RTX Corp 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of RTC is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of RTC’s internal control over financial reporting as of December 31, 2022. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control—Integrated Framework , released in 2013 . Management concluded that based on its assessment, RTC’s internal control over financial reporting was effective as of December 31, 2022. The effectiveness of RTC’s internal control over financial reporting, as of December 31, 2022, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. /s/ GREGORY J. HAYES Gregory J. Hayes President and Chief Executive Officer /s/ NEIL G. MITCHILL, JR. Neil G. Mitchill, Jr. Executive Vice President and Chief Financial Officer /s/ AMY L. JOHNSON Amy L. Johnson Corporate Vice President and Controller 59 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareowners and Board of Directors of Raytheon Technologies Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Raytheon Technologies Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive income (loss), of changes in equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 60 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition - Contract Estimates at Completion As described in Note 1 to the consolidated financial statements, a significant portion of the Company’s revenues of $67.1 billion for the year ended December 31, 2022 are from long-term contracts associated with the design, development, manufacture or modification of complex aerospace or defense equipment or related services. The timing of the satisfaction of performance obligations varies across the Company’s businesses due to their diverse product and service mix, customer base, and contractual terms. Substantially all of the Company’s revenues from the Raytheon Intelligence & Space and Raytheon Missiles & Defense segments are recognized over time because of the continuous transfer of control to the customer. The Company’s revenues from certain long-term aftermarket contracts within its Pratt & Whitney segment are recognized over the contract period as a series of daily performance obligations to stand ready to provide spare parts, product maintenance and aftermarket services. For these performance obligations satisfied over time, revenue is recognized on a percentage of completion basis using costs incurred to date relative to total estimated costs at completion to measure progress. 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. Within the Raytheon Intelligence & Space and Raytheon Missiles & Defense segments, the variables and significant judgments relate to 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 for the contracts relate to management’s ability and cost to achieve the schedule, consideration of customer-directed delays or reductions in scheduled deliveries, technical requirements, customer activity levels and related variable consideration. Management also makes judgments about variables related to 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 the Company’s subcontractors, the availability and timing of funding from the customer, overhead cost rates, and the estimated cost of satisfying the Company’s industrial cooperation agreements required under certain contracts. Within the Pratt & Whitney segment, the variables and significant judgments relate to current and past maintenance cost and frequency experience. Management reviews contract estimates at completion on a periodic basis and no less than annually or when a change in circumstances warrants a modification to a previous estimate. The principal considerations for our determination that performing procedures relating to revenue recognition - contract estimates at completion is a critical audit matter are (i) the significant judgment by management in developing their estimates of total revenue and total costs at completion, including significant judgments and assumptions on a contract by contract basis, and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s estimates of total revenue and total costs at completion for contracts. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the estimates of total revenue and total costs at completion. These procedures also included, among others, testing management’s process for developing the estimated total revenue and total costs at completion, including evaluating on a test basis the reasonableness of certain significant judgments and variables considered by management specific to each contract or performance obligation. Evaluating the significant judgments and assumptions related to the estimates of total revenue and total costs at completion involved evaluating whether the significant judgments and assumptions used were reasonable considering: (i) management’s historical forecasting accuracy, (ii) evidence to support the relevant aforementioned variables, (iii) the consistent application of accounting policies, and (iv) the timely identification of circumstances which may warrant a modification to a previous estimate. 61 Table of Contents Goodwill and Indefinite-lived Intangible Assets Impairment Assessments As described in Notes 1 and 2 to the consolidated financial statements, the Company’s consolidated goodwill and indefinite-lived intangible assets balances were $53.8 billion and $8.6 billion, respectively, as of December 31, 2022. A portion of the total goodwill balance relates to certain reporting units of the Collins Aerospace segment. A portion of the total indefinite-lived intangible assets balance relates to the Collins Aerospace segment. Goodwill and indefinite-lived intangible assets are subject to impairment testing annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. For the quantitative assessments that are performed, fair value is primarily based on market-based valuation methods, income-based methods using a discounted cash flow model, relief from royalty methods, or a combination of such. These assessments utilize significant assumptions related to sales growth rates, projected operating profit, terminal growth rates, discount rates, royalty rates, and comparable multiples from publicly traded companies in the aerospace and defense industry. The impairment testing compares carrying values to estimated fair values. If the carrying value exceeds the fair value, then the carrying value is reduced to fair value. The principal considerations for our determination that performing procedures relating to the goodwill and indefinite-lived intangible assets impairment assessments is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of certain reporting units and indefinite-lived intangible assets of the Collins Aerospace segment, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to sales growth rates, discount rates, and comparable multiples from publicly traded companies in the aerospace and defense industry, as applicable, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and indefinite-lived intangible assets impairment assessments, including controls over the valuation of certain reporting units and indefinite-lived intangible assets of the Collins Aerospace segment. These procedures also included, among others (i) testing management’s process for developing the fair value estimates, (ii) evaluating the appropriateness of the methodologies used to estimate fair value, (iii) testing the completeness and accuracy of underlying data used in developing the estimates, and (iv) evaluating the reasonableness of the significant assumptions used by management related to sales growth rates, discount rates, and comparable multiples from publicly traded companies in the aerospace and defense industry, as applicable. Evaluating management’s assumptions related to sales growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the relevant businesses, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the Company’s discounted cash flow, market-based valuation, and relief from royalty methods, and (ii) the reasonableness of the discount rates and comparable multiples from publicly traded companies in the aerospace and defense industry assumptions. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 6, 2023 We have served as the Company’s auditor since 1947. 62 Table of Contents RAYTHEON TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (dollars in millions, except per share amounts; shares in millions) 2022 2021 2020 Net sales: Products sales $ 50,773 $ 49,270 $ 43,319 Services sales 16,301 15,118 13,268 Total net sales 67,074 64,388 56,587 Costs and expenses: Cost of sales - products 41,927 41,095 38,137 Cost of sales - services 11,479 10,802 9,919 Research and development 2,711 2,732 2,582 Selling, general and administrative 5,663 5,224 5,540 Total costs and expenses 61,780 59,853 56,178 Goodwill impairment — — ( 3,183 ) Other income, net 120 423 885 Operating profit (loss) 5,414 4,958 ( 1,889 ) Non-operating expense (income), net: Non-service pension income ( 1,889 ) ( 1,944 ) ( 902 ) Debt extinguishment costs — 649 — Interest expense, net 1,276 1,322 1,366 Total non-operating expense (income), net ( 613 ) 27 464 Income (loss) from continuing operations before income taxes 6,027 4,931 ( 2,353 ) Income tax expense 700 786 575 Net income (loss) from continuing operations 5,327 4,145 ( 2,928 ) Less: Noncontrolling interest in subsidiaries’ earnings from continuing operations 111 248 181 Net income (loss) from continuing operations attributable to common shareowners 5,216 3,897 ( 3,109 ) Discontinued operations (Note 3) Loss from discontinued operations ( 30 ) ( 10 ) ( 216 ) Income tax expense (benefit) from discontinued operations ( 11 ) 23 151 Loss from discontinued operations ( 19 ) ( 33 ) ( 367 ) Less: Noncontrolling interest in subsidiaries’ earnings from discontinued operations — — 43 Loss from discontinued operations attributable to common shareowners ( 19 ) ( 33 ) ( 410 ) Net income (loss) attributable to common shareowners $ 5,197 $ 3,864 $ ( 3,519 ) Earnings (loss) per share attributable to common shareowners - basic Income (loss) from continuing operations attributable to common shareowners $ 3.54 $ 2.60 $ ( 2.29 ) Loss from discontinued operations ( 0.02 ) ( 0.03 ) ( 0.30 ) Net income (loss) attributable to common shareowners $ 3.52 $ 2.57 $ ( 2.59 ) Earnings (loss) per share attributable to common shareowners - diluted Income (loss) from continuing operations attributable to common shareowners $ 3.51 $ 2.58 $ ( 2.29 ) Loss from discontinued operations ( 0.01 ) ( 0.02 ) ( 0.30 ) Net income (loss) attributable to common shareowners $ 3.50 $ 2.56 $ ( 2.59 ) Weighted average number of shares outstanding: Basic shares 1,475.5 1,501.6 1,357.8 Diluted shares 1,485.9 1,508.5 1,357.8 See accompanying Notes to Consolidated Financial Statements 63 Table of Contents RAYTHEON TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (dollars in millions) 2022 2021 2020 Net income (loss) from continuing and discontinued operations $ 5,308 $ 4,112 $ ( 3,295 ) Pension and postretirement benefit plans adjustments Net actuarial gain (loss) arising during period 1,291 3,246 ( 202 ) Prior service credit (cost) arising during period ( 131 ) ( 59 ) 2,095 Amortization of actuarial loss and prior service cost 129 258 373 Other 65 23 ( 51 ) Pension and postretirement benefit plans adjustments 1,354 3,468 2,215 Change in unrealized cash flow hedging ( 143 ) ( 254 ) 263 Foreign currency translation adjustments ( 1,048 ) ( 647 ) 609 Other comprehensive income, before tax 163 2,567 3,087 Income tax expense related to items of other comprehensive income ( 266 ) ( 748 ) ( 547 ) Other comprehensive income (loss), net of tax ( 103 ) 1,819 2,540 Comprehensive income (loss) 5,205 5,931 ( 755 ) Less: Comprehensive income attributable to noncontrolling interest 111 248 224 Comprehensive income (loss) attributable to common shareowners $ 5,094 $ 5,683 $ ( 979 ) See accompanying Notes to Consolidated Financial Statements 64 Table of Contents RAYTHEON TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEET (dollars in millions; shares in thousands) 2022 2021 Assets Current assets Cash and cash equivalents $ 6,220 $ 7,832 Accounts receivable, net 9,108 9,661 Contract assets 11,534 11,361 Inventory, net 10,617 9,178 Other assets, current 4,964 4,018 Total current assets 42,443 42,050 Customer financing assets 2,603 2,848 Fixed assets, net 15,170 14,972 Operating lease right-of-use assets 1,829 1,958 Goodwill 53,840 54,436 Intangible assets, net 36,823 38,516 Other assets 6,156 6,624 Total assets $ 158,864 $ 161,404 Liabilities, Redeemable Noncontrolling Interest and Equity Current liabilities Short-term borrowings $ 625 $ 134 Accounts payable 9,896 8,751 Accrued employee compensation 2,401 2,658 Other accrued liabilities 10,999 10,162 Contract liabilities 14,598 13,720 Long-term debt currently due 595 24 Total current liabilities 39,114 35,449 Long-term debt 30,694 31,327 Operating lease liabilities, non-current 1,586 1,657 Future pension and postretirement benefit obligations 4,807 7,855 Other long-term liabilities 8,449 10,417 Total liabilities 84,650 86,705 Commitments and contingencies (Note 18) Redeemable noncontrolling interest 36 35 Shareowners’ equity: Capital stock: Preferred stock, $ 1 par value; 250,000 shares authorized; None issued or outstanding — — Common stock, $ 1 par value; 4,000,000 shares authorized; 1,710,960 and 1,708,065 shares issued 37,939 37,483 Treasury stock, 244,720 and 214,785 common shares at average cost ( 15,530 ) ( 12,727 ) Retained earnings 52,269 50,265 Unearned ESOP shares ( 28 ) ( 38 ) Accumulated other comprehensive loss ( 2,018 ) ( 1,915 ) Total shareowners’ equity 72,632 73,068 Noncontrolling interest 1,546 1,596 Total equity 74,178 74,664 Total liabilities, redeemable noncontrolling interest and equity $ 158,864 $ 161,404 See accompanying Notes to Consolidated Financial Statements 65 Table of Contents RAYTHEON TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in millions) 2022 2021 2020 Operating Activities: Net income (loss) from continuing operations $ 5,327 $ 4,145 $ ( 2,928 ) Adjustments to reconcile net income (loss) from continuing operations to net cash flows provided by operating activities: Depreciation and amortization 4,108 4,557 4,156 Deferred income tax benefit ( 1,663 ) ( 88 ) ( 99 ) Stock compensation cost 420 442 330 Net periodic pension and other postretirement income ( 1,413 ) ( 1,414 ) ( 413 ) Debt extinguishment costs — 649 — Goodwill impairment charge — — 3,183 Change in: Accounts receivable 437 ( 570 ) 1,318 Contract assets ( 234 ) ( 1,594 ) 63 Inventory ( 1,575 ) 163 412 Other current assets ( 1,027 ) ( 566 ) ( 445 ) Accounts payable and accrued liabilities 2,075 917 ( 1,666 ) Contract liabilities 846 1,372 1,129 Global pension contributions ( 94 ) ( 59 ) ( 1,025 ) Other operating activities, net ( 39 ) ( 812 ) 319 Net cash flows provided by operating activities from continuing operations 7,168 7,142 4,334 Investing Activities: Capital expenditures ( 2,288 ) ( 2,134 ) ( 1,795 ) Payments on customer financing assets ( 150 ) ( 231 ) ( 280 ) Receipts from customer financing assets 179 389 368 Investments in businesses (Note 2) ( 66 ) ( 1,088 ) ( 419 ) Cash acquired in Raytheon merger — — 3,208 Dispositions of businesses, net of cash transferred (Note 2) 94 1,879 2,556 Increase in other intangible assets ( 487 ) ( 308 ) ( 312 ) Payments from settlements of derivative contracts, net ( 205 ) ( 16 ) ( 32 ) Other investing activities, net 94 145 49 Net cash flows (used in) provided by investing activities from continuing operations ( 2,829 ) ( 1,364 ) 3,343 Financing Activities: Issuance of long-term debt 1 4,062 2,004 Distribution from discontinued operations — — 17,207 Repayment of long-term debt ( 3 ) ( 4,254 ) ( 16,082 ) Debt extinguishment costs — ( 649 ) — Change in commercial paper, net (Note 10) 518 ( 160 ) 160 Change in other short-term borrowings, net ( 29 ) 47 ( 2,201 ) Dividends paid on common stock ( 3,128 ) ( 2,957 ) ( 2,732 ) Repurchase of common stock ( 2,803 ) ( 2,327 ) ( 47 ) Net transfers to discontinued operations — ( 71 ) ( 2,033 ) Other financing activities, net ( 415 ) ( 447 ) ( 136 ) Net cash flows used in financing activities from continuing operations ( 5,859 ) ( 6,756 ) ( 3,860 ) Discontinued Operations: Net cash used in operating activities — ( 71 ) ( 728 ) Net cash used in investing activities — — ( 241 ) Net cash provided by (used in) financing activities — 71 ( 1,414 ) Net cash used in discontinued operations — — ( 2,383 ) Effect of foreign exchange rate changes on cash and cash equivalents from continuing operations ( 42 ) ( 1 ) 54 Effect of foreign exchange rate changes on cash and cash equivalents from discontinued operations — — ( 76 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 1,562 ) ( 979 ) 1,412 Cash, cash equivalents and restricted cash, beginning of year 7,853 8,832 4,961 Cash, cash equivalents and restricted cash within assets related to discontinued operations, beginning of year — — 2,459 Cash, cash equivalents and restricted cash, end of year 6,291 7,853 8,832 Less: Restricted cash, included in Other assets 71 21 30 Cash and cash equivalents, end of year $ 6,220 $ 7,832 $ 8,802 Supplemental Disclosure of Cash Flow Information (1) : Interest paid, net of amounts capitalized $ 1,263 $ 1,339 $ 1,628 Income taxes paid, net of refunds 2,400 1,124 1,716 (1) Amounts are inclusive of continuing operations and discontinued operations payments. See accompanying Notes to Consolidated Financial Statements 66 Table of Contents RAYTHEON TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (dollars in millions, except per share amounts; shares in thousands) 2022 2021 2020 Equity at January 1 $ 74,664 $ 73,852 $ 44,231 Common Stock Balance at January 1 37,483 36,930 23,019 Common stock plans activity 485 553 417 Common stock issued for Raytheon Company outstanding common stock and equity awards — — 10,897 Adjustment to Common stock for the Otis Distribution — — 2,598 Purchase of subsidiary shares from noncontrolling interest, net ( 29 ) — ( 1 ) Balance at December 31 37,939 37,483 36,930 Treasury Stock Balance at January 1 ( 12,727 ) ( 10,407 ) ( 32,626 ) Common stock plans activity — — 2 Common stock repurchased ( 2,803 ) ( 2,331 ) ( 43 ) Common stock issued for Raytheon Company outstanding common stock and equity awards — — 22,269 Other — 11 ( 9 ) Balance at December 31 ( 15,530 ) ( 12,727 ) ( 10,407 ) Retained Earnings Balance at January 1 50,265 49,423 61,594 Net income (loss) 5,197 3,864 ( 3,519 ) Adjustment to retained earnings for the Carrier Distribution — — ( 5,805 ) Dividends on common stock ( 3,128 ) ( 2,957 ) ( 2,732 ) Dividends on ESOP common stock ( 54 ) ( 50 ) ( 50 ) Other ( 11 ) ( 15 ) ( 65 ) Balance at December 31 52,269 50,265 49,423 Unearned ESOP Shares Balance at January 1 ( 38 ) ( 49 ) ( 64 ) Common Stock plans activity 10 11 15 Balance at December 31 ( 28 ) ( 38 ) ( 49 ) Accumulated Other Comprehensive Loss Balance at January 1 ( 1,915 ) ( 3,734 ) ( 10,149 ) Other comprehensive income (loss), net of tax ( 103 ) 1,819 2,540 Separation of Carrier and Otis — — 3,875 Balance at December 31 ( 2,018 ) ( 1,915 ) ( 3,734 ) Noncontrolling Interest Balance at January 1 1,596 1,689 2,457 Net income 111 248 224 Less: Redeemable noncontrolling interest net income (loss) ( 8 ) ( 8 ) ( 4 ) Dividends attributable to noncontrolling interest ( 132 ) ( 332 ) ( 159 ) Sale (purchase) of subsidiary shares from noncontrolling interest, net ( 19 ) — 66 Acquisition (disposition) of noncontrolling interest, net ( 13 ) ( 1 ) 1 Separation of Carrier and Otis — — ( 865 ) Capital contributions (distributions) 11 — ( 31 ) Balance at December 31 1,546 1,596 1,689 Equity at December 31 $ 74,178 $ 74,664 $ 73,852 Supplemental share information Shares of common stock issued under employee plans, net 2,894 1,893 2,689 Shares of common stock repurchased 29,935 28,052 330 Shares of common stock issued for Raytheon Company outstanding common stock and equity awards — — 652,638 Dividends declared per share of common stock $ 2.160 $ 2.005 $ 2.160 See accompanying Notes to Consolidated Financial Statements 67 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING PRINCIPLES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Separation Transactions, Distributions and Raytheon Merger. 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 the 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.” 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. Unless otherwise indicated, amounts and activity throughout these Consolidated Financial Statements are presented on a continuing operations basis. Refer to “Note 3: Discontinued Operations” below for further details. Unless the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” “Raytheon Technologies,” and “RTC” mean Raytheon Technologies Corporation and its subsidiaries. UTC was determined to be the accounting acquirer in the Raytheon merger and, as a result, the financial statements of Raytheon Technologies for the 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. Russia Sanctions. 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. As a result of these sanctions on Russia and export controls, in the first quarter of 2022, we recorded pretax charges of $ 290 million, $ 210 million net of tax and the impact of noncontrolling interest, within our Collins Aerospace (Collins) and Pratt & Whitney businesses primarily related to increased estimates for credit losses on both our accounts receivables and contract assets, inventory reserves and purchase order obligations, impairment of customer financing assets for products under lease, impairment of contract fulfillment costs that are no longer recoverable, and a loss on the exit of our investment in a Russia-based joint venture. Additionally, we reversed approximately $ 1.3 billion of remaining performance obligations (RPO) in the quarter ended March 31, 2022 related to our sales contracts in Russia at Pratt & Whitney and Collins. We continue to monitor future developments, including additional sanctions and other measures, that could adversely affect the Company and/or our supply chain, business partners or customers. Coronavirus Disease 2019 (COVID-19) Pandemic. 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. As a result of COVID-19, commercial air travel demand experienced an unprecedented downturn as governments, businesses and individuals reacted to the pandemic in ways such as lockdowns, quarantines, border closings and other travel restrictions and requirements, the adoption of remote working and decreased leisure travel. The unprecedented decrease in air travel adversely affected our airline and airframer customers and their demand for our products and services of our Collins and Pratt & Whitney businesses. In addition, the border closings, lockdowns and labor shortages resulting from COVID-19 negatively impacted global supply and distribution capabilities. Decreases in the availability of supplies, increases in the cost of supplies and delivery issues have caused shortages and delays for the procurement of raw materials, components and other supplies required for our performance, 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 68 Table of Contents 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. In 2020, we recorded write-downs of assets and significant unfavorable Estimate at Completion (EAC) adjustments in our Collins and Pratt & Whitney businesses primarily related to: • goodwill impairment charges of $ 3.2 billion related to two of our Collins reporting units. Refer to “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets” for additional information; • increased estimated credit losses on both our receivables and contract assets of $ 387 million; • an unfavorable EAC adjustment on a Pratt & Whitney commercial engine aftermarket contract due to lower estimated revenues driven by a change in the estimated maintenance coverage period of $ 334 million; • contract asset and inventory impairments at Collins due to the impact of lower estimated future customer activity resulting from the expected acceleration of fleet retirements of a certain commercial aircraft type of $ 146 million; • an unfavorable EAC adjustment of $ 129 million related to lower estimated revenues due to the restructuring of a customer contract at Pratt & Whitney; • an $ 89 million impairment of commercial aircraft program assets at Pratt & Whitney; • the impairment of a Collins trade name of $ 57 million; • net unfavorable EAC adjustments on commercial aftermarket contracts at Pratt & Whitney based on a change in estimated future customer activity of $ 75 million; • an unfavorable EAC adjustment at Pratt & Whitney related to a shift in overhead costs to military contracts of $ 44 million; and • reserves related to a commercial financing arrangement at Pratt & Whitney of $ 43 million. Summary of Accounting Principles. The following represents the significant accounting principles of Raytheon Technologies Corporation. Consolidation and Classification. The Consolidated Financial Statements include the accounts of Raytheon Technologies Corporation, and all wholly owned, majority-owned and otherwise controlled domestic and foreign subsidiaries. All intercompany transactions have been eliminated. For our consolidated non-wholly owned subsidiaries, a noncontrolling interest is recognized to reflect the portion of equity that is not attributable to us. For classification of certain current assets and liabilities, the duration of our contracts or programs is utilized to define our operating cycle, which is generally longer than one year. Included within our Current assets and liabilities are Contract assets and liabilities related to our aftermarket and development arrangements, which can generally span up to fifteen years. We reclassified certain immaterial prior period amounts within the Consolidated Statement of Cash Flows to conform to our current period presentation. Use of Estimates. Our Consolidated Financial Statements are based on the application of U.S. Generally Accepted Accounting Principles (GAAP), which require us to make estimates and assumptions about future events that affect the amounts reported in our Consolidated Financial Statements and the accompanying notes. Actual results could differ from those estimates, and any such differences may be material to our Consolidated Financial Statements. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in our Consolidated Financial Statements in the period they are determined. Cash and Cash Equivalents. Cash and cash equivalents includes cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less. The estimated fair value of Cash and cash equivalents approximates the carrying value due to their short maturities. Accounts Receivable. Accounts receivable are stated at the net amount expected to be collected. We are exposed to credit losses primarily on our accounts receivable and contract assets related to our sales of products and services to commercial customers. The allowance for expected credit losses is established to provide for the expected lifetime credit losses by evaluating factors such as customer creditworthiness, historical payment and loss experiences, current economic conditions, including geographic and political risk, and the age and status of outstanding receivables. In certain circumstances, we may be able to develop reasonable and supportable forecasts over the contractual term of the financial asset. For periods beyond which we are able to make or obtain reasonable and supportable forecasts, we revert to historical loss experience and information. We determine credit ratings for each customer in our portfolio based upon public information and information obtained directly from our customers. We conduct a review of customer credit ratings, published historical credit default rates for different rating categories, and multiple third-party aircraft value publications as a basis to validate the reasonableness of the allowance for expected credit losses on a quarterly basis, or when events and circumstances warrant. A credit limit is established for each 69 Table of Contents customer based on the outcome of this review and consideration of the other factors discussed above. In certain cases, we may require collateral or prepayment to mitigate credit risk. Expected credit losses are written off in the period in which the financial asset is no longer collectible. Unbilled receivables represent revenues that are not currently billable to the customer under the terms of the contract and include unbilled amounts under commercial contracts where payment is solely subject to the passage of time. These items are expected to be billed and collected in the normal course of business. Accounts receivable as of December 31, 2022 and 2021 includes unbilled receivables of $ 298 million and $ 342 million, respectively, which primarily includes unbilled receivables with commercial aerospace customers. Other unbilled receivables where payment is subject to factors beyond just the passage of time are included in Contract assets in the Consolidated Balance Sheet. Contract Assets and Liabilities. Contract assets and liabilities represent the difference in the timing of revenue recognition from receipt of cash from our customers. Contract assets reflect revenue recognized and performance obligations satisfied or partially satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. Contract assets and Contract liabilities are generally classified as current as our operating cycle is generally longer than one year. See “Note 6: Contract Assets and Liabilities” for further discussion of Contract assets and liabilities. As described in more detail above in “Accounts Receivable,” we are exposed to credit losses on our contract assets related to our sales of products and services to commercial customers and regularly assess our allowance for expected credit losses as it relates to our Contract assets. Inventory. Inventory is stated at the lower of cost or estimated realizable value and is primarily based on first-in, first-out (FIFO) or average cost methods. Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory where the resale value or replacement value is less than inventoriable cost. Other factors that management considers in determining the adequacy of these reserves include whether individual inventory parts meet current specifications and can be substituted for a part currently being sold or used as a service part, overall market conditions, and other inventory management initiatives. Manufacturing costs are allocated to current production contracts. In our commercial aerospace businesses, excess costs beyond standard manufacturing costs are expensed when they meet certain thresholds. Equity Investments. Investments in entities we do not control are included in Other assets on the Consolidated Balance Sheet. For investments where we have significant influence, we apply the equity method of accounting, and as such, our share of the net earnings or losses of the investee is recorded. For investments where we do not have significant influence, we record them at cost under the measurement alternative and record adjustments for observable price changes. Equity investment income and losses are included in Other income, net on the Consolidated Statement of Operations since the activities of the investee are closely aligned with our operations. We evaluate our equity investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. Our sales to and purchases from unconsolidated entities accounted for under the equity method, which are considered related parties, are not material. Customer Financing Assets . Customer financing assets (CFA) relate to our commercial aerospace businesses in which we provide financing to airline customers. Our financing predominantly relates to products under lease, and to a lesser extent, notes and lease receivables. In certain limited circumstances, we pay deposits on behalf of our airline customers to secure production slots with the airframers, and such pre-delivery payments are included in Accounts receivable, net, if current, and Customer financing assets, if non-current, in our Consolidated Balance Sheet. Any unfunded pre-delivery payments are included within our commercial aerospace financing commitments as further discussed in “Note 18: Commitments and Contingencies.” Interest income from notes and financing leases and rental income from operating lease assets is generally included in Other income, net in the Consolidated Statement of Operations, while gains or losses on sales of operating lease assets are included in Products sales and Cost of sales. The current portion of these financing arrangements are aggregated in Accounts receivable, net and the non-current portion of these financing arrangements are aggregated in CFA in the Consolidated Balance Sheet. The increases and decreases in CFA from funding, receipts and certain other activity, are generally reflected as Investing Activities in the Consolidated Statement of Cash Flows. Leased assets are valued at cost and reviewed for impairment when circumstances indicate that the related carrying amounts may not be recoverable. Notes and lease receivables are valued at the net amount expected to be collected. For notes and lease receivables, we determine a specific reserve for exposure based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral in connection with 70 Table of Contents the evaluation of credit risk and collectability. As of December 31, 2022 and 2021, the reserves related to CFA were not material. At December 31, 2022 and 2021, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be impaired. Fixed Assets, Net. Fixed assets, net, are stated at cost less accumulated depreciation. Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements are expensed. For asset sales or retirements, the assets and related accumulated depreciation and amortization are eliminated from the accounts. Gains and losses on sales of our Fixed assets, net, are generally recorded in operating income. Business Combinations. Once a business is acquired, the fair value of the identifiable assets acquired and liabilities assumed is determined with the excess cost recorded to goodwill. As required, a preliminary fair value is determined once a business is acquired, with the final determination of the fair value being completed no later than one year from the date of acquisition. In connection with the acquisitions of Rockwell Collins in 2018 and Goodrich in 2012, and to a lesser extent the acquisition of Raytheon Company in 2020, we recorded assumed liabilities related to customer contractual obligations on certain contracts with economic returns that were lower than what could be realized in market transactions as of the acquisition date. We measured these assumed liabilities based on the estimated cash flows of the programs plus a reasonable contracting profit margin required to transfer the contracts to market participants. These liabilities are being amortized in accordance with the underlying pattern of obligations, as reflected by the expenses incurred on the contracts. The balance of the contractual obligations was $ 818 million and $ 929 million at December 31, 2022 and 2021, respectively. Total consumption of the contractual obligations for the years ended December 31, 2022, 2021 and 2020 was $ 111 million, $ 314 million and $ 295 million, respectively, with future consumption expected to be as follows: $ 104 million in 2023, $ 80 million in 2024, $ 68 million in 2025, $ 67 million in 2026, $ 65 million in 2027 and $ 434 million thereafter. Goodwill and Intangible Assets. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. 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. The goodwill impairment test compares carrying values of the reporting units to their estimated fair values. 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, fair value is primarily based on market-based valuation methods, income-based methods using a discounted cash flow model, relief from royalty methods, or a combination of such. These assessments utilize significant assumptions including 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. Finite-lived intangible assets are tested for impairment when events occur that indicate that the net book value will not be recovered over future cash flows. Intangible assets consist of patents, trademarks/tradenames, customer relationships, exclusivity assets, developed technology and other intangible assets including collaboration assets. Acquired intangible assets are recognized at fair value in purchase accounting. Finite-lived intangible assets are amortized to Cost of sales and Selling, general and administrative expenses over the applicable useful lives. Exclusivity assets are commercial aerospace payments made to secure certain contractual rights to provide product on new aircraft platforms. We classify amortization of such payments as a reduction of sales. Such payments are capitalized when there are distinct rights obtained and there are sufficient incremental cash flows to support the recoverability of the assets established. Otherwise, the applicable portion of the payments are expensed. In addition, in connection with our 2012 agreement to acquire Rolls-Royce’s ownership and collaboration interests in International Aero Engines AG (IAE), additional payments are due to Rolls-Royce contingent upon each hour flown through June 2027 by the V2500-powered aircraft in service as of the acquisition date. These flight hour payments are being capitalized as collaboration assets and amortized to cost of sales. Useful lives of finite-lived intangible assets are estimated based upon the nature of the intangible asset and the industry in which the intangible asset is used. These intangible assets are amortized based on the pattern in which the economic benefits of the intangible assets are consumed, as represented by the underlying cash flows, which may result in an amortization method other than straight-line. For both our commercial aerospace collaboration assets and exclusivity arrangements, the pattern of economic benefit generally results in no amortization during the development period with amortization beginning as programs enter full rate production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined or if straight- 71 Table of Contents line amortization approximates the pattern of economic benefit, a straight-line amortization method may be used. The range of estimated useful lives is as follows: Years Collaboration assets 30 Customer relationships and related programs 3 to 30 Developed technology 3 to 25 Patents and trademarks 5 to 30 Exclusivity assets 5 to 25 Leases. As a lessee, we record a right-of-use asset and a lease liability on the Consolidated Balance Sheet for leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statement of Operations. We enter into lease agreements for the use of real estate space, vehicles, information technology equipment, and certain other equipment under both operating and finance leases. We determine if an arrangement contains a lease at inception. Operating leases are included in Operating lease right-of-use assets and Operating lease liabilities, non-current on our Consolidated Balance Sheet. The current portion of our operating lease liabilities is included in Accrued liabilities on our Consolidated Balance Sheet. Finance leases are not considered significant to our Consolidated Balance Sheet or Consolidated Statement of Operations. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, and use the implicit rate when readily determinable. We determine our incremental borrowing rate through market sources including relevant industry rates. Our lease right-of-use assets also include any initial direct costs and lease pre-payments made at or before the commencement date and are reduced for any lease incentives received at or before the commencement date. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. We exclude variable payments from lease right-of-use assets and lease liabilities, to the extent such payments are not considered fixed, and instead, expense variable payments as incurred. Variable lease expense and lease expense for short duration contracts are not a material component of lease expense. Some of our leases include the option to extend or terminate the lease. We include these options in the recognition of our right-of-use assets and lease liabilities when it is reasonably certain that we will exercise the option. Lease expense is generally recognized on a straight-line basis over the lease term. In limited instances we act as a lessor, primarily for commercial aerospace engines, the majority of which are classified as operating leases. These leases are not significant to our Consolidated Balance Sheet or Consolidated Statement of Operations. Other Long-Lived Assets. We evaluate the potential impairment of other long-lived assets whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. If the carrying value of other long-lived assets held and used exceeds the sum of the undiscounted expected future cash flows, the carrying value is written down to fair value. In order for long-lived assets to be considered held for disposal, we must have committed to a plan to dispose of the assets. Once deemed held for disposal, the assets are stated at the lower of the carrying amount or fair value. Income Taxes. Future income taxes represent the tax effects of transactions which are reported in different periods for tax and financial reporting purposes. These amounts consist of the tax effects of temporary differences between the tax and financial reporting balance sheets and tax carryforwards. Future income tax benefits and payables within the same tax paying component of a particular jurisdiction are offset for presentation in the Consolidated Balance Sheet. I n the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest expense has also been recognized. We recognize accrued interest related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense. State income tax amounts are generally included in income tax expense; however state income tax payments related to our Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD) segments are generally recoverable through the pricing of products and 72 Table of Contents services to the U.S. government, and, accordingly, we have recorded the future recovery of these costs from the U.S. government within Other assets, current in the Consolidated Balance Sheet. Accordingly, these state income taxes are generally allocated to contracts and then classified as Selling, general and administrative expenses when paid (recovered) or otherwise agreed as allocable with the U.S. government. We have elected to account for tax on Global Intangible Low-Taxed Income ( GILTI) as a period cost, as incurred. Revenue Recognition. The vast majority of our revenues are from long-term contracts associated with the design, development, manufacture or modification of complex aerospace or defense equipment or related services. Collins and Pratt & Whitney primarily serve commercial and government customers in both the original equipment manufacturer (OEM) and aftermarket parts and services markets of the aerospace industry, while RIS and RMD primarily provide products and services to government customers in the defense industry. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily contracts that are directly with a foreign government, we are required to obtain certain regulatory approvals. In these cases, we recognize revenue based on the likelihood of obtaining regulatory approvals based upon all known facts and circumstances. A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Some of our contracts with customers contain a single performance obligation, while others contain multiple performance obligations most commonly when a contract contains multiple distinct units (such as engines or certain aerospace components) or spans multiple phases of the product life-cycle such as production, maintenance and support. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its standalone selling price when available. If standalone selling price is not available, we estimate the standalone selling price of each performance obligation, which is generally based on an expected cost plus a margin approach. We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price, including contractual discounts, contract incentive payments, estimates of award fees, flight hours, aircraft landings or other customer usage activities on long term maintenance contracts, and other sources of variable consideration, when determining the transaction price of each contract. When reasonably able to estimate, we include variable consideration in the transaction price at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. These estimates are based on historical experience, anticipated performance and our best judgment at the time. We also consider whether our contracts contain a significant financing component, which they generally do not. Timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms. Performance obligations are satisfied as of a point in time for certain aerospace components, engines, and spare parts. Revenue is recognized when control of the product transfers to the customer, generally upon product shipment. Since billing also typically occurs upon product shipment, we generally do not have Contract assets or Contract liabilities balances related to point in time sales. Performance obligations are satisfied over-time if the customer receives the benefits as we perform work, if the customer controls the asset as it is being produced (continuous transfer of control), or if the product being produced for the customer has no alternative use and we have a contractual right to payment for performance to date. We recognize revenue on an over-time basis for substantially all defense contracts and certain long-term aerospace OEM and aftermarket contracts. Substantially all of our defense business revenue, which primarily relates to our RIS and RMD segments, and to a lesser extent Pratt & Whitney and Collins, is recognized over time because of the continuous transfer of control to our customers. For performance obligations satisfied over time, revenue is recognized on a percentage of completion basis generally using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs can include labor, materials, subcontractors’ costs, or other direct costs and indirect costs. Our contracts with the U.S. government are typically subject to the Federal Acquisition Regulation (FAR) and are priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer. Under the typical payment terms of our U.S. government fixed-price contracts, the customer pays us either performance-based payments (PBPs) or progress payments. PBPs are interim payments equal to a negotiated percentage of the 73 Table of Contents contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments up to 80-90% of costs incurred as the work progresses. Because the customer retains a portion of the contract price until completion of the contract, our U.S. government fixed-price contracts generally result in revenue recognized in excess of billings which we present as Contract assets on the Consolidated Balance Sheet. For our U.S. government cost-type contracts, the customer generally pays us for our costs incurred within a short period of time. For non-U.S. government contracts, we typically receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment. Such advances are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. We recognize a liability for advance payments in excess of revenue recognized and present it as Contract liabilities on the Consolidated Balance Sheet. For certain of our long-term aftermarket contracts, revenue is recognized over the contract period. We generally account for such contracts as a series of daily performance obligations to stand ready to provide spare parts, product maintenance and aftermarket services. These arrangements include the sale of spare parts with integral services to our customers, and are generally classified as Services sales, with the corresponding costs classified in Cost of sales - services, within the Consolidated Statement of Operations. Revenue is primarily recognized on a percentage of completion basis using costs incurred to date relative to total estimated costs at completion to measure progress, as sufficient historical evidence indicates that the cost of performing services under the contract is incurred on an other-than-straight-line basis. For some of our long-term aftermarket contracts, we receive payment prior to delivery of products and services, resulting in a contract liability balance, while for others, we deliver products or services in advance of payment, resulting in a contract asset balance. Contracts are often modified to account for changes in contract specifications or requirements. We consider contract modifications to exist when the modification either creates new or changes existing enforceable rights and obligations. Contract modifications for goods or services that are not distinct are accounted for as part of the existing contract either on a cumulative catch-up basis or prospective basis depending on the nature of the modification. Loss provisions on contracts are recognized to the extent that estimated contract costs exceed the estimated consideration from the products or services contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at contract signing except for certain contracts under which losses are recorded upon receipt of the purchase order that obligates us to perform. For existing commitments, anticipated losses on contractual arrangements are recognized in the period in which losses become evident. In estimating losses, products contemplated under contractual arrangements include firm quantities of product sold under contract and, in the commercial engine and wheels and brakes businesses, future highly probable sales of replacement parts required by regulation that are expected to be sold subsequently for incorporation into the original equipment. In our commercial engine and wheels and brakes businesses, when the OEM product is sold for a loss, but the combined OEM and aftermarket arrangement for each individual sales campaign is profitable, we record OEM product losses at the time of product delivery. 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 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. 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 changes. 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. These obligations may or may not be distinct depending on their nature. 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 74 Table of Contents more of these estimates could affect the profitability of one or more of our performance obligations. 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 ) Income (loss) from continuing operations attributable to common shareowners (1) ( 29 ) 87 ( 508 ) Diluted earnings (loss) per share from continuing operations attributable to common shareowners (1) $ ( 0.02 ) $ 0.06 $ ( 0.37 ) (1) Amounts reflect a U.S. statutory tax rate of 21%, which approximates our tax rate on our EAC adjustments. For additional discussion on significant unfavorable EAC adjustments in 2020, see the COVID-19 Pandemic discussion above. 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.” In our Collins and Pratt & Whitney businesses, we may offer customers incentives to purchase our products, which may result in payments made to those customers, which are treated as a reduction in sales. In our Collins and Pratt & Whitney businesses, we incur contract fulfillment costs for engineering and development of aerospace products directly related to existing or anticipated contracts with customers. Such costs generate or enhance our ability to satisfy our performance obligations under these contracts. We capitalize these costs as contract fulfillment costs to the extent the costs are recoverable from the associated contract margin and customer funding, and subsequently amortize the costs as the related performance obligations are satisfied. In instances where intellectual property does not transfer to the customer, we generally defer the customer funding of product engineering and development and recognize revenue when the related performance obligations are satisfied. Capitalized contract fulfillment costs were $ 2.3 billion and $ 2.0 billion as of December 31, 2022 and 2021, respectively, and are classified in Other assets, current in our Consolidated Balance Sheet and are included in Other current assets in our Consolidated Statement of Cash Flows. We regularly assess capitalized contract fulfillment costs for impairment and recognized $ 111 million of impairment for contract fulfillment costs in 2020 in conjunction with the related impacts of the COVID-19 pandemic. Costs to obtain contracts are not material. In view of the risks and costs associated with developing new engines and the large up-front investments required that often require returns generated over the full estimated life of the engine, Pratt & Whitney has entered into certain collaboration arrangements in which sales, costs and risks are shared. Sales generated from engine programs, spare parts sales, and aftermarket business under these collaboration arrangements are recorded consistent with our revenue recognition policies in our Consolidated Financial Statements. Amounts attributable to our collaborators for their share of sales are recorded as cost of sales in our Consolidated Financial Statements based upon the terms and nature of the arrangement. Costs associated with engine programs under collaborative arrangements are expensed as incurred. Under these arrangements, collaborators contribute their program share of engine parts, incur their own production costs and make certain payments for shared or joint program costs. The reimbursement from collaborators of their share of program costs is recorded as a reduction of the related expense item at that time. As of December 31, 2022, the collaborators’ interests in all commercial engine programs ranged from 13 % to 49 %, inclusive of a portion of Pratt & Whitney’s interests held by other participants. Pratt & Whitney is the principal participant in all existing collaborative arrangements, with the exception of the Engine Alliance (EA), a joint venture with GE Aviation, which provides aftermarket support, spare parts, and service for the GP7000 engine for the Airbus A380 aircraft. There are no individually significant collaborative arrangements, and none of the collaborators individually have more than a 75 Table of Contents 25 % share in an individual program. The following table illustrates the Consolidated Statement of Operations classification and amounts attributable to transactions arising from the collaborative arrangements between participants for each period presented. (dollars in millions) 2022 2021 2020 Collaborator share of sales: Cost of sales - products $ 2,058 $ 1,534 $ 1,183 Cost of sales - services 1,808 1,428 1,374 Collaborator share of program costs (reimbursement of expenses incurred): Cost of sales - products ( 154 ) ( 160 ) ( 147 ) Research and development ( 182 ) ( 135 ) ( 177 ) Selling, general and administrative ( 105 ) ( 85 ) ( 99 ) Remaining Performance Obligations (RPO). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. Total RPO was $ 175 billion as of December 31, 2022. In the quarter ended March 31, 2022, we reversed approximately $ 1.3 billion of RPO related to our sales contracts in Russia due to global sanctions on and export controls with respect to Russia, as further discussed above. Of the total RPO as of December 31, 2022, we expect approximately 25 % will be recognized as sales over the next 12 months. Approximately 45 % of our RPO relates to long-term commercial aerospace maintenance contracts at Pratt & Whitney, which are generally expected to be realized over a span of up to 15 years. Research and Development. Company-sponsored research and development costs, including those costs related to the Company’s portion in connection with cost-sharing arrangements, are charged to expense as incurred and recovery on these cost-sharing arrangements is recorded as a reduction to research and development expense as earned. Customer-sponsored research and development projects performed under contracts with customers are accounted for as contract costs and reported as cost of sales on the related revenue generating contracts. Foreign Exchange. We conduct business in many different currencies and, accordingly, are subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of many of our foreign subsidiaries are often measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. Dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred as a separate component of Accumulated other comprehensive loss (AOCL) in Shareowners’ equity on our Consolidated Balance Sheet. Foreign exchange transaction gains and losses are recorded in Other income, net on our Consolidated Statement of Operations. Derivatives and Hedging Activity. We use derivative instruments, including swaps, forward contracts and options, to help manage certain foreign currency, and from time to time to help manage interest rate and commodity price exposures. Derivative instruments are viewed as risk management tools by us and are not used for trading or speculative purposes. By their nature, all financial instruments involve market and credit risks. We enter into derivative and other financial instruments with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. We limit counterparty exposure and concentration of risk by diversifying counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties. We enter into transactions that are subject to enforceable master netting arrangements or similar agreements with various counterparties. However, we have not elected to offset multiple contracts with a single counterparty and, as a result, the fair value of the derivative instruments in a loss position is not offset against the fair value of derivative instruments in a gain position. Derivatives used for hedging purposes may be designated and effective as a hedge of the identified risk exposure at the inception of the contract. All derivative instruments are recorded on the balance sheet at fair value. Derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases may be accounted for as cash flow hedges, as deemed appropriate. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and reclassified to earnings as a component of products sales or expenses, as applicable, when the hedged transaction occurs. Cash payments or receipts on derivatives designated as cash flow hedges are recorded in Other operating activities, net within the Consolidated Statement of Cash Flows. To the extent that a previously designated hedging transa ction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs. To the extent the hedge accounting criteria are not met, the foreign currency forward contracts are utilized as economic hedges and changes in the fair value of these contracts are recorded currently in earnings in the period in which they occur. Cash 76 Table of Contents receipts or payments related to the settlement of derivatives not designated as hedging instruments are recorded as investing cash flows within the Consolidated Statement of Cash Flows. Additional information pertaining to foreign currency forward contracts and net investment hedging is included in “Note 14: Financial Instruments.” Environmental. Environmental investigatory, remediation, operating and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and regulations and prior remediation experience. Where no amount within a range of estimates is more likely, the minimum is accrued. For sites with multiple responsible parties, we consider our likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. Liabilities with fixed or reliably determinable future cash payments are discounted. A portion of these costs is eligible for future recovery through the pricing of our products and services to the U.S. government. We regularly assess the probability of recovery of these costs, which requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract activity with the U.S. government. We consider such recovery probable based on government contracting regulations and our history of receiving reimbursement for such costs, and accordingly have recorded the future recovery of these costs from the U.S. government within Other assets, current in the Consolidated Balance Sheet. Accrued environmental liabilities are not reduced by potential insurance reimbursements or potential recoveries from pursuing other parties. We also lease certain government-owned properties and generally are not liable for remediation of preexisting environmental contamination at these sites. As a result, we generally do not provide for these costs in our Consolidated Financial Statements. See “Note 18: Commitments and Contingencies” for additional details on the environmental remediation activities. Pension and Postretirement Obligations. U.S. GAAP requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit (PRB) plans. Funded status is measured at least annually in the fourth quarter and represents the difference between the plans’ projected benefit obligation (PBO) and the fair market value of the plans’ assets. Changes to our pension and PRB plans’ funded status can result from company actions, such as contributions or changes in plan provisions, or by gains and losses. Gains and losses are primarily a result of changes in assumptions and actual experience that differs from these assumptions. Major assumptions include the discount rate and expected return on plan assets (EROA). These gains or losses are recorded in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit (income) expense. A calculated “market-related value” of our plan assets is used to develop the amount of deferred asset gains or losses to be amortized. The market-related value of assets is equal to the fair value of assets adjusted to reflect the recognition, and subsequent amortization, of the difference between actual and expected asset returns over a five-year period. The market-related value of assets is used to calculate the expected return on assets included in the net periodic benefit (income) expense. The Company has elected to use the “corridor” approach in the amortization of gains and losses, which limits the expense recognition to the net outstanding gains and losses in excess of the greater of 10% of the PBO or 10% of the market-related value of assets. Gains and losses exceeding the corridor are amortized in net periodic benefit (income) expense over either the projected average remaining employee service period or the projected average remaining lifetime of inactive participants depending on the plan. Net periodic benefit (income) expense is classified between operating and non-operating, whereby only the service cost component is included in operating profit and the remaining components are included in Non-service pension (income) expense. Product Performance Obligations. We extend performance and operating cost guarantees beyond our normal service and warranty policies for extended periods on some of our products, particularly commercial aircraft engines. Liability under such guarantees is based upon future product performance and durability. We accrue for such costs that are probable and can be reasonably estimated. In addition, we incur discretionary costs to service our products in connection with product performance issues. The costs associated with these product performance and operating cost guarantees require estimates over the full terms of the agreements, and require management to consider factors such as the extent of future maintenance requirements, interval between flight and repair time and the future cost of material and labor to perform the services. These cost estimates are largely based upon historical experience. See “Note 17: Guarantees” for further discussion. Government Grants. We may receive grants from various federal, state, local, and foreign governments in exchange for compliance with certain conditions relating to our activities in a specific jurisdiction. Grants are often structured to encourage investment, job creation, job retention, employee training, and other related activities. We recognize government grants when there is reasonable assurance that the Company will comply with the conditions of the grant and the grant is received or is probable of receipt and the amount is determinable. Government grants are recorded as a reduction to the related expense or 77 Table of Contents asset to which the grant relates or recorded in Other income, net in our Consolidated Statement of Operations. Government grant transactions are not material to our financial position, results of operations or liquidity. Accounting Pronouncements. In September 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which requires that a buyer in a supplier finance program disclose the key terms of supplier finance programs, the amount of obligations outstanding at the end of the reporting period that the entity has confirmed as valid to the finance provider, where these obligations are recorded in the balance sheet, and a roll forward of the obligations. The new standard is effective for fiscal years beginning after December 15, 2022, on a retrospective basis, including interim periods within those fiscal years. We are currently evaluating the impact of adopting this new pronouncement. In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities to make specific annual disclosures about transactions with a government. The new standard is effective for fiscal years beginning after December 15, 2021. The adoption of this standard did not have an impact on our disclosures. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer to apply the guidance in ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities in a business combination, rather than using fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. Effective January 1, 2022, we elected to early adopt the requirements of the new standard on a prospective basis. The adoption of the standard did not have an impact on our financial position, results of operations or liquidity. Other new pronouncements issued but not effective until after December 31, 2022 are not expected to have a material impact on our results of operations, financial condition or liquidity. NOTE 2: BUSINESS ACQUISITIONS, DISPOSITIONS, GOODWILL AND INTANGIBLE ASSETS Business Acquisitions. Our investments in businesses, net of cash acquired, in 2022, 2021 and 2020 totaled $ 66 million, $ 1.1 billion and $ 35.1 billion, respectively. Our investments in business in 2022 consisted of immaterial acquisitions. Our investments in business in 2021 and 2020 primarily consisted of the acquisitions discussed below. In November 2021, we completed the acquisitions of FlightAware and SEAKR Engineering Inc., for a total of approximately $ 1.1 billion, net of cash received. FlightAware is a leading digital aviation company providing global flight tracking solutions, predictive technology, analytics and decision-making tools, and is reported in the Collins segment. SEAKR Engineering Inc. is a leading supplier of advanced space electronics and is reported in the RIS segment. In connection with these acquisitions, we recorded $ 0.8 billion of goodwill and $ 0.3 billion of intangible assets. In December 2020, we completed the acquisition of Blue Canyon Technologies, a leading provider of small satellites and spacecraft systems components for $ 425 million, net of cash received. Blue Canyon Technologies is reported in the RIS segment. In connection with this acquisition, we recorded $ 281 million of goodwill and $ 149 million of intangible assets. Pro forma financial information and revenue from the date of acquisition have not been provided for these acquisitions as they are not material either individually or in the aggregate. Raytheon Merger. As discussed in “Note 1: Basis of Presentation and Summary of Accounting Principles”, on April 3, 2020, UTC and Raytheon Company completed an all-stock merger of equals, following the completion by UTC of the Separation Transactions and Distributions. Raytheon Company (previously New York Stock Exchange (NYSE): RTN) shares ceased trading prior to the market open on April 3, 2020, and each share of Raytheon common stock was converted in the merger into the right to receive 2.3348 shares of UTC common stock, previously traded on the NYSE under the ticker symbol “UTX.” Upon closing of the Raytheon merger, UTC’s name was changed to “Raytheon Technologies Corporation,” and its shares of common stock began trading as of April 3, 2020 on the NYSE under the ticker symbol “RTX.” Total consideration is calculated as follows: (dollars in millions) Amount Fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards $ 33,067 Fair value attributable to pre-merger service for replacement equity awards 99 Total merger consideration $ 33,166 78 Table of Contents The fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards is calculated as follows: (dollars and shares in millions, except per share amounts and exchange ratio) Amount Number of Raytheon Company common shares outstanding as of April 3, 2020 277.3 Number of Raytheon Company stock awards vested as a result of the Raytheon merger (1) 0.4 Total outstanding shares of Raytheon Company common stock and equity awards entitled to merger consideration 277.7 Exchange ratio (2) 2.3348 Shares of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards 648.4 Price per share of RTC common stock (3) $ 51.00 Fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards $ 33,067 (1) Represents Raytheon Company stock awards that vested as a result of the Raytheon merger, which is considered a “change in control” for purposes of the Raytheon 2010 Stock Plan. Certain Raytheon Company restricted stock awards and Raytheon Company restricted stock unit (RSU) awards, issued under the Raytheon 2010 Stock Plan vested on an accelerated basis as a result of the Raytheon merger. Such vested awards were converted into the right to receive RTC common stock determined as the product of (1) the number of vested awards, and (2) the exchange ratio. (2) The exchange ratio is equal to 2.3348 shares of UTC common stock for each share of Raytheon Company common stock in accordance with the Raytheon merger agreement. (3) The price per share of RTC common stock is based on the RTC opening stock price as of April 3, 2020. Allocation of Consideration Transferred to Net Assets Acquired. We accounted for the Raytheon merger under the acquisition method and are required to measure identifiable assets acquired and liabilities assumed of the acquiree (Raytheon Company) at the fair values on the closing date. During the first quarter of 2021, based on the finalization of our valuation and internal reviews, we completed the purchase price allocation which resulted in a net increase to goodwill of $ 61 million. The final purchase price allocation, net of cash acquired, for the acquisition was as follows: (dollars in millions) Cash and cash equivalents $ 3,208 Accounts receivable 1,997 Contract assets 6,023 Inventory 705 Other assets, current 940 Fixed assets 4,745 Operating lease right-of-use assets 950 Intangible assets 19,130 Other assets 1,218 Total identifiable assets acquired 38,916 Accounts payable 1,477 Accrued employee compensation 1,492 Other accrued liabilities 1,921 Contract liabilities 3,002 Long-term debt, including current portion 4,700 Operating lease liabilities, non-current 738 Future pension and postretirement benefit obligations 11,607 Other long-term liabilities 2,368 Total liabilities acquired 27,305 Total identifiable net assets 11,611 Goodwill 21,589 Redeemable noncontrolling interest ( 34 ) Total consideration transferred $ 33,166 Fair value adjustments to Raytheon Company’s identified assets and liabilities included an increase in fixed assets of 79 Table of Contents $ 1.1 billion and an increase to future pension and postretirement benefit obligations of $ 3.6 billion, primarily related to remeasurement of the liability based on market conditions on the Raytheon merger closing date. In determining the fair value of identifiable assets acquired and liabilities assumed, a review was conducted for any significant contingent assets or liabilities existing as of the closing date. The assessment did not note any material contingencies related to existing legal or government action. The Separation Transactions included the transfer of certain defined benefit plans from UTC to Carrier and Otis. The plans transferred were primarily international plans with the majority of the UTC defined benefit liability remaining with Raytheon Technologies. Upon separation, the pension participants within Carrier and Otis were effectively terminated from Raytheon Technologies. The terminations triggered a mid-year remeasurement of the UTC domestic plans. The remeasurement, which was calculated using discount rates and asset values as of April 3, 2020 (using March 31, 2020 as a practical expedient), resulted in a $ 2.4 billion increase to our pension liability, primarily due to a decrease in the fair market value of the plans’ assets since December 31, 2019. All service cost previously associated with Carrier and Otis was reclassified to discontinued operations. For non-service pension (income) expense and pension liabilities, generally only the portions related to the defined benefit plans transferred to Carrier and Otis as part of the Separation Transactions were reclassified to discontinued operations. The fair values of the customer relationship intangible assets were determined by using a discounted cash flow valuation method, which is a form of the income approach. Under this approach, the estimated future cash flows attributable to the asset are adjusted to exclude the future cash flows that can be attributed to supporting assets, such as tradenames or fixed assets. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant future cash flows, which required significant management judgment, included forecasted revenue growth rates, remaining developmental effort, operational performance including company specific synergies, program life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows were probability-adjusted to reflect the uncertainties associated with the underlying assumptions, including cancellation rates related to backlog, government demand for sole-source and recompete contracts and win rates for recompete contracts, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future cash flows were then discounted to present value, using an appropriate discount rate that required significant judgment by management. The customer relationship intangible assets are being amortized based on the pattern of economic benefits we expect to realize over the estimated economic life of the underlying programs. The fair value of the tradename intangible assets were determined utilizing the relief from royalty method, which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the tradename and discounted to present value, using forecasted revenue growth rate projections and a discount rate, respectively, that required significant judgment by management. The tradename intangible assets were determined to have an indefinite life. The developed technology intangible assets are being amortized based on the pattern of economic benefits. The intangible assets included above consist of the following: (dollars in millions) Fair Value Useful Life Acquired customer relationships $ 12,900 25 years Acquired tradenames 5,430 Indefinite Acquired developed technology 800 5 to 7 years Total identifiable intangible assets $ 19,130 We also identified customer contractual obligations on loss making programs and recorded liabilities of $ 222 million related to these programs based on the difference between the actual expected operating loss and a normalized operating profit. These liabilities are being liquidated based on the expected pattern of expenses incurred on these contracts. We recorded $ 21.6 billion of goodwill as a result of the Raytheon merger which primarily relates to expected synergies from combining operations and the value of the existing workforce. The goodwill generated as a result of the Raytheon merger is nondeductible for tax purposes. Merger-Related Costs. Merger-related costs have been expensed as incurred. In 2021 and 2020, we recorded $ 17 million and $ 142 million, respectively, of Raytheon merger transaction and integration costs. These costs were recorded in Selling, general and administrative expenses within the Consolidated Statement of Operations. Supplemental Pro-Forma Data. Raytheon Company’s results of operations have been included in RTC’s financial statements for the period subsequent to the completion of the Raytheon merger on April 3, 2020. The following unaudited supplemental pro-forma data presents consolidated information as if the Raytheon merger had been completed on January 1, 2019. The pro-forma results were calculated by combining the results of Raytheon Technologies with the stand-alone results of Raytheon Company for the pre-acquisition periods, which were adjusted to account for certain costs that would have been incurred during 80 Table of Contents this pre-acquisition period. The results below reflect Raytheon Technologies on a continuing operations basis, in order to more accurately represent the structure of Raytheon Technologies after completion of the Separation Transactions, the Distributions and the Raytheon merger. (dollars in millions, except per share amounts) 2020 Net sales $ 64,087 Loss from continuing operations attributable to common shareowners ( 2,167 ) Basic loss per share of common stock from continuing operations $ ( 1.43 ) Diluted loss per share of common stock from continuing operations ( 1.43 ) The unaudited supplemental pro-forma data above includes the following significant adjustments made to account for certain costs which would have been incurred if the acquisition had been completed on January 1, 2019, as adjusted for the applicable tax impact. As the merger was completed on April 3, 2020, the pro-forma adjustments in the table below only include the required adjustments through April 3, 2020. (dollars in millions) 2020 Amortization of acquired Raytheon Company intangible assets, net (1) $ ( 270 ) Amortization of fixed asset fair value adjustment (2) ( 9 ) Utilization of contractual customer obligation (3) 8 Deferred revenue fair value adjustment (4) ( 4 ) Adjustment to non-service pension (income) expense (5) 239 RTC/Raytheon fees for advisory, legal, accounting services (6) 134 Adjustment to interest expense related to the Raytheon merger, net (7) 9 Elimination of deferred commission amortization (8) 5 $ 112 (1) Reflects the additional amortization of the acquired Raytheon Company’s intangible assets recognized at fair value in purchase accounting and eliminates the historical Raytheon Company intangible asset amortization expense. (2) Reflects the amortization of the fixed asset fair value adjustment as of the acquisition date. (3) Reflects the additional amortization of liabilities recognized for certain acquired loss making contracts as of the acquisition date. (4) Reflects the difference between prepayments related to extended arrangements and the fair value of the assumed performance obligations as they are satisfied. (5) Represents the elimination of unamortized prior service costs and actuarial losses, as a result of fair value purchase accounting. (6) Reflects the elimination of transaction-related fees incurred by RTC and Raytheon Company in connection with the Raytheon merger and assumes all of the fees were incurred during the first quarter of 2019. (7) Reflects the amortization of the fair market value adjustment related to Raytheon Company. (8) Reflects the elimination of amortization recognized on deferred commissions that are eliminated in purchase accounting. The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings related to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition had been consummated on January 1, 2019, nor are they indicative of future results. Dispositions. In 2022, 2021 and 2020 cash inflows related to dispositions were $ 94 million, $ 1.9 billion and $ 2.6 billion, respectively. Our dispositions of businesses in 2022 were immaterial. Our dispositions of businesses in 2021 and 2020 consisted of the dispositions discussed below and other immaterial dispositions. In December 2021, we divested our global training and services business within our RIS segment for approximately $ 0.9 billion in cash and other consideration, resulting in an aggregate pre-tax gain, net of transaction costs, of $ 251 million ($ 135 million after tax), which includes a $ 12 million pre-tax gain recognized in Non-service pension income within the Consolidated Statement of Operations. In January 2021, we sold our Forcepoint business for proceeds of $ 1.1 billion, net of cash transferred. We did not recognize a pre-tax gain or loss within the Consolidated Statement of Operations related to the sale of Forcepoint. The results of Forcepoint were included in Eliminations and other in our segment results. In the third quarter of 2020, in accordance with conditions imposed for regulatory approval of the Raytheon merger, we completed the sale of our Collins military Global Positioning System (GPS) and space-based precision optics businesses for $ 2.3 billion in cash, resulting in an aggregate pre-tax gain, net of transaction costs, of $ 580 million ($ 253 million after tax), of which $ 608 million was included in Other income, net partially offset by $ 20 million of aggregate transaction costs included in 81 Table of Contents Selling, general and administrative costs and an $ 8 million expense included in Non-service pension income within our Consolidated Statement of Operations. In May 2020, in order to meet the requirements for regulatory approval of the Raytheon merger, we completed the sale of our airborne tactical radios business within our RIS segment for $ 231 million in cash, net of transaction-related costs. As the transaction occurred subsequent to the Raytheon merger, the gain of $ 199 million was not recorded in the Consolidated Statement of Operations, but rather was recorded as an adjustment to the fair value of net assets acquired in the allocation of consideration transferred to net assets acquired in the Raytheon merger. Goodwill. Changes in our goodwill balances for the year ended in 2022 were as follows: (dollars in millions) Balance as of January 1, 2022 Acquisitions and Divestitures Foreign currency translation and other Balance as of December 31, 2022 Collins Aerospace $ 31,384 $ ( 36 ) $ ( 629 ) $ 30,719 Pratt & Whitney 1,563 — — 1,563 Raytheon Intelligence & Space 9,813 26 2 9,841 Raytheon Missiles & Defense 11,659 41 — 11,700 Total Segment 54,419 31 ( 627 ) 53,823 Eliminations and other 17 — — 17 Total $ 54,436 $ 31 $ ( 627 ) $ 53,840 The Company reviews goodwill for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. 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 discounted cash flows 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. Material changes in these estimates could occur and result in impairments in future periods. 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. We considered the deterioration in general economic and market conditions primarily due to the COVID-19 pandemic to be a triggering event in the first and second quarters of 2020, requiring an impairment evaluation of goodwill, intangible assets, net and other assets in our commercial aerospace businesses, Collins and Pratt & Whitney. Beginning in the second quarter of 2020, we observed several airline customer bankruptcies, delays and cancellations of aircraft purchases by airlines, fleet retirements and repositioning of OEM production schedules and we experienced significant unfavorable EAC adjustments at our Collins and Pratt & Whitney businesses due to a decline in flight hours, aircraft fleet utilization, shop visits and commercial OEM deliveries. These factors contributed to a deterioration of our expectations regarding the timing of a return to pre-COVID-19 commercial flight activity, which further reduced our future sales and cash flows expectations. In the second quarter of 2020, we evaluated the Collins and Pratt & Whitney reporting units for goodwill impairment and determined that the carrying values of two of the six Collins reporting units exceeded the sum of discounted future cash flows, resulting in goodwill impairments of $ 3.2 billion. Goodwill impairment was not indicated for any of the other reporting units evaluated for impairment in any of these scenarios. 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. 82 Table of Contents Intangible Assets. Identifiable intangible assets are comprised of the following: 2022 2021 (dollars in millions) Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization Amortized: Collaboration assets $ 5,536 $ ( 1,408 ) $ 5,319 $ ( 1,173 ) Exclusivity assets 2,911 ( 323 ) 2,673 ( 318 ) Developed technology and other 1,202 ( 544 ) 1,214 ( 466 ) Customer relationships 29,775 ( 8,967 ) 29,982 ( 7,411 ) 39,424 ( 11,242 ) 39,188 ( 9,368 ) Indefinite-lived: Trademarks and other 8,641 — 8,696 — Total $ 48,065 $ ( 11,242 ) $ 47,884 $ ( 9,368 ) 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. In 2020, given the deterioration in general economic and market conditions primarily due to the COVID-19 pandemic, we performed an assessment of our indefinite-lived intangible assets and recorded charges of $ 57 million related to the impairment of an indefinite-lived tradename intangible assets at Collins. Amortization of intangible assets was $ 1,957 million, $ 2,439 million and $ 2,125 million in 2022, 2021 and 2020, respectively. The following is the expected amortization of total intangible assets for 2023 through 2027: (dollars in millions) 2023 2024 2025 2026 2027 Amortization expense $ 2,082 $ 2,203 $ 2,086 $ 2,002 $ 1,882 NOTE 3: DISCONTINUED OPERATIONS As discussed above, on April 3, 2020, UTC separated into three independent, publicly traded companies – UTC, Carrier and Otis and distributed all of the outstanding common stock of Carrier and Otis to UTC shareowners who held shares of U TC common stock as of the close of business on March 19, 2020. 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. Loss from discontinued operations is as follows: (dollars in millions) 2022 2021 2020 Otis $ — $ — $ 187 Carrier — — 196 Separation related and other discontinued operations transactions ( 19 ) ( 33 ) ( 793 ) Loss from discontinued operations attributable to common shareowners $ ( 19 ) $ ( 33 ) $ ( 410 ) The following summarized financial information related to discontinued operations has been reclassified from Income from continuing operations and included in Income (loss) from discontinued operations: (dollars in millions) 2022 2021 2020 Otis Products sales $ — $ — $ 1,123 Services sales — — 1,843 Cost of sales - products — — 913 Cost of sales - services — — 1,157 Research and development — — 38 Selling, general and administrative expense — — 450 Other income (expense), net — — ( 65 ) 83 Table of Contents Non-operating expense (income), net — — 3 Income from discontinued operations, before income taxes — — 340 Income tax expense — — 116 Income from discontinued operations — — 224 Less: Noncontrolling interest in subsidiaries earnings from discontinued operations — — 37 Income from discontinued operations attributable to common shareowners $ — $ — $ 187 Carrier Products sales $ — $ — $ 3,143 Services sales — — 741 Cost of sales - products — — 2,239 Cost of sales - services — — 527 Research and development — — 98 Selling, general and administrative expense — — 669 Other income (expense), net — — ( 30 ) Non-operating expense (income), net — — 17 Income from discontinued operations, before income taxes — — 304 Income tax expense — — 102 Income from discontinued operations — — 202 Less: Noncontrolling interest in subsidiaries earnings from discontinued operations — — 6 Income from discontinued operations attributable to common shareowners $ — $ — $ 196 Separation related and other discontinued operations transactions (1) Selling, general and administrative expense $ — $ 10 $ 151 Other income (expense), net ( 30 ) — ( 709 ) Loss from discontinued operations, before income taxes ( 30 ) ( 10 ) ( 860 ) Income tax (benefit) expense ( 11 ) 23 ( 67 ) Loss from discontinued operations, net of tax ( 19 ) ( 33 ) ( 793 ) Total loss from discontinued operations attributable to common shareowners $ ( 19 ) $ ( 33 ) $ ( 410 ) (1) Primarily reflects unallocable transaction costs incurred by the Company primarily related to professional services costs pertaining to the Separation Transactions and the establishment of Carrier and Otis as stand-alone public companies, facility relocation costs, costs to separate information systems, costs of retention bonuses and tax charges and benefits related to separation activities. In addition, 2020 includes debt extinguishment costs related to the Company’s paydown of debt to not exceed the maximum applicable net indebtedness under the Raytheon merger agreement. Selected financial information related to cash flows from discontinued operations is as follows: (dollars in millions) 2022 2021 2020 Net cash flows used in operating activities from discontinued operations $ — $ ( 71 ) $ ( 728 ) Net cash flows used in investing activities from discontinued operations — — ( 241 ) Net cash flows provided by (used in) financing activities from discontinued operations — 71 ( 1,414 ) Net cash flows used in operating activities from discontinued operations includes the net operating cash flows of Carrier and Otis prior to the Separation Transactions, as well as costs incurred by the Company primarily related to professional services pertaining to the Separation Transactions and the establishment of Carrier and Otis as stand-alone public companies, facility relocation costs, costs to separate information systems, costs of retention bonuses and tax charges related to separation activities. Net cash flows provided by (used in) financing activities from discontinued operations primarily consists of net cash transfers from Carrier and Otis to the Company, as well as debt extinguishment costs related to the early repayment of debt in 2020. The Separation of Carrier was treated as a return on capital and recorded as a reduction to retained earnings, as it was in a net asset position, while the Separation of Otis was treated as a return of capital and recorded as an adjustment to Common stock, as it was in a net liability position. 84 Table of Contents NOTE 4: EARNINGS PER SHARE (dollars in millions, except per share amounts; shares in millions) 2022 2021 2020 Net income (loss) attributable to common shareowners: Income (loss) from continuing operations $ 5,216 $ 3,897 $ ( 3,109 ) Loss from discontinued operations ( 19 ) ( 33 ) ( 410 ) Net income (loss) attributable to common shareowners $ 5,197 $ 3,864 $ ( 3,519 ) Basic weighted average number of shares outstanding 1,475.5 1,501.6 1,357.8 Stock awards and equity units (share equivalent) 10.4 6.9 — Diluted weighted average number of shares outstanding 1,485.9 1,508.5 1,357.8 Earnings (Loss) per share attributable to common shareowners - basic Income (loss) from continuing operations $ 3.54 $ 2.60 $ ( 2.29 ) Loss from discontinued operations ( 0.02 ) ( 0.03 ) ( 0.30 ) Net income (loss) attributable to common shareowners $ 3.52 $ 2.57 $ ( 2.59 ) Earnings (Loss) per share attributable to common shareowners - diluted Income (loss) from continuing operations $ 3.51 $ 2.58 $ ( 2.29 ) Loss from discontinued operations ( 0.01 ) ( 0.02 ) ( 0.30 ) Net income (loss) attributable to common shareowners $ 3.50 $ 2.56 $ ( 2.59 ) The computation of diluted EPS excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period because the effect would be anti-dilutive. In addition, the computation of diluted EPS excludes the effect of the potential exercise of stock awards when the awards’ assumed proceeds exceed the average market price of the common shares during the period. For 2022 and 2021, there were 6.2 million and 13.4 million stock awards excluded from the computation, respectively. For 2020, all stock awards were excluded from the computation of diluted EPS because their effect was antidilutive due to the loss from continuing operations, and amounted to 32.5 million stock awards. NOTE 5: ACCOUNTS RECEIVABLE, NET Accounts receivable, net consisted of the following: (dollars in millions) 2022 2021 U.S. government contracts (including foreign military sales) $ 1,371 $ 1,204 Other customers 8,189 8,932 Allowance for expected credit losses ( 452 ) ( 475 ) Total accounts receivable, net $ 9,108 $ 9,661 The changes in the allowance for expected credit losses related to Accounts receivable were as follows: (dollars in millions) 2022 2021 Balance as of January 1 $ 475 $ 546 Current period provision for expected credit losses, net of recoveries 26 ( 47 ) Write-offs charged against the allowance for expected credit losses ( 42 ) ( 18 ) Other, net ( 7 ) ( 6 ) Balance as of December 31 $ 452 $ 475 NOTE 6: CONTRACT ASSETS AND LIABILITIES Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments 85 Table of Contents from customers based on the terms established in our contracts. Total contract assets and contract liabilities as of December 31, 2022 and 2021 are as follows: (dollars in millions) 2022 2021 Contract assets $ 11,534 $ 11,361 Contract liabilities ( 14,598 ) ( 13,720 ) Net contract liabilities $ ( 3,064 ) $ ( 2,359 ) Contract assets increased $ 173 million during 2022 primarily due to sales in excess of billings at Pratt & Whitney, partially offset by contractual billing terms on U.S. government and foreign military sales contracts at RMD. Contract liabilities increased $ 878 million during 2022 primarily due to billings in excess of sales at Pratt & Whitney and RMD. In 2022, 2021 and 2020, we recognized revenue of $ 4.8 billion, $ 4.3 billion and $ 2.8 billion related to our Contract liabilities at January 1, 2022, January 1, 2021 and January 1, 2020, respectively. As of December 31, 2022, our Contract liabilities include approximately $ 385 million of advance payments received from a Middle East customer on contracts for which we no longer believe we will be able to execute on or obtain required regulatory approvals. These advance payments may become refundable to the customer if the contracts are ultimately terminated. In addition, as of December 31, 2022, our Contract liabilities include advance payments, in immaterial amounts, received from Russian customers on contracts we are currently unable to perform on due to global sanctions on Russia and export controls. Depending on the contractual terms and as allowed by sanctions, certain of these advance payments may become refundable. Contract assets consisted of the following at December 31: (dollars in millions) 2022 2021 Unbilled $ 23,909 $ 23,652 Progress payments ( 12,375 ) ( 12,291 ) Total contract assets $ 11,534 $ 11,361 The U.S. government has title to the assets related to unbilled amounts on U.S. government contracts that provide progress payments. Contract assets are net of an allowance for expected credit losses of $ 318 million and $ 251 million as of December 31, 2022 and 2021, respectively. The allowance for expected credit losses activity was not material in 2022 or 2021. NOTE 7: INVENTORY, NET (dollars in millions) 2022 2021 Raw materials $ 3,477 $ 3,024 Work-in-process 3,839 3,085 Finished goods 3,301 3,069 Total inventory, net $ 10,617 $ 9,178 Raw materials, work-in-process and finished goods are net of total valuation reserves of $ 2.2 billion and $ 2.0 billion as of December 31, 2022 and 2021, respectively. NOTE 8: COMMERCIAL AEROSPACE INDUSTRY ASSETS AND COMMITMENTS The COVID-19 pandemic continues to negatively affect the global economy, our business and operations, and the industries in which we operate. The pandemic and government, business and individual actions in response, including lockdowns, quarantines, border closings and other travel restrictions and requirements, remote working, facilities closures and reduced business and leisure travel, led to significant declines in demand for commercial air travel. The decrease in commercial air travel decreased demand for our commercial aerospace products and services of our Collins and Pratt & Whitney businesses. Refer to “Note 1: Basis of Presentation and Summary of Accounting Principles” for further details. While we have seen indications that commercial air travel is recovering, we continue to closely monitor our commercial aerospace assets for 86 Table of Contents recoverability and our off-balance sheet exposures. The following summarizes certain significant assets and off-balance sheet exposures specifically related to our commercial aerospace customers as of December 31: (dollars in millions) 2022 2021 Assets related to commercial aerospace industry customers: Accounts receivable, net (Note 5) $ 6,653 $ 7,235 Contract assets (Note 6) 4,274 3,264 Customer financing assets (1) (Note 1) 2,700 2,945 Contract fulfillment costs (Note 1) 1,962 1,711 Guarantees and commitments related to commercial aerospace industry customers: Commercial aerospace guarantees (net of reserves and collaboration partners’ share) (Note 17) 164 165 Commercial aerospace commitments (net of collaboration partners’ share) (Note 18) 9,364 9,659 (1) Customer financing assets is inclusive of both the current and long term balances. We also have goodwill and intangible assets, including exclusivity assets and collaboration assets, associated with our commercial aerospace business. Refer to “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets” for further discussion. NOTE 9: FIXED ASSETS, NET Fixed assets, net, consisted of the following: (dollars in millions) Estimated Useful Lives 2022 2021 Land $ 744 $ 765 Buildings and improvements 10 - 45 years 7,519 7,271 Machinery, tools and equipment 3 - 20 years 17,479 16,729 Other, including assets under construction 3,374 2,872 Fixed assets, gross 29,116 27,637 Accumulated depreciation ( 13,946 ) ( 12,665 ) Fixed assets, net $ 15,170 $ 14,972 Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated useful life of the improvement. Depreciation expense related to Fixed assets, net is recorded predominantly utilizing the straight-line method and was $ 1,843 million in 2022, $ 1,828 million in 2021 and $ 1,767 million in 2020. NOTE 10: BORROWINGS AND LINES OF CREDIT 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. In addition, at December 31, 2022, approximately $ 0.8 billion was available under short-term lines of credit with local banks at our various domestic and international subsidiaries. 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 $ 524 million of commercial paper outstanding at December 31, 2022, which is reflected in Short-term borrowings in our Consolidated Balance Sheet. At December 31, 2022, short-term commercial paper borrowings outstanding had a weighted-average interest rate of 4.4 %. There was no commercial paper outstanding at December 31, 2021. Proceeds from issuance of commercial paper with maturities greater than 90 days were $ 1.4 billion during 2022. There were $ 1.2 billion repayments of commercial paper with maturities greater than 90 days during 2022. During 2021, we had no commercial paper borrowings with original maturities more than 90 days from the date of issuance. 87 Table of Contents On November 17, 2021, we completed a cash tender offer for the notes included in the repayments table below (the Tender Offer Notes), resulting in a partial repayment of approximately $ 1.5 billion of aggregate principal on these notes. In connection with this transaction, we recorded debt extinguishment costs of $ 617 million, primarily related to premiums. We had de minimis issuances and repayments of long-term debt during 2022. We had the following issuances of long-term debt during 2021: Issuance Date Description of Notes Aggregate Principal Balance (in millions) November 16, 2021 2.375 % notes due 2032 (1) $ 1,000 3.030 % notes due 2052 (1) 1,100 August 10, 2021 1.900 % notes due 2031 (2) 1,000 2.820 % notes due 2051 (2) 1,000 (1) The net proceeds received from these debt issuances were used to fund the purchase of the Tender Offer Notes. (2) The net proceeds received from these debt issuances, along with cash on hand, were used to fund the repayment of our 2.800 % and 2.500 % notes due in 2022. We made the following repayments of long-term debt during 2021: Repayment Date Description of Notes Aggregate Principal Balance (in millions) November 17, 2021 5.700 % notes due 2040 (1) $ 447 6.125 % notes due 2038 (1) 425 6.050 % notes due 2036 (1) 190 5.400 % notes due 2035 (1) 154 7.500 % notes due 2029 (1) 136 6.700 % notes due 2028 (1) 115 6.800 % notes due 2036 (1) 17 7.000 % notes due 2038 (1) 11 7.100 % notes due 2027 (1) 6 November 15, 2021 3.100 % notes due 2021 250 August 26, 2021 2.800 % notes due 2022 (1) 1,100 2.500 % notes due 2022 (1) 1,100 March 1, 2021 8.750 % notes due 2021 250 (1) In connection with the early repayment of outstanding principal, we recorded debt extinguishment costs of $ 649 million in 2021. 88 Table of Contents Long-term debt consisted of the following as of December 31: (dollars in millions) 2022 2021 3.650 % notes due 2023 (1) $ 171 $ 171 3.700 % notes due 2023 (1) 400 400 3.200 % notes due 2024 (1) 950 950 3.150 % notes due 2024 (1) 300 300 3.950 % notes due 2025 (1) 1,500 1,500 2.650 % notes due 2026 (1) 719 719 3.125 % notes due 2027 (1) 1,100 1,100 3.500 % notes due 2027 (1) 1,300 1,300 7.200 % notes due 2027 (1) 382 382 7.100 % notes due 2027 135 135 6.700 % notes due 2028 285 285 7.000 % notes due 2028 (1) 185 185 4.125 % notes due 2028 (1) 3,000 3,000 7.500 % notes due 2029 (1) 414 414 2.150 % notes due 2030 (€ 500 million principal value) (1) 531 565 2.250 % notes due 2030 (1) 1,000 1,000 1.900 % notes due 2031 (1) 1,000 1,000 2.375 % notes due 2032 (1) 1,000 1,000 5.400 % notes due 2035 (1) 446 446 6.050 % notes due 2036 (1) 410 410 6.800 % notes due 2036 (1) 117 117 7.000 % notes due 2038 148 148 6.125 % notes due 2038 (1) 575 575 4.450 % notes due 2038 (1) 750 750 5.700 % notes due 2040 (1) 553 553 4.875 % notes due 2040 (1) 600 600 4.700 % notes due 2041 (1) 425 425 4.500 % notes due 2042 (1) 3,500 3,500 4.800 % notes due 2043 (1) 400 400 4.200 % notes due 2044 (1) 300 300 4.150 % notes due 2045 (1) 850 850 3.750 % notes due 2046 (1) 1,100 1,100 4.050 % notes due 2047 (1) 600 600 4.350 % notes due 2047 (1) 1,000 1,000 4.625 % notes due 2048 (1) 1,750 1,750 3.125 % notes due 2050 (1) 1,000 1,000 2.820 % notes due 2051 (1) 1,000 1,000 3.030 % notes due 2052 (1) 1,100 1,100 Other (including finance leases) 253 270 Total principal long-term debt 31,249 31,300 Other (fair market value adjustments, (discounts)/premiums and debt issuance costs) 40 51 Total long-term debt 31,289 31,351 Less: current portion 595 24 Long-term debt, net of current portion $ 30,694 $ 31,327 (1) We may redeem these notes, in whole or in part, at our option pursuant to their terms prior to the applicable maturity date. 89 Table of Contents The weighted-average interest rate related to total debt was 4.0 % at both December 31, 2022 and 2021. The average maturity of our long-term debt at December 31, 2022 is approximately 14 years. The schedule of principal payments required on long-term debt for the next five years and thereafter is: (in millions) 2023 $ 588 2024 1,270 2025 1,590 2026 751 2027 2,935 Thereafter 24,115 Total $ 31,249 NOTE 11: EMPLOYEE BENEFIT PLANS We sponsor various domestic and foreign employee benefit plans, which are discussed below. Employee Savings Plans. We sponsor various employee savings plans. Our contributions to employer sponsored defined contribution plans were $ 1,037 million, $ 962 million and $ 875 million for 2022, 2021 and 2020, respectively. Our non-union domestic employee savings plan for legacy UTC employees uses an Employee Stock Ownership Plan (ESOP) for employer matching contributions. External borrowings were used by the ESOP to fund a portion of its purchase of ESOP stock from us. The external borrowings have been extinguished and only re-amortized loans remain between RTC and the ESOP Trust. As ESOP debt service payments are made, common stock is released from an unreleased shares account. ESOP debt may be prepaid or re-amortized to either increase or decrease the number of shares released so that the value of released shares equals the value of plan benefit. We may also, at our option, contribute additional common stock or cash to the ESOP. Shares of common stock are allocated to employees’ ESOP accounts at fair value on the date earned. Cash dividends on common stock held by the ESOP are used for debt service payments. Participants may choose to have their ESOP dividends reinvested or distributed in cash. Common stock allocated to ESOP participants is included in the average number of common shares outstanding for both basic and diluted EPS. At December 31, 2022, 24.7 million common shares had been allocated to employees, leaving 5.1 million unallocated common shares in the ESOP Trust, with a fair value of $ 512 million. Pension and Postretirement Plans. We sponsor both funded and unfunded domestic and foreign defined benefit pension plans that cover a large number of our employees. Our largest plans are generally closed to new participants. We also sponsor both funded and unfunded PRB plans that provide health care and life insurance benefits to eligible retirees. Our plans use a December 31 measurement date consistent with our fiscal year. Raytheon Company has both funded and unfunded domestic and foreign defined benefit pension and PRB plans. As of the merger date, the Raytheon Company plans were remeasured at fair value using accounting policies consistent with the UTC plans. Refer to “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets” for additional information. The deferred pension and PRB plan losses included in Raytheon Company’s accumulated other comprehensive income (loss) as of the merger date were eliminated and are no longer subject to amortization in net periodic benefit (income) expense. Amounts prior to the merger date of April 3, 2020 do not include the Raytheon Company pension plan results. In December 2020, we approved a change to the Raytheon Company domestic benefit pension plans for non-union participants to cease future benefit accruals based on an employee’s years of service and compensation under the historical formula effective December 31, 2022. 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. We utilized a practical expedient and measured the plan assets and pension benefit obligations for the effected pension plans as of the nearest month end, December 31, 2020, resulting in a prior service credit of $ 2.1 billion. For non-union employees in the UTC domestic pension plans, benefits for service up to December 31, 2014 are generally based on the employee’s years of service and compensation. Benefits for service after December 31, 2014 and through December 31, 2019 are based on the existing cash balance formula that was adopted in 2003 for newly hired non-union employees and for non-union employees who made a one-time voluntary election to have future benefit accruals determined under this formula. In September 2019, we amended the UTC domestic defined benefit pension plans to cease accrual of additional benefits for future service and compensation for non-union participants effective December 31, 2019. Beginning January 1, 2020, these participants began receiving additional contributions under the UTC domestic defined contribution 90 Table of Contents plan. Benefits for union employees in the UTC domestic pension plans are generally based on a stated amount for each year of service. We made the following contributions to our pension and PRB plans’ trusts during the years ended December 31: (dollars in millions) 2022 2021 2020 U.S. qualified defined benefit plans $ — $ — $ 885 International defined benefit plans 69 42 125 PRB plans 25 17 15 The contributions to our U.S. qualified defined benefit plans in 2020 include a $ 750 million discretionary contribution to the Raytheon Company U.S. qualified pension plans’ trust. The contributions to our International defined benefit plans in 2020 include discretionary contributions of $ 51 million. Pension PRB (dollars in millions) 2022 2021 2022 2021 Change in Benefit Obligation: Beginning balance $ 67,214 $ 71,257 $ 1,370 $ 1,535 Service cost attributable to continuing operations 470 523 6 7 Interest cost 1,520 1,249 29 24 Actuarial gain ( 15,466 ) ( 1,643 ) ( 294 ) ( 73 ) Total benefits paid (1) ( 4,328 ) ( 4,098 ) ( 166 ) ( 165 ) Net settlement, curtailment and special termination benefits 3 ( 89 ) ( 8 ) ( 11 ) Plan amendments 131 59 — — Business combinations and divestitures — 48 — — Other (2) ( 516 ) ( 92 ) 47 53 Ending balance $ 49,028 $ 67,214 $ 984 $ 1,370 Change in Plan Assets: Beginning balance $ 63,323 $ 62,318 $ 389 $ 381 Actual return on plan assets ( 10,841 ) 4,983 ( 63 ) 36 Employer contributions (1) 306 289 98 95 Total benefits paid (1) ( 4,328 ) ( 4,098 ) ( 166 ) ( 165 ) Settlements ( 4 ) ( 85 ) ( 8 ) ( 11 ) Other (2) ( 496 ) ( 84 ) 52 53 Ending balance $ 47,960 $ 63,323 $ 302 $ 389 Funded Status: Fair value of plan assets $ 47,960 $ 63,323 $ 302 $ 389 Benefit obligations ( 49,028 ) ( 67,214 ) ( 984 ) ( 1,370 ) Funded status of plan $ ( 1,068 ) $ ( 3,891 ) $ ( 682 ) $ ( 981 ) Amounts Recognized in the Consolidated Balance Sheet Consist of: Noncurrent assets $ 3,301 $ 3,214 $ — $ — Current liability ( 236 ) ( 232 ) ( 71 ) ( 78 ) Noncurrent liability ( 4,133 ) ( 6,873 ) ( 611 ) ( 903 ) Net amount recognized $ ( 1,068 ) $ ( 3,891 ) $ ( 682 ) $ ( 981 ) Amounts Recognized in Accumulated Other Comprehensive Loss Consist of: Net actuarial (gain) loss $ 2,950 $ 4,402 $ ( 394 ) $ ( 199 ) Prior service credit ( 1,424 ) ( 1,715 ) ( 4 ) ( 6 ) Net amount recognized $ 1,526 $ 2,687 $ ( 398 ) $ ( 205 ) (1) Includes benefit payments paid directly by the company. (2) The amount included in Other primarily reflects the impact of foreign exchange translation, primarily for plans in the United Kingdom (U.K.) and Canada, and participant contributions. 91 Table of Contents The majority of our pension obligations relate to our U.S. Internal Revenue Service (IRS) qualified pension plans, which comprise 87 % and 86 % of our pension PBO as of December 31, 2022 and 2021, respectively. 3 % of our pension PBO as of both December 31, 2022 and 2021 is attributable to our nonqualified domestic pension plans, which provide supplementary retirement benefits to certain employees in excess of the IRS qualified plan limits. International plans comprise 10 % and 11 % of the pension PBO as of December 31, 2022 and 2021, respectively, and are considered defined benefit pension plans for accounting purposes. In addition to the pension and PRB noncurrent liabilities shown above, Future pension and postretirement benefit obligations on the Consolidated Balance Sheet includes other immaterial pension and PRB-related liabilities. Information for pension plans with accumulated benefit obligations in excess of plan assets: (dollars in millions) 2022 2021 Projected benefit obligation $ 22,116 $ 28,960 Accumulated benefit obligation 22,080 28,494 Fair value of plan assets 17,747 22,002 The accumulated benefit obligation for all defined benefit pension plans was $ 48.8 billion and $ 66.5 billion at December 31, 2022 and 2021, respectively. Information for pension plans with projected benefit obligations in excess of plan assets: (dollars in millions) 2022 2021 Projected benefit obligation $ 22,116 $ 31,471 Accumulated benefit obligation 22,080 30,745 Fair value of plan assets 17,747 24,366 The components of the net periodic pension (income) expense are as follows: (dollars in millions) 2022 2021 2020 Operating expense Service cost $ 470 $ 523 $ 483 Non-operating expense Interest cost 1,520 1,249 1,650 Expected return on plan assets ( 3,544 ) ( 3,476 ) ( 2,995 ) Amortization of prior service cost (credit) ( 163 ) ( 168 ) 51 Recognized actuarial net loss 305 435 337 Net settlement, curtailment and special termination benefits loss 2 22 45 Non-service pension income ( 1,880 ) ( 1,938 ) ( 912 ) Total net periodic pension benefit (income) expense $ ( 1,410 ) $ ( 1,415 ) $ ( 429 ) The components of the net periodic PRB (income) expense are as follows: (dollars in millions) 2022 2021 2020 Operating expense Service cost $ 6 $ 7 $ 6 Non-operating expense Interest cost 29 24 37 Expected return on plan assets ( 22 ) ( 21 ) ( 13 ) Amortization of prior service credit ( 2 ) ( 3 ) ( 3 ) Recognized actuarial net gain ( 11 ) ( 6 ) ( 12 ) Net settlement, curtailment and special termination benefits (gain) loss ( 3 ) — 1 Non-service pension (income) expense ( 9 ) ( 6 ) 10 Total net periodic PRB benefit (income) expense $ ( 3 ) $ 1 $ 16 92 Table of Contents Other changes in pension plan assets and benefit obligations recognized in other comprehensive loss in 2022 and 2021 are as follows: (dollars in millions) 2022 2021 Net actuarial gain arising during the period $ ( 1,082 ) $ ( 3,158 ) Amortization of actuarial loss ( 305 ) ( 435 ) Current year prior service cost 131 59 Amortization of prior service credit 163 168 Net settlement and curtailment 1 ( 17 ) Other (1) ( 69 ) ( 6 ) Total recognized in other comprehensive (income) loss ( 1,161 ) ( 3,389 ) Net recognized in net periodic benefit (income) cost and other comprehensive (income) loss $ ( 2,571 ) $ ( 4,804 ) (1) The amount included in Other primarily reflects the impact of foreign exchange translation, primarily for plans in the U.K. and Canada. The Actuarial gain arising in 2022 was primarily due to an increase in discount rates during 2022, partially offset by actual asset returns less than our expected return on assets. The Actuarial gain arising in 2021 was primarily due to an increase in discount rates during 2021 and asset returns exceeding our expected return on assets, partially offset by demographic losses. Other changes in PRB assets and benefit obligations recognized in other comprehensive loss in 2022 and 2021 are as follows: (dollars in millions) 2022 2021 Net actuarial gain arising during the period $ ( 209 ) $ ( 88 ) Amortization of actuarial gain 11 6 Amortization of prior service credit 2 3 Net settlement and curtailment 3 — Total recognized in other comprehensive (income) loss ( 193 ) ( 79 ) Net recognized in net periodic benefit (income) cost and other comprehensive loss $ ( 196 ) $ ( 78 ) The Actuarial gain arising in 2022 was primarily due to an increase in discount rates during 2022, partially offset by actual asset returns less than our expected return on assets on our funded plans. The Actuarial gain arising in 2021 was primarily due to an increase in discount rates during 2021 and asset returns exceeding our expected return on assets on our funded plans. The table below reflects the total benefit payments expected to be paid from the plans or from corporate assets. (dollars in millions) Pension PRB 2023 $ 4,418 $ 107 2024 3,796 100 2025 3,780 94 2026 3,734 89 2027 3,671 84 2028-2032 17,654 357 93 Table of Contents Major assumptions used in determining the pension benefit obligation and net periodic pension benefit (income) expense are presented in the following table as weighted-averages: Benefit Obligation Net Periodic Benefit (Income) Expense 2022 2021 2022 2021 2020 Discount rate PBO 5.5 % 2.8 % 2.8 % 2.5 % 3.2 % Interest cost (1) N/A N/A 2.3 % 1.8 % 2.8 % Service cost (1) N/A N/A 3.1 % 2.8 % 3.5 % Salary scale 4.4 % 4.4 % 4.4 % 4.4 % 4.3 % Expected return on plan assets N/A N/A 6.5 % 6.5 % 6.5 % Interest crediting rate 4.5 % 4.0 % 4.0 % 3.8 % 3.8 % (1) The discount rates used to measure the service cost and interest cost applies to our significant plans. The PBO discount rate is used for the service cost and interest cost measurements for non-significant plans. Major assumptions used in determining the PRB benefit obligation and net periodic PRB (income) expense are presented in the following table as weighted-averages: Benefit Obligation Net Periodic Benefit (Income) Expense 2022 2021 2022 2021 2020 Discount rate 5.5 % 2.8 % 2.8 % 2.4 % 3.1 % Expected return on assets N/A N/A 5.7 % 5.7 % 5.7 % Assumed health care cost trend rates used in determining the PRB benefit obligation and net periodic PRB (income) expense are as follows: 2022 2021 Health care cost trend rate assumed for next year 5.0 % 4.7 % Ultimate health care cost trend rate 4.2 % 4.2 % Year that the rate reaches the ultimate health care cost trend rate 2029 2026 The weighted-average discount rates used to measure pension and PRB liabilities are based on yield curves developed using high-quality corporate bonds as well as plan specific expected cash flows. For our significant plans, we utilize a full yield curve approach in the estimation of the service cost and interest cost components of net periodic benefit expense by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant discounted projected cash flows. 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 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 %. Plan Assets. The plans’ investment management objectives include providing the liquidity and asset levels needed to meet current and future benefit payments, while maintaining a prudent degree of portfolio diversification considering interest rate risk and market volatility. Globally, investment strategies generally target a mix of 40 % to 45 % of growth seeking assets and 55 % to 60 % of income generating and hedging assets using a wide set of diversified asset types, fund strategies and investment managers. The growth seeking allocation consists of global public equities in developed and emerging countries, private equity, real estate and multi-asset class strategies. Growth assets include an enhanced alpha strategy that invests in publicly traded equity and fixed income securities, derivatives and foreign currency. Investments in private equity are primarily via limited partnership interests in buy-out strategies with smaller allocations to distressed debt funds. The real estate strategy is principally concentrated in directly held U.S. core investments with some smaller investments in international, value-added and opportunistic strategies. Within the income generating assets, the fixed income portfolio consists of mainly government and broadly diversified high quality corporate bonds. The plans have continued their pension risk management techniques designed to reduce their interest rate risk. Specifically, the plans have incorporated liability hedging programs that include the adoption of a risk reduction objective as part of the long-term investment strategy. Under this objective the interest rate hedge is intended to increase as funded status improves. The 94 Table of Contents hedging programs incorporate a range of assets and investment tools, each with varying interest rate sensitivities. The investment portfolios are currently hedging approximately 40 % to 80 % of the interest rate sensitivity of the pension plan liabilities, depending on the funded status of the plan. The fair values of pension plan assets at December 31, 2022 and 2021 by asset category are as follows: (dollars in millions) Quoted Prices in Active Markets For Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Not Subject to Leveling (8) Total Asset Category: Public Equities Global Equities $ 6,194 $ 5 $ — $ — $ 6,199 Global Equity Commingled Funds (1) 20 568 — — 588 Enhanced Global Equities (2) ( 53 ) 75 — — 22 Other Public Equities — — — 5,771 5,771 Private Equities (3) — — — 4,068 4,068 Fixed Income Securities Governments 2,526 1,426 — — 3,952 Corporate Bonds 1 12,638 — — 12,639 Structured Products — 57 — — 57 Other Fixed Income — — — 6,975 6,975 Real Estate (4) — — 1,650 1,761 3,411 Other (5) — 84 — 3,071 3,155 Cash & Cash Equivalents (6) — 150 — 164 314 Subtotal $ 8,688 $ 15,003 $ 1,650 $ 21,810 $ 47,151 Other Assets & Liabilities (7) 809 Total at December 31, 2022 $ 47,960 Public Equities Global Equities $ 9,411 $ 6 $ — $ — $ 9,417 Global Equity Commingled Funds (1) 3 929 — — 932 Enhanced Global Equities (2) 46 163 — — 209 Other Public Equities — — — 8,495 8,495 Private Equities (3) — — — 4,490 4,490 Fixed Income Securities Governments 1,933 1,172 — — 3,105 Corporate Bonds 1 18,681 — — 18,682 Structured Products — 25 — — 25 Other Fixed Income — — — 7,367 7,367 Real Estate (4) — — 1,885 1,743 3,628 Other (5) — 91 — 5,351 5,442 Cash & Cash Equivalents (6) — 111 — 220 331 Subtotal $ 11,394 $ 21,178 $ 1,885 $ 27,666 $ 62,123 Other Assets & Liabilities (7) 1,200 Total at December 31, 2021 $ 63,323 (1) Represents commingled funds that invest primarily in common stocks. (2) Represents enhanced equity separate account and commingled fund portfolios. A portion of the portfolio may include long-short market neutral and relative value strategies that invest in publicly traded, equity and fixed income securities, as well as derivatives of equity and fixed income securities and foreign currency. 95 Table of Contents (3) Represents limited partnership investments with general partners that primarily invest in equity and debt. (4) Represents investments in real estate including commingled funds and directly held properties. (5) Represents global balanced risk commingled funds that invest in multiple asset classes including equity, fixed income and some commodities. “Other” also includes insurance contracts. (6) Represents short-term commercial paper, bonds and other cash or cash-like instruments. (7) Represents receivables, payables and certain individually immaterial international plan assets that are not leveled. (8) In accordance with ASU 2015-07, Fair Value Measurement (Topic 820) , certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total pension benefits plan assets. Derivatives in the plan are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. Derivative instruments mainly consist of equity futures, interest rate futures, interest rate swaps and currency forward contracts. The fair market value of the plans’ derivatives through direct or separate account investments was approximately $( 79 ) million and $ 98 million as of December 31, 2022 and 2021, respectively. We review our assets at least quarterly to ensure we are within the targeted asset allocation ranges and, if necessary, asset balances are adjusted back within target allocations. We employ a broadly diversified investment manager structure that includes diversification by active and passive management, style, capitalization, country, sector, industry and number of investment managers. No individual investment represented more than 5 % of the plan assets as of December 31, 2022. The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed due to the following: (dollars in millions) Corporate Bonds Real Estate Total Balance, December 31, 2020 $ 2 $ 1,647 $ 1,649 Realized gains — 212 212 Unrealized gains relating to instruments still held in the reporting period — 50 50 Purchases, sales, and settlements, net — ( 24 ) ( 24 ) Transfers in/out, net ( 2 ) — ( 2 ) Balance, December 31, 2021 — 1,885 1,885 Realized gains — 76 76 Unrealized gains relating to instruments still held in the reporting period — 64 64 Purchases, sales, and settlements, net — ( 211 ) ( 211 ) Transfers in/out, net — ( 164 ) ( 164 ) Balance, December 31, 2022 $ — $ 1,650 $ 1,650 Quoted market prices are used to value investments when available. Investments in securities traded on exchanges, including listed futures and options, are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Fixed income securities are primarily measured using a market approach pricing methodology, where observable prices are obtained by market transactions involving identical or comparable securities of issuers with similar credit ratings. Mortgages have been valued on the basis of their future principal and interest payments discounted at prevailing interest rates for similar investments. Investment contracts are valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations. Real estate investments are valued on a quarterly basis using discounted cash flow models which consider long-term lease estimates, future rental receipts and estimated residual values. Valuation estimates are supplemented by third-party appraisals on an annual basis. The fair market value of assets related to our PRB benefits was $ 302 million and $ 389 million as of December 31, 2022 and 2021, respectively. These assets include $ 105 million and $ 147 million of which are invested in our domestic qualified pension plan trust at December 31, 2022 and 2021, respectively. The remaining PRB investments are held within Voluntary Employees’ Beneficiary Association (VEBA) trusts. The VEBA assets are generally invested in mutual funds and are valued primarily using quoted prices in active markets (Level 1). There were no Level 3 investments in the VEBA trusts as of December 31, 2022 or 2021. We have set aside assets in separate trusts, which we expect to be used to pay for certain nonqualified defined benefit and defined contribution plan obligations in excess of qualified plan limits. These assets are included in Other assets in our Consolidated Balance Sheet. The fair value of marketable securities held in trusts as of December 31 was as follows: (dollars in millions) 2022 2021 Marketable securities held in trusts $ 774 $ 965 96 Table of Contents NOTE 12: LEASES Operating lease expense was $ 475 million, $ 525 million, and $ 497 million for 2022, 2021, and 2020, respectively. Finance leases and leases where we are the lessor are not considered significant to our Consolidated Balance Sheet, Consolidated Statement of Operations or Consolidated Statement of Cash Flows. In 2021 and 2020, we entered into sale and leaseback transactions for the sale of equipment and related maintenance. We subsequently leased back the equipment sold for a limited timeframe, which is accounted for as an operating lease. The proceeds received as a result of the equipment sales are classified in Receipts from customer financing assets within the Investing Activities in our Consolidated Statement of Cash Flows, and the portion related to future maintenance services are classified within Operating Activities. The net gains as a result of these transactions were not material. Supplemental cash flow information related to operating leases were as follows: (dollars in millions) 2022 2021 2020 Operating cash flows used in the measurement of operating lease liabilities $ 399 $ 490 $ 420 Operating lease right-of-use assets obtained in exchange for operating lease obligations 359 535 299 Future lease payments related to our operating lease liabilities as of December 31, 2022 are as follows: (dollars in millions) 2023 $ 340 2024 301 2025 265 2026 236 2027 195 Thereafter 735 Total undiscounted lease payments 2,072 Less imputed interest ( 130 ) Total discounted lease payments $ 1,942 Our lease liabilities recognized in our Consolidated Balance Sheet were as follows as of December 31: (dollars in millions) 2022 2021 Operating lease liabilities, current (included in Other accrued liabilities) $ 356 $ 411 Operating lease liabilities, noncurrent 1,586 1,657 Total operating lease liabilities $ 1,942 $ 2,068 The weighted-average remaining lease term related to our operating leases was 9 years as of December 31, 2022 and 2021. The weighted-average discount rate related to our operating leases was 3.3 % and 2.8 % as of December 31, 2022 and 2021, respectively. NOTE 13: INCOME TAXES Income Before Income Taxes. The sources of income (loss) from continuing operations before income taxes are: (dollars in millions) 2022 2021 2020 United States $ 4,061 $ 3,498 $ ( 2,762 ) Foreign 1,966 1,433 409 Income (loss) from continuing operations before income taxes $ 6,027 $ 4,931 $ ( 2,353 ) The Company no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. As such, we recorded the taxes associated with the future remittance of these earnings. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, the Company will continue to permanently reinvest these earnings. As of December 31, 2022, such undistributed earnings were approximately $ 18 billion, excluding other comprehensive income amounts. It is not practicable to estimate the amount of tax that might be payable on the remaining amounts. 97 Table of Contents Provision for Income Taxes. The income tax expense (benefit) for the years ended December 31 are as follows: (dollars in millions) 2022 2021 2020 Current: United States: Federal $ 1,724 $ 387 $ 324 State 126 60 45 Foreign 513 427 305 2,363 874 674 Future: United States: Federal ( 1,399 ) ( 26 ) ( 264 ) State ( 166 ) 41 258 Foreign ( 98 ) ( 103 ) ( 93 ) ( 1,663 ) ( 88 ) ( 99 ) Income tax expense $ 700 $ 786 $ 575 Reconciliation of Effective Income Tax Rate. Differences between effective income tax rates and the statutory U.S. federal income tax rate are as follows: 2022 2021 2020 (dollars in millions) Amount Rate Amount Rate Amount Rate Statutory U.S. federal income tax rate $ 1,266 21.0 % $ 1,036 21.0 % $ ( 494 ) 21.0 % Tax on international activities ( 186 ) ( 3.1 ) ( 204 ) ( 4.1 ) 27 ( 1.1 ) Tax charges related to Separation Transactions and Raytheon merger — — ( 39 ) ( 0.8 ) 416 ( 17.7 ) Disposals of businesses — — 108 2.2 177 ( 7.5 ) U.S. research and development credit ( 164 ) ( 2.7 ) ( 172 ) ( 3.5 ) ( 142 ) 6.1 Goodwill impairment — — — — 668 ( 28.4 ) State income tax, net ( 12 ) ( 0.2 ) 33 0.7 ( 56 ) 2.4 Foreign Derived Intangible Income ( 214 ) ( 3.5 ) ( 121 ) ( 2.5 ) ( 83 ) 3.5 U.K. corporate tax rate enactment — — 73 1.5 8 ( 0.4 ) Other 10 0.1 72 1.4 54 ( 2.3 ) Effective income tax rate $ 700 11.6 % $ 786 15.9 % $ 575 ( 24.4 ) % 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 included in international activities 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 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. 98 Table of Contents The 2020 negative effective tax rate is a result of having tax expense of $ 575 million on a loss from continuing operations before income taxes of $ 2.4 billion. The loss from continuing operations before income taxes in 2020 includes the $ 3.2 billion goodwill impairment as described in “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets,” 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, the airborne tactical radios business at RIS and the entry into a definitive agreement to sell Forcepoint, as described in “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets.” 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. Deferred Tax Assets and Liabilities. The tax effects of temporary differences and tax carryforwards which gave rise to future income tax benefits and payables at December 31, 2022 and 2021 are as follows: (dollars in millions) 2022 2021 Future income tax benefits: Insurance and employee benefits $ 1,126 $ 1,831 Inventory and contract balances 639 756 Warranty provisions 242 248 Capitalization of research and experimental expenditures 1,712 — Other basis differences 828 878 Tax loss carryforwards 305 251 Tax credit carryforwards 970 1,088 Valuation allowances ( 842 ) ( 825 ) Total future income tax benefits $ 4,980 $ 4,227 Future income taxes payable: Goodwill and intangible assets $ 6,588 $ 7,168 Fixed assets 1,751 1,746 Other basis differences 220 323 Total future income tax payable $ 8,559 $ 9,237 Valuation allowances have been established primarily for tax credit carryforwards, tax loss carryforwards, and certain temporary differences to reduce the future income tax benefits to expected realizable amounts. Tax Credit and Loss Carryforwards. At December 31, 2022, tax credit carryforwards, principally state and foreign, and tax loss carryforwards, principally state and foreign, were as follows: (dollars in millions) Tax Credit Carryforwards Tax Loss Carryforwards Expiration period: 2023-2027 $ 54 $ 292 2028-2032 73 174 2033-2042 337 318 Indefinite 506 1,357 Total $ 970 $ 2,141 99 Table of Contents Unrecognized Tax Benefits. At December 31, 2022, we had gross tax-effected unrecognized tax benefits of $ 1,515 million, of which $ 1,378 million, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits and interest expense related to unrecognized tax benefits for the years ended December 31, 2022, 2021 and 2020 is as follows: (dollars in millions) 2022 2021 2020 Balance at January 1 $ 1,458 $ 1,225 $ 1,347 Additions for tax positions related to the current year 106 110 125 Additions for tax positions of prior years 23 282 323 Reductions for tax positions of prior years ( 56 ) ( 49 ) ( 83 ) Settlements ( 16 ) ( 110 ) ( 48 ) Separation of Carrier and Otis — — ( 439 ) Balance at December 31 $ 1,515 $ 1,458 $ 1,225 Gross interest expense related to unrecognized tax benefits $ 34 $ 39 $ 50 Total accrued interest balance at December 31 190 165 141 The unrecognized tax benefit table includes discontinued operations activity in 2020. As a result of the Separation Transactions and the Distributions in April 2020, we transferred unrecognized tax benefits to Carrier and Otis of $ 439 million and associated interest of approximately $ 165 million. Pursuant to the terms of the separation agreements, certain other unrecognized tax benefits retained by the Company are subject to indemnification. The 2020 additions for tax positions of prior years in the table above include amounts related to the Raytheon merger . We conduct business globally and, as a result, Raytheon Technologies or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, China, France, Germany, India, Poland, Saudi Arabia, Singapore, Switzerland, the United Kingdom and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2012. The Examination Division of the IRS is currently auditing Raytheon Technologies tax years 2017 and 2018 and pre-merger Raytheon Company tax years 2017, 2018 and 2019 as well as certain refund claims of Raytheon Company for tax years 2014, 2015 and 2016 filed prior to the Raytheon merger. The examination phase of the audits for each of these tax years is expected to close in 2023. The Examination Division of the IRS is also auditing pre-acquisition Rockwell Collins fiscal tax years 2016, 2017 and 2018. The examination phase of the audit for each of these tax years is expected to close during 2023. It is reasonably possible that a net reduction within the range of $ 25 million to $ 375 million of unrecognized tax benefits may occur over the next 12 months as a result of the revaluation of uncertain tax positions arising from developments in examinations, in appeals, or in the courts, or the closure of tax statutes. NOTE 14: FINANCIAL INSTRUMENTS We enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments and those utilized as economic hedges. We operate internationally and in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency, interest rate and commodity price exposures. The present value of aggregate notional principal of our outstanding foreign currency hedges was $ 11.2 billion and $ 8.5 billion at December 31, 2022 and 2021, respectively. At December 31, 2022, all derivative contracts accounted for as cash flow hedges will mature b y February 2030. Additional information pertaining to foreign exchange and hedging activities is included in “Note 1: Basis of Presentation and Summary of Accounting Principles.” 100 Table of Contents The following table summarizes the fair value and presentation in the Consolidated Balance Sheet for derivative instruments as of December 31: (dollars in millions) Balance Sheet Location 2022 2021 Derivatives designated as hedging instruments: Foreign exchange contracts Other assets, current $ 67 $ 59 Other accrued liabilities 347 202 Derivatives not designated as hedging instruments: Foreign exchange contracts Other assets, current $ 17 $ 11 Other accrued liabilities 39 11 The effect of cash flow hedging relationships on Accumulated other comprehensive income (loss) and on the Consolidated Statement of Operations in 2022 and 2021 are presented in “Note 19: Accumulated Other Comprehensive Loss”. The amounts of gain or (loss) are attributable to foreign exchange contract activity and are primarily recorded as a component of Products sales when reclassified from Accumulated other comprehensive loss. The Company utilizes the critical terms match method in assessing derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective. As of December 31, 2022, we have € 500 million of euro-denominated long-term debt outstanding, which qualifies as a net investment hedge against our investments in European businesses, which is deemed to be effective. The effect of derivatives not designated as hedging instruments is included within Other income, net, on the Consolidated Statement of Operations and is not material. NOTE 15: FAIR VALUE MEASUREMENTS The following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring basis in our Consolidated Balance Sheet: December 31, 2022 (dollars in millions) Total Level 1 Level 2 Level 3 Recurring fair value measurements: Marketable securities held in trusts $ 774 $ 713 $ 61 $ — Derivative assets 84 — 84 — Derivative liabilities 386 — 386 — December 31, 2021 (dollars in millions) Total Level 1 Level 2 Level 3 Recurring fair value measurements: Marketable securities held in trusts $ 965 $ 890 $ 75 $ — Derivative assets 70 — 70 — Derivative liabilities 213 — 213 — Valuation Techniques. Our derivative assets and liabilities include foreign exchange contracts that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks. As of December 31, 2022, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks. 101 Table of Contents The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Consolidated Balance Sheet at December 31: 2022 2021 (dollars in millions) Carrying Amount Fair Value Carrying Amount Fair Value Customer financing notes receivables $ 169 $ 161 $ 195 $ 192 Long-term debt (excluding finance leases) 31,201 28,049 31,250 35,828 The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Consolidated Balance Sheet at December 31: December 31, 2022 (dollars in millions) Total Level 1 Level 2 Level 3 Customer financing notes receivables $ 161 $ — $ 161 $ — Long-term debt (excluding finance leases) 28,049 — 28,003 46 December 31, 2021 (dollars in millions) Total Level 1 Level 2 Level 3 Customer financing notes receivables $ 192 $ — $ 192 $ — Long-term debt (excluding finance leases) 35,828 — 35,778 50 The fair value of our Short-term borrowings approximates the carrying value due to their short-term nature, with commercial paper classified as level 2 and other short-term borrowings classified as level 3 within the fair value hierarchy. NOTE 16: VARIABLE INTEREST ENTITIES Pratt & Whitney holds a 61 % program share interest in the International Aero Engines AG (IAE) collaboration with MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC) and a 49.5 % ownership interest in IAE. IAE’s business purpose is to coordinate the design, development, manufacturing and product support of the V2500 engine program through involvement with the collaborators. Additionally, Pratt & Whitney, JAEC and MTU are participants in the International Aero Engines, LLC (IAE LLC) collaboration, whose business purpose is to coordinate the design, development, manufacturing and product support for the PW1100G-JM engine for the Airbus A320neo family of aircraft. Pratt & Whitney holds a 59 % program share interest and a 59 % ownership interest in IAE LLC. IAE and IAE LLC retain limited equity with the primary economics of the programs passed to the participants. As such, we have determined that IAE and IAE LLC are variable interest entities with Pratt & Whitney as the primary beneficiary. IAE and IAE LLC have, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for variable interest entities in our Consolidated Balance Sheet as of December 31, 2022 and 2021 are as follows: (dollars in millions) 2022 2021 Current assets $ 7,609 $ 7,081 Noncurrent assets 779 825 Total assets $ 8,388 $ 7,906 Current liabilities $ 9,154 $ 7,965 Noncurrent liabilities 19 54 Total liabilities $ 9,173 $ 8,019 NOTE 17: GUARANTEES We extend a variety of financial, market value and product performance guarantees to third parties. These instruments expire on various dates through 2028. Additional guarantees of project performance for which there is no stated value also remain 102 Table of Contents outstanding. A portion of our third party guarantees are subject to indemnification for our benefit for any liabilities that could arise. As of December 31, 2022 and 2021, the following financial guarantees were outstanding: December 31, 2022 December 31, 2021 (dollars in millions) Maximum Potential Payment Carrying Amount of Liability Maximum Potential Payment Carrying Amount of Liability Commercial aerospace financing arrangements $ 304 $ — $ 309 $ 3 Third party guarantees 335 1 511 5 We have made residual value and other guarantees related to various commercial aerospace customer financing arrangements. The estimated fair market values of the guaranteed assets equal or exceed the value of the related guarantees, net of existing reserves. Collaboration partners’ share of these financing guarantees is $ 140 million and $ 141 million at December 31, 2022 and 2021, respectively. We also have obligations arising from sales of certain businesses and assets, including those from representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. The maximum potential payment related to these obligations is not a specified amount as a number of the obligations do not contain financial caps. The carrying amount of liabilities related to these obligations was $ 97 million and $ 120 million at December 31, 2022 and 2021, respectively. These primarily relate to environmental liabilities, which are included in our total environmental liabilities as further discussed in “Note 18: Commitments and Contingencies.” We accrue for costs associated with guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts, and where no amount within a range of estimates is more likely, the minimum is accrued. We also provide service and warranty policies on our products and extend performance and operating cost guarantees beyond our normal service and warranty policies on some of our products, particularly commercial aircraft engines. In addition, we incur discretionary costs to service our products in connection with specific product performance issues. Liabilities for performance and operating cost guarantees are based upon future product performance and durability, and are largely estimated based upon historical experience. Adjustments are made to accruals as claims data and historical experience warrant. The changes in the carrying amount of service and product warranties and product performance guarantees for the years ended December 31 were as follows: (dollars in millions) 2022 2021 2020 Balance as of January 1 $ 1,157 $ 1,057 $ 1,033 Warranties and performance guarantees issued 264 380 311 Settlements ( 284 ) ( 272 ) ( 292 ) Other ( 28 ) ( 8 ) 5 Balance as of December 31 $ 1,109 $ 1,157 $ 1,057 NOTE 18: COMMITMENTS AND CONTINGENCIES Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, financial condition or liquidity. Environmental. Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. We have accrued for the costs of environmental remediation activities, including but not limited to investigatory, remediation, operating and maintenance costs and performance guarantees, and periodically reassess these amounts. We do not expect any additional liability to have a material adverse effect on our results of operations, financial condition or liquidity. As of December 31, 2022 and 2021, we had $ 798 million and $ 834 million, respectively, reserved for environmental remediation. Additional information pertaining to environmental matters is included in “Note 1: Basis of Presentation and Summary of Accounting Principles.” Commercial Aerospace Financing and Other Commitments. We had commercial aerospace financing commitments and other contractual commitments of approximately $ 15.3 billion and $ 15.6 billion as of December 31, 2022 and 2021, respectively, on a gross basis before reduction for our collaboration partners’ share. Aircraft financing commitments, in the form of debt or lease financing, are provided to certain commercial aerospace customers. The extent to which the financing commitments will be utilized is not currently known, since customers may be able to obtain more favorable terms from other 103 Table of Contents financing sources. We may also arrange for third-party investors to assume a portion of these commitments. The majority of financing commitments are collateralized arrangements. We may also lease aircraft and subsequently sublease the aircraft to customers under long-term non-cancelable operating leases, or pay deposits on behalf of our customers to secure production slots with the airframers (pre-delivery payments). Our financing commitments with customers are contingent upon maintenance of certain levels of financial condition by the customers. Associated risks on these commitments are mitigated due to the fact that interest rates are variable during the commitment term and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financing commitments is expected to equal the amounts funded. We also have other contractual commitments to make payments to secure certain contractual rights to provide product on new aircraft platforms. The estimated amount and timing of these payments, which are generally based on future sales or engine flight hours, are reflected in “Other commercial aerospace commitments” in the table below. Payments made on these contractual commitments are included within intangible assets as exclusivity assets and are amortized over the term of underlying economic benefit. We have entered into certain collaboration arrangements, which may include participation by our collaboration partners in these commitments. In addition, in connection with our 2012 agreement to acquire Rolls-Royce’s ownership and collaboration interests in IAE, additional payments are due to Rolls-Royce contingent upon each hour flown through June 2027 by the V2500-powered aircraft in service as of the acquisition date. These flight hour payments, which are considered in “Other commercial aerospace commitments” below, will be capitalized as collaboration intangible assets as payments are made. The following is the expected maturity of our commercial aerospace industry commitments as of December 31, 2022: (dollars in millions) Committed 2023 2024 2025 2026 2027 Thereafter Commercial aerospace financing commitments $ 4,559 $ 1,559 $ 1,405 $ 980 $ 556 $ 59 $ — Other commercial aerospace commitments 10,710 1,147 883 794 695 717 6,474 Collaboration partners’ share ( 5,905 ) ( 915 ) ( 863 ) ( 714 ) ( 535 ) ( 331 ) ( 2,547 ) Total commercial aerospace commitments $ 9,364 $ 1,791 $ 1,425 $ 1,060 $ 716 $ 445 $ 3,927 Other Financing Arrangements. We have entered into standby letters of credit and surety bonds with financial institutions to meet various bid, performance, warranty, retention and advance payment obligations for us or our affiliates. We enter into these agreements to assist certain affiliates in obtaining financing on more favorable terms, making bids on contracts and performing their contractual obligations. The stated values of these letters of credit agreements and surety bonds totaled $ 3.3 billion as of December 31, 2022. Offset Obligations. We have entered into industrial cooperation agreements, sometimes in the form of either offset agreements or ICIP agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. At December 31, 2022, the aggregate amount of our offset agreements, both agreed to and anticipated to be agreed to, had an outstanding notional value of approximately $ 11.3 billion. These agreements are designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. Offset agreements may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects, and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for activities such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. Such activities may also vary by country depending upon requirements as dictated by their governments. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customers and typically require cash outlays that represent only a fraction of the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for penalties in the event we fail to perform in accordance with offset requirements. Historically, we have not been required to pay any penalties of significance. Government Oversight. In the ordinary course of business, the Company and its subsidiaries and our properties are subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations and threatened legal actions and proceedings. For example, we are now, and believe that, in light of the current U.S. government contracting environment, we will continue to be the subject of one or more U.S. government investigations. Our contracts with the U.S. government are also subject to audits. Agencies that oversee contract performance include: the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA), the Inspectors General of the U.S. Department of Defense (DoD) and other 104 Table of Contents departments and agencies, the Government Accountability Office (GAO), the Department of Justice (DOJ), and Congressional Committees. Other areas of our business operations may also be subject to audit and investigation by these and other agencies. From time to time, agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. Such investigations and audits may be initiated due to a number of reasons, including as a result of a whistleblower complaint. Such investigations and audits could result in administrative, civil or criminal liabilities, including repayments, fines, treble or other damages, forfeitures, restitution, or penalties being imposed upon us, the suspension of government export licenses or the suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete. The U.S. government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. The U.S. government could void any contracts found to be tainted by fraud. Like many defense contractors, we have received audit reports recommending the reduction of certain contract prices because, for example, cost or pricing data or cost accounting practices used to price and negotiate those contracts may not have conformed to government regulations. Some of these audit reports recommend that certain payments be repaid, delayed, or withheld, and may involve substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and, in some cases, continue to negotiate and/or litigate. The Company may be, and in some cases has been, required to make payments into escrow of disputed liabilities while the related litigation is pending. If the litigation is resolved in the Company’s favor, any such payments will be returned to the Company with interest. Our final allowable incurred costs for each year are also subject to audit and have, from time to time, resulted in disputes between us and the U.S. government, with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their related courts of appeals. In addition, the DOJ has, from time to time, convened grand juries to investigate possible irregularities by us. We also provide products and services to customers outside of the U.S., and those sales are subject to local government laws, regulations and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and International Traffic in Arms Regulations (ITAR)) may also be investigated or audited. In addition, we accrue for liabilities associated with those matters that are probable and can be reasonably estimated. The most likely liability amount to be incurred is accrued based upon a range of estimates. Where no amount within a range of estimates is more likely, then we accrue the minimum amount. Other than as specifically disclosed in this Form 10-K, we do not expect these audits, investigations or disputes to have a material effect on our results of operations, financial condition or liquidity, either individually or in the aggregate. Tax Treatment of Carrier and Otis Dispositions. Management has determined that the distributions of Carrier and Otis on April 3, 2020, and certain related internal business separation transactions, qualified as tax-free under applicable law. In making these determinations, we applied the tax law in the relevant jurisdictions to our facts and circumstances and obtained tax rulings from the relevant taxing authorities, tax opinions, and/or other external tax advice related to the concluded tax treatment. If the completed distributions of Carrier or Otis or certain internal business separation transactions, were to fail to qualify for tax-free treatment, the Company could be subject to significant liabilities, and there could be material adverse impacts on the Company’s business, results of operations, financial condition or liquidity in future reporting periods. Legal Proceedings. The Company and its subsidiaries are subject to various contract pricing disputes, government investigations and litigation matters across jurisdictions, updates to certain of which are set forth below. Cost Accounting Standards Claims As previously disclosed, in April 2019, a Divisional Administrative Contracting Officer (DACO) of the United States DCMA asserted a claim against Pratt & Whitney to recover alleged overpayments of approximately $ 1.73 billion plus interest ($ 843 million at December 31, 2022). The claim is based on Pratt & Whitney’s alleged noncompliance with Cost Accounting Standards (CAS) from January 1, 2007 to March 31, 2019, due to its method of allocating independent research and development costs to government contracts. Pratt & Whitney believes that the claim is without merit and filed an appeal to the ASBCA on June 7, 2019. As previously disclosed, in December 2013, a DCMA DACO asserted a claim against Pratt & Whitney to recover alleged overpayments of approximately $ 177 million plus interest ($ 132 million at December 31, 2022). The claim is based on Pratt & Whitney’s alleged noncompliance with CAS from January 1, 2005 to December 31, 2012, due to its method of determining the cost of collaborator parts used in the calculation of material overhead costs for government contracts. In 2014, Pratt & Whitney filed an appeal to the ASBCA. An evidentiary hearing was held and completed in June 2019. On November 22, 2021, the ASBCA issued its written decision sustaining in part and denying in part Pratt & Whitney’s appeal. The ASBCA rejected the DCMA’s asserted measure of the cost of collaborator parts, and ruled substantially in Pratt & Whitney’s favor on other liability issues. The ASBCA remanded the appeal to the parties for resolution of damages issues, which could require further proceedings at the ASBCA. On December 23, 2021, the DCMA filed a motion with the ASBCA seeking partial reconsideration of the November 22, 2021 decision. The motion for reconsideration was denied on August 29, 2022. On December 23, 2022, the DCMA filed an appeal to the United States Court of Appeals for the Federal Circuit. We continue to believe that the 105 Table of Contents ASBCA’s rejection of the DCMA’s asserted measure of the cost of collaborator parts is well supported in fact and law and likely will be sustained. In December 2018, a DCMA DACO issued a second claim against Pratt & Whitney that similarly alleges that its method of determining the cost of collaborator parts does not comply with the CAS for calendar years 2013 through 2017. This second claim, which asserts the same measure of the cost of collaborator parts rejected by the ASBCA’s recent decision, demands payment of $ 269 million plus interest ($ 96 million at December 31, 2022). Pratt & Whitney appealed this second claim to the ASBCA in January 2019. Although subject to further litigation at the ASBCA and potentially further litigation at the ASBCA and potentially further appellate proceedings, we continue to believe that the November 22, 2021 decision in the first claim will apply with equal legal effect to the second claim. Accordingly, we believe that the amounts demanded by the DCMA as set forth in the two claims are without legal basis and that any damages owed to the U.S. government for the two claims will not have a material adverse effect on our results of operations, financial condition or liquidity. Thales-Raytheon Systems and Related Matters As previously disclosed, in 2019, Raytheon Company received a subpoena from the Securities and Exchange Commission (SEC) seeking information in connection with an investigation into whether there were improper payments made by Raytheon Company, our joint venture known as Thales-Raytheon Systems (TRS) or anyone acting on their behalf in connection with TRS or Raytheon Company contracts in certain Middle East countries since 2014. In the first quarter of 2020, the DOJ advised Raytheon Company it had opened a parallel criminal investigation. In the third quarter of 2020, Raytheon Company received an additional subpoena from the SEC, seeking information and documents as part of its ongoing investigation. The Company maintains a rigorous anti-corruption compliance program, and continues to cooperate fully with the SEC’s and DOJ’s inquiries and to examine through our own investigation whether there were any improper payments or any such conduct that was in violation of Raytheon Company policy. At this time, the Company is unable to predict the outcome of the SEC’s or DOJ’s inquiries. Based on the information available to date, however, we cannot reasonably estimate the range of any potential loss or impact to the business that may result, but do not believe that the results of these inquiries will have a material adverse effect on our results of operations, financial condition or liquidity. DOJ Investigation, Contract Pricing Disputes and Related Civil Litigation As previously disclosed, on October 8, 2020, the Company received a criminal subpoena from the DOJ seeking information and documents in connection with an investigation relating to financial accounting, internal controls over financial reporting, and cost reporting regarding Raytheon Company’s Missiles & Defense (RMD) business since 2009. The investigation involves multi-year contracts subject to governmental regulation, including potential civil defective pricing claims for three RMD contracts entered into between 2011 and 2013. As part of the same investigation, on March 24, 2021, the Company received a second criminal subpoena from the DOJ seeking documents relating to a different RMD contract entered into in 2017. We are cooperating fully with, and will continue to review the issues raised by the DOJ’s ongoing investigation. We continue to make substantial progress in our internal review of the issues raised by the DOJ investigation. Although we believe we have defenses to the potential claims, the Company has determined that there is a probable risk of liability for damages, interest and potential penalties and has accrued approximately $ 290 million for this matter. We are currently unable to estimate an incremental loss, if any, which may result when the DOJ investigation is complete. Based on the information available to date, we do not believe the results of the DOJ investigation or of any pending or potential civil litigation will have a material adverse effect on our results of operations, financial condition or liquidity. Four shareholder lawsuits were filed against the Company after the DOJ investigation was first disclosed. A putative securities class action lawsuit was filed in the United States District Court for the District of Arizona against the Company and certain of its executives alleging that the defendants violated federal securities laws by making material misstatements in regulatory filings regarding internal controls over financial reporting in RMD. Three shareholder derivative lawsuits were also filed in the United States District Court for the District of Delaware against the former Raytheon Company Board of Directors, the Company and certain of its executives, each alleging that defendants violated federal securities laws and breached their fiduciary duties by engaging in improper accounting practices, failing to implement sufficient internal financial and compliance controls, and making a series of false and misleading statements in regulatory filings. We believe that each of these lawsuits lacks merit. Darnis, et al. and Related Matter As previously disclosed, on August 12, 2020, several former employees of UTC or its subsidiaries filed a putative class action complaint in the United States District Court for the District of Connecticut against the Company, Otis, Carrier, the former members of the UTC Board of Directors, and the members of the Carrier and Otis Boards of Directors (Geraud Darnis, et al. v. Raytheon Technologies Corporation, et al.). The complaint challenged the method by which UTC equity awards were converted to Company, Otis, and Carrier equity awards following the separation of UTC into three independent, publicly-traded companies on April 3, 2020. The complaint also claimed that the defendants are liable for breach of certain equity 106 Table of Contents compensation plans and also asserted claims under certain provisions of the Employee Retirement Income Security Act of 1974 (ERISA). On September 13, 2021, Plaintiffs filed an amended complaint which supersedes the initial complaint and continues to assert claims for breach of the equity compensation plans against the Company, Otis and Carrier, but no longer asserts ERISA claims. Further, no claim is made in the amended complaint against any current or former director of any of the three companies. Plaintiffs seek money damages, attorneys’ fees and other relief. On September 30, 2022, in response to motions to dismiss filed by the Company, Otis and Carrier, the Court dismissed the class action in its entirety with prejudice. On October 26, 2022, Plaintiffs filed an appeal to the United States Court of Appeals for the Second Circuit. We continue to believe that this matter will not have a material adverse effect on our results of operations, financial condition or liquidity. On December 6, 2022, a shareholder derivative lawsuit was filed in the Delaware Court of Chancery against the Company and certain current and former members of its Board of Directors, alleging that defendants breached their fiduciary duties in May 2020 by amending the method by which UTC equity awards were converted to certain Company equity awards following the separation of UTC into three independent, publicly-traded companies. We believe that the lawsuit lacks merit. DOJ Grand Jury Investigation and Related Civil Litigation The Company received a grand jury subpoena in late 2019, as part of a DOJ criminal investigation into purported agreements not to solicit or hire employees in violation of the federal antitrust laws. While the investigation has focused on alleged hiring restrictions between and among Pratt & Whitney and certain of its suppliers of outsourced engineering services, the subpoena also included requests regarding Collins. Since receipt of the subpoena, the Company has been cooperating with the DOJ investigation. On December 15, 2021, a criminal indictment was filed in the United States District Court for the District of Connecticut, against a former Pratt & Whitney employee and other employees of certain outsourced engineering suppliers charging each of them with one count of violating the federal antitrust laws. No current or former Collins employees were named in the indictment. We have been advised that the Company is a target of the DOJ investigation, and we continue to cooperate with the investigation. No criminal charge has been filed against the Company or its affiliates. After the criminal charges against the individuals were filed, numerous civil class action antitrust lawsuits have been filed against Pratt & Whitney and other corporate and individual defendants in the United States District Court for the District of Connecticut. The allegations in each of the civil lawsuits track the factual assertions in the criminal indictment and generally allege that Pratt & Whitney and the other defendants agreed to restrict the hiring and recruiting of certain engineers and skilled laborers in a manner that violated federal antitrust laws. Plaintiffs in each of the civil lawsuits seek to represent different purported classes of engineers and skilled laborers employed by Pratt & Whitney and other supplier-defendants since 2011. Plaintiffs in each of the lawsuits seek treble damages in an undetermined amount, plus attorneys’ fees and costs of suit. All of the lawsuits have been consolidated and a single amended class action complaint was filed. We believe that the claims asserted lack merit. Based on the information available to date, we do not believe that this matter will have a material adverse effect on our results of operations, financial condition or liquidity. Where appropriate, we have recorded loss contingency accruals for the above-referenced matters, and the amounts individually, or in the aggregate, are not material. Other. As described in “Note 17: Guarantees,” we extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated. We also have other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then we accrue the minimum amount. In the ordinary course of business, the Company and its subsidiaries are also routinely defendants in, parties to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some instances, claims for substantial monetary damages are asserted against the Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. We do not believe that these matters will have a material adverse effect upon our results of operations, financial condition or liquidity. 107 Table of Contents NOTE 19: ACCUMULATED OTHER COMPREHENSIVE LOSS A summary of the changes in each component of Accumulated other comprehensive (loss) income, net of tax is provided below: (dollars in millions) Foreign Currency Translation Defined Benefit Pension and Postretirement Plans Unrealized Hedging (Losses) Gains Accumulated Other Comprehensive (Loss) Income Balance at December 31, 2019 $ ( 3,211 ) $ ( 6,772 ) $ ( 166 ) $ ( 10,149 ) Other comprehensive income (loss) before reclassifications, net 609 1,842 181 2,632 Amounts reclassified, pre-tax — 373 82 455 Tax benefit (expense) 25 ( 510 ) ( 62 ) ( 547 ) Separation of Carrier and Otis, net of tax 3,287 584 4 3,875 Balance at December 31, 2020 $ 710 $ ( 4,483 ) $ 39 $ ( 3,734 ) Other comprehensive income before reclassifications, net ( 647 ) 3,210 ( 226 ) 2,337 Amounts reclassified, pre-tax — 258 ( 28 ) 230 Tax benefit (expense) ( 14 ) ( 813 ) 79 ( 748 ) Balance at December 31, 2021 $ 49 $ ( 1,828 ) $ ( 136 ) $ ( 1,915 ) Other comprehensive income (loss) before reclassifications, net ( 1,050 ) 1,225 ( 246 ) ( 71 ) Amounts reclassified, pre-tax 2 129 103 234 Tax benefit (expense) ( 6 ) ( 308 ) 48 ( 266 ) Balance at December 31, 2022 $ ( 1,005 ) $ ( 782 ) $ ( 231 ) $ ( 2,018 ) Amounts reclassified that relate to our defined benefit pension and postretirement plans include the amortization of prior service costs and actuarial net gains or losses recognized during each period presented. These costs are recorded as components of net periodic pension income for each period presented. See “Note 11: Employee Benefit Plans” for additional details. All noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests) are reported in the mezzanine section of the Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value. NOTE 20: STOCK-BASED COMPENSATION RTC’s long-term incentive plans authorize various types of market and performance based incentive awards that may be granted to officers and key employees. Certain historic awards remain outstanding under predecessor plans. The Raytheon Technologies Corporation 2018 Long-Term Incentive Plan, as amended and restated (2018 LTIP) was approved by shareowners on April 26, 2021. A total of 134.8 million shares have been authorized for issuance pursuant to awards under the 2018 LTIP including shares assumed from predecessor plans. There is also an additional 21.5 million shares for future issuance due to adjustments related to the Separation Transactions. As of December 31, 2022, approximately 81.2 million shares remain available for awards under the 2018 LTIP. The 2018 LTIP does not contain aggregate annual award limits, however, it sets an annual award limit per participant. The 2018 LTIP will expire after all authorized shares have been awarded or April 26, 2031, whichever is sooner. Under the 2018 LTIP, the exercise price of awards is set on the grant date and may not be less than the fair market value per share on that date. Generally, stock appreciation rights and stock options have a term of ten years and a three-year vesting period, subject to limited exceptions. In the event of retirement, annual stock appreciation rights, stock options, and RSUs held for more than one year may become vested and exercisable, subject to certain terms and conditions. LTIP awards with performance-based vesting generally have a minimum three-year vesting period and vest based on actual performance against pre-established metrics. In the event of retirement, performance-based awards held for more than one year, remain eligible to vest based on actual performance relative to performance goals. We have historically repurchased shares of our common stock in an amount at least equal to the number of shares issued under our equity compensation arrangements and will continue to evaluate this policy in conjunction with our overall share repurchase program. 108 Table of Contents We measure the cost of all share-based payments, including stock options and stock appreciation rights, at fair value on the grant date and recognize this cost in the Consolidated Statement of Operations, net of expected forfeitures, as follows: (dollars in millions) 2022 2021 2020 Total compensation cost recognized $ 420 $ 442 $ 330 The associated future income tax benefit recognized was $ 91 million, $ 83 million and $ 63 million for the years ended December 31, 2022, 2021 and 2020, respectively. For the years ended December 31, 2022, 2021 and 2020, the amount of cash received from the exercise of stock options was $ 20 million, $ 7 million and $ 15 million, respectively, with an associated tax benefit realized of $ 32 million, $ 42 million and $ 48 million, respectively. In addition, for the years ended December 31, 2022, 2021 and 2020, the associated tax benefit realized from the vesting of performance share units (PSUs), restricted stock awards and RSUs was $ 80 million, $ 44 million and $ 58 million, respectively. At December 31, 2022, there was $ 329 million of total unrecognized compensation cost related to non-vested equity awards granted under long-term incentive plans. This cost is expected to be recognized ratably over a weighted-average period of 2.1 years. A summary of the transactions under our long-term incentive plans for the year ended December 31, 2022 follows. Stock Options Stock Appreciation Rights Performance Share Units Restricted Stock and RSUs (shares and units in thousands) Shares Average Price (1) Shares Average Price (1) Units Average Price (2) Units Average Price (1) Outstanding at: December 31, 2021 1,849 $ 78.36 33,061 $ 78.62 1,265 $ 73.75 11,443 $ 66.18 Granted 102 94.04 3,225 94.06 990 96.15 3,441 97.76 Exercised / earned ( 283 ) 70.20 ( 3,827 ) 70.53 ( 1 ) 80.53 ( 4,476 ) 62.03 Cancelled ( 11 ) 94.04 ( 427 ) 86.34 ( 104 ) 85.06 ( 651 ) 78.38 December 31, 2022 1,657 $ 80.67 32,032 $ 81.04 2,150 $ 83.52 9,757 $ 78.40 (1) Weighted-average exercise price. (2) Weighted-average grant date fair value. The weighted-average grant date fair value of stock options and stock appreciation rights granted during 2022, 2021 and 2020 was $ 21.80 , $ 15.60 and $ 23.37 , respectively. The weighted-average grant date fair value of performance share units, which vest upon achieving certain performance metrics, granted during 2022 and 2021 was $ 96.15 and $ 73.75 , respectively. There were no performance share units granted in 2020. The total fair value of awards vested during the years ended December 31, 2022, 2021 and 2020 was $ 346 million, $ 287 million and $ 284 million, respectively. The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of stock options and stock appreciation rights exercised during the years ended December 31, 2022, 2021 and 2020 was $ 110 million, $ 54 million and $ 206 million, respectively. The total intrinsic value (which is the stock price at vesting multiplied by the number of underlying shares) of performance share units and other restricted awards vested was $ 427 million, $ 256 million and $ 295 million during the years ended December 31, 2022, 2021 and 2020, respectively. The following table summarizes information about equity awards outstanding that are vested and expected to vest as well as equity awards outstanding that are exercisable at December 31, 2022: Equity Awards Vested and Expected to Vest Equity Awards That Are Exercisable (shares in thousands; aggregate intrinsic value in millions) Awards Average Price (1) Aggregate Intrinsic Value Remaining Term (2) Awards Average Price (1) Aggregate Intrinsic Value Remaining Term (2) Stock Options 1,654 $ 80.61 $ 34 5.36 1,182 $ 77.13 $ 28 4.47 Stock Appreciation Rights 31,896 81.01 635 5.56 22,118 77.68 514 4.52 Performance Share Units 2,105 83.41 212 1.48 Restricted Stock and RSUs 9,417 78.02 950 1.54 (1) Weighted-average exercise price per share. (2) Weighted-average contractual remaining term in years. 109 Table of Contents The fair value of each option award is estimated on the date of grant using a binomial lattice model. The following table indicates the assumptions used in estimating fair value for awards granted during 2022, 2021 and 2020. Lattice-based option models incorporate ranges of assumptions for inputs; those ranges are as follows: 2022 2021 2020 Expected volatility 27.9 % 29.9 % 18.8 % Weighted-average volatility 28 % 30 % 19 % Expected term (in years) 6.5 6.5 6.5 Expected dividend yield 2.2 % 2.6 % 1.9 % Risk-free rate 0.02 % - 2.1 % 0.04 % - 1.2 % 1.4 % - 1.6 % Expected volatilities are based on the returns of our stock, including implied volatilities from traded options on our stock for the binomial lattice model. We use historical data to estimate equity award exercise and employee termination behavior within the valuation model. The expected term represents an estimate of the period of time equity awards are expected to remain outstanding. The risk-free rate is based on the term structure of interest rates at the time of equity award grant. NOTE 21: SEGMENT FINANCIAL DATA Our operations, for the periods presented herein, are classified into four principal segments: Collins, Pratt & Whitney, RIS and RMD. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. The results of RIS and RMD reflect the period subsequent to the completion of the Raytheon merger on April 3, 2020. 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, at which time management will begin to manage its operations under its new segment structure. The changes will require the Company to revise its segment reporting. 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. Collins Aerospace is a leading global provider of technologically advanced aerospace and defense products and aftermarket service solutions for aircraft manufacturers, airlines, and regional, business and general aviation, as well as for defense and commercial space operations. Collins’ product lines include integrated avionics systems, aviation systems, communications systems, navigation systems, electric power generation, management and distribution systems, environmental control systems, flight control systems, air data and aircraft sensing systems, engine control systems, engine components, engine nacelle systems, including thrust reversers and mounting pylons, interior and exterior aircraft lighting, aircraft seating and cargo systems, evacuation systems, landing systems, including landing gear, wheels and braking systems, hoists and winches, fire and ice detection and protection systems, actuation systems, and propeller systems. Collins also designs, manufactures, and supports cabin interior, oxygen systems, food and beverage preparation, storage and galley systems, lavatory and wastewater management systems. Collins’ solutions support human space exploration with environmental control and power systems and extravehicular activity suits and support government and defense customer missions by providing airborne intelligence, surveillance and reconnaissance systems, test and training range systems, crew escape systems, and simulation and training solutions. Collins also provides connected aviation solutions and services through worldwide voice and data communication networks and solutions. Aftermarket services include spare parts, overhaul and repair, engineering and technical support, training and fleet management solutions, asset management services and information management services. Pratt & Whitney is among the world’s leading suppliers of aircraft engines for commercial, military, business jet and general aviation customers. Pratt & Whitney’s Commercial Engines and Military Engines businesses design, develop, produce and maintain families of large engines for wide- and narrow-body and large regional aircraft for commercial customers and for fighter, bomber, tanker and transport aircraft for military customers. Pratt & Whitney’s small engine business, Pratt & Whitney Canada (P&WC), is among the world’s leading suppliers of engines powering regional airlines, general and business aviation, as well as helicopters. Pratt & Whitney also produces, sells and services military and commercial auxiliary power units. Pratt & Whitney provides fleet management services and aftermarket maintenance, repair and overhaul services in all of these segments. Raytheon Intelligence & Space is a leading provider of integrated space, communication and sensor systems, and cyber and software solutions to intelligence, defense, federal and commercial customers. RIS’s Sensing and Effects business provides intelligence, surveillance and reconnaissance, precision targeting radars, and electronic warfare solutions across all domains, as well as end-to-end space solutions, including missile warning and intelligence, weather, and navigation. RIS Sensing and Effects products include the Multi-Spectral Targeting System (MTS) product family of sensors, Electro Optical Distributed 110 Table of Contents Aperture System (EODAS), AN/APG-79 AESA Radar, AN/APG-82(V)1 AESA Radar, Next Generation Jammer Mid-Band (NGJ-MB), Global Positioning System (GPS) Next-Generation Operational Control System (GPS-OCX), Next Generation Overhead Persistent Infrared (OPIR), and Future Operationally Resilient Ground Evolution (FORGE). RIS’s Command, Control and Communications business provides automated battle management and secure, resilient communications systems, including terminals providing satellite communications connecting submarines, ships, aircraft and ground stations for the U.S. Department of Defense (DoD), identification friend or foe interrogators and transponders, and automation, surveillance, navigation, and landing solutions including the Joint Precision Approach Landing System (JPALS). RIS’s Cyber, Training and Services provides full-spectrum cyber and service solutions in every domain, including offensive and defensive cyber services for certain classified and department of defense customers, cyber protection solutions which secure and monitor information technology (IT) systems and networks across the federal and commercial domains, and high consequence missions which provide classified special mission support and IT intelligence services to certain classified customers. Raytheon Missiles & Defense is a leading provider of end-to-end solutions for U.S. and foreign government customers designed to detect, track and engage threats. RMD’s systems span air, land, sea and space, and are designed to defend against the most sophisticated threats. RMD’s Air Power business provides air-to-air and air-to-ground weapons that deliver power and precision to fourth- and fifth-generation fighters including the Advanced Medium Range Air-to-Air Missile (AMRAAM) and StormBreaker smart weapon, and ground-based sensors for persistent wide-area defense and space surveillance including Early Warning Radar. RMD’s Land Warfare and Air Defense business provides capabilities ranging from precision weapons including Excalibur, Javelin, Stinger and TOW to integrated air and missile defense, including the proven Patriot air and missile defense system, the Guidance Enhanced Missile (GEM-T), the National Advanced Surface-to-Air Missile System (NASAMS) and the GhostEye family of radars, including the Lower Tier Air and Missile Defense Sensor (LTAMDS). RMD’s Naval Power business provides advanced sensors, command and control and weapons to protect ships and sailors around the world, including AIM-9X Sidewinder, Tomahawk, Standard Missile 2 (SM-2) and Standard Missile 6 (SM-6) missiles, and the SPY-6 family of radars. RMD’s Strategic Missile Defense business provides technologically advanced sensors, satellites and interceptors including the AN/TPY-2 radar, Standard Missile 3 (SM-3) Block IA/IB/IIA missiles and development of future integrated missile defense solutions. RMD’s Advanced Technology business focuses on the development and early introduction of next-generation technologies and systems, including hypersonics, counter-hypersonics, directed energy, advanced weapons and next-generation radars. Segment Information. Total sales and operating profit by segment include inter-segment sales which are generally recorded at cost-plus a specified fee or at a negotiated fixed price. These pricing arrangements may result in margins different than what the purchasing segment realizes on the ultimate third-party sales. We present a FAS/CAS operating adjustment outside of segment results, which represents the difference between the service cost component of our pension and PRB expense under the Financial Accounting Standards (FAS) requirements of U.S. GAAP and our pension and PRB expense under U.S. government Cost Accounting Standards (CAS) primarily related to our RIS and RMD segments. While the ultimate liability for pension and PRB costs under FAS and CAS is similar, the pattern of cost recognition is different. 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. government. Collins and Pratt & Whitney generally record pension and PRB expense on a FAS basis. 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. 111 Table of Contents Segment information for the years ended December 31 are as follows: Net Sales Operating Profit (Loss) Operating Profit (Loss) Margins (dollars in millions) 2022 2021 2020 2022 2021 2020 2022 2021 2020 Collins Aerospace $ 20,597 $ 18,449 $ 19,288 $ 2,343 $ 1,759 $ 1,466 11.4 % 9.5 % 7.6 % Pratt & Whitney 20,530 18,150 16,799 1,075 454 ( 564 ) 5.2 % 2.5 % ( 3.4 ) % Raytheon Intelligence & Space 14,312 15,180 11,069 1,342 1,833 1,020 9.4 % 12.1 % 9.2 % Raytheon Missiles & Defense 14,863 15,539 11,396 1,519 2,004 880 10.2 % 12.9 % 7.7 % Total segment 70,302 67,318 58,552 6,279 6,050 2,802 8.9 % 9.0 % 4.8 % Eliminations and other (1) ( 3,228 ) ( 2,930 ) ( 1,965 ) ( 174 ) ( 133 ) ( 107 ) Corporate expenses and other unallocated items (2) — — — ( 318 ) ( 552 ) ( 590 ) FAS/CAS operating adjustment — — — 1,520 1,796 1,106 Acquisition accounting adjustments (3) — — — ( 1,893 ) ( 2,203 ) ( 5,100 ) Consolidated $ 67,074 $ 64,388 $ 56,587 $ 5,414 $ 4,958 $ ( 1,889 ) 8.1 % 7.7 % ( 3.3 ) % (1) Includes the operating results of certain smaller non-reportable business segments. 2020 amounts include Forcepoint, LLC, which was acquired as part of the Raytheon merger, and subsequently disposed of on January 8, 2021. (2) Includes the net expenses related to the U.S. Army’s LTAMDS project. (3) Operating profit (loss) in 2020 includes the $ 3.2 billion goodwill impairment charge in the second quarter of 2020 related to two Collins reporting units. Refer to “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets” for additional information. Total Assets Capital Expenditures Depreciation & Amortization (dollars in millions) 2022 2021 2022 2021 2020 2022 2021 2020 Collins Aerospace (1) $ 67,030 $ 67,564 $ 655 $ 665 $ 638 $ 742 $ 728 $ 736 Pratt & Whitney (1) 36,205 33,414 949 700 565 724 642 729 Raytheon Intelligence & Space (1) 21,174 21,545 320 305 218 209 187 154 Raytheon Missiles & Defense (1) 27,852 28,766 260 287 280 333 333 228 Total segment 152,261 151,289 2,184 1,957 1,701 2,008 1,890 1,847 Corporate, eliminations and other 6,603 10,115 104 177 94 99 152 155 Acquisition accounting adjustments 2,001 2,515 2,154 Consolidated $ 158,864 $ 161,404 $ 2,288 $ 2,134 $ 1,795 $ 4,108 $ 4,557 $ 4,156 (1) Total assets include acquired intangible assets and the property, plant and equipment fair value adjustment. Related amortization expense is included in Acquisition accounting adjustments. Geographic External Sales by Origin and Long-Lived Assets. Geographic external sales are attributed to the geographic regions based on their location of origin. U.S. external sales include export sales to commercial customers outside the U.S. and sales to the U.S. government, commercial and affiliated customers, which are known to be for resale to customers outside the U.S. Long-lived assets are Fixed assets, net attributed to the specific geographic regions. External Net Sales Long-Lived Assets (dollars in millions) 2022 2021 2020 2022 2021 United States $ 57,869 $ 55,837 $ 48,560 $ 12,162 $ 11,731 International Europe 3,874 3,630 3,696 1,132 1,255 Asia Pacific 1,778 1,748 1,574 801 854 Middle East and North Africa 173 136 103 113 129 Other 3,380 3,037 2,654 962 1,003 Consolidated $ 67,074 $ 64,388 $ 56,587 $ 15,170 $ 14,972 Disaggregation of Revenue. We also disaggregate our contracts from customers by geographic region based on customer location, by customer and by sales type. Our geographic region based on customer location uses end user customer location where known or practical to determine, or in instances where the end user customer is not known or not practical to determine, we utilize “ship to” location as the customer location. In addition, for our RIS and RMD segments, we disaggregate our 112 Table of Contents contracts from customers by contract type. We believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Segment sales disaggregated by geographic region for the years ended December 31 are as follows: 2022 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total United States $ 9,847 $ 10,433 $ 11,418 $ 9,482 $ 10 $ 41,190 Europe 5,374 4,211 418 1,108 — 11,111 Asia Pacific 2,021 3,775 747 1,514 — 8,057 Middle East and North Africa 474 450 231 2,444 — 3,599 Other 1,240 1,658 141 78 — 3,117 Consolidated net sales 18,956 20,527 12,955 14,626 10 67,074 Inter-segment sales 1,641 3 1,357 237 ( 3,238 ) — Business segment sales $ 20,597 $ 20,530 $ 14,312 $ 14,863 $ ( 3,228 ) $ 67,074 2021 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total United States $ 9,341 $ 9,034 $ 12,126 $ 9,495 $ 15 $ 40,011 Europe 4,421 3,488 434 1,255 — 9,598 Asia Pacific 1,851 3,885 771 1,462 — 7,969 Middle East and North Africa 462 441 469 3,007 — 4,379 Other 915 1,302 144 70 — 2,431 Consolidated net sales 16,990 18,150 13,944 15,289 15 64,388 Inter-segment sales 1,459 — 1,236 250 ( 2,945 ) — Business segment sales $ 18,449 $ 18,150 $ 15,180 $ 15,539 $ ( 2,930 ) $ 64,388 2020 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total United States $ 10,132 $ 8,534 $ 8,704 $ 6,906 $ 284 $ 34,560 Europe 4,643 2,726 307 1,031 149 8,856 Asia Pacific 1,810 4,024 637 1,132 41 7,644 Middle East and North Africa 421 505 410 2,077 30 3,443 Other 904 1,001 83 73 23 2,084 Consolidated net sales 17,910 16,790 10,141 11,219 527 56,587 Inter-segment sales 1,378 9 928 177 ( 2,492 ) — Business segment sales $ 19,288 $ 16,799 $ 11,069 $ 11,396 $ ( 1,965 ) $ 56,587 113 Table of Contents Segment sales disaggregated by type of customer for the years ended December 31 are as follows: 2022 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total U.S. government (1) $ 4,337 $ 5,272 $ 11,221 $ 9,477 $ 10 $ 30,317 Foreign military sales through the U.S. government 238 1,115 604 3,085 — 5,042 Foreign government direct commercial sales 978 474 827 2,048 — 4,327 Commercial aerospace and other commercial 13,403 13,666 303 16 — 27,388 Consolidated net sales 18,956 20,527 12,955 14,626 10 67,074 Inter-segment sales 1,641 3 1,357 237 ( 3,238 ) — Business segment sales $ 20,597 $ 20,530 $ 14,312 $ 14,863 $ ( 3,228 ) $ 67,074 (1) Excludes foreign military sales through the U.S. government. 2021 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total U.S. government (1) $ 4,685 $ 5,140 $ 11,844 $ 9,493 $ 15 $ 31,177 Foreign military sales through the U.S. government 168 1,273 825 3,280 — 5,546 Foreign government direct commercial sales 1,095 541 844 2,513 — 4,993 Commercial aerospace and other commercial 11,042 11,196 431 3 — 22,672 Consolidated net sales 16,990 18,150 13,944 15,289 15 64,388 Inter-segment sales 1,459 — 1,236 250 ( 2,945 ) — Business segment sales $ 18,449 $ 18,150 $ 15,180 $ 15,539 $ ( 2,930 ) $ 64,388 (1) Excludes foreign military sales through the U.S. government. 2020 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total U.S. government (1) $ 5,159 $ 5,193 $ 8,512 $ 6,896 $ 202 $ 25,962 Foreign military sales through the U.S. government 218 1,229 640 2,498 — 4,585 Foreign government direct commercial sales 923 583 740 1,725 3 3,974 Commercial aerospace and other commercial 11,610 9,785 249 100 322 22,066 Consolidated net sales 17,910 16,790 10,141 11,219 527 56,587 Inter-segment sales 1,378 9 928 177 ( 2,492 ) — Business segment sales $ 19,288 $ 16,799 $ 11,069 $ 11,396 $ ( 1,965 ) $ 56,587 (1) Excludes foreign military sales through the U.S. government. Sales to Airbus primarily relate to Pratt & Whitney and Collins products, and prior to discounts and incentives were approximately 14 %, 12 % and 13 % of total net sales in 2022, 2021 and 2020, respectively. 114 Table of Contents Segment sales disaggregated by sales type for the years ended December 31 are as follows: 2022 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total Products $ 14,857 $ 12,411 $ 10,261 $ 13,234 $ 10 $ 50,773 Services 4,099 8,116 2,694 1,392 — 16,301 Consolidated net sales 18,956 20,527 12,955 14,626 10 67,074 Inter-segment sales 1,641 3 1,357 237 ( 3,238 ) — Business segment sales $ 20,597 $ 20,530 $ 14,312 $ 14,863 $ ( 3,228 ) $ 67,074 2021 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total Products $ 13,404 $ 11,189 $ 10,735 $ 13,927 $ 15 $ 49,270 Services 3,586 6,961 3,209 1,362 — 15,118 Consolidated net sales 16,990 18,150 13,944 15,289 15 64,388 Inter-segment sales 1,459 — 1,236 250 ( 2,945 ) — Business segment sales $ 18,449 $ 18,150 $ 15,180 $ 15,539 $ ( 2,930 ) $ 64,388 2020 (dollars in millions) Collins Aerospace Pratt & Whitney Raytheon Intelligence & Space Raytheon Missiles & Defense Other Total Products $ 14,664 $ 10,186 $ 7,775 $ 10,232 $ 462 $ 43,319 Services 3,246 6,604 2,366 987 65 13,268 Consolidated net sales 17,910 16,790 10,141 11,219 527 56,587 Inter-segment sales 1,378 9 928 177 ( 2,492 ) — Business segment sales $ 19,288 $ 16,799 $ 11,069 $ 11,396 $ ( 1,965 ) $ 56,587 RIS and RMD segment sales disaggregated by contract type for the years ended December 31 are as follows: 2022 2021 2020 (dollars in millions) Raytheon Intelligence & Space Raytheon Missiles & Defense Raytheon Intelligence & Space Raytheon Missiles & Defense Raytheon Intelligence & Space Raytheon Missiles & Defense Fixed-price $ 5,357 $ 8,763 $ 6,338 $ 9,406 $ 4,526 $ 7,080 Cost-type 7,598 5,863 7,606 5,883 5,615 4,139 Consolidated net sales 12,955 14,626 13,944 15,289 10,141 11,219 Inter-segment sales 1,357 237 1,236 250 928 177 Business segment sales $ 14,312 $ 14,863 $ 15,180 $ 15,539 $ 11,069 $ 11,396 115 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.