RTX Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations BUSINESS OVERVIEW We are a global premier systems provider of high technology products and services to the aerospace and defense industries. We operate in four principal business segments: Collins Aerospace (Collins), Pratt & Whitney, Raytheon Intelligence & Space (RIS), and Raytheon Missiles & Defense (RMD). Unless the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” “Raytheon Technologies,” and “RTC” mean Raytheon Technologies Corporation and its subsidiaries. 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 implement the reorganization beginning in July 2023. All segment information included in this Form 10-Q is reflective of the existing four segments of Collins, Pratt & Whitney, RIS, and RMD in accordance with the management structure in place as of March 31, 2023. RIS and RMD follow a 4-4-5 fiscal calendar while Collins and Pratt & Whitney use a quarter calendar end. Throughout this Quarterly Report on Form 10-Q, when we refer to the quarters ended March 31, 2023 and 2022 with respect to RIS or RMD, we are referring to their April 2, 2023 and April 3, 2022 fiscal quarter ends, respectively. The current status of significant factors affecting our business environment in 2023 is discussed below. For additional discussion, refer to the “Business Overview” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in our 2022 Annual Report on Form 10-K. Industry Considerations Our worldwide operations can be affected by industrial, economic, and political factors on both a regional and global level. Our operations include original equipment manufacturer (OEM) and extensive related aftermarket parts and services related to our aerospace operations. Our defense business serves both domestic and international customers primarily as a prime contractor or subcontractor on a broad portfolio of defense and related programs for government customers. Our business mix also reflects the combination of shorter cycles in our commercial aerospace spares contracts and certain service contracts in our defense business primarily at RIS, and longer cycles in our aerospace OEM and aftermarket maintenance contracts and on our defense contracts to design, develop, manufacture, or modify complex equipment. Our customers are in the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization. Government legislation, policies, and regulations can impact our business and operations. Changes in environmental and climate change-related laws or regulations, including regulations on greenhouse gas emissions, carbon pricing, and energy taxes, could lead to new or additional investment in product designs and facility upgrades and could increase our operational and environmental compliance expenditures, including increased energy and raw materials costs and costs associated with manufacturing changes. In addition, government and industry-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, government imposed travel restrictions, and government procurement practices can impact our businesses. Collins and Pratt & Whitney serve both commercial and government aerospace customers. Revenue passenger miles (RPMs), available seat miles, and the general economic health of airline carriers are key barometers for our commercial aerospace operations. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits. Many of our aerospace customers are covered under long-term aftermarket service agreements at both Collins and Pratt & Whitney, which are inclusive of both spare parts and services. RIS, RMD, and the defense operations of Collins and Pratt & Whitney are affected by U.S. Department of Defense (DoD) budget and spending levels, changes in demand, changes in policy positions or priorities, the domestic and global political and economic environment, and the evolving nature of the global and national security threat environment. In addition, our defense businesses engage in both direct commercial sales, which generally require U.S. government licenses and approvals, as well as foreign military sales, which are government-to-government transactions initiated by, and carried out at the direction of, the U.S. government. Changes in these budget and spending levels, policies, or priorities, which are subject to U.S. domestic and foreign geopolitical risks and threats, may impact our defense businesses, including the timing of and delays in U.S. government licenses and approvals for sales, the risk of sanctions, or other restrictions. Other Matters Global economic and political conditions, changes in raw material and commodity prices and supply, labor availability and costs, inflation, interest rates, international and domestic tax law changes, foreign currency exchange rates, energy costs and 28 Table of Contents supply, levels of air travel, the financial condition of commercial airlines, and the impact from natural disasters and weather conditions create uncertainties that could impact our businesses. Global Supply Chain and Labor Markets. Ongoing global supply chain and labor market constraints continue to include materials and parts shortages, including raw material, microelectronics and commodity shortages, as well as delivery delays, labor shortages, distribution problems, and price increases. Current geopolitical conditions, including sanctions and other trade restrictive activities and strained intercountry relations, are contributing to these issues. We have had difficulties procuring necessary materials, including raw materials, components, and other supplies, and services on a timely basis or at all. We have also had difficulties hiring qualified personnel, particularly personnel with specialized engineering experience and security clearances. Our suppliers and subcontractors have been impacted by the same issues, compounding the shortages for us because we rely on them, sometimes as sole-source providers. In addition, the ongoing recovery in commercial air travel has increased demand for our products and services and added to these supply chain and labor market challenges. We work continuously to mitigate the effects of these supply chain and labor constraints through a number of targeted activities and ongoing programs. However, the timing as to when our supply chain and labor challenges will abate is uncertain and subject to a wide range of factors and future developments. Geopolitical Matters. In response to the Russian military’s invasion of Ukraine on February 24, 2022, the U.S. government and the governments of various jurisdictions in which we operate, including Canada, the United Kingdom, the European Union, and others, have imposed broad economic sanctions and export controls targeting specific industries, entities, and individuals in Russia. The Russian government has implemented similar counter-sanctions and export controls targeting specific industries, entities, and individuals in the U.S. and other jurisdictions in which we operate, including certain members of the Company’s management team and Board of Directors. These government measures, among other limitations, restrict transactions involving various Russian banks and financial institutions and impose enhanced export controls limiting transfers of various goods, software, and technologies to and from Russia, including broadened export controls specifically targeting the aerospace sector. These measures have adversely affected, and could continue to adversely affect, the Company and/or our supply chain, business partners, or customers; however, based on information available to date, we do not currently expect these issues will have a material adverse effect on our financial results. We will 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. China previously announced that it may take measures against RTC in connection with certain foreign military sales to Taiwan. On February 16, 2023, China’s Ministry of Commerce announced that it has added RMD to its “unreliable entities list” in connection with certain foreign military sales to Taiwan involving RMD’s products and services, and that it would impose certain sanctions against RMD, including a fine equal to twice the value of the arms that RMD has sold to Taiwan since September 2020. In addition, on September 16, 2022, China indicated that it decided to sanction our Chairman and Chief Executive Officer Gregory Hayes, in connection with another foreign military sale to Taiwan involving RTC products and services. RTC is not aware of any specific sanctions against Mr. Hayes. If China were to impose additional sanctions, enforce announced sanctions, or take other regulatory action against RTC, our suppliers, affiliates, or partners, it could potentially disrupt our business operations. Any impact of these or other potential sanctions or other actions by China is uncertain. We have direct commercial sales contracts for products and services to certain foreign customers, for which U.S. government review and approval have been pending. The U.S. government’s approval of these sales is subject to a range of factors, including its foreign policies related to these customers, which are subject to continuing review and potential changes. Likewise, regulatory approvals previously granted for prior sales can be paused or revoked if the products and services have not yet been delivered to the customer. If we ultimately do not receive all of the regulatory approvals, or those approvals are revoked, it could have a material effect on our financial results. In particular, as of March 31, 2023, our Contract liabilities include approximately $395 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. Coronavirus Disease 2019 (COVID-19) Pandemic. The COVID-19 pandemic caused continuing negative effects on the global economy, our business and operations, the labor market, supply chains, inflation, and the industries in which we operate. Commercial air travel continues to recover to varying degrees. 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-pandemic levels. Our expectations regarding the negative effects of the COVID-19 pandemic and ongoing recovery and their potential financial impact are based on available information and assumptions that we believe are reasonable at this time; however, the actual financial impact is highly uncertain and subject to a wide range of factors and future developments. See Part I, Item 1A, “Risk Factors” in our 2022 Annual Report on Form 10-K for further discussion of these items. 29 Table of Contents CRITICAL ACCOUNTING ESTIMATES Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes the most complex and sensitive judgments, because of their significance to the Condensed Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. See “Critical Accounting Estimates” within Item 7 and “Note 1: Basis of Presentation and Summary of Accounting Principles” within Item 8 of our 2022 Annual Report on Form 10-K, which describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the quarter ended March 31, 2023. RESULTS OF OPERATIONS As described in our “Cautionary Note Concerning Factors That May Affect Future Results” of this Form 10-Q, our interim period results of operations and period-to-period comparisons of our results, particularly at a segment level, may not be indicative of our future operating results. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context. We provide the organic change in Net sales and Cost of sales for our consolidated results of operations as well as the organic change in Net sales and Operating profit for our segments. We believe that these non-Generally Accepted Accounting Principles (non-GAAP) measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability. The organic change in Net sales, Cost of sales, and Operating profit excludes acquisitions and divestitures, net, and the effect of foreign currency exchange rate translation fluctuations and other significant non-operational items and/or significant operational items that may occur at irregular intervals (Other). Additionally, the organic change in Cost of sales and Operating profit excludes restructuring costs, the FAS/CAS operating adjustment, and costs related to certain acquisition accounting adjustments. Restructuring costs generally arise from severance related to workforce reductions and facility exit costs. We are continuously evaluating our cost structure and have implemented restructuring actions in an effort to keep our cost structure competitive. Acquisition accounting adjustments include the amortization of acquired intangible assets related to acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through acquisitions, the amortization of customer contractual obligations related to loss making or below market contracts acquired, and goodwill impairment. Net Sales Quarter Ended March 31, (dollars in millions) 2023 2022 Net sales $ 17,214 $ 15,716 The factors contributing to the change year-over-year in total net sales for the quarter ended March 31, 2023 are as follows: (dollars in millions) Quarter Ended March 31, 2023 Organic (1) $ 1,562 Acquisitions and divestitures, net (34) Other (30) Total change $ 1,498 (1) See “Results of Operations” for definition of organic. A reconciliation of this measure to the reported U.S. GAAP amount is provided in the table above. Net sales increased $1.6 billion organically in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 primarily due to higher organic sales of $0.8 billion at Collins, $0.7 billion at Pratt & Whitney, and $0.2 billion at RMD. See “Segment Review” below for further information by segment. 30 Table of Contents Quarter Ended March 31, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Net Sales Products $ 12,787 $ 11,862 74.3 % 75.5 % Services 4,427 3,854 25.7 % 24.5 % Total net sales $ 17,214 $ 15,716 100 % 100 % Refer to “Note 17: Segment Financial Data” within Item 1 of this Form 10-Q for the composition of external net sales by products and services by segment. Net products sales increased $0.9 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 primarily due to increases in external products sales of $0.5 billion at Collins, $0.4 billion at Pratt & Whitney, and $0.1 billion at RMD, partially offset by a decrease in external products sales of $0.1 billion at RIS. Net services sales increased $0.6 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 primarily due to increases in external services sales of $0.3 billion at Pratt & Whitney, $0.2 billion at Collins, and $0.1 billion at RMD. Our sales to major customers were as follows: Quarter Ended March 31, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Sales to the U.S. government (1) $ 7,557 $ 7,338 43.9 % 46.7 % Foreign military sales through the U.S. government 1,262 1,176 7.3 % 7.5 % Foreign government direct commercial sales 1,004 959 5.8 % 6.1 % Commercial aerospace and other commercial sales 7,391 6,243 42.9 % 39.7 % Total net sales $ 17,214 $ 15,716 100 % 100 % (1) Excludes foreign military sales through the U.S. government. Cost of Sales Quarter Ended March 31, (dollars in millions) 2023 2022 Total cost of sales $ 13,645 $ 12,560 Percentage of net sales 79.3 % 79.9 % The factors contributing to the change year-over-year in total cost of sales for the quarter ended March 31, 2023 are as follows: (dollars in millions) Quarter Ended March 31, 2023 Organic (1) $ 1,267 Acquisitions and divestitures, net (25) Restructuring 22 FAS/CAS operating adjustment 57 Acquisition accounting adjustments 8 Other (244) Total change $ 1,085 (1) See “Results of Operations” for definition of organic. A reconciliation of this measure to the reported U.S. GAAP amount is provided in the table above. The organic increase in total cost of sales of $1.3 billion for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, was primarily driven by the organic sales increases at Pratt & Whitney, Collins, and RMD noted above. The decrease in other cost of sales of $0.2 billion for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, was primarily driven by the absence of charges recorded during the first quarter of 2022 at Pratt & Whitney and Collins related to impairment of customer financing assets for products under lease, inventory reserves, purchase order obligations, and the impairment of contract fulfillment costs that are no longer recoverable, all due to global sanctions on and 31 Table of Contents export controls with respect to Russia, and the impact of foreign exchange. See “Note 1: Basis of Presentation” within Item 1 of this Form 10-Q for additional information with respect to Russia. For further discussion on FAS/CAS operating adjustment see the “FAS/CAS operating adjustment” subsection under the “Segment Review” section below. For further discussion on Acquisition accounting adjustments, see the “Acquisition accounting adjustments” subsection under the “Segment Review” section below. Quarter Ended March 31, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Cost of sales Products $ 10,700 $ 9,820 62.2 % 62.5 % Services 2,945 2,740 17.1 % 17.4 % Total cost of sales $ 13,645 $ 12,560 79.3 % 79.9 % Net products cost of sales increased $0.9 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 primarily due to increases at Pratt & Whitney, Collins, and RMD all driven by the products sales changes noted above. Net services cost of sales increased $0.2 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 primarily due to an increase in external services cost of sales at Collins, Pratt & Whitney, and RMD all driven by the services sales changes noted above. Research and Development Quarter Ended March 31, (dollars in millions) 2023 2022 Company-funded $ 607 $ 635 Percentage of net sales 3.5 % 4.0 % Customer-funded (1) $ 1,122 $ 1,086 Percentage of net sales 6.5 % 6.9 % (1) Included in cost of sales in our Condensed Consolidated Statement of Operations. Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected. The decrease in company-funded research and development of $28 million for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily driven by a decrease in net expenses related to the Lower Tier Air and Missile Defense Sensor (LTAMDS) project. The increase in customer-funded research and development of $36 million for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, was primarily driven by higher expenses on various military programs at Collins, partially offset by lower expenses on various programs at RMD and RIS. Selling, General and Administrative Quarter Ended March 31, (dollars in millions) 2023 2022 Selling, general and administrative $ 1,398 $ 1,469 Percentage of net sales 8.1 % 9.3 % Selling, general and administrative expenses decreased $0.1 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 primarily driven by the absence of $71 million of charges recorded in the first quarter of 2022 related to increased estimates for credit losses due to global sanctions on and export controls with respect to Russia. We are continuously evaluating our cost structure and have implemented restructuring actions in an effort to keep our cost structure competitive. As appropriate, the amounts reflected above include the beneficial impact of previous restructuring actions on Selling, general and administrative expenses. 32 Table of Contents Other Income, Net Quarter Ended March 31, (dollars in millions) 2023 2022 Other income, net $ 88 $ 28 Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, and other ongoing and nonrecurring items. The increase in Other income, net of $0.1 billion for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to a gain on sale of land during the first quarter of 2023 and the absence of a loss resulting from the exit of our investment in a Russia-based joint venture at Collins recorded in the quarter ended March 31, 2022. Operating Profit Quarter Ended March 31, (dollars in millions) 2023 2022 Operating profit $ 1,652 $ 1,080 Operating profit margin 9.6 % 6.9 % The increase in Operating profit of $0.6 billion for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily driven by the operating performance of our segments and a decrease in Corporate expenses and other unallocated items, partially offset by the change in our FAS/CAS operating adjustment, all of which are described below in “Segment Review.” Non-service Pension Income Quarter Ended March 31, (dollars in millions) 2023 2022 Non-service pension income $ (444) $ (480) The change in Non-service pension income of $36 million for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily driven by an increase in interest rates during 2022 and prior years’ pension asset returns less than our expected return on plan assets (EROA) assumption, partially offset by an increase in our 2023 EROA assumption. Interest Expense, Net Quarter Ended March 31, (dollars in millions) 2023 2022 Interest expense $ 339 $ 322 Interest income (10) (31) Other non-operating expense (income) (1) (14) 27 Interest expense, net $ 315 $ 318 Average interest expense rate 4.0 % 4.0 % (1) Primarily consists of the gains or losses on assets associated with certain of our nonqualified deferred compensation and employee benefit plans, as well as the gains or losses on liabilities associated with certain of our nonqualified deferred compensation plans and non-operating dividend income. Interest expense, net in the quarter ended March 31, 2023 was relatively consistent with the quarter ended March 31, 2022. The decrease in Interest income of $21 million was primarily due to the absence of certain tax-related interest reserve adjustments recorded in the quarter ended March 31, 2022. The increase in Interest expense of $17 million was primarily due to the long-term debt issuance in the quarter ended March 31, 2023 and the commercial paper activity in the first quarter of 2023. The change in Other non-operating expense (income) of $41 million was primarily driven by a change in the mark-to-market fair value of marketable securities held in trusts associated with certain of our nonqualified deferred compensation and employee benefit plans. 33 Table of Contents Income Taxes Quarter Ended March 31, 2023 2022 Effective income tax rate 16.8 % 9.3 % Our effective tax rate was 16.8% and 9.3% in the quarters ended March 31, 2023 and 2022, respectively. The increase in the effective tax rate for the quarter ended March 31, 2023 as compared to the quarter ended March 31, 2022 is primarily driven by a higher forecasted annualized effective tax rate for 2023 principally due to a lower forecasted Foreign Derived Intangible Income (FDII) benefit in addition to a lower tax benefit from stock based compensation in the current quarter. Net Income from Continuing Operations Attributable to Common Shareowners Quarter Ended March 31, (dollars in millions, except per share amounts) 2023 2022 Net income from continuing operations attributable to common shareowners $ 1,426 $ 1,103 Diluted earnings per share from continuing operations $ 0.97 $ 0.74 Net income from continuing operations attributable to common shareowners for the quarter ended March 31, 2023 includes the following: • acquisition accounting adjustments of $385 million, net of tax, which had an unfavorable impact on diluted earnings per share (EPS) from continuing operations of $0.26. Net income from continuing operations attributable to common shareowners for the quarter ended March 31, 2022 includes the following: • acquisition accounting adjustments of $379 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.25; and • impairment charges and reserve adjustments related to the global sanctions on, and export controls with respect to, Russia of $210 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.14. Net Income Attributable to Common Shareowners Quarter Ended March 31, (dollars in millions, except per share amounts) 2023 2022 Net income attributable to common shareowners $ 1,426 $ 1,084 Diluted earnings per share from operations $ 0.97 $ 0.72 The increase in net income attributable to common shareowners and diluted earnings per share from operations for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily driven by the increases in continuing operations, as discussed above. SEGMENT REVIEW Our operations, for the periods presented herein, are classified into four principal segments: Collins, Pratt & Whitney, RIS, and RMD. Segments are generally based on the management structure of the businesses and the grouping of similar operations, based on capabilities and technologies, where each management organization has general operating autonomy over diversified products and services. Segment total net sales and operating profit include intercompany sales and profit, which are ultimately eliminated within Eliminations and other, which also includes certain smaller non-reportable segments. Segment results exclude certain acquisition accounting adjustments, the FAS/CAS operating adjustment, and certain corporate expenses, as further discussed below. 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 implement the reorganization beginning in July 2023. All segment information included in this Form 10-Q is reflective of the existing four segments of Collins, Pratt & Whitney, RIS, and RMD in accordance with the management structure in place as of March 31, 2023. Given the nature of our business, we believe that total net sales and operating profit (and the related operating profit margin percentage), which we disclose and discuss at the segment level, are most relevant to an understanding of management’s view of our segment performance, as described below. 34 Table of Contents We provide the organic change in Net sales and Operating profit for our segments as discussed above in “Results of Operations.” We believe that these non-GAAP measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability. For Pratt & Whitney only, Other also includes the transactional impact of foreign exchange hedging at Pratt & Whitney Canada due to its significance to Pratt & Whitney’s overall operating results. Total Net Sales. Total net sales by segment were as follows: Quarter Ended March 31, (dollars in millions) 2023 2022 Collins Aerospace $ 5,581 $ 4,824 Pratt & Whitney 5,230 4,529 Raytheon Intelligence & Space 3,565 3,572 Raytheon Missiles & Defense 3,671 3,527 Total segment 18,047 16,452 Eliminations and other (833) (736) Consolidated $ 17,214 $ 15,716 Operating Profit. Operating profit by segment was as follows: Quarter Ended March 31, (dollars in millions) 2023 2022 Collins Aerospace $ 794 $ 440 Pratt & Whitney 415 151 Raytheon Intelligence & Space 324 378 Raytheon Missiles & Defense 328 387 Total segment 1,861 1,356 Eliminations and other 13 (34) Corporate expenses and other unallocated items (1) (43) (136) FAS/CAS operating adjustment 314 378 Acquisition accounting adjustments (493) (484) Consolidated $ 1,652 $ 1,080 (1) 2022 included the net expenses related to the U.S. Army’s LTAMDS project. Beginning in 2023, LTAMDS results are included in the RMD segment. Included in segment operating profit are Estimate at Completion (EAC) adjustments, which relate to changes in operating profit and margin due to revisions to total estimated revenues and costs at completion. These changes may reflect improved or deteriorated operating performance, as well as changes in facts and assumptions related to contract options, contract modifications, incentive and award fees associated with program performance, customer activity levels, and other customer-directed changes. For a full description of our EAC process, refer to “Note 4: Changes in Contract Estimates at Completion” within Item 1 of this Form 10-Q. Given that we have thousands of individual contracts, and given the types and complexity of the assumptions and estimates we must make on an on-going basis, and the nature of the work required to be performed under our contracts, we have both favorable and unfavorable EAC adjustments in the ordinary course. We had the following aggregate EAC adjustments for the periods presented: Quarter Ended March 31, (dollars in millions) 2023 2022 Gross favorable $ 303 $ 374 Gross unfavorable (427) (338) Total net EAC adjustments $ (124) $ 36 The change in net EAC adjustments of $160 million in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to unfavorable changes in net EAC adjustments of $61 million at RMD, and $49 million at RIS spread across numerous individual programs with no individual or common significant driver. Significant EAC adjustments, when they occur, are discussed in each business segment’s discussion below. 35 Table of Contents Backlog and Bookings. Total backlog was approximately $180 billion and $175 billion as of March 31, 2023 and December 31, 2022, respectively, which includes defense backlog of $71 billion and $69 billion as of March 31, 2023 and December 31, 2022, respectively. Our defense operations consist primarily of our RIS and RMD businesses and operations in the defense businesses within our Collins and Pratt & Whitney segments. Defense bookings were approximately $12 billion and $8 billion for the quarters ended March 31, 2023 and 2022, respectively. Bookings are impacted by the timing and amounts of awards in a given period, which are subject to numerous factors, including: the desired capability by the customer and urgency of customer needs, customer budgets and other fiscal constraints, political and economic and other environmental factors, the timing of customer negotiations, and the timing of customer and governmental approvals and notifications. In addition, due to these factors, quarterly bookings tend to fluctuate from period to period, particularly on a segment basis. Collins Aerospace Quarter Ended March 31, (dollars in millions) 2023 2022 Change Net sales $ 5,581 $ 4,824 16 % Operating profit 794 440 80 % Operating profit margins 14.2 % 9.1 % Quarter Ended March 31, 2023 Compared with Quarter Ended March 31, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 811 $ (27) $ — $ (27) $ 757 Operating profit 212 (1) — 143 354 (1) See “Segment Review” above for definition of organic. A reconciliation of these measures to reported U.S. GAAP amounts is provided in the table above. The organic sales increase of $0.8 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 primarily relates to higher commercial aerospace aftermarket sales of $0.5 billion, including increases across all aftermarket sales channels, and higher commercial aerospace OEM sales of $0.2 billion. These increases were principally driven by the recovery of commercial air traffic which has resulted in an increase in flight hours, aircraft fleet utilization and OEM production rates. Military sales increased $0.1 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 primarily due to higher material receipts and increased production volume. The organic operating profit increase of $0.2 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to higher commercial aerospace operating profit of $0.3 billion, principally driven by the higher commercial aerospace aftermarket sales discussed above as well as favorable mix. This increase in commercial aerospace operating profit was partially offset by higher production costs and selling, general and administrative expenses. The increase in Other operating profit of $0.1 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to the absence of $141 million of pretax charges recorded in the first quarter of 2022 related to increased estimates for credit losses, inventory reserves, recognition of purchase order obligations, and a loss resulting from the exit of our investment in a Russia-based joint venture, all due to global sanctions on and export controls with respect to Russia. See “Note 1: Basis of Presentation” within Item 1 of this Form 10-Q for additional information. 36 Table of Contents Pratt & Whitney Quarter Ended March 31, (dollars in millions) 2023 2022 Change Net sales $ 5,230 $ 4,529 15 % Operating profit 415 151 175 % Operating profit margins 7.9 % 3.3 % Quarter Ended March 31, 2023 Compared with Quarter Ended March 31, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 710 $ — $ — $ (9) $ 701 Operating profit 111 — (17) 170 264 (1) See “Segment Review” above for definition of organic. A reconciliation of these measures to reported U.S. GAAP amounts is provided in the table above. The organic sales increase of $0.7 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 reflects higher commercial aftermarket sales of $0.3 billion primarily due to an increase in volume and favorable mix as the commercial aerospace environment continues to recover. The increase also includes higher commercial OEM sales of $0.2 billion primarily driven by volume and favorable mix on commercial engine shipments and higher military sales of $0.2 billion primarily driven by the F135 production contract award in the second quarter of 2022 and higher F135 sustainment volume. The organic operating profit increase of $0.1 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily driven by higher commercial aerospace operating profit of $0.1 billion principally due to the aftermarket sales increase discussed above and includes a $60 million favorable contract matter. These increases were partially offset by lower commercial OEM operating profit driven by the volume increases noted above. T he increase in operating profit also includes higher military operating profit primarily driven by the sales increases discussed above. The increase in Other operating profits of $0.2 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to the absence of $155 million of pretax charges recorded the first quarter of 2022 related to impairment of customer financing assets for products under lease, increased estimates for credit losses, inventory reserves, and recognition of purchase order obligations, all due to global sanctions on and export controls with respect to Russia. See “Note 1: Basis of Presentation” within Item 1 of this Form 10-Q for additional information. Defense Bookings – In addition to a number of smaller bookings, in the quarter ended March 31, 2023, Pratt & Whitney booked $308 million for F119 sustainment, $224 million for F117 sustainment, $217 million for tanker production Lots 8 and 9, and $213 million for F135 sustainment. Raytheon Intelligence & Space Quarter Ended March 31, (dollars in millions) 2023 2022 Change Net sales $ 3,565 $ 3,572 — % Operating profit 324 378 (14) % Operating profit margins 9.1 % 10.6 % Bookings $ 4,295 $ 2,592 66 % Quarter Ended March 31, 2023 Compared with Quarter Ended March 31, 2022 Factors Contributing to Total Change in Net Sales (dollars in millions) Organic (1) Acquisitions / Divestitures, net Other Total Change Net sales $ 6 $ — $ (13) $ (7) (1) See “Segment Review” above for definition of organic. A reconciliation of this measure to the reported U.S. GAAP amount is provided in the table above. Factors Contributing to Change in Operating Profit (dollars in millions) Volume Net change in EAC adjustments Acquisitions / Divestitures, net Mix and other performance Total Change Operating profit $ 4 $ (49) $ — $ (9) $ (54) 37 Table of Contents Organic sales in the quarter ended March 31, 2023 were relatively consistent with the quarter ended March 31, 2022. Included in the organic change in sales were higher Cyber and Services sales (formerly Cyber, Training and Services), and lower Command, Control and Communications sales. The decrease in operating profit of $0.1 billion, and the related decrease in operating profit margins, in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, were primarily due to the net unfavorable change in EAC adjustments of $49 million, which was spread across numerous programs, with no individual common or significant driver. Backlog and Bookings – Backlog was $17 billion at March 31, 2023 and $16 billion at December 31, 2022. In addition to a number of smaller bookings, in the quarter ended March 31, 2023, RIS booked $1.9 billion on a number of classified contracts, $650 million on Next Generation Jammer Mid-Band (NGJ-MB) for the U.S. Navy and the government of Australia, $275 million on a seven-vehicle missile tracking satellite constellation for the Space Development Agency, and $266 million to deliver airborne radars to an international customer. Raytheon Missiles & Defense Quarter Ended March 31, (dollars in millions) 2023 2022 Change Net sales $ 3,671 $ 3,527 4 % Operating profit 328 387 (15) % Operating profit margins 8.9 % 11.0 % Bookings $ 5,200 $ 4,100 27 % Quarter Ended March 31, 2023 Compared with Quarter Ended March 31, 2022 Factors Contributing to Total Change in Net Sales (dollars in millions) Organic (1) Acquisitions / Divestitures, net Other Total Change Net sales $ 160 $ (7) $ (9) $ 144 (1) See “Segment Review” above for definition of organic. A reconciliation of this measure to the reported U.S. GAAP amount is provided in the table above. Factors Contributing to Change in Operating Profit (dollars in millions) Volume Net change in EAC adjustments Acquisitions / Divestitures, net Mix and other performance Total Change Operating profit $ 30 $ (61) $ (1) $ (27) $ (59) The organic sales increase of $0.2 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to higher net sales of $0.1 billion from our Advanced Technologies programs, and $0.1 billion from our Air Power programs. The increase in Advanced Technologies programs includes higher net sales on certain classified programs awarded in 2022. The increase in Air Power programs includes higher net sales on the StormBreaker program driven by the award in the first quarter of 2023, primarily driven by the recognition of previously deferred precontract costs. The decrease in operating profit of $0.1 billion in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, was primarily due to a net unfavorable change in EAC adjustments of $61 million and mix and other performance of $27 million, partially offset by the impact of higher volume of $30 million. The net change in EAC adjustments was driven primarily by an unfavorable impact related to a significant contract option exercised in the first quarter of 2023. The unfavorable change in mix and other performance was spread across numerous programs and includes higher development program mix . The increase in volume was principally driven by the higher net sales on the Advanced Technologies and Air Power programs discussed above. The decrease in operating profit margins in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, was primarily due to the net change in EAC adjustments and the change in mix and other performance discussed above. Backlog and Bookings – Backlog was $35 billion at March 31, 2023 and $34 billion at December 31, 2022. In addition to a number of smaller bookings, in the quarter ended March 31, 2023, RMD booked $1.2 billion to provide Patriot Air Defense system to Switzerland, $619 million on the SPY-6 Hardware Production and Sustainment contract for the U.S. Navy, $320 million on StormBreaker for the U.S. Air Force and Navy, $234 million on Naval Strike Missiles (NSM) for the U.S. Navy, and $212 million on Excalibur for the U.S. Army and international customers. In addition to the bookings noted above, RMD booked $827 million on a number of classified contracts. 38 Table of Contents Corporate and Eliminations and other Eliminations and other reflects the elimination of sales, other income, and operating profit transacted between segments, as well as the operating results of certain smaller non-reportable business segments. Corporate expenses and other unallocated items consists of costs and certain other unallowable corporate costs not considered part of management’s evaluation of reportable segment operating performance and certain reserves. In addition, in 2022, net costs associated with corporate research and development related to the LTAMDS program were included in Corporate Eliminations and other. Beginning in 2023, the remaining net costs associated with the LTAMDS program are within the RMD segment. Net Sales Operating Profit Quarter Ended March 31, Quarter Ended March 31, (dollars in millions) 2023 2022 2023 2022 Eliminations and other $ (833) $ (736) $ 13 $ (34) Corporate expenses and other unallocated items — — (43) (136) The increase in eliminations and other sales of $97 million in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to an increase in intersegment eliminations, principally driven by Collins and RIS. The change in eliminations and other operating profit of $47 million in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to a gain on sale of land in the first quarter of 2023. The change in corporate expenses and other unallocated items operating profit of $93 million in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was primarily due to a decrease in expenses related to the LTAMDS project, which are now included in the RMD segment, and lower restructuring costs. FAS/CAS operating adjustment We present a FAS/CAS operating adjustment outside of segment results, which represents the difference between the service cost component of our pension and postretirement benefit (PRB) expense under the Financial Accounting Standards (FAS) requirements of U.S. 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. The components of the FAS/CAS operating adjustment were as follows: Quarter Ended March 31, (dollars in millions) 2023 2022 FAS service cost (expense) $ (40) $ (91) CAS expense 354 469 FAS/CAS operating adjustment $ 314 $ 378 The change in our FAS/CAS operating adjustment of $64 million in the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was driven by a $115 million decrease in CAS expense, partially offset by a $51 million decrease in FAS service cost. The decrease in CAS expense was primarily due to changes to the Raytheon Company domestic pension plans announced in December 2020 that was effective December 31, 2022, and the recognition of historical CAS gain/loss experience. The decrease in FAS service cost was primarily due to changes to the Raytheon Company domestic pension plans announced in December 2020 that was effective December 31, 2022. Refer to “Note 9: Employee Benefit Plans” within Item 1 of this Form 10-Q for additional information on the Raytheon Company domestic pension plan change. Acquisition accounting adjustments Acquisition accounting adjustments include the amortization of acquired intangible assets related to acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through acquisitions, the amortization of customer contractual obligations related to loss making or below market contracts acquired, and goodwill impairment. These adjustments are not considered part of management’s evaluation of segment results . 39 Table of Contents The components of Acquisition accounting adjustments were as follows: Quarter Ended March 31, (dollars in millions) 2023 2022 Amortization of acquired intangibles $ (495) $ (477) Amortization of property, plant and equipment fair value adjustment (16) (32) Amortization of customer contractual obligations related to acquired loss-making and below-market contracts 18 25 Acquisition accounting adjustments $ (493) $ (484) Acquisition accounting adjustments related to acquisitions in each segment were as follows: Quarter Ended March 31, (dollars in millions) 2023 2022 Collins Aerospace $ (199) $ (206) Pratt & Whitney (64) (57) Raytheon Intelligence & Space (80) (84) Raytheon Missiles & Defense (150) (137) Total segment (493) (484) Eliminations and other — — Acquisition accounting adjustments $ (493) $ (484) Acquisition accounting adjustments in the quarter ended March 31, 2023 were relatively consistent with the quarter ended March 31, 2022. LIQUIDITY AND FINANCIAL CONDITION (dollars in millions) March 31, 2023 December 31, 2022 Cash and cash equivalents $ 5,893 $ 6,220 Total debt 34,486 31,914 Total equity 74,347 74,178 Total capitalization (total debt plus total equity) 108,833 106,092 Total debt to total capitalization 32 % 30 % We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our principal source of liquidity is cash flows from operating activities. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in and divestitures of businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, redemptions of debt, and the ability to attract long-term capital at satisfactory terms. At March 31, 2023, we had cash and cash equivalents of $5.9 billion, of which approximatel y 34% was held by RTC’s foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The Company does not intend to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. Taxes associated with the future remittance of these earnings have been recorded. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, RTC will continue to permanently reinvest these earnings. Historically, our strong credit ratings and financial position have enabled us to issue long-term debt at favorable market rates. As of March 31, 2023, 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 expires in September 2023. As of March 31, 2023, there were no borrowings outstanding under these agreements. From time to time, we use commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments, and repurchases of our common stock. The commercial paper notes have original maturities of not more than 364 days from the date of issuance. As of March 31, 2023, 40 Table of Contents our maximum commercial paper borrowing limit was $5.0 billion as the commercial paper is backed by our $5.0 billion revolving credit agreement. We had $0.1 billion of commercial paper outstanding at March 31, 2023. At March 31, 2023 short-term commercial paper borrowings outstanding had a weighted-average interest rate of 4.3%. There were no repayments of long-term debt during the quarters ended March 31, 2023 and 2022, and there were no issuances of long-term debt during the quarter ended March 31, 2022. We had the following issuances of long-term debt during the quarter ended March 31, 2023: Issuance Date Description of Notes Aggregate Principal Balance (in millions) February 27, 2023 5.000% notes due 2026 (1) $ 500 5.150% notes due 2033 (1) 1,250 5.375% notes due 2053 (1) 1,250 (1) The net proceeds from these issuances will be used to fund repayment at maturity of the 3.650% notes due August 16, 2023 and the 3.700% notes due December 15, 2023, with the remaining proceeds to be used for general corporate purposes. We have an existing universal shelf registration statement, which we filed with the Securities and Exchange Commission (SEC) on September 22, 2022, for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement. The Company offers voluntary supply chain finance (SCF) programs with global financial institutions which enables our suppliers, at their sole discretion, to sell their receivables from the Company to the financial institutions at a rate that leverages our credit rating, which might be beneficial to them. Our suppliers’ participation in the SCF programs does not impact or change our terms and conditions with those suppliers, and therefore, we have no economic interest in a supplier’s decision to participate in the programs. In addition, we do not pay for any of the costs of the programs incurred by those suppliers that choose to participate, and have no direct financial relationship with the financial institutions, as it relates to sales of receivables made by those suppliers. As such, the SCF programs do not impact our working capital, cash flows, or overall liquidity. We believe our cash on hand and future operating cash flows will be sufficient to meet our future operating cash needs. Further, we continue to have access to the commercial paper markets and our existing credit facilities, and our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate. Cash Flow - Operating Activities Quarter Ended March 31, (dollars in millions) 2023 2022 Net cash flows (used in) provided by operating activities from continuing operations $ (863) $ 476 Net cash (used in) provided by operating activities from continuing operations in the quarter ended March 31, 2023 was $1.3 billion lower than the same period in 2022, primarily driven by an unfavorable impact to cash flow from accounts receivable as a result of increased sales volume and related factoring activity, and an increase in contract assets driven by sales in excess of billings at RMD, Pratt & Whitney, and RIS. These impacts were partially offset by the increase in net income after adjustments for depreciation and amortization, deferred income tax benefit, stock compensation costs, and net periodic pension and other postretirement income. Included in the change in accounts payable and accrued liabilities was an increase in collaborator payables at Pratt & Whitney, which was mostly offset by an increase in collaborator receivables, included in accounts receivable, due to the timing of settlements. The Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Factoring activity resulted in a decrease of approximately $0.4 billion in cash provided by operating activities during the quarter ended March 31, 2023, compared to an increase of approximately $0.5 billion in cash provided by operating activities during the quarter ended March 31, 2022. Factoring activity includes amounts factored on certain aerospace receivables at the customers’ request for which we may be compensated by the customer. We made net tax payments of $171 million and $133 million in the quarters ended March 31, 2023 and 2022, respectively. 41 Table of Contents Cash Flow - Investing Activities Quarter Ended March 31, (dollars in millions) 2023 2022 Net cash flows used in investing activities from continuing operations $ (579) $ (518) Our investing activities primarily include capital expenditures, cash investments in customer financing assets, investments in and dispositions of businesses, payments related to our collaboration intangible assets, and contractual rights to provide product on new aircraft platforms, and settlements of derivative contracts not designated as hedging instruments. The $0.1 billion increase in cash flows used in investing activities from continuing operations in the quarter ended March 31, 2023 compared to in the quarter ended March 31, 2022 primarily related to an increase in capital expenditures and other intangible assets, both of which are described below, partially offset by proceeds from a land sale in the first quarter of 2023. Capital expenditures in the quarter ended March 31, 2023 increased by $81 million from the quarter ended March 31, 2022 primarily due to investments in production facilities at Pratt & Whitney. Customer financing assets receipts (payments), net were receipts of $28 million and payments of $19 million in the quarters ended March 31, 2023 and 2022, respectively, and included purchases and sales of engines in our leased asset pool as well as customer financing activity. During the quarters ended March 31, 2023 and 2022, we increased other intangible assets by approximately $154 million and $82 million, respectively, primarily related to collaboration payment commitments made under our 2012 agreement to acquire Rolls-Royce’s collaboration interests in International Aero Engines AG (IAE) and exclusivity payments made on contractual commitments included within intangible assets. As discussed in “Note 11: Financial Instruments” within Item 1 of this Form 10-Q, 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. During the quarters ended March 31, 2023 and 2022, we had net cash payments of $13 million and $33 million, respectively, from the settlement of these derivative instruments not designated as hedging instruments. Cash Flow - Financing Activities Quarter Ended March 31, (dollars in millions) 2023 2022 Net cash flows provided by (used in) financing activities from continuing operations $ 1,096 $ (1,745) Our financing activities primarily include the issuance and repayment of commercial paper and other short-term and long-term debt, payment of dividends, and stock repurchases. The $2.8 billion change in cash flows provided by (used in) financing activities from continuing operations in the quarter ended March 31, 2023 compared to in the quarter ended March 31, 2022 was primarily driven by long-term debt issuances of $3.0 billion, offset by repayments of commercial paper, net of $0.4 billion. Refer to “Note 8: Borrowings and Lines of Credit” within Item 1 of this Form 10-Q for additional information on debt issuances and commercial paper. At March 31, 2023, management had remaining authority to repurchase approximately $5.4 billion of our common stock under the December 12, 2022 share repurchase program. Under the 2022 program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs, and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. We may also reacquire shares outside of the program from time to time in connection with the surrender of shares to cover taxes on vesting of restricted stock and as required under our employee savings plan. Our ability to repurchase shares is subject to applicable law. 42 Table of Contents Our share repurchases were as follows: Quarter Ended March 31, (dollars in millions; shares in thousands) 2023 2022 $ Shares $ Shares Shares of common stock repurchased (1) $ 562 5,714 $ 743 7,758 (1) Relates to share repurchases that were settled in cash during the period. Our Board of Directors authorized the following cash dividends: Quarter Ended March 31, (dollars in millions, except per share amounts) 2023 2022 Dividends paid per share of common stock $ 0.550 $ 0.510 Total dividends paid $ 790 $ 745 On April 24, 2023, the Board of Directors declared a dividend of $0.59 per share payable June 15, 2023 to shareowners of record at the close of business on May 19, 2023. Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no significant change in our exposure to market risk during the quarter ended March 31, 2023. For discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our 2022 Form 10-K.