratt & Whitney.

Net services sales grew $0.9 billion in 2020 compared to 2019 primarily due to an increase in external services sales of $3.4 billion due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external services sales of $1.3 billion at Pratt & Whitney and $1.2 billion at Collins Aerospace.

Net products sales increased $1.5 billion in 2022 compared to 2021 primarily due to increases in external products sales of $1.5 billion at Collins and $1.2 billion at Pratt & Whitney, partially offset by decreases in external products sales of $0.7 billion at RMD and $0.5 billion at RIS.

Net services sales increased $1.2 billion in 2022 compared to 2021 primarily due to increases in external services sales of $1.2 billion at Pratt & Whitney and $0.5 billion at Collins, partially offset by a decrease in external services sales of $0.5 billion at RIS primarily driven by the sale of the global training and services business in the fourth quarter of 2021 .

Net products sales increased $6.0 billion in 2021 compared to 2020 primarily due to an increase in external products sales of $3.7 billion at RMD and $3.0 billion at RIS, both primarily due to the Raytheon merger on April 3, 2020, and an increase in external products sales of $1.0 billion at Pratt & Whitney, partially offset by a decrease in external products sales of $1.3 billion at Collins.

Net services sales grew $1.9 billion in 2021 compared to 2020 primarily due to an increase in external services sales of $0.8 billion at RIS and $0.4 billion at RMD, both primarily due to the Raytheon merger on April 3, 2020, and an increase in external services sales of $0.4 billion at Pratt & Whitney and $0.3 billion at Collins.

Our sales to major customers were as follows:

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Acquisition accounting adjustments (348) 345

Other (196) (34)

Total change $ 1,509 $ 3,841

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GAAP amounts is provided in the table above.

The organic decrease in total Cost of sales in 2021 compared to 2020 of $1.3 billion was primarily due to a decrease in organic Cost of sales at Collins Aerospace primarily due to the sales decrease noted above, the benefit of cost reduction initiatives, and the absence of prior year significant unfavorable adjustments, and a decrease in organic Cost of sales at RMD primarily due to the absence of an unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and

The organic increase in total Cost of sales in 2022 compared to 2021 of $2.4 billion was primarily due to the organic sales increases at Collins and Pratt & Whitney noted above.

The decrease related to Acquisitions and divestitures, net of $0.6 billion in 2022 compared to 2021 was primarily driven by t he sale of our global training and services business within our RIS segment in the fourth quarter of 2021.

The decrease in other cost of sales of $0.2 billion in 2022 compared to 2021 was primarily driven by the impact of foreign exchange, partially offset by charges recorded during the first quarter of 2022 at Pratt & Whitney and Collins related to impairment of customer financing assets for products under lease, inventory reserves, purchase order obligations, and the impairment of contract fulfillment costs that are no longer recoverable, all due to global sanctions on and export controls with respect to Russia.

Basis of Presentation and Summary of Accounting Principles” within Item 8 of this Form 10-K for additional information.

The organic decrease in total Cost of sales in 2021 compared to 2020 of $1.3 billion was primarily due to an organic Cost of sales decrease at Collins and RMD.

The Collins decrease was primarily due to the sales decrease noted above, the benefit of cost reduction initiatives, and the absence of prior year significant unfavorable adjustments.

The RMD decrease was primarily due to the absence of an unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and

recognition of supplier related obligations for certain international contracts as further described in “Segment Review” below.

These decreases in Cost of sales were partially offset by an increase in organic Cost of sales at Pratt & Whitney due to the organic sales increases noted above.

The increase in Acquisitions and divestitures, net of $5.8 billion in 2021 compared to 2020 is primarily driven by the Raytheon Merger on April 3, 2020, partially offset by the sale of the Collins Aerospace military GPS and space-based precision optics businesses in the third quarter of 2020 and the sale of our Forcepoint business in the first quarter of 2021 as further discussed in “Note 2:

The increase related to Acquisitions and divestitures, net of $5.8 billion in 2021 compared to 2020 was primarily driven by the Raytheon merger on April 3, 2020, partially offset by the sale of the Collins military GPS and space-based precision optics businesses in the third quarter of 2020, and the sale of our Forcepoint business in the first quarter of 2021 as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K.

The organic decrease in total Cost of sales in 2020 compared to 2019, of $4.4 billion was primarily driven by the organic sales decreases noted above.

The increase in Acquisitions and divestitures, net of $17.7 billion for 2020 compared to 2019 was primarily driven by the Raytheon Merger on April 3, 2020.

Included in the change in Acquisitions and divestitures, net is the sale of the Collins Aerospace military GPS and space-based precision optics businesses sold in the third quarter of 2020, and an unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and recognition of supplier related obligations for certain international contracts at RMD as further described in “Segment Review” below.

Included in Other cost of sales was an $89 million impairment of commercial aircraft program assets at Pratt & Whitney in 2020 and amortization of the inventory fair value step-up associated with the Rockwell Collins acquisition of $181 million at Collins Aerospace in 2019.

For further discussion on Restructuring costs see “Restructuring Costs” section below.

For further discussion on FAS/CAS operating adjustment see “FAS/CAS operating adjustment” subsection under the “Segment Review” section below.

For further discussion on Acquisition accounting adjustments, see “Acquisition accounting adjustments” subsection under the “Segment Review” section below.

The $0.4 billion decrease in Restructuring is primarily due to the absence of 2020 severance and restructuring actions at Pratt & Whitney and Collins related to the economic environment primarily caused by the COVID-19 pandemic, and ongoing cost reduction efforts.

For further discussion on FAS/CAS operating adjustment see the “FAS/CAS operating adjustment” subsection under the “Segment Review” section below.

For further discussion on Acquisition accounting adjustments, see the “Acquisition accounting adjustments” subsection under the “Segment Review” section below.

% of Total Net Sales

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Total cost of sales $ 53,406 $ 51,897 $ 48,056 80 % 81 % 85 %

Net products Cost of sales increased $3.0 billion in 2021 compared to 2020 primarily due to an increase in external products cost of sales at RIS and RMD principally due to the Raytheon Merger on April 3, 2020, and an increase in external product cost of sales at Pratt & Whitney, principally driven by the products sales increase noted above, partially offset by a decrease in external products Cost of sales at Collins Aerospace, principally driven by the products sales decrease noted above, the benefit of cost reduction initiatives and the absence of prior year significant unfavorable adjustments.

Net products cost of sales increased $0.8 billion in 2022 compared to 2021 primarily due to increases at Collins and Pratt & Whitney, partially offset by decreases in Acquisition Accounting Adjustments and RIS.

The changes at Collins, Pratt & Whitney and RIS were related to the changes in products sales noted above.

Net services cost of sales increased $0.7 billion in 2022 compared to 2021 primarily due to increases in external services cost of sales at Pratt & Whitney and Collins, partially offset by a decrease in external services sales at RIS, all driven by the services sales changes noted above.

Net products cost of sales increased $3.0 billion in 2021 compared to 2020 primarily due to increases in external products cost of sales at RIS and RMD principally due to the Raytheon merger on April 3, 2020, and an increase in external products cost of sales at Pratt & Whitney, principally driven by the products sales increase noted above, partially offset by a decrease in external products cost of sales at Collins, principally driven by the products sales decrease noted above, the benefit of cost reduction initiatives and the absence of prior year significant unfavorable adjustments.

Net services cost of sales grew $0.9 billion in 2021 compared to 2020 primarily due to an increase in external services cost of sales at RIS and RMD principally due to the Raytheon merger on April 3, 2020.

Net products Cost of sales grew $11.2 billion in 2020 compared to 2019 primarily due to an increase in external products Cost of sales due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external products Cost of sales at Collins Aerospace and Pratt & Whitney.

Net services Cost of sales grew $2.2 billion in 2020 compared to 2019 primarily due to an increase in external services Cost of sales due to the Raytheon Merger on April 3, 2020, partially offset by a decrease in external services Cost of sales at Collins Aerospace.

Research and Development

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Percentage of net sales 6.5 % 7.0 % 7.3 %

(1) Customer-funded research and development costs are included in cost of sales in our Consolidated Statement of Operations.

(1) Included in Cost of sales in our Consolidated Statement of Operations.

Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected.

Company-funded research and development in 2022 was relatively consistent with 2021.

The increase in company-funded research and development of $0.2 billion in 2021 compared to 2020, was primarily driven by $0.2 billion related to the Raytheon merger on April 3, 2020.

The increase in company-funded research and development of $0.1 billion in 2020 compared to 2019, was primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020, partially offset by lower expenses of $0.3 billion across various

commercial programs at Pratt & Whitney and $0.2 billion across various commercial programs at Collins Aerospace, both principally driven by cost reduction measures in response to the economic environment primarily due to COVID-19.

The increase in customer-funded research and development of $0.4 billion in 2021 compared to 2020, was primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020, partially offset by lower expenses of $0.2 billion on various military and commercial programs at Pratt & Whitney and lower expenses of $0.1 billion at Collins Aerospace primarily related to the sale of the military GPS and space-based precision optics businesses in the third quarter of 2020.

The increase in customer-funded research and development of $1.8 billion in 2020 compared to 2019, was primarily driven by $1.7 billion related to the Raytheon Merger on April 3, 2020.

The decrease in customer-funded research and development of $0.1 billion in 2022 compared to 2021, was primarily driven by lower expenses on various programs at RMD, partially offset by an increase in expenses on the Next Generation Interceptor (NGI) program at RMD.

The increase in customer-funded research and development of $0.4 billion in 2021 compared to 2020, was primarily driven by $0.6 billion related to the Raytheon merger on April 3, 2020, partially offset by lower expenses of $0.2 billion on various military and commercial programs at Pratt & Whitney and lower expenses of $0.1 billion at Collins primarily related to the sale of the military GPS and space-based precision optics businesses in the third quarter of 2020.

Selling, General and Administrative

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Percentage of net sales 8.4 % 8.1 % 9.8 %

Selling, general and administrative expenses decreased $0.3 billion in 2021 compared to 2020, primarily driven by the absence of $0.4 billion of prior year charges related to increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses at our Pratt & Whitney and Collins Aerospace segments, lower costs of $0.3 billion due to the sale of our Forcepoint business in the first quarter of 2021, and lower general and administrative restructuring costs of $0.3 billion primarily related to restructuring actions taken at Collins Aerospace and Corporate in the prior year, partially offset by an increase in expenses of $0.4 billion related to the Raytheon Merger, and higher employee-related costs.

Selling, general and administrative expenses increased $1.8 billion in 2020 compared to 2019, primarily driven by $1.6 billion related to the Raytheon Merger on April 3, 2020, excluding the impact of merger-related restructuring costs.

The increase in selling, general and administrative expenses also includes higher expenses of $0.4 billion related to increased estimates of expected credit losses primarily due to customer bankruptcies and additional allowances for credit losses at Pratt & Whitney and Collins Aerospace, higher general and administrative restructuring costs of $0.3 billion, and lower expenses due to cost reduction initiatives.

We are continuously evaluating our cost structure and have implemented restructuring actions in an effort to keep our cost structure competitive.

As appropriate, the amounts reflected above include the beneficial impact of previous restructuring actions on selling, general and administrative expenses.

See “Note 14:

Restructuring Costs” within Item 8 of this Form 10-K and Restructuring Costs, below, for further discussion.

Selling, general and administrative expenses increased $0.4 billion in 2022 compared to 2021, primarily driven by higher information technology-related costs at Corporate, Collins and Pratt & Whitney, and higher combined expenses at Collins and Pratt & Whitney principally driven by higher employee-related costs and $0.1 billion of charges related to increased estimates for credit losses due to global sanctions on and export controls with respect to Russia.

Basis of Presentation and Summary of Accounting Principles” within Item 8 of this Form 10-K for additional information on Russia sanctions.

Selling, general and administrative expenses decreased $0.3 billion in 2021 compared to 2020, primarily driven by the absence of $0.4 billion of prior year charges related to increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses at our Pratt & Whitney and Collins segments, lower costs of $0.3 billion due to the sale of our Forcepoint business in the first quarter of 2021, and lower general and administrative restructuring costs of $0.3 billion primarily related to 2020 severance and restructuring actions at Collins and Corporate related to the economic environment primarily caused by the COVID-19 pandemic, the Raytheon merger and ongoing cost reduction efforts, partially offset by an increase in expenses of $0.4 billion related to the Raytheon merger, and higher employee-related costs.

Other Income, Net

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Other income, net $ 120 $ 423 $ 885

Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, as well as other ongoing and nonrecurring items.

The decrease in Other income, net of $462 million in 2021 compared to 2020 was primarily due to the absence of $595 million of gains on the sales of the Collins Aerospace businesses in the third quarter of 2020, a decrease of $178 million of foreign government wage subsidies related to COVID-19 at Pratt & Whitney and Collins Aerospace and an accrual of $147 million in the fourth quarter of 2021 related to the ongoing Department of Justice (DOJ) investigation into contract pricing matters at RMD, partially offset by a gain of $269 million on the sale of RIS’s global training and services business in the fourth quarter of 2021, as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K.

Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, and other ongoing and nonrecurring items.

The decrease in Other income, net of $0.3 billion in 2022 compared to 2021 was primarily due to the absence of a gain of $269 million on the sale of RIS’s global training and services business in the fourth quarter of 2021, as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K, $69 million of charges associated with the disposition of two non-core businesses at Collins in the second quarter of 2022, a $42 million charge in the fourth quarter of 2022 associated with a divestiture of a small non-core Naval Power business at RMD, and the absence of prior year foreign government wage subsidies related to COVID-19 at Pratt & Whitney of $41 million, partially offset by the absence of an accrual of $147 million in the fourth quarter of 2021 related to the ongoing Department of Justice (DOJ) investigation into contract pricing matters at RMD.

The decrease in Other income, net of $0.5 billion in 2021 compared to 2020, was primarily due to the absence of $595 million of gains on the sales of the Collins businesses, in the third quarter of 2020, a decrease of $178 million of foreign government wage subsidies related to COVID-19 at Pratt & Whitney and Collins and an accrual of $147 million in the fourth quarter of 2021 related to the ongoing DOJ investigation into contract pricing matters at RMD, partially offset by a gain of $269 million on the sale of RIS’s global training and services business in the fourth quarter of 2021.

The remaining change was spread across multiple items with no common or significant driver.

The increase in Other income, net of $559 million in 2020 compared to 2019, was primarily due to $595 million of gains on the sales of the Collins Aerospace businesses, and $225 million related to foreign government wage subsidies due to COVID-19 at Pratt & Whitney and Collins Aerospace, partially offset by a net unfavorable year-over-year impact of foreign exchange gains and losses of $138 million.

Operating Profit (Loss)

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Operating profit (loss) margin 8.1 % 7.7 % (3.3) %

The change in Operating profit (loss) of $6.8 billion in 2021 compared to 2020 was primarily driven by the operating performance at our operating segments, including the impact of the Raytheon Merger, the absence of the $3.2 billion goodwill impairment in the second quarter of 2020 related to two Collins Aerospace reporting units, and an increase in our FAS/CAS operating adjustment of $690 million primarily as a result of the Raytheon Merger.

Included in the increase in Operating profit was a decrease in restructuring costs of $625 million primarily related to restructuring actions taken at our Collins Aerospace and Pratt & Whitney segments in the prior year and the absence of a prior year unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and recognition of supplier related obligations for certain international contracts at RMD as further described in “Segment Review” below.

The change in Operating profit (loss) of $6.8 billion in 2020 compared to 2019 was primarily driven by the operating performance at our segments as described below in “Segment Review” and the $3.2 billion goodwill impairment in the second quarter of 2020 related to two Collins Aerospace reporting units.

Included in the decrease in Operating profit (loss) was an increase in acquisition accounting adjustments of $1.1 billion related to the Raytheon Merger, an increase in restructuring costs of $527 million primarily related to restructuring actions taken at our Collins Aerospace segment and restructuring actions in connection with the Raytheon Merger on April 3, 2020 and an unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and recognition of supplier related obligations for certain international contracts at RMD as further described in “Segment Review” below.

The increase in Operating profit (loss) of $0.5 billion in 2022 compared to 2021 was primarily driven by a decrease in Acquisition accounting adjustments, the operating performance at our operating segments and a decrease in Corporate and Eliminations and other, partially offset by the change in our FAS/CAS operating adjustment, all of which are described below in “Segment Review.”

The change in Operating profit (loss) of $6.8 billion in 2021 compared to 2020 was primarily driven by the operating performance at our operating segments, including the impact of the Raytheon merger, the absence of the $3.2 billion goodwill impairment in the second quarter of 2020 related to two Collins reporting units, and an increase in our FAS/CAS operating adjustment of $690 million primarily as a result of the Raytheon merger.

Included in the increase in Operating profit was a decrease in restructuring costs of $625 million primarily related to 2020 restructuring actions taken at our Collins and Pratt & Whitney segments and the absence of 2020 unfavorable profit impact of $516 million related to inventory reserves, contract

asset impairments and recognition of supplier related obligations for certain international contracts at RMD as further described in “Segment Review” below.

Non-service Pension Income

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Non-service pension (income) $ (1,889) $ (1,944) $ (902)

The change in Non-service pension income of $1.0 billion in 2021 compared to 2020 was primarily driven by the decrease in the discount rates at December 31, 2020 compared to the prior period, the Raytheon Company domestic defined benefit pension plan amendment described below and prior year pension asset returns exceeding our expected return on plan assets (EROA) assumption.

The change in Non-service pension income of $73 million in 2020 compared to 2019 was primarily driven by the inclusion of Raytheon Company plans in 2020 as a result of the Raytheon Merger and a decrease in the interest rates at December 31, 2019 and during 2020 compared to December 31, 2018, partially offset by a decrease in the EROA assumption for the UTC plans in 2020 and a one-time curtailment gain of $98 million in 2019.

The one-time curtailment gain was due to the recognition of previously unrecognized prior service credits as a result of an amendment to the UTC domestic defined benefit plans to cease accrual of additional benefits for future service and compensation for non-union participants effective December 31, 2019.

In December 2020, we approved a change to the Raytheon Company domestic defined benefit pension plans for non-union participants to cease future benefit accruals based on an employee’s years of service and compensation effective December 31, 2022.

The change in Non-service pension income of $0.1 billion in 2022 compared to 2021 was primarily driven by the impact of an increase in discount rates, partially offset by prior years’ pension asset returns exceeding our expected return on plan assets (EROA) assumption.

The change in Non-service pension income of $1.0 billion in 2021 compared to 2020 was primarily driven by the decrease in the discount rates at December 31, 2020 compared to the prior period, the Raytheon Company domestic defined benefit pension plan amendment described below and prior years’ pension asset returns exceeding our EROA assumption.

The plan change does not impact participants’ historical benefit accruals.

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Interest income (70) (36) (42)

Other non-operating expense (income) (1)

Interest expense, net $ 1,276 $ 1,322 $ 1,366

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4.0 % 4.0 % 4.2 %

(1) Primarily consists of the gains or losses on assets associated with certain of our nonqualified deferred compensation and employee benefit plans, as well as the gains or losses on liabilities associated with certain of our nonqualified deferred compensation plans.

Interest expense, net in 2022 was relatively consistent with 2021.

Included in Interest expense, net was a $50 million unfavorable change in the mark-to-market fair value of marketable securities held in trusts associated with certain of our nonqualified deferred compensation and employee benefit plans, partially offset by a decrease in interest expense primarily due to the repayment of long-term debt.

The average maturity of our long-term debt at December 31, 2021 was approximately 15 years.

Interest expense, net decreased $225 million in 2020 as compared with 2019, primarily due to a decrease in interest expense principally driven by the repayment of long-term debt, partially offset by a decrease in interest income principally driven by interest income of $63 million related to tax settlements in the prior year.

The average maturity of our long-term debt at December 31, 2020 was approximately 14 years.

Interest expense, net in 2021 was relatively consistent with 2020.

Included in Interest expense, net was a decrease in interest expense primarily due to the repayment of long-term debt.

2022 2021 2020

Effective income tax rate 11.6 % 15.9 % (24.4) %

The 2021 effective tax rate includes tax benefits of $244 million associated with legal entity and operational reorganizations implemented in the third quarter of 2021, $172 million associated with U.S.

research and development credits and $121 million associated with Foreign Derived Intangible Income (FDII), and tax charges of $73 million associated with the revaluation of deferred taxes resulting from the increase in the United Kingdom (U.K.) corporate tax rate to 25% enacted in 2021 and effective in 2023.

The 2022 effective tax rate includes a benefit of $214 million related to the Foreign Derived Intangible Income (FDII) benefit, $207 million associated with legal entity and operational reorganizations implemented in 2022, and $164 million associated with U.S.

research and development credits.

The increase in the FDII benefit from 2021 is primarily attributable to the capitalization of research or experimental expenditures for tax-purposes, enacted as part of the Tax Cuts and Jobs Act of 2017 effective beginning January 1, 2022.

The 2021 effective tax rate includes tax benefits of $244 million associated with legal entity and operational reorganizations implemented in 2021, $172 million associated with U.S.

research and development credits and $121 million associated with FDII, and tax charges of $73 million associated with the revaluation of deferred taxes resulting from the increase in the United Kingdom (U.K.) corporate tax rate to 25% enacted in 2021.

In the first quarter of 2021, we recorded $148 million of tax charges associated with the sale of the Forcepoint business, and subsequently recognized a $104 million tax benefit due to the revaluation of that tax benefit as a result of completing the divestiture of RIS’s global training and services business for a gain in the fourth quarter of 2021.

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The loss from continuing operations before income taxes in 2020 includes the $3.2 billion goodwill impairment, most of which was non-deductible for tax purposes.

Tax expense includes net deferred tax charges of $416 million resulting from the Separation Transactions and the Raytheon Merger primarily related to the impairment of deferred tax assets and the revaluation of certain international tax incentives, and incremental tax expense of $177 million related to the disposal of businesses, including the sales of businesses at Collins Aerospace, the airborne tactical radios business at RIS and the entry into a definitive agreement to sell Forcepoint.

Tax expense includes net deferred tax charges of $416 million resulting from the Separation Transactions and the Raytheon merger primarily related to the impairment of deferred tax assets and the revaluation of certain international tax incentives, and incremental tax expense of $177 million related to the disposal of businesses, including the sales of businesses at Collins, the airborne tactical radios business at RIS and the entry into a definitive agreement to sell Forcepoint.

Also included in the 2020 effective tax rate are tax benefits of $142 million associated with U.S.

research and development credits and $83 million associated with FDII.

The 2019 effective tax rate includes tax benefits of $290 million primarily associated with the conclusion of the audit by the Examination Division of the Internal Revenue Service (IRS) for the Company’s 2014, 2015 and 2016 tax years and the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority.

The 2019 effective tax rate also includes tax benefits of $101 million related to U.S.

research and development credits and $138 million associated with FDII.

Provisions enacted in the Tax Cuts and Jobs Act of 2017 (TCJA) related to the capitalization for tax purposes of research and experimental expenditures became effective on January 1, 2022.

If these provisions are not deferred beyond 2022, our tax payments will increase by an estimated $2 billion in 2022;

however, our effective tax rate will be favorably impacted.

For additional discussion of income taxes and the effective income tax rate, see “Income Taxes” within Critical Accounting Estimates, below, and “Note 13:

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Net income from continuing operations attributable to common shareowners for 2022 includes the following:

• acquisition accounting adjustments of $1.5 billion, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.99;

• impairment charges and reserve adjustments related to the global sanctions on and export controls with respect to Russia of $210 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.14;

• combined charges associated with disposition of businesses at Collins and RMD of $102 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.07;

• restructuring charges of $91 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.06.

Net income from continuing operations attributable to common shareowners for 2021 includes the following:

• acquisition accounting adjustments primarily related to the Raytheon merger of $1.7 billion, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $1.13;

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Net loss from continuing operations attributable to common shareowners for 2020 includes the following:

• $3.2 billion of primarily non-deductible goodwill and intangibles impairment charges related to our Collins segment, which had an unfavorable impact on diluted EPS from continuing operations of $2.37;

• acquisition accounting adjustments primarily related to the Raytheon merger of $1.4 billion, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $1.06;

• significant unfavorable contract adjustments at Pratt & Whitney and Collins of $667 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.49;

• restructuring charges of $598 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.44;

• $3.2 billion of primarily non-deductible goodwill and intangibles impairment charges related to our Collins Aerospace segment, which had an unfavorable impact on diluted EPS from continuing operations of $2.37;

• significant unfavorable contract adjustments at Pratt & Whitney and Collins Aerospace of $667 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.49;

• $415 million of tax charges in connection with the Separation Transactions, including the impairment of deferred tax assets not expected to be utilized, which had an unfavorable impact on diluted EPS from continuing operations of $0.31;

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• increased estimates of expected credit losses driven by customer bankruptcies and additional allowances for credit losses of $300 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.22;

• gains on the sales of the Collins Aerospace businesses of $240 million, net of tax, which had a favorable impact on diluted EPS from continuing operations of $0.18.

Net income from continuing operations attributable to common shareowners for 2019 includes the following:

• acquisition accounting adjustments of $704 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.81;

• restructuring charges of $186 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.21;

• tax settlements and related interest income on tax settlements of $341 million, which had a favorable impact on diluted EPS from continuing operations of $0.39;

• amortization on the inventory fair value step-up associated with the Rockwell Collins Acquisition of $140 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.16.

Net Income (Loss) from Discontinued Operations Attributable to Common Shareowners

• gains on the sales of the Collins businesses of $240 million, net of tax, which had a favorable impact on diluted EPS from continuing operations of $0.18.

Loss from Discontinued Operations Attributable to Common Shareowners

(dollars in millions, except per share amounts) 2022 2021 2020

Net income (loss) from discontinued operations attributable to common shareowners $ (33) $ (410) $ 2,027

Diluted earnings (loss) per share from discontinued operations $ (0.02) $ (0.30) $ 2.35

Loss from discontinued operations attributable to common shareowners $ (19) $ (33) $ (410)

Diluted loss per share from discontinued operations $ (0.01) $ (0.02) $ (0.30)

On April 3, 2020, we completed the separation of our commercial businesses, Carrier and Otis.

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Discontinued Operations” within Item 8 of this Form 10-K for additional information.

The change in Net income (loss) from discontinued operations attributable to common shareowners of $377 million and the related change in diluted earnings (loss) per share from discontinued operations of $0.28 in 2021 compared to 2020 was primarily due to higher prior year costs associated with the separation of our commercial businesses, including debt extinguishment costs of $611 million, net of tax, in connection with the early repayment of outstanding principal, partially offset by prior year Carrier and Otis operating activity, as the Separation Transactions occurred on April 3, 2020.

The change in Net income (loss) from discontinued operations attributable to common shareowners of $2.4 billion and the related change in diluted earnings (loss) per share from discontinued operations of $2.65 in 2020 compared to 2019 was primarily due to prior year Carrier and Otis operating activity, as the Separation Transactions occurred on April 3, 2020, partially offset by higher prior year costs associated with the separation of our commercial businesses.

Net income (loss) from discontinued operations for 2020 and 2019 includes $888 million, net of tax, and $1.3 billion, net of tax, respectively, of costs associated with the Company’s separation of its commercial businesses.

Separation costs in 2020 primarily related to debt extinguishment costs of $611 million in connection with the early repayment of outstanding principal.

Loss from discontinued operations attributable to common shareowners and the related change in diluted loss per share from discontinued operations in 2022 was relatively consistent with 2021.

The change in Loss from discontinued operations attributable to common shareowners of $377 million and the related change in diluted loss per share from discontinued operations of $0.28 in 2021 compared to 2020 was primarily due to higher prior year costs associated with the separation of our commercial businesses, including debt extinguishment costs of $611 million, net of tax, in connection with the early repayment of outstanding principal, partially offset by prior year Carrier and Otis operating activity, as the Separation Transactions occurred on April 3, 2020.

Net Income (Loss) Attributable to Common Shareowners

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Diluted earnings (loss) per share from operations $ 3.50 $ 2.56 $ (2.59)

The changes in Net income (loss) attributable to common shareowners and diluted EPS from operations for 2021 compared to 2020 and for 2020 compared to 2019 were driven by the changes in continuing operations, as discussed above in Net Income (Loss) from Continuing Operations Attributable to Common Shareowners and the changes from discontinued operations, as discussed above in Net Income (Loss) from Discontinued Operations Attributable to Common Shareowners.

RESTRUCTURING COSTS

(dollars in millions) 2021 2020 2019

Restructuring costs $ 143 $ 777 $ 245

Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and recent mergers and acquisitions.

Charges generally arise from severance related to workforce reductions and facility exit costs associated with the consolidation of field and manufacturing operations and costs to exit legacy programs.

We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.

2021 Actions.

During 2021, we recorded net pre-tax restructuring charges of $137 million for restructuring efforts initiated in 2021, primarily related to severance costs in connection with ongoing cost reduction efforts, and to a much lesser extent, the exit and consolidation of facilities.

We expect to incur additional restructuring charges of $62 million to complete these actions.

We are targeting to complete the majority of actions initiated in 2021 by 2022.

We expect recurring pre-tax savings in continuing operations related to these actions to reach approximately $140 million annually within one to two years.

Approximately 60% of the total pre-tax charge will require cash payments, which we have funded and expect to continue to fund with cash generated from operations.

During 2021, we had cash outflows of approximately $20 million related to 2021 actions.

2020 Actions.

During 2021, we reversed net pre-tax restructuring costs of $23 million related to actions initiated in 2020.

In 2020, we recorded net pre-tax restructuring charges of $770 million for actions initiated in 2020.

These costs primarily related to severance and restructuring actions at Pratt & Whitney and Collins Aerospace in response to the impact on our operating results related to the economic environment primarily caused by the COVID-19 pandemic, the Raytheon Merger, and the ongoing cost reduction efforts.

Additional restructuring charges to complete these actions are expected to be de minimis.

We expect recurring pre-tax savings in continuing operations related to these actions to reach approximately $1.2 billion annually within two years of initiating these actions.

Approximately 90% of the total pre-tax charge will require cash payments, which we have funded and expect to continue to fund with cash generated from operations.

During 2021 and 2020, we had cash outflows of approximately $220 million and $400 million, respectively, related to the 2020 actions.

In addition, during 2021, we recorded $29 million of net pre-tax restructuring costs for restructuring actions initiated in 2019 and prior.

In 2020 and 2019, we recorded $7 million and $245 million, respectively, of net pre-tax restructuring costs for restructuring actions initiated in 2019 and prior.

For additional discussion of restructuring, see “Note 14:

Restructuring Costs” within Item 8 of this Form 10-K.

The changes in Net income (loss) attributable to common shareowners and diluted EPS from operations for 2022 compared to 2021 and for 2021 compared to 2020 were driven by the changes in continuing operations, as discussed above in Net Income (Loss) from Continuing Operations Attributable to Common Shareowners and the changes from discontinued operations, as discussed above in Loss from Discontinued Operations Attributable to Common Shareowners.

SEGMENT REVIEW

We operate in four principal business segments:

Collins Aerospace Systems (Collins Aerospace), Pratt & Whitney, Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD).

Collins, Pratt & Whitney, RIS and RMD.

The results of RIS and RMD reflect the period subsequent to the completion of the Raytheon merger on April 3, 2020.

The historical results of Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

The Company recently announced its intention to streamline the structure of its core businesses into three principal business segments:

Collins Aerospace, Pratt & Whitney and Raytheon.

The Company plans to determine the exact composition of each segment and implement the reorganization in the second half of 2023.

For a detailed description of our businesses, see “Business” within Item 1 of this Form 10-K.

As previously announced, effective January 1, 2021, we reorganized certain product areas of our RIS and RMD businesses to more efficiently leverage our capabilities.

The amounts and presentation of our business segments, including intersegment activity, set forth in this Form 10-K reflect this reorganization.

The reorganization does not impact our previously reported Collins Aerospace Systems and Pratt & Whitney segment results, or our consolidated balance sheets, statements of operations or statements of cash flows.

We present a FAS/CAS operating adjustment outside of segment results, which represents the difference between the service cost component of our pension and postretirement benefit (PRB) expense under the Financial Accounting Standards (FAS) requirements of U.S.

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Over time, we generally expect to recover the related RIS and RMD pension and PRB liabilities through the pricing of our products and services to the U.S.

Collins Aerospace and Pratt & Whitney segments generally record pension and PRB expense on a FAS basis.

Segments are generally based on the management structure of the businesses and the grouping of similar operations, based on capabilities and technologies, where each management organization has general operating autonomy over diversified products and services.

Collins and Pratt & Whitney generally record pension and PRB expense on a FAS basis.

and services.

Segment Total Net Sales and Operating profit (loss) include intercompany sales and profit, which are ultimately eliminated within Eliminations and other, which also includes certain smaller non-reportable segments.

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(dollars in millions) 2022 2021 2020

Collins Aerospace Systems $ 18,449 $ 19,288 $ 26,028

Collins Aerospace $ 20,597 $ 18,449 $ 19,288

Pratt & Whitney 20,530 18,150 16,799

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(dollars in millions) 2022 2021 2020

Collins Aerospace Systems $ 1,759 $ 1,466 $ 4,508

Collins Aerospace $ 2,343 $ 1,759 $ 1,466

Pratt & Whitney 1,075 454 (564)

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2020 amounts include Forcepoint, LLC, which was acquired as part of the Raytheon merger, and subsequently disposed of on January 8, 2021.

(2) Corporate expenses and other unallocated items in 2021 and 2020 include the net expenses related to the U.S.

(2) Includes the net expenses related to the U.S.

Army’s Lower Tier Air and Missile Defense Sensor (LTAMDS) project.

No amounts were recorded in 2019.

(3) Acquisition accounting adjustments in 2020 includes the $3.2 billion goodwill impairment loss in the second quarter of 2020 related to two Collins Aerospace reporting units.

(3) 2020 includes the $3.2 billion goodwill impairment loss in the second quarter of 2020 related to two Collins reporting units.

Refer to “Note 2:

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As a result of the Raytheon merger, RIS’s and RMD’s long-term contracts that are accounted for on a percentage of completion basis, were reset to zero percent complete as of the merger date because only the unperformed portion of the contract at the merger date represented an obligation of the Company.

This had the impact of reducing gross favorable and unfavorable EAC adjustments for these segments in the short term, most notably in 2020.

The change in net EAC adjustments of $753 million in 2021 compared 2020 was primarily due to a favorable change in net EAC adjustments of $635 million at Pratt & Whitney, due to the absence of significant unfavorable contract adjustments in the prior year, and a favorable change in net EAC adjustments of $126 million at RIS and $40 million at RMD, primarily due to the Raytheon Merger.

This was partially offset by an unfavorable change in net EAC adjustments of $48 million at Collins Aerospace spread across numerous individual programs with no individual or common significant driver.

The change in net EAC adjustments of $574 million in 2020 compared 2019 was primarily due to an increase in net unfavorable EAC adjustments of $544 million at Pratt & Whitney, principally due to the economic and operating environment primarily driven by the COVID-19 pandemic.

This had the impact of reducing gross favorable and unfavorable EAC adjustments for these segments in the short term period following the merger, most notably in 2020.

The change in net EAC adjustments of $147 million in 2022 compared 2021 was primarily due to unfavorable changes in net EAC adjustments of $183 million at RMD and $108 million at RIS, including the impact of acquisitions and dispositions, both spread across numerous individual programs, with no individual or common significant driver, and includes the impact of continued supply chain and labor market constraints.

These unfavorable changes were partially offset by a favorable change in net EAC adjustments of $119 million at Collins, spread across numerous individual programs, with no individual or common significant driver, and a favorable change in net EAC adjustments of $26 million at Pratt & Whitney primarily due to a $50 million favorable contract adjustment resulting from a contract modification on a commercial aftermarket program in the second quarter of 2022.

The change in net EAC adjustments of $753 million in 2021 compared 2020 was primarily due to a favorable change in net EAC adjustments of $635 million at Pratt & Whitney, due to the absence of significant unfavorable contract adjustments in 2020, and a favorable change in net EAC adjustments of $126 million at RIS and $40 million at RMD, primarily due to the Raytheon merger.

This was partially offset by an unfavorable change in net EAC adjustments of $48 million at Collins spread across numerous individual programs with no individual or common significant driver.

Significant EAC adjustments, when they occur, are discussed in each business segment’s discussion below.

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(dollars in billions) 2022 2021

Collins Aerospace Systems $ 24 $ 23

Collins Aerospace $ 25 $ 24

Pratt & Whitney 100 85

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Included in total backlog is defense backlog of $69 billion and $63 billion as of December 31, 2022 and 2021, respectively.

Our defense operations consist primarily of our RIS and RMD businesses and operations in the defense businesses within our Collins Aerospace and Pratt & Whitney segments.

Our defense operations consist primarily of our RIS and RMD businesses and operations in the defense businesses within our Collins and Pratt & Whitney segments.

Defense bookings were approximately $47 billion, $40 billion and $31 billion for 2022, 2021 and 2020 respectively.

In the quarter ended March 31, 2022, we reversed $1.3 billion of total backlog related to our sales contracts in Russia at Pratt & Whitney and Collins as discussed further in “Note 1:

Basis of Presentation and Summary of Accounting Principles” within Item 8 of this Form 10-K.

Backlog, which is equivalent to our RPO for our sales contracts, represents the aggregate dollar value of firm orders for which products have not been provided or service has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ type contracts).

Backlog generally increases with bookings and generally decreases as sales are recognized on these bookings and is affected by changes in foreign exchange rates, as well as contract cancellations and terminations as discussed further below.

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Defense bookings generally represent the dollar value of new external defense contracts awarded to us during the reporting period and include firm orders for which funding has not been appropriated.

Defense bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ type contracts), and are reduced for contract cancellations and terminations of bookings recognized in the current period.

We reflect contract cancellations and terminations from prior year bookings, as well as the impact of changes in foreign exchange rates, directly as an adjustment to backlog in the period in which the cancellation or termination occurs and the impact is determinable.

Defense bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ type contracts).

We reflect contract cancellations and terminations, as well as the impact of changes in foreign exchange rates,

directly as an adjustment to backlog in the period in which the cancellation or termination occurs and the impact is determinable.

Contract cancellations and terminations also include contract underruns on cost-type programs.

Collins Aerospace Systems

Collins Aerospace

(dollars in millions) 2022 2021 2020 2022 compared with 2021

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2022 Compared with 2021

The organic sales decrease of $0.6 billion in 2021 compared to 2020 primarily relates to lower commercial aerospace OEM sales of $0.8 billion, predominately due to wide body volume declines principally driven by lower 787 deliveries.

This was partially offset by higher commercial aerospace aftermarket sales of $0.3 billion primarily due to an increase in flight hours and aircraft fleet utilization as commercial aerospace continues to recover from the prior year’s unfavorable economic environment principally driven by the COVID-19 pandemic.

The organic sales increase of $2.4 billion in 2022 compared to 2021 primarily relates to higher commercial aerospace aftermarket sales of $1.7 billion, including increases across all aftermarket sales channels, and higher commercial aerospace OEM sales of $1.0 billion, both principally driven by the recovery of commercial air traffic which has resulted in an increase in flight hours, aircraft fleet utilization and narrow-body commercial OEM volume growth.

These increases were partially offset by lower military sales of $0.3 billion in 2022 compared to 2021 primarily due to lower material receipts and decreased volume.

The organic profit increase of $0.7 billion in 2022 compared to 2021 was primarily due to higher commercial aerospace operating profit of $1.2 billion principally driven by the higher commercial aerospace aftermarket sales discussed above, partially offset by the absence of a favorable $52 million impact from a contract-related matter in 2021.

The increase in commercial aerospace operating profit was partially offset by lower military operating profit of $0.2 billion principally driven by the lower military sales discussed above, and higher selling, general and administrative expenses of $0.2 billion, which includes the benefits of cost reduction initiatives.

The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the disposition of two non-core businesses in the second quarter of 2022.

The decrease in Other operating profit of $0.1 billion in 2022 compared to 2021 primarily relates to $141 million of pretax charges related to increased estimates for credit losses, inventory reserves, recognition of purchase order obligations and a loss resulting from the exit of our investment in a Russia-based joint venture, all due to global sanctions on and export controls with respect to Russia in the first quarter of 2022.

In addition, we recognized $69 million of charges associated with the disposition of two non-core businesses in the second quarter of 2022.

Basis of Presentation and Summary of Accounting Principles” within Item 1 of this Form 10-K for additional information on Russia sanctions.

2021 Compared with 2020

The organic sales decrease of $0.6 billion in 2021 compared to 2020 primarily relates to lower commercial aerospace OEM sales of $0.8 billion, predominantly due to wide body volume declines principally driven by lower 787 deliveries.

This was partially offset by higher commercial aerospace aftermarket sales of $0.3 billion primarily due to an increase in flight hours and aircraft fleet utilization as commercial aerospace continued to recover from the unfavorable economic environment principally driven by the COVID-19 pandemic.

Military sales were down slightly in 2021 compared to 2020.

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Included in organic profit in 2020 was $72 million of foreign government wage subsidies related to COVID-19.

The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the sale of our Collins Aerospace military GPS and space-based precision optics businesses in the third quarter of 2020, as further discussed in “Note 2:

The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the sale of our Collins military GPS and space-based precision optics businesses in the third quarter of 2020, as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K.

The decrease in Other operating profit of $0.6 billion in 2021 compared to 2020 primarily relates to the absence of prior year gains of $595 million on the sales of the Collins Aerospace military GPS and space-based precision optics businesses.

2020 Compared with 2019

The organic sales decrease of $6.6 billion in 2020 compared to 2019 primarily relates to lower commercial aerospace OEM sales of $3.7 billion and lower commercial aerospace aftermarket sales of $3.4 billion, including declines across all aftermarket sales channels.

These reductions were primarily due to the economic environment principally driven by the COVID-19 pandemic, which resulted in lower flight hours, aircraft fleet utilization and commercial OEM deliveries.

This decrease was

partially offset by higher military sales of $0.6 billion.

Included in the organic sales decrease were lower commercial aerospace OEM and aftermarket sales of approximately $1.0 billion related to the Boeing 737 Max program and fewer upgrades due to certain regulatory mandates that were primarily completed in early 2020.

The organic profit decrease of $3.6 billion in 2020 compared to 2019 was primarily due to lower commercial aerospace operating profit of $4.0 billion principally driven by the lower commercial aerospace OEM and aftermarket sales volume discussed above.

Included in the lower commercial OEM operating profit were $157 million of significant unfavorable adjustments principally driven by the expected acceleration of fleet retirements of a certain aircraft.

The decrease was partially offset by lower research and development expenses of $0.2 billion, which includes the impact of cost reduction initiatives.

Included in the operating profit decrease was $125 million of increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses.

Included in organic profit in 2020 was other income of $72 million related to foreign government wage subsidies due to COVID-19.

The increase in other operating profit of $0.8 billion in 2020 compared to 2019 primarily relates to gains of $595 million on the sales of the Collins Aerospace businesses discussed above, the absence of prior year amortization of inventory fair value step-up associated with the Rockwell Acquisition of $181 million and the absence of a prior year loss on the sale of a business of $25 million.

The decrease in other operating profit of $0.6 billion in 2021 compared to 2020 primarily relates to the absence of prior year gains of $595 million on the sales of the Collins military GPS and space-based precision optics businesses.

Pratt & Whitney

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2022 Compared with 2021

The organic sales increase of $1.3 billion in 2021 compared to 2020 primarily reflects higher commercial aftermarket sales of $1.2 billion, primarily due to an increase in shop visits and related spare part sales driven by the recovery from the prior year’s unfavorable economic environment largely due to the COVID-19 pandemic, and higher commercial OEM sales of $0.1 billion.

The organic sales increase of $2.5 billion in 2022 compared to 2021 primarily reflects higher commercial aftermarket sales of $1.8 billion primarily due to an increase in shop visits and related spare part sales as the commercial aerospace environment continues to recover.

The increase also includes higher commercial OEM sales of $0.9 billion driven by favorable mix and higher volume on commercial engine shipments.

These increases were partially offset by lower military sales of $0.2 billion primarily due to lower sales on F135 production volume and lower volume on legacy aftermarket programs, partially offset by higher F135 sustainment volume.

The organic profit increase of $0.8 billion in 2022 compared to 2021 was primarily driven by higher commercial aerospace operating profit of $1.1 billion principally due to the aftermarket sales volume increase discussed above and favorable OEM mix.

The organic profit increase also includes slightly higher military operating profit primarily driven by favorable mix.

These increases were partially offset by a combined increase in selling, general and administrative expenses and research and development costs of $0.3 billion.

The year over year increase in commercial aerospace operating profit includes a $50 million favorable contract adjustment on a commercial aftermarket program in the second quarter of 2022.

In 2021, our organic profit included approximately $50 million related to foreign government wage subsidies due to COVID-19.

The decrease in other operating profit of $0.1 billion in 2022 compared to 2021 was primarily due to $155 million of pretax charges related to impairment of customer financing assets for products under lease, increased estimates for credit losses,

inventory reserves and recognition of purchase order obligations, all due to global sanctions on and export controls with respect to Russia in the first quarter of 2022.

Basis of Presentation and Summary of Accounting Principles” within Item 1 of this Form 10-K for additional information on Russia sanctions.

2021 Compared with 2020

The organic sales increase of $1.3 billion in 2021 compared to 2020 primarily reflects higher commercial aftermarket sales of $1.2 billion, primarily due to an increase in shop visits and related spare part sales driven by the recovery from the unfavorable economic environment largely due to the COVID-19 pandemic, and higher commercial OEM sales of $0.1 billion.

Prior year commercial aftermarket sales include unfavorable EAC adjustments of $0.4 billion, discussed further below.

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The higher commercial aerospace operating profit also includes the impact of the aftermarket sales volume increase discussed above, which was partially offset by lower commercial OEM operating profit due to unfavorable mix on the increased sales volume.

The lower year-over-year unfavorable commercial aerospace EAC adjustments were principally driven by prior year unfavorable EAC adjustments discussed below.

The lower selling, general and administrative expenses were primarily driven by the absence of a $257 million charge in the prior year for allowances for

credit losses, partially offset by higher employee-related costs.

The change in organic operating profit was also impacted by $106 million of lower government wage subsidies, and the absence of prior year unfavorable EAC adjustments on certain commercial aftermarket and military programs, as discussed below.

The increase in other operating profit of $0.1 billion in 2021 compared to 2020 was primarily driven by the absence of an $89 million impairment of commercial aircraft program assets and $43 million of reserves related to a commercial financing arrangement, both recorded in the prior year.

2020 Compared with 2019

The organic sales decrease of $4.1 billion in 2020 compared to 2019 primarily reflects lower commercial aftermarket sales of $3.8 billion, due to a significant reduction in shop visits and related spare part sales, and lower commercial OEM sales of $1.1 billion, primarily due to a significant reduction in commercial engine deliveries, all principally driven by the economic and operating environment primarily due to the COVID-19 pandemic.

These declines were partially offset by higher military sales of $0.8 billion primarily driven by an increase in F135 engine sales and aftermarket growth on multiple platforms.

Included in the lower commercial aftermarket sales is a $0.4 billion impact to sales from the net unfavorable contract adjustments discussed further below.

The organic profit decrease of $2.1 billion in 2020 compared to 2019 was primarily driven by lower commercial aftermarket operating profit of $2.4 billion driven by the sales volume decrease discussed above, unfavorable mix, a $334 million unfavorable EAC adjustment on a commercial engine aftermarket contract due to lower estimated revenues driven by a change in the estimated maintenance coverage period, an unfavorable EAC adjustment of $129 million related to lower estimated revenues due to the restructuring of a customer contract, and $86 million related to an unfavorable EAC adjustment and increased allowances for warranty for legacy fleet related retrofits.

The decrease was also driven by higher selling, general and administrative expenses of $0.2 billion primarily driven by $257 million of increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses, primarily related to the impact of the COVID-19 pandemic.

This decrease in organic profit was partially offset by lower research and development costs of $0.3 billion, which includes the impact of cost reduction initiatives, and other income of $153 million related to foreign government wage subsidies due to COVID-19.

Included in organic profit was an increase in net unfavorable EAC adjustments of $544 million, which included the unfavorable EAC adjustments discussed above and significant net unfavorable EAC adjustments of $62 million based on a portfolio review of our commercial aftermarket programs in the second quarter of 2020 in consideration of the estimated lower flight hours, a change in the estimated number of shop visits and the related amount of estimated costs.

Also included was an unfavorable EAC adjustment of $44 million in the second quarter of 2020 on a military program primarily driven by a shift in estimated overhead costs due to the lower commercial engine activity discussed above.

The decrease in other operating profit of $0.2 billion in 2020 compared to 2019 was primarily due to an $89 million impairment of commercial aircraft program assets in the current year and $43 million of reserves related to a commercial financing arrangement in the current year.

Defense Bookings – In addition to a number of smaller bookings, Pratt & Whitney booked the following significant bookings in 2021:

$1.7 billion for F135 sustainment contracts, $435 million for an F119 sustainment contract, $255 million for an F135 production contract and $212 million for F100 engines for an international customer.

The lower year-over-year unfavorable commercial aerospace EAC adjustments were principally driven by prior year unfavorable EAC adjustments including a $334 million unfavorable EAC adjustment on a commercial engine aftermarket contract due to lower estimated revenues driven by a change in the estimated maintenance coverage period, an unfavorable EAC adjustment of $129 million related to lower estimated revenues due to the restructuring of a customer contract, and $86 million related to an unfavorable EAC adjustment and increased allowances for warranty for legacy fleet related retrofits.

The lower selling, general and administrative expenses were primarily driven by the absence of a $257 million charge in 2020 for allowances for credit losses, partially offset by higher employee-related costs.

Defense Bookings – In addition to a number of smaller bookings, in 2022 Pratt & Whitney booked $4.9 billion for F135 production Lots 15, 16 and 17, $1.4 billion for F135 sustainment, $251 million for tanker production Lots 7 and 8 and $210 million for F117 sustainment.

Raytheon Intelligence & Space

(dollars in millions) 2022 2021 2020 2022 compared with 2021 2021 compared with 2020

Net sales $ 15,180 11,069 — 37 % NM

Operating profit 1,833 1,020 — 80 % NM

Net sales $ 14,312 $ 15,180 $ 11,069 (6) % 37 %

Operating profit 1,342 1,833 1,020 (27) % 80 %

Operating profit margins 9.4 % 12.1 % 9.2 %

Bookings $ 14,019 10,568 — 33 % NM

NM = Not meaningful

Bookings $ 12,391 $ 14,019 $ 10,568 (12) % 33 %

2022 Compared with 2021

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2021 Compared with 2020

Factors Contributing to Total Change in Net Sales

(dollars in millions) Organic (1)

Acquisitions /

Divestitures, net Other Total Change

Net sales $ 86 $ 3,991 $ 34 $ 4,111

(1) See “Segment Review” above for definition of organic.

A reconciliation of these measures to reported U.S.

GAAP amounts is provided in the table above.

Factors Contributing to Change in Operating Profit

(dollars in millions) Volume Net change in EAC adjustments Acquisitions /

Divestitures, net Mix and other performance Total Change

Operating profit $ (10) $ 132 $ 399 $ 292 $ 813

2022 Compared with 2021

The organic sales decrease of $0.2 billion in 2022 compared to 2021 was driven by lower Command, Control and Communications sales of $0.3 billion partially offset by higher sales at both Cyber, Training and Services and Sensing and Effects.

The lower Command, Control and Communications sales were primarily driven by an anticipated decrease in production volumes on certain tactical communications systems programs.

The higher Cyber, Training and Services sales were driven by certain classified cyber programs.

The higher Sensing and Effects sales were primarily driven by an increase in sales on classified programs and an increase due to certain electro-optical development programs transitioning into production, partially offset by a decrease in surveillance and targeting systems due to lower production volume on certain legacy programs.

The decrease in operating profit of $0.5 billion and the related decrease in operating profit margins in 2022 compared to 2021, were primarily due to an unfavorable change in mix and other performance of $0.3 billion driven by the absence of a prior year $239 million gain, net of transaction costs, on the sale of the global training and services business, as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K and acquisition / divestitures, net of $0.1 billion described below.

The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the sale of the global training and services business in the fourth quarter of 2021.

2021 Compared with 2020

Organic sales in 2021 were relatively consistent with 2020.

The increase in net sales due to acquisitions / divestitures, net primarily relates to the Raytheon merger on April 3, 2020.

The increase in operating profit of $0.8 billion and the related increase in operating profit margins in 2021 compared to 2020, were primarily due to the change in Acquisitions / divestitures, net of $399 million, primarily due to the Raytheon Merger on April 3, 2020, an increase in mix and other performance of $292 million primarily due to a $239 million gain, net of transaction costs, on the sale of RIS’s global training and services business in December 2021, as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K, and the net favorable change in EAC adjustments of $132 million, which was primarily driven by the absence of $124 million of unfavorable EAC adjustments related to a domestic classified fixed price development program in 2020.

2020 Compared with 2019

The increase in net sales of $11.1 billion in 2020 compared to 2019 was due to the Raytheon Merger on April 3, 2020.

The increase in operating profit of $1.0 billion and the related increase in operating profit margins in 2020 compared to 2019 were due to the Raytheon Merger.

Included in operating profit in 2020 were $124 million of unfavorable EAC adjustments for loss reserves related to a domestic classified fixed price development program in a net loss position, of which $87 million was recorded in the fourth quarter of 2020.

The increase in operating profit of $0.8 billion and the related increase in operating profit margins in 2021 compared to 2020, were primarily due to the change in acquisitions / divestitures, net of $399 million, primarily due to the Raytheon merger on April 3, 2020, a favorable change in mix and other performance of $292 million primarily due to a $239 million gain, net of transaction costs, on the sale of RIS’s global training and services business in December 2021, as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K, and the net favorable change in EAC adjustments of $132 million, which was primarily driven by the absence of $124 million of unfavorable EAC adjustments in 2020 for loss reserves related to a domestic classified fixed price development program in a net loss position.

Backlog and Bookings – Backlog was $16 billion at December 31, 2022 compared to $18 billion at December 31, 2021.

Included in the decrease in backlog was a $0.9 billion adjustment related to the sale of RIS’s global training and services business discussed above.

In 2021, RIS booked $4.8 billion on a number of classified contracts, $672 million of Electro-Optical Infrared (EO/IR) products and services contracts in the fourth quarter of 2021 including the Electro-Optical Distributed Aperture System (EODAS) for the F35 Joint Strike Fighter program, $419 million on the Next Generation Jammer (NGJ) Mid-Band Low Rate Initial Production (LRIP) contract with the U.S.

Navy, $365 million on the Standard Terminal Automation Replacement System (STARS) program for the Federal Aviation Administration (FAA), $227 million on a missile warning and defense contract, $211 million to provide additional upgrades to the Global Positioning System Next Generation Operational Control System (GPS OCX) program for the U.S.

Air Force, $199 million on an international tactical airborne radar sustainment contract, and $185 million on an international training contract with the U.K.

In addition to a number of smaller bookings, in 2022, RIS booked $5.0 billion on a number of classified contracts, and a major award for a prototype Missile Track Custody system for the U.S.

RIS also booked $311 million on the Next-Generation Overhead Persistent Infrared (Next-Gen OPIR) GEO missile warning and defense contract for the U.S.

Space Force, $271 million to provide communications satellite payloads to a commercial customer, and $253 million on the Development, Operations and Maintenance (DOMino) cyber program for the Department of Homeland Security (DHS).

Raytheon Missiles & Defense

(dollars in millions) 2022 2021 2020 2022 compared with 2021 2021 compared with 2020

Net sales $ 15,539 11,396 — 36 % NM

Operating profit 2,004 880 — 128 % NM

Net sales $ 14,863 $ 15,539 $ 11,396 (4) % 36 %

Operating profit 1,519 2,004 880 (24) % 128 %

Operating profit margins 10.2 % 12.9 % 7.7 %

Bookings $ 15,650 9,716 — 61 % NM

NM = Not meaningful

Bookings $ 20,048 $ 15,650 $ 9,716 28 % 61 %

2022 Compared with 2021

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2021 Compared with 2020

Factors Contributing to Total Change in Net Sales

(dollars in millions) Organic (1)

Acquisitions /

Divestitures, net Other Total Change

Net sales $ 130 $ 3,999 $ 14 $ 4,143

(1) See “Segment Review” above for definition of organic.

A reconciliation of these measures to reported U.S.

GAAP amounts is provided in the table above.

Factors Contributing to Change in Operating Profit

(dollars in millions) Volume Net change in EAC adjustments Acquisitions /

Divestitures, net Mix and other performance Total Change

Operating profit $ 7 $ (14) $ 521 $ 610 $ 1,124

2022 Compared with 2021

The organic sales decrease of $0.6 billion in 2022 compared to 2021 was primarily due to lower net sales of $0.7 billion from our Land Warfare and Air Defense programs, lower net sales of $0.3 billion from our Air Power programs, and lower net sales of $0.2 billion on our Naval Power programs.

These decreases were partially offset by higher net sales of $0.4 billion from our Strategic Missile Defense programs.

The decrease in Land Warfare and Air Defense programs includes lower sales on certain international air and missile defense programs primarily driven by lower material receipts as a result of supply chain constraints and anticipated decreases in production.

The decrease in Air Power programs includes lower net sales on the Paveway program and the Advanced Medium Range Air-to-Air Missile (AMRAAM) program.

The lower net sales in Naval Power programs was driven by lower volume across multiple programs, partially offset by higher net sales from SPY-6 programs.

The increased sales in Strategic Missile Defense programs included higher net sales from the Next Generation Interceptor (NGI) program.

The decrease in operating profit of $0.5 billion and the related decrease in operating profit margins in 2022 compared to 2021 were primarily due to a change in mix and other performance of $0.3 billion and a net unfavorable change in EAC adjustments of $0.2 billion.

The change in mix and other performance includes unfavorable program mix and a $42 million charge associated with a divestiture of a small non-core Naval Power business.

The net unfavorable change in EAC adjustments was spread across numerous programs and includes the impact of continued supply chain and labor market constraints.

2021 Compared with 2020

Organic sales in 2021 were relatively consistent with 2020.

The increase in net sales due to acquisitions / divestitures, net relates to the Raytheon merger on April 3, 2020.

The increase in operating profit of $1.1 billion and the related increase in operating profit margins in 2021 compared to 2020 was primarily due to a change in mix and other performance of $610 million, primarily driven by the absence of an unfavorable profit impact of $516 million in 2020 related to certain international contracts as further described below, and a change in acquisitions / divestitures, net of $521 million due to the Raytheon Merger on April 3, 2020.

2020 Compared with 2019

The increase in net sales of $11.4 billion in 2020 compared to 2019 was due to the Raytheon Merger on April 3, 2020.

The increase in operating profit of $0.9 billion and the related increase in operating profit margins in 2020 compared to 2019 was due to the Raytheon Merger.

Included in operating profit in 2020 was an unfavorable net impact of $516 million related to certain international contracts as further described below, and a $25 million net favorable EAC adjustment due to a revised estimate in costs to complete an industrial cooperation agreement obligation on multiple contracts for an international customer based upon an agreement signed in the fourth quarter of 2020.

The increase in operating profit of $1.1 billion and the related increase in operating profit margins in 2021 compared to 2020 was primarily due to a change in mix and other performance of $0.6 billion, primarily driven by the absence of an unfavorable profit impact of $516 million in 2020 related to certain international contracts as further described below, and a change in acquisitions / divestitures, net of $0.5 billion due to the Raytheon merger on April 3, 2020.

In the fourth quarter of 2020, RMD reversed $119 million of sales for work performed subsequent to the date of the Raytheon merger through the end of the third quarter of 2020, and the related operating profit, on our direct commercial sales contracts for precision guided munitions with a certain Middle East customer, for which we have not yet obtained regulatory approval.

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RMD also recognized an unfavorable profit impact of $516 million related to these contracts, primarily related to inventory reserves, contract asset impairments and recognition of supplier related obligations related to termination liability, which we do not expect to be utilized or otherwise directed to other customers.

In addition, we reversed $755 million of backlog on these contracts.

Backlog and Bookings – Backlog was $29 billion at both December 31, 2021 and 2020.

In 2021, RMD booked $3.2 billion on a number of classified contracts, including approximately $2 billion for the Long Range Standoff (LRSO) Weapon System Engineering and Manufacturing Development (EMD) contract for the U.S.

RMD also booked $1,315 million for the NGI program for the Missile Defense Agency (MDA), $1,088 million for the Advanced Medium Range Air-to-Air Missile (AMRAAM) for the U.S.

Air Force and Navy and international customers, $729 million for Standard Missile-2 (SM-2) for the U.S.

Navy and international customers, $627 million for Evolved Seasparrow Missile (ESSM) for the U.S.

Navy and international customers, $432 million to provide Guidance Enhanced Missiles (GEM-T) for an international customer, $327 million for AIM-9X Sidewinder short-range air-to-air missiles for the U.S.

Navy and Air Force and international customers, $291 million for Stinger missiles for international customers, $247 million to provide Patriot engineering services support for the U.S.

Army and international customers, $242 million on the Army Navy/Transportable Radar Surveillance-Model 2 (AN/TPY-2) radar program for the MDA, $213 million for StormBreaker for the U.S.

Air Force and Navy, $175 million to provide Patriot technical assistance for an international customer, and $164 million for the Air and Missile Defense Radar (AMDR) program for the U.S.

Eliminations and other

Backlog and Bookings – Backlog was $34 billion at December 31, 2022 compared to $29 billion at December 31, 2021.

In 2022, RMD booked $3.5 billion on a number of classified contracts, including a strategic competitive award.

RMD also booked $1.1 billion for the SPY-6 Hardware Production and Sustainment contract for the U.S.

Navy, $1.0 billion to provide Guidance Enhanced Missile (GEM-T) for an international customer, $1.0 billion for the first Hypersonic Attack Cruise Missile (HACM) for the U.S.

Air Force, $972 million for AMRAAM for the U.S.

Air Force and Navy and international customers, $762 million for AIM-9X Sidewinder short-range air-to-air missiles for the U.S.

Navy and Air Force and international customers, $698 million to provide National Advanced Surface-to-Air Missile System (NASAMS) for Ukraine, $662 million on Stinger for the U.S.

Army, $648 million for Standard Missile-3 (SM-3) for the Missile Defense Agency (MDA), $415 million on Evolved Seasparrow Missile (ESSM) for the U.S.

Navy and international customers, $405 million on a Surveillance Radar Program (SRP) for an international customer, $384 million for Excalibur Rapid Demonstration Phase 2 for the U.S.

Army, $353 million for the Lower Tier Air and Missile Defense Sensor (LTAMDS) Pre-planned Product Improvement program for the U.S.

Army, $247 million on MIR replenishment for an international customer through our consolidated Raytheon-Rafael joint venture, $218 million to provide Patriot engineering support services for the U.S.

Army and international customers, $217 million on Tomahawk for the U.S.

Navy, $209 million for Naval Strike Missiles (NSM) Coastal Defense System (CDS) for the U.S.

Navy, and $207 million for integrated effectors and sensors for Counter-Unmanned Aircraft Systems (C-UAS) defense system for the U.S.

Corporate and Eliminations and other

Eliminations and other reflects the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller non-reportable business segments, including Forcepoint, which was acquired as part of the Raytheon merger and subsequently disposed of on January 8, 2021, as further discussed in “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K.

Corporate expenses and other unallocated items consists of costs and certain other unallowable corporate costs not considered part of management’s evaluation of reportable segment operating performance including restructuring and merger costs related to the Raytheon merger, net costs associated with corporate research and development, including the LTAMDS program and certain reserves.

Net Sales Operating Profit

(dollars in millions) 2022 2021 2020 2022 2021 2020

Inter-segment eliminations (1)

$ (2,945) $ (2,492) $ (1,594) $ (86) $ (79) $ (208)

Other non-reportable segments 15 527 13 (47) (28) 68

Eliminations and other $ (3,228) $ (2,930) $ (1,965) $ (174) $ (133) $ (107)

(1) The increase in inter-segment eliminations sales in 2020 compared to 2019, was primarily due to the Raytheon Merger on April 3, 2020.

The decrease in other non-reportable segment sales and the change in other non-reportable segment operating profit in 2021 compared to 2020, was primarily due to the sale of our Forcepoint business in the first quarter of 2021.

The increase in other non-reportable segment sales in 2020 compared to 2019, was primarily related to Forcepoint sales.

The decrease in other non-reportable segments operating profit in 2020 compared to 2019, was primarily due to the impact of foreign currency translation, partially offset by operating profit related to Forcepoint.

Corporate expenses and other unallocated items — — — (318) (552) (590)

Corporate expenses and other unallocated items consists of costs and certain other unallowable corporate costs not considered part of management’s evaluation of reportable segment operating performance including restructuring and merger costs related to the Raytheon Merger, net costs associated with corporate research and development, including the Lower Tier Air and Missile Defense Sensor (LTAMDS) program which was acquired as part of the Raytheon Merger, and certain reserves.

See Restructuring Costs, above, for a more detailed discussion of our restructuring costs.

(dollars in millions) 2021 2020 2019

Corporate expenses and other unallocated items $ (552) $ (590) $ (367)

The change in Corporate expenses and other unallocated items of $38 million for 2021 compared to 2020 was primarily driven by a decrease in merger-related costs related to the Raytheon Merger of $148 million and lower restructuring costs of $112 million, partially offset by an accrual of $147 million in the fourth quarter of 2021 related to the ongoing DOJ investigation into contract pricing matters at RMD and an increase in net expenses related to the LTAMDS project.

The change in corporate expenses and other unallocated items of $223 million in 2020 compared to 2019 was primarily driven by increased restructuring costs of $201 million, $130 million of net expenses related to the LTAMDS project acquired as part of the Raytheon Merger and an increase in merger-related costs related to the Raytheon Merger of $82 million, partially offset by $40 million of merger-related costs for the Rockwell Acquisition in 2019 and other unallocated items with no individual or common significant driver.

The increase in eliminations and other sales in 2022 compared to 2021 was primarily due to an increase in intersegment eliminations, principally driven by Collins and RIS.

Eliminations and other operating profit in 2022 was relatively consistent with 2021.

The increase in eliminations and other sales in 2021 compared to 2020 was primarily due to the sale of our Forcepoint business in the first quarter of 2021 and an increase in intersegment eliminations, principally driven by RIS.

The change in eliminations and other operating profit in 2021 compared to 2020 was primarily due to the sale of our Forcepoint business in the first quarter of 2021.

The change in corporate expenses and other unallocated items of $234 million in 2022 compared to 2021 was primarily driven by the absence of an accrual of $147 million in the fourth quarter of 2021 related to the ongoing DOJ investigation into contract pricing matters at RMD, a decrease in expenses related to the LTAMDS project and lower restructuring costs, partially offset by an increase in information technology-related costs.

The change in corporate expenses and other unallocated items of $38 million in 2021 compared to 2020 was primarily driven by a decrease in merger-related costs related to the Raytheon merger of $148 million and lower restructuring costs of $112 million, partially offset by an accrual of $147 million in the fourth quarter of 2021 related to the ongoing DOJ investigation into contract pricing matters at RMD and an increase in net expenses related to the LTAMDS project.

FAS/CAS operating adjustment

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GAAP is the FAS/CAS operating adjustment.

The FAS/CAS operating adjustment results in consolidated pension expense in operating profit equal to the service cost component of FAS expense under U.S.

The FAS/CAS operating adjustment results in

consolidated pension expense in operating profit equal to the service cost component of FAS expense under U.S.

The segment results of Collins Aerospace and Pratt & Whitney generally include FAS service cost.

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FAS/CAS operating adjustment $ 1,520 $ 1,796 $ 1,106

The change in our FAS/CAS operating adjustment of $276 million in 2022 compared to 2021 was driven by a $316 million decrease in CAS expense, partially offset by a $40 million decrease in FAS service cost.

The decrease in CAS expense was primarily due to an increase in applicable discount rates as a result of U.S.

qualified pension plan funding relief included in the American Rescue Plan Act of 2021 (ARPA).

The change in our FAS/CAS operating adjustment of $690 million in 2021 compared to 2020 was driven by a $741 million increase in CAS expense, partially offset by a $51 million increase in FAS service cost.

The increase in our CAS expense was primarily due to the Raytheon merger.

The change in our FAS/CAS operating adjustment of $1,106 million in 2020 compared to 2019 was due to the Raytheon Merger.

The plan change does not impact participants’ historical benefit accruals.

Benefits for service after December 31, 2022 will be based on a cash balance formula.

In response to the economic environment resulting from the COVID-19 pandemic, Congress passed the American Rescue Plan Act of 2021 (ARPA) in March 2021 which included pension funding relief provisions, as further discussed in “Cash Flow - Operating Activities”.

These pension funding relief provisions are expected to result in decreases to CAS expense, and the related recovery under our contracts, for our U.S.

qualified pension plans beginning in 2022, as the interest rates used to determine pension funding requirements for these plans are also used in determining CAS expense.

Acquisition accounting adjustments

Acquisition accounting adjustments include the amortization of acquired intangible assets related to acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through acquisitions, the amortization of customer contractual obligations related to loss making or below market contracts acquired, and goodwill impairment.

These adjustments are not considered part of management’s evaluation of segment results.

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(dollars in millions) 2022 2021 2020

Collins Aerospace Systems $ (641) $ (3,926) $ (605)

Collins Aerospace $ (800) $ (641) $ (3,926)

Pratt & Whitney (243) (160) (117)

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Acquisition accounting adjustments $ (1,893) $ (2,203) $ (5,100)

The change in the Acquisition accounting adjustments of $2.9 billion in 2021 compared to 2020, is primarily driven by the absence of the $3.2 billion goodwill impairment loss in the second quarter of 2020 related to two Collins Aerospace reporting units, partially offset by an increase of $0.4 billion for acquisition accounting adjustments related to the Raytheon Merger, primarily due to the timing of the merger in the prior year.

Included in Acquisition accounting adjustments in 2021 was $116 million of amortization of customer contractual obligations due to the accelerated liquidation of below-market contract reserves

at Collins Aerospace driven by the termination of two customer contracts.

The change in the Acquisition accounting adjustments of $0.3 billion in 2022 compared to 2021, is primarily driven by a decrease in RIS and RMD intangibles amortization related to the Raytheon merger, partially offset by the absence of $116 million of amortization of customer contractual obligations due to the accelerated liquidation of below-market contract reserves at Collins in 2021 driven by the termination of two customer contracts.

The change in the Acquisition accounting adjustments of $2.9 billion in 2021 compared to 2020, is primarily driven by the absence of the $3.2 billion goodwill impairment loss in the second quarter of 2020 related to two Collins reporting units partially offset by an increase of $0.4 billion for acquisition accounting adjustments related to the Raytheon merger, primarily due to the timing of the merger in 2020.

Included in Acquisition accounting adjustments in 2021 was $116 million of amortization of customer contractual obligations due to the accelerated liquidation of below-market contract reserves at Collins driven by the termination of two customer contracts.

Refer to “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K for additional information on the goodwill impairment.

The change in the Acquisition accounting adjustments of $4.2 billion in 2020 compared to 2019, is primarily driven by the $3.2 billion goodwill impairment in the second quarter of 2020 related to two Collins Aerospace reporting units and an increase of $1.1 billion related to the Raytheon Merger, primarily related to the amortization of acquired intangibles.

LIQUIDITY AND FINANCIAL CONDITION

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capital expenditures, customer financing requirements, investments in and divestitures of businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, redemptions of debt and the ability to attract long-term capital at satisfactory terms.

We had $7.0 billion available under our various credit facilities at December 31, 2021.

Although our business has been and will continue to be impacted by COVID-19, we currently believe we have sufficient liquidity to withstand the potential impacts.

At December 31, 2022, we had cash and cash equivalents of $6.2 billion, of which approximately 34% was held by RTC’s foreign subsidiaries.

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Historically, our strong credit ratings and financial position have enabled us to issue long-term debt at favorable market rates.

As of December 31, 2021, our maximum commercial paper borrowing limit was $5.0 billion as the commercial paper is backed by our $5.0 billion revolving credit agreement.

We had no commercial paper borrowings as of December 31, 2021.

The daily average amount of short-term commercial paper borrowings outstanding during the year ended December 31, 2021 was $175 million.

We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock.

The commercial paper notes have original maturities of not more than 90 days from the date of issuance.

As of December 31, 2021, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $7.0 billion, consisting of a $5.0 billion revolving credit agreement, which matures in April 2025, and a $2.0 billion revolving credit agreement, which we renewed in May 2021 and expires in May 2022.

As of December 31, 2022, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $7.0 billion, consisting of a $5.0 billion revolving credit agreement, which expires in April 2025, and a $2.0 billion revolving credit agreement, which was renewed in September 2022 and expires in September 2023.

As of December 31, 2022, there were no borrowings outstanding under these agreements.

From time to time, we use commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock.

The commercial paper notes have original maturities of not more than 364 days from the date of issuance.

As of December 31, 2022, our maximum commercial paper borrowing limit was $5.0 billion as the commercial paper is backed by our $5.0 billion revolving credit agreement.

We had $0.5 billion of commercial paper outstanding at December 31, 2022, which is reflected in Short-term borrowings in our Consolidated Balance Sheet.

The proceeds from these borrowings have primarily been used to

fund payments related to the impact of a provision enacted in the Tax Cuts and Jobs Act of 2017 requiring the capitalization of research and experimental expenditures for tax purposes.

At December 31, 2022, short-term commercial paper borrowings outstanding had a weighted-average interest rate of 4.4%.

We have an existing universal shelf registration statement, which we filed with the Securities and E xchange Commission (SEC) on September 22, 2022, for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement.

The Company offers a voluntary supply chain finance (SCF) program with a global financial institution which enables our suppliers, at their sole discretion, to sell their receivables from the Company to the financial institution at a rate that leverages our credit rating, which might be beneficial to them.

Our suppliers’ participation in the SCF program does not impact or change our terms and conditions with those suppliers, and therefore, we have no economic interest in a supplier’s decision to participate in the program.

In addition, we provide no guarantees or otherwise pay for any of the costs of the program incurred by those suppliers that choose to participate, and have no direct financial relationship with the financial institution, as it relates to the program.

As such, the SCF program does not impact our overall liquidity.

The Company offers voluntary supply chain finance (SCF) programs with global financial institutions which enables our suppliers, at their sole discretion, to sell their receivables from the Company to the financial institutions at a rate that leverages our credit rating, which might be beneficial to them.

Our suppliers’ participation in the SCF programs does not impact or change our terms and conditions with those suppliers, and therefore, we have no economic interest in a supplier’s decision to participate in the programs.

In addition, we do not pay for any of the costs of the programs incurred by those suppliers that choose to participate, and have no direct financial relationship with the financial institutions, as it relates to sales of receivables made by those suppliers.

As such, the SCF programs do not impact our working capital, cash flows or overall liquidity.

We believe our cash on hand and future operating cash flows will be sufficient to meet our future operating cash needs.

Further, we continue to have access to the commercial paper markets and our existing credit facilities, and our ability to obtain debt or

equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.

Further, we continue to have access to the commercial paper markets and our existing credit facilities, and our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.

Cash Flow - Operating Activities

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Net cash flows provided by operating activities from continuing operations $ 7,168 $ 7,142 $ 4,334

Net cash flows (used in) provided by operating activities from discontinued operations (71) (728) 3,062

Net cash flows used in operating activities from discontinued operations — (71) (728)

2022 Compared with 2021 Operating Activities - Continuing Operations

Cash flows provided by operating activities in 2022 were relatively consistent with 2021 and benefited from an improvement in working capital, which was more than offset by the net increase in tax payments resulting from a change in tax law discussed below.

Included in the change in working capital was a favorable impact from accounts receivable driven by higher collections resulting from increased sales volume and a related increase in factoring as discussed below.

The change in working capital also included a favorable impact from contract assets compared to 2021 primarily due to the timing of billings and collections, and increases in accounts payable and accrued liabilities primarily driven by higher inventory purchasing activity, deferred revenue and advanced payments.

This impact was largely offset by an unfavorable impact from inventory principally due to current year increases to support sales volume growth.

The Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables.

Higher sales volume in the current year supported increased factoring activity that resulted in approximately $2.3 billion of increased cash flows provided by operating activities during 2022 , compared to a decrease in cash flows provided by operating activities of $0.2 billion during 2021 .

Factoring activity includes amounts factored on certain aerospace receivables at the customers’ request for which we may be compensated by the customer.

2021 Compared with 2020 Operating Activities - Continuing Operations

Cash generated from operating activities in 2021 was $2.8 billion higher than 2020.

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Also included in the total unfavorable change in working capital was an increase in contract assets principally driven by sales in excess of billings at Pratt & Whitney and contractual billing terms on U.S.

government and foreign military sales contracts at RMD, and growth in accounts payable and accounts receivable at Collins Aerospace and Pratt & Whitney due to an increase in sales volume as commercial aerospace recovers.

The Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables.

Factoring activity resulted in a decrease of approximately $0.2 billion in cash provided by operating activities during the year ended December 31, 2021, compared to a decrease in cash flows provided by operating activities of $1.3 billion during the year ended December 31, 2020.

The year over year favorable impact from factoring activity was primarily due to the significant decline in sales volume in 2020 principally driven by the economic environment primarily due to COVID-19.

Factoring activity includes amounts factored on certain aerospace receivables at the customers’ request for which we are compensated by the customer for the extended collection cycle.

2020 Compared with 2019 Operating Activities - Continuing Operations

Cash generated from operating activities in 2020 was $1.5 billion lower than 2019.

This decrease is primarily due to a decrease in net income after adjustments for depreciation and amortization, the 2020 goodwill impairment charge, the deferred income tax provision, stock compensation costs and net periodic pension and other post retirement income of $2.0 billion primarily driven by a decrease at Pratt & Whitney and Collins Aerospace as a result of the economic environment primarily driven by COVID-19, partially offset by net income from RIS and RMD following the Raytheon Merger.

Included in the decrease in operating cash flows was an increase in pension contributions, as further discussed below, and an unfavorable impact from accounts payable primarily at Collins Aerospace and Pratt & Whitney due to a decline in volume principally driven by the economic environment primarily driven by COVID-19, which was partially offset by a favorable change in inventory at Collins Aerospace and Pratt & Whitney due to the decline in volume and a favorable change in Accounts receivable and Contract assets due to the timing of billings and collections in 2020 across our segments.

Factoring activity resulted in a decrease of approximately $1.3 billion in cash generated from operating activities during the year ended December 31, 2020, compared to an increase of approximately $0.3 billion in cash generated from operating activities during the year ended December 31, 2019.

This decrease in factoring activity was driven by a decrease in factoring levels at Collins Aerospace and Pratt & Whitney primarily driven by lower sales volume.

government and foreign military sales contracts at RMD, and growth in accounts payable and accounts receivable at Collins and Pratt & Whitney due to an increase in sales volume as commercial aerospace recovered.

Factoring activity resulted in a decrease of approximately $0.2 billion in cash provided by operating activities during 2021, compared to a decrease of approximately $1.3 billion in cash provided by operating activities during 2020.

The year over year

favorable impact from factoring activity was primarily due to the significant decline in sales volume in 2020 principally driven by the economic environment primarily due to COVID-19.

Operating Activities - Continuing Operations

We made pension and PRB contributions to trusts of $94 million, $59 million, and $1,025 million in 2022, 2021, and 2020, respectively.

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In response to the economic environment resulting from the COVID-19 pandemic, Congress passed the ARPA in March 2021, which included pension funding relief provisions.

These provisions extend and expand upon existing pension funding relief, most notably by increasing the liability interest rates used to determine the required cash contributions for our U.S.

These provisions extended and expanded upon existing pension funding relief, most notably by increasing the liability interest rates used to determine the required cash contributions for our U.S.

qualified pension plans.

The Infrastructure Investment and Jobs Act passed by Congress in November 2021 further extended the interest rate pension funding relief provisions included in ARPA.

As a result of these pension funding relief provisions, we do not currently expect cash contributions to be required for our U.S.

qualified pension plans in the foreseeable future.

Global pension and PRB cash funding requirements are expected to be approximately $0.4 billion annually in 2022, 2023, 2024, and 2025, which includes benefit payments to be paid directly by the company.

Provisions enacted in the TCJA related to the capitalization for tax purposes of research and experimental expenditures became effective on January 1, 2022.

If these provisions are not deferred beyond 2022, our tax payments will increase by an estimated $2 billion in 2022.

Global pension and PRB cash funding requirements are expected to be approximately $0.4 billion in 2023, which includes benefit payments to be paid directly by the company.

We made net tax payments of $2.4 billion, $1.1 billion, and $1.7 billion in 2022, 2021, and 2020, respectively.

A provision enacted in the Tax Cuts and Jobs Act of 2017 related to the capitalization of research and experimental expenditures for tax purposes became effective on January 1, 2022.

As this provision was not deferred legislatively, we have made incremental tax payments of $1.6 billion in 2022.

Included in cash flows from operating activities are payments related to our operating lease obligations.

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In addition, the majority of our cash flows for purchase obligations are classified as cash flows from operating activities.

We expect future payments related to our purchase obligations to be $23.3 billion, $17.2 billion of which is payable in 2022.

We expect future payments related to our purchase obligations to be $27.6 billion, of which $19.4 billion is payable in 2023.

Purchase obligations include current amounts committed for the purchase of goods and services under legally enforceable contracts or purchase orders, and do not represent our entire anticipated purchases in the future.

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Operating Activities - Discontinued Operations

The $657 million increase in cash flows provided by operating activities from discontinued operations in 2021 compared to 2020 was primarily driven by the absence of prior year separation costs as the Separation Transactions occurred on April 3, 2020.

Th e $3.8 billion decrease in cash flows provided by operating activities from discontinued operations in 2020 compared to 2019 primarily relates to a decrease in net income from discontinued operations driven by the absence of operating activity for the majority of the year, as the Separation Transactions occurred on April 3, 2020.

Cash flows provided by operating activities from discontinued operations in 2022 and 2021 were not significant as the Separation Transactions occurred on April 3, 2020.

Cash Flow - Investing Activities

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Net cash flows used in investing activities from discontinued operations — — (241)

Our investing activities primarily include investments in/dispositions of businesses, capital expenditures, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, settlements of derivative contracts not designated as hedging instruments, and cash investments in Customer financing assets.

Our investing activities primarily include capital expenditures, cash investments in customer financing assets, investments in and dispositions of businesses, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, and settlements of derivative contracts not designated as hedging instruments.

2022 Compared with 2021 Investing Activities - Continuing Operations

The $4.7 billion change in cash flows (used in) provided by investing activities in 2021 compared to 2020 primarily relates to the absence of cash acquired in the Raytheon Merger in the prior year of $3.2 billion, and investments in and dispositions of businesses, as discussed below.

The $1.5 billion change in cash flows (used in) provided by investing activities in 2022 compared to 2021 primarily relates to the absence of 2021 investments in and dispositions of businesses, as discussed below.

2021 Compared with 2020 Investing Activities - Continuing Operations

The $6.0 billion change in cash flows (used in) provided by investing activities in 2020 compared to 2019 primarily relates to cash acquired in the Raytheon Merger of $3.2 billion, the sale of our Collins Aerospace military Global Positioning System (GPS) and space-based precision optics businesses for $2.3 billion in cash proceeds, and a net increase from customer financing assets of $747 million, as discussed below, partially offset by the Blue Canyon Technologies acquisition of $419 million.

Investments in businesses in 2021 of $1.1 billion primarily related to the acquisitions of FlightAware at Collins Aerospace and SEAKR Engineering Inc.

Investments in businesses in 2020 of $419 million primarily related to the acquisition of Blue Canyon Technologies at RIS.

Investments in businesses in 2019 were not material.

The $4.7 billion change in cash flows (used in) provided by investing activities in 2021 compared to 2020 primarily relates to the absence of cash acquired in the Raytheon merger in 2020 of $3.2 billion, and investments in and dispositions of businesses, as discussed below.

Investing Activities - Continuing Operations

There were no material acquisitions in 2022.

Investments in businesses in 2021 of $1.1 billion primarily related to the acquisitions of FlightAware at Collins and SEAKR Engineering Inc.

Investments in businesses in 2020 of $0.4 billion primarily related to the acquisition of Blue Canyon Technologies at RIS.

For additional detail, see “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K.

There were no material dispositions of businesses in 2022.

Dispositions of businesses in 2021 of $1.9 billion, net of cash transferred, primarily related to the sale of our Forcepoint business and the sale of our global training and services business within RIS.

Dispositions of businesses in 2020 of $2.6 billion, net of cash transferred, primarily related to the sale of our Collins Aerospace military GPS and space-based precision optics businesses.

Dispositions of business in 2019 of $134 million, net of cash transferred, primarily consisted of the business sold in

connection with the Rockwell Acquisition.

Dispositions of businesses in 2020 of $2.6 billion, net of cash transferred, primarily related to the sale of our Collins military GPS and space-based precision optics businesses.

For additional detail, see “Note 2:

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Capital expenditures were $2.3 billion, $2.1 billion and $1.8 billion in 2022, 2021, and 2020, respectively.

Capital expenditures increased $339 million in 2021 compared to 2020, primarily due to increases at RIS and RMD principally driven by the Raytheon Merger and increases at Pratt & Whitney.

Capital expenditures decreased $73 million in 2020 from 2019 as reductions at Collins Aerospace and Pratt & Whitney were largely offset by increased capital expenditures driven by the Raytheon Merger.

Customer financing assets payments were $231 million, $280 million, and $787 million in 2021, 2020 and 2019, respectively.

Capital expenditures increased $154 million in 2022 compared to 2021, primarily due to investments in production facilities at Pratt & Whitney.

Capital expenditures increased $339 million in 2021 from 2020, primarily due to increases at RIS and RMD principally driven by the Raytheon merger and increases at Pratt & Whitney.

Payments on customer financing assets were $150 million, $231 million, and $280 million in 2022, 2021 and 2020, respectively.

The decrease in payments in 2022 compared to 2021 was primarily due to fewer engines added to our leased asset pool.

The decrease in payments in 2021 compared to 2020 was due to fewer engines added to our leased asset pool, partially offset by increased customer financing.

The decrease in payments in 2020 compared to 2019 was due to fewer engines added to our leased asset pool.

Customer financing assets receipts were $389 million, $368 million and $128 million in 2021, 2020 and 2019, respectively.

Receipts from customer financing assets were $179 million, $389 million and $368 million in 2022, 2021 and 2020, respectively.

The decrease in receipts in 2022 compared to 2021 was primarily driven by the absence of the prior year sale and leaseback transaction.

Receipts in 2021 were relatively consistent with 2020, as both periods included similar sale and leaseback transactions for the sale of equipment.

The increase in receipts in 2020 compared to 2019 was driven by the sale and leaseback transaction in 2020.

Refer to “Note 12:

Leases” within Item 8 of this Form 10-K for additional discussion of these transactions.

In 2021, 2020, and 2019 we increased our collaboration intangible assets by approximately $188 million, $172 million, $351 million, respectively, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce’s collaboration interests in International Aero Engines AG (IAE).

In 2022, 2021, and 2020 we increased other intangible assets by approximately $487 million, $308 million, $312 million, respectively, which primarily relates to collaboration payment commitments made under our 2012 agreement to acquire Rolls-Royce’s collaboration interests in International Aero Engines AG (IAE) and exclusivity payments made on contractual commitments included within intangible assets that are amortized over the term of the underlying economic benefit.

At December 31, 2022, we had commercial aerospace financing and other contractual commitments, including exclusivity and collaboration payment commitments, of approximately $15.3 billion, on a gross basis before reduction for our collaboration partners’ share.

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We have used derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency, interest rate and commodity price exposures.

During 2021, 2020, and 2019 we had net cash (payments) receipts of $(16) million, $(32) million, and $342 million, respectively, from the settlement of these derivative instruments not designated as hedging instruments.

During 2022, 2021, and 2020 we had net cash payments of $205 million, $16 million, and $32 million, respectively, from the settlement of these derivative instruments not designated as hedging instruments.

Investing Activities - Discontinued Operations

The $241 million decrease in cash flows used in investing activities from discontinued operations in 2021 compared to 2020 was due to the fact that the Separation Transactions occurred on April 3, 2020.

The $175 million decrease in cash flows used in investing activities from discontinued operations in 2020 compared to 2019 primarily relates to a reduction in capital expenditures at Carrier and Otis of approximately $300 million, partially offset by a reduction in investment cash of approximately $135 million.

Cash flows used in investing activities from discontinued operations in 2022 and 2021 were not significant as the Separation Transactions occurred on April 3, 2020.

The $241 million decrease in cash flows used in investing activities from discontinued operations in 2021 compared to 2020 was due to the fact that the Separation Transactions occurred in 2020.

Cash Flow - Financing Activities

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Net cash flows provided by (used in) financing activities from discontinued operations — 71 (1,414)

Our financing activities primarily include the issuance and repayment of short-term and long-term debt, payment of dividends and stock repurchases.

Our financing activities primarily include the issuance and repayment of commercial paper and other short-term and long-term debt, payment of dividends and stock repurchases.

2022 Compared with 2021 Financing Activities- Continuing Operations

The $0.9 billion change in cash flows used in financing activities in 2022 compared to 2021 was primarily driven by the absence of 2021 repayments of long-term debt, including debt extinguishment costs, net of issuances of $0.8 billion and an increase in commercial paper borrowings, net of $0.7 billion, partially offset by an increase in share repurchases of $0.5 billion, as discussed below.

2021 Compared with 2020 - Financing Activities- Continuing Operations

The $2.9 billion change in cash flows used in financing activities in 2021 compared to 2020 primarily relates to an increase in share repurchases of $2.3 billion, as discussed below.

In addition, in 2021, we had debt repayments, including debt extinguishment costs, of $4.9 billion and long-term debt issuances of $4.1 billion.

2020 Compared with 2019 - Financing Activities- Continuing Operations

The $1.9 billion change in cash flows used in financing activities in 2020 compared to 2019 primarily relates to increases in long-term debt repayments of $13.4 billion, a $4.4 billion change in net cash transfers to discontinued operations, an increase in short-term borrowing repayments of $2.9 billion, and an increase in dividends paid on common stock of $0.3 billion, partially

offset by an increase in long-term debt issuances of $19.2 billion.

The 2020 debt issuances reflect debt incurred by Carrier and Otis of approximately $6 billion and $11 billion, respectively.

The net proceeds of these issuances and draws were primarily utilized by UTC to extinguish Raytheon Technologies short-term and long-term debt in order to not exceed the maximum applicable net indebtedness required by the Raytheon Merger Agreement.

Financing Activities- Continuing Operations

Included in cash flows from financing activities are payments related to our long term debt, including both interest and principal payments.

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Shares of common stock repurchased (1)

$ 2,803 29,943 $ 2,327 28,003 $ 47 330

(1) Relates to share repurchases that were settled in cash during the period.

At December 31, 2022, management had remaining authority to repurchase approximately $6.0 billion of our common stock under the December 12, 2022 share repurchase program.

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Financing Activities - Discontinued Operations

Cash flows provided by financing activities from discontinued operations in 2021 were not significant as the Separation Transactions occurred on April 3, 2020.

The $1.2 billion decrease in cash flows used in financing activities from discontinued operations in 2020 compared to 2019 primarily relates to $703 million of debt extinguishment costs related to the early repayment of debt in 2020 and cash distributions made to Carrier and Otis of $2.8 billion, which were more than offset by a change in net transfer activity of $4.5 billion.

Cash flows provided by financing activities from discontinued operations in 2022 and 2021 were not significant as the Separation Transactions occurred on April 3, 2020.

The $1.5 billion decrease in cash flows used in financing activities from discontinued operations in 2021 compared to 2020 was due to the fact that the Separation Transactions occurred in 2020.

CRITICAL ACCOUNTING ESTIMATES

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Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management’s judgment.

We review our Estimate at Completion (EACs) on significant contracts on a periodic basis and for others, no less than annually or when a change in circumstances warrant a modification to a previous estimate.

We review our Estimates at Completion (EACs) at least annually or when a change in circumstances warrants a modification to a previous estimate.

For significant contracts, we review our EACs more frequently.

Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment by management on a contract by contract basis.

As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of

revenues and costs.

The risks and opportunities relate to management’s judgment about the ability and cost to achieve the schedule, consideration of customer-directed delays or reductions in scheduled deliveries, technical requirements, customer activity levels, such as flight hours or aircraft landings, and related variable consideration.

Management’s judgment related to these considerations has become increasingly more significant given the economic environment primarily caused by the COVID-19 pandemic.

Management must make assumptions and estimates regarding contract revenue and costs, including estimates of labor productivity and availability, the complexity and scope of the work to be performed, the availability and cost of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer, overhead cost rates, and current and past maintenance cost and frequency driven by estimated aircraft and engine utilization and estimated useful lives of components, among others.

In particular, fixed-price development programs involve significant management judgment, as development contracts by nature have elements that have not been done before and thus, are highly subject to future unexpected cost growth.

Cost estimates may also include the estimated cost of satisfying our industrial cooperation agreements, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements, required under certain contracts primarily within our RIS and RMD segments.

Management must make assumptions and estimates regarding contract revenue and costs, including estimates of labor productivity and availability, the complexity and scope of the work to be performed, the availability and cost of materials, including any impact from rising costs or inflation, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer, overhead cost rates, and current and past maintenance cost and frequency driven by estimated aircraft and engine utilization and estimated useful lives of components, among others.

These obligations may or may not be distinct depending on their nature.

Changes in estimates of net sales, cost of sales and the related impact to operating profit are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation’s percentage of completion in the current period.

If cash is paid to a customer to satisfy our offset obligations it is recorded as a reduction in the transaction price.

Changes in estimates of net sales, cost of sales and the related impact to operating profit on contracts recognized over time are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation’s percentage of completion in the current period.

A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations.

Our EAC adjustments also include the establishment of loss provisions on our contracts accounted for on a percentage of completion basis.

Our EAC adjustments also include the establishment of and changes to loss provisions for our contracts accounted for on a percentage of completion basis.

Net EAC adjustments had the following impact on our operating results:

(dollars in millions, except per share amounts) 2022 2021 2020

Total net sales $ 152 $ 296 $ (407)

Operating profit (loss) (37) 110 (643)

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As a result of the Raytheon merger, Raytheon Company’s contracts accounted for on a percentage of completion basis were reset to zero percent complete as of the merger date, because only the unperformed portion of the contract at the merger date represented the obligation of the Company.

This had the impact of reducing EAC adjustments for these segments in the short term period following the merger, most notably in 2020.

For additional information related to the Raytheon merger, see “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K.

Costs incurred for engineering and development of aerospace products under contracts with customers are capitalized as contract fulfillment costs, to the extent recoverable from the associated contract margin and customer funding, and subsequently amortized as the OEM products are delivered to the customer.

Costs incurred for engineering and development of certain aerospace products under contracts with customers are capitalized as contract fulfillment costs, to the extent recoverable from the associated contract margin and customer funding, and subsequently amortized as the products are delivered to the customer.

The estimation of contract costs, and margin, considered as part of this recoverability assessment requires significant judgment.

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We regularly assess capitalized contract fulfillment costs for impairment.

In 2020, we recognized impairment of $111 million related to contract fulfillment costs.

In 2020, we recognized impairment of $111 million related to contract fulfillment costs in conjunction with the related impacts of the COVID 19 pandemic.

Income Taxes.

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Significant judgment is required when assessing our income tax positions and in determining our tax expense and benefits.

Each quarter, management

assesses our tax positions based on an evaluation of the facts, circumstances, applicable tax laws, including regulations, case law, and other interpretive guidance, as well as any other relevant information.

Management assesses our tax positions based on an evaluation of the facts, circumstances, applicable tax laws, including regulations, case law, and other interpretive guidance, as well as any other relevant information.

Adjustments to our tax positions are made as new information becomes available or when our assessments change.

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Also included within intangible assets are exclusivity assets, which are payments made to secure certain contractual rights to provide products on new commercial aerospace platforms.

At December 31, 2021, our exclusivity assets, net of accumulated amortization, was approximately $2.4 billion, and our remaining estimated commitments, net of collaborator share, were approximately $8.9 billion.

We regularly assess the recoverability of these intangibles, which is dependent upon our assumptions around the future success and profitability of the underlying aircraft platforms including the associated aftermarket revenue streams, and the related future cash flows.

At December 31, 2022, our exclusivity assets, net of accumulated amortization, were approximately $2.6 billion, and our remaining estimated commitments, net of collaborator share, were approximately $6.2 billion.

We regularly assess the recoverability of these intangibles, which is dependent upon our

assumptions around the future success and profitability of the underlying aircraft platforms including the associated aftermarket revenue streams, and the related future cash flows.

Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment testing annually, or more frequently if events or changes in circumstances indicate the asset might be impaired.

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If the carrying value exceeds the fair value, then the carrying value is reduced to fair value.

In developing our estimates for the fair value of our reporting units and indefinite-lived intangible assets, significant judgment is required in the determination of the appropriateness of using a qualitative assessment or quantitative assessment.

For the quantitative assessments that are performed for goodwill and indefinite-lived intangible assets, fair value is primarily based on income approaches using a discounted cash flow method and relief from royalty method, respectively, which have significant assumptions including sales growth rates, projected operating profit, terminal growth rates, discount rates and royalty rates.

In testing our reporting units and indefinite-lived intangible assets for impairment, we may perform both qualitative and quantitative assessments.

For the quantitative assessments that are performed for goodwill, we utilize a combination of discounted cash flows (DCF) and market-based valuation methodologies.

For the quantitative assessments of indefinite-lived intangible assets, fair value is primarily based on the relief from royalty method.

These quantitative assessments incorporate significant assumptions that include sales growth rates, projected operating profit, terminal growth rates, discount rates, royalty rates and comparable multiples from publicly traded companies in our industry.

Such assumptions are subject to variability from year to year and are directly impacted by, among other things, global market conditions.

We completed our annual goodwill impairment testing as of October 1, 2021, where we compared the fair value of all of our reporting units to their respective carrying values (step 1) and determined that no adjustments to the carrying value of goodwill were necessary.

We estimated the fair value of our reporting units using a discounted cash flow (DCF) model based on our most recent long-range plan in place at the time of our impairment testing.

The key assumptions used in the DCF analysis include our business projections, including revenue growth rates and operating profit margins, the long-term growth rate used to calculate the terminal value of the reporting unit, and the discount rate.

We completed our annual goodwill impairment testing as of October 1, 2022 and determined that no adjustments to the carrying value of goodwill were necessary.

For those reporting units where we performed a quantitative test, we estimated the fair value of our reporting units using a combination of DCF and market-based valuation methodologies.

As noted above, these methodologies involve significant assumptions that are subject to variability.

The key assumptions used in our quantitative analysis include our business projections, including revenue growth rates and operating profit margins, the long-term growth rate used to calculate the terminal value of the reporting unit, the discount rate, and comparable multiples from publicly traded companies in our industry.

We consider both internal and external factors and refresh key assumptions annually or as considered necessary.

As part of our 2021 analysis, we used a slightly higher long-term growth rate assumption as compared to our 2020 analysis, based on our review of historical growth rates for our business and industry, long-term inflation estimates, and industry reports on projected future long-term growth for the industry.

Material changes in these estimates could occur and result in impairments in future periods.

Based on our annual impairment analysis as of October 1, 2021, the reporting unit that was closest to impairment was a Collins Aerospace reporting unit with a fair value in excess of book value, including goodwill, of 15%.

All other factors being equal, a

10% decrease in expected future cash flows, either due to a delay in the return to pre-pandemic revenue levels or other factors, would result in an excess of fair value over net book value of approximately 3%.

Alternatively, all other factors being equal, a 50 basis points decrease in the assumed long-term growth rate would result in an excess of fair value over net book value of approximately 7%.

The discount rate that we used in our 2021 analysis was consistent with the discount rate used in our 2020 analysis.

All other factors being equal, a 50 basis points increase in the discount rate would result in an excess of fair value over net book value of approximately 4%.

Based on our annual impairment analysis as of October 1, 2022, the reporting units that were closest to impairment were two previously combined Collins reporting units with fair values in excess of book values, including goodwill, of 15% and 17%.

The combined value of goodwill allocated to these two reporting units is approximately $9.5 billion as of the date testing was performed.

All other reporting units had a fair value substantially in excess of book value.

In 2020, we recognized goodwill impairments of $3.2 billion related to two Collins Aerospace reporting units.

The Company continuously monitors and evaluates relevant events and circumstances that could unfavorably impact the significant assumptions noted above, including changes to U.S.

treasury rates and equity risk premiums, tax rates, 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 or in the inputs and assumptions used in estimating the fair value of our reporting units, could require the Company to record a non-cash impairment charge.

In 2020, we recognized goodwill impairments of $3.2 billion related to two Collins reporting units.

Refer to “Note 2:

Business Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 8 of this Form 10-K for additional details.

We also completed our annual indefinite-lived intangible assets impairment testing as of October 1, 2021.

Based on this analysis, all of our indefinite-lived intangible assets had a fair value substantially in excess of book value.

The Company continuously monitors and evaluates relevant events and circumstances that could unfavorably impact the key assumptions in determining the fair value of our reporting units, including long-term revenue growth projections, profitability and expectations for net cash flows, discount rates including changes to U.S.

It is possible that future changes in such circumstances, including significant future negative developments in the COVID-19 pandemic, or future changes in the inputs and assumptions used in estimating 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.

We also completed our annual indefinite-lived intangible assets impairment testing as of October 1, 2022 and determined that no adjustments to the carrying value of these assets were necessary.

As noted above, our indefinite-lived intangible assets impairment analysis involves significant assumptions that are subject to variability.

Material changes in these assumptions could occur and result in impairments in future periods.

Contingent Liabilities.

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They are evaluated annually at December 31 and when significant events require a mid-year remeasurement.

A change in any of these assumptions or actual experience that differs from these assumptions are subject to recognition in pension and postretirement net periodic benefit (income) expense reported in the Consolidated Financial Statements.

A change in any of these assumptions

or actual experience that differs from these assumptions are subject to recognition in pension and postretirement net periodic benefit (income) expense reported in the Consolidated Financial Statements.

Assumptions used in the accounting for these employee benefit plans require judgement.

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In determining the EROA assumption, we consider the target asset allocation of plan assets, as well as economic and other indicators of future performance.

We may consult with and consider the opinions of financial and other professionals in determining the appropriate capital market assumptions.

We consult with and consider the opinions of financial and other professionals in determining the appropriate capital market assumptions.

Return projections are validated using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns.

As a result of this analysis at year end 2022, our weighted average pension EROA assumption for 2023 increased to 7.1%.

Differences between actual asset returns in a given year and the EROA do not necessarily indicate a change in the assumption is required, as the EROA represents the expected average returns over a long-term horizon.

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See “Note 18:

Income Taxes” and “Note 19:

Commitments and Contingencies” within Item 8 of this Form 10-K for further discussion of these and other government matters.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis