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. Effective July 17, 2023, we changed our legal name from Raytheon Technologies Corporation to RTX Corporation. 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,” and “RTX” mean RTX Corporation and its subsidiaries. Effective July 1, 2023, we streamlined the structure of our core businesses from four principal business segments to three principal business segments: Collins Aerospace, Pratt & Whitney, and Raytheon. All segment information included in this Form 10-Q is reflective of the four segments of Collins, Pratt & Whitney, RIS, and RMD in accordance with the management structure in place as of June 30, 2023. See “Note 20: Subsequent Events” within Item 1 of this Form 10-Q for additional information. 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 June 30, 2023 and 2022 with respect to RIS or RMD, we are referring to their July 2, 2023 and July 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, 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. Our defense operations 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 31 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. Pratt & Whitney Geared TurboFan Matter. As described further in “Note 15: Commitments and Contingencies,” within Item 1 of this Form 10-Q, Pratt & Whitney has determined that a rare condition in powdered metal used to manufacture certain engine parts will require accelerated fleet inspection. This does not impact engines currently being produced. As a result, the business anticipates that a significant portion of the PW1100G-JM fleet, which powers the A320neo, will require engine removals and inspections within the next nine to twelve months, including approximately 200 accelerated removals by mid-September of this year. Please refer to “Note 15: Commitments and Contingencies” for additional information. 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 RTX 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 RTX products and services. RTX 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 RTX, 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. In addition, certain programs require approvals by foreign governments and those approvals may not be obtained or may be revoked. 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 June 30, 2023, our Contract liabilities include approximately $405 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. We believe the long-term outlook for the aerospace industry remains positive due to the fundamental drivers of air travel 32 Table of Contents demand, and expect to fully return to and/or exceed pre-pandemic levels as we exit 2023. 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. 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 six months ended June 30, 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 June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Net sales $ 18,315 $ 16,314 $ 35,529 $ 32,030 The factors contributing to the change year-over-year in total net sales for the quarter and six months ended June 30, 2023 are as follows: (dollars in millions) Quarter Ended June 30, 2023 Six Months Ended June 30, 2023 Organic (1) $ 2,047 $ 3,609 Acquisitions and divestitures, net (48) (82) Other 2 (28) Total change $ 2,001 $ 3,499 (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 $2.0 billion organically in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 primarily due to higher organic sales of $0.9 billion at Collins, $0.7 billion at Pratt & Whitney, and $0.5 billion at RMD. 33 Table of Contents Net sales increased $3.6 billion organically in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily due to higher organic sales of $1.7 billion at Collins, $1.4 billion at Pratt & Whitney, and $0.6 billion at RMD. See “Segment Review” below for further information by segment. Quarter Ended June 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Net Sales Products $ 13,411 $ 12,258 73.2 % 75.1 % Services 4,904 4,056 26.8 % 24.9 % Total net sales $ 18,315 $ 16,314 100 % 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 $1.2 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 primarily due to increases in external products sales of $0.6 billion at Collins, $0.4 billion at RMD, and $0.2 billion at Pratt & Whitney. Net services sales increased $0.8 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 primarily due to increases in external services sales of $0.5 billion at Pratt & Whitney and $0.2 billion at Collins. Six Months Ended June 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Net Sales Products $ 26,198 $ 24,120 73.7 % 75.3 % Services 9,331 7,910 26.3 % 24.7 % Total net sales $ 35,529 $ 32,030 100 % 100 % Net products sales increased $2.1 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 due to increases in external products sales of $1.1 billion at Collins, $0.6 billion at Pratt & Whitney, and $0.5 billion at RMD, partially offset by a decrease in external products sales of $0.2 billion at RIS. Net services sales increased $1.4 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 due to increases in external services sales of $0.8 billion at Pratt & Whitney, $0.4 billion at Collins, $0.1 billion at RMD, and $0.1 billion at RIS. Our sales to major customers were as follows: Quarter Ended June 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Sales to the U.S. government (1) $ 7,958 $ 7,559 43.5 % 46.3 % Foreign military sales through the U.S. government 1,241 1,181 6.8 % 7.2 % Foreign government direct commercial sales 1,089 1,095 5.9 % 6.7 % Commercial aerospace and other commercial sales 8,027 6,479 43.8 % 39.7 % Total net sales $ 18,315 $ 16,314 100 % 100 % (1) Excludes foreign military sales through the U.S. government. Six Months Ended June 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Sales to the U.S. government (1) $ 15,515 $ 14,897 43.7 % 46.5 % Foreign military sales through the U.S. government 2,503 2,357 7.0 % 7.4 % Foreign government direct commercial sales 2,093 2,054 5.9 % 6.4 % Commercial aerospace and other commercial sales 15,418 12,722 43.4 % 39.7 % Total net sales $ 35,529 $ 32,030 100 % 100 % (1) Excludes foreign military sales through the U.S. government. 34 Table of Contents Cost of Sales Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Total cost of sales $ 14,518 $ 12,856 $ 28,163 $ 25,416 Percentage of net sales 79.3 % 78.8 % 79.3 % 79.4 % The factors contributing to the change year-over-year in total cost of sales for the quarter and six months ended June 30, 2023 are as follows: (dollars in millions) Quarter Ended June 30, 2023 Six Months Ended June 30, 2023 Organic (1) $ 1,536 $ 2,803 Acquisitions and divestitures, net (48) (73) Restructuring 20 42 FAS/CAS operating adjustment 61 118 Acquisition accounting adjustments 42 50 Other 51 (193) Total change $ 1,662 $ 2,747 (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 $1.5 billion for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, was primarily driven by the organic sales increases at Pratt & Whitney, Collins, and RMD noted above. The increase in other cost of sales of $0.1 billion for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, was primarily driven by charges at Pratt & Whitney related to a customer insolvency in the quarter ended June 30, 2023. The organic increase in total cost of sales of $2.8 billion for the six months ended June 30, 2023 compared to the six months ended June 30, 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 six months ended June 30, 2023 compared to the six months ended June 30, 2022, was primarily driven by the absence of charges recorded during the first quarter of 2022 at Pratt & Whitney and Collins related to global sanctions on and export controls with respect to Russia and the impacts of foreign exchange, partially offset by charges at Pratt & Whitney related to a customer insolvency in the quarter ended June 30, 2023. 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 June 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Cost of sales Products $ 11,089 $ 10,040 60.5 % 61.5 % Services 3,429 2,816 18.7 % 17.3 % Total cost of sales $ 14,518 $ 12,856 79.3 % 78.8 % Net products cost of sales increased $1.0 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, primarily due to increases in external products cost of sales at Collins, RMD, and Pratt & Whitney, all driven by the products sales changes noted above. Net services cost of sales increased $0.6 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, primarily due to increases in external services cost of sales at Pratt & Whitney and Collins, all driven by the services sales changes noted above. 35 Table of Contents Six Months Ended June 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Cost of sales Products $ 21,789 $ 19,860 61.3 % 62.0 % Services 6,374 5,556 17.9 % 17.3 % Total cost of sales $ 28,163 $ 25,416 79.3 % 79.4 % Net products cost of sales increased $1.9 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily due to increases in external products cost of sales at Collins, Pratt & Whitney, and RMD all driven by the products sales changes noted above. Net services cost of sales increased $0.8 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily due to increases in external services cost of sales at Pratt & Whitney, Collins, RIS, and RMD all driven by the services sales changes noted above. Research and Development Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Company-funded $ 729 $ 698 $ 1,336 $ 1,333 Percentage of net sales 4.0 % 4.3 % 3.8 % 4.2 % Customer-funded (1) $ 1,188 $ 1,089 $ 2,310 $ 2,175 Percentage of net sales 6.5 % 6.7 % 6.5 % 6.8 % (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 increase in company-funded research and development of $31 million for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was primarily driven by higher program expenses at Collins, and an increase in research and development spending at Pratt & Whitney on various commercial and military programs, partially offset by a decrease in net expenses related to the Lower Tier Air and Missile Defense Sensor (LTAMDS) project, and lower research and development spending at RIS across various programs. The increase in customer-funded research and development of $99 million for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, was primarily driven by higher expenses on various military and commercial programs at Collins and increased spending at Pratt & Whitney on military programs. Company- funded research and development for the six months ended June 30, 2023 was relatively consistent with the six months ended June 30, 2022. Included in the change in company-funded research and development were higher program expenses at Collins, and an increase in research and development spending at Pratt & Whitney on various commercial and military programs, mostly offset by a decrease in net expenses related to the LTAMDS project, and lower research and development spending at RIS across various programs. The increase in customer-funded research and development of $135 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily driven by higher expenses on various military and commercial programs at Collins and increased spending at Pratt & Whitney on military programs, partially offset by lower expenses on various programs at RIS. Selling, General and Administrative Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Selling, general and administrative $ 1,635 $ 1,424 $ 3,033 $ 2,893 Percentage of net sales 8.9 % 8.7 % 8.5 % 9.0 % Selling, general and administrative expenses increased $0.2 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, primarily driven by a $0.1 billion charge at our Pratt & Whitney segment related to a customer insolvency in the quarter ended June 30, 2023 and increased employee-related costs. 36 Table of Contents Selling, general and administrative expenses increased $0.1 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by a $0.1 billion charge at our Pratt & Whitney segment related to a customer insolvency in the quarter ended June 30, 2023 and increased employee-related costs, partially offset 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. See “Note 1: Basis of Presentation” within Item 1 of this Form 10-Q for additional information on Russia sanctions. 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. Other Income, Net Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Other income, net $ 25 $ 17 $ 113 $ 45 Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, and other ongoing and non-recurring items. Other income, net for the quarter ended June 30, 2023 was relatively consistent with the quarter ended June 30, 2022. Included in the change in other income was the absence of $69 million of charges associated with the disposition of two non-core businesses at Collins in the second quarter of 2022, which was partially offset by a net unfavorable year-over-year impact of foreign exchange gains and losses of $27 million, with remaining change spread across multiple items with no common or significant driver. The increase in Other income, net of $68 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to the absence of $69 million of charges associated with the disposition of two non-core businesses at Collins in the second quarter of 2022 and a $68 million gain on sale of land during the first quarter of 2023, partially offset by a net unfavorable year-over-year impact of foreign exchange gains and losses of $44 million, with remaining change spread across multiple items with no common or significant driver. Operating Profit Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Operating profit $ 1,458 $ 1,353 $ 3,110 $ 2,433 Operating profit margin 8.0 % 8.3 % 8.8 % 7.6 % The increase in Operating profit of $0.1 billion for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was primarily driven by the operating performance of our segments, partially offset by the change in our FAS/CAS operating adjustment, both of which are described below in “Segment Review”. The increase in Operating profit of $0.7 billion for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily driven by the operating performance of our segments, partially offset by the change in our FAS/CAS operating adjustment, both of which are described below in “Segment Review.” Non-service Pension Income Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Non-service pension income $ (447) $ (474) $ (891) $ (954) The change in Non-service pension income of $27 million for the quarter ended June 30, 2023 compared to the quarter ended June 30, 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. The change in Non-service pension income of $63 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily driven by an increase in interest rates during 2022 and prior years’ pension asset returns less than our EROA assumption, partially offset by an increase in our 2023 EROA assumption. 37 Table of Contents Interest Expense, Net Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Interest expense $ 372 $ 320 $ 711 $ 642 Interest income (17) (13) (27) (44) Other non-operating expense (income) (1) (22) 22 (36) 49 Interest expense, net $ 333 $ 329 $ 648 $ 647 Average interest expense rate 4.2 % 4.0 % 4.1 % 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 June 30, 2023 was relatively consistent with the quarter ended June 30, 2022. The increase in Interest expense of $52 million was primarily due to the long-term debt issuance in the first quarter of 2023 and the increase in commercial paper activity in 2023. The change in Other non-operating expense (income) of $44 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, and an increase in non-operating dividend income. Interest expense, net in the six months ended June 30, 2023 was relatively consistent with the six months ended June 30, 2022. The change in Other non-operating expense (income) of $85 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, and an increase in non-operating dividend income. The increase in Interest expense of $69 million was primarily due to the long-term debt issuance in the first quarter of 2023 and the increased commercial paper activity in 2023. Income Taxes Quarter Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Effective income tax rate 13.5 % 10.7 % 15.3 % 10.1 % Our effective tax rate for the quarter and six months ended June 30, 2023 was 13.5% and 15.3% , respectively, as compared to 10.7% and 10.1% for the quarter and six months ended June 30, 2022, respectively. The increase in the 2023 effective tax rates for both the quarter and year to date periods as compared to respective prior year periods 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, the effective tax rate for the six months ended June 30, 2023 reflects a lower tax benefit from stock based compensation as compared to the six months ended June 30, 2022. Net Income from Continuing Operations Attributable to Common Shareowners Quarter Ended June 30, Six Months Ended June 30, (dollars in millions, except per share amounts) 2023 2022 2023 2022 Net income from continuing operations attributable to common shareowners $ 1,327 $ 1,304 $ 2,753 $ 2,407 Diluted earnings per share from continuing operations $ 0.90 $ 0.88 $ 1.87 $ 1.61 Net income from continuing operations attributable to common shareowners for the quarter ended June 30, 2023 includes the following: • acquisition accounting adjustments of $384 million, net of tax, which had an unfavorable impact on diluted earnings per share (EPS) from continuing operations of $0.26; and • charges on our contract assets and customer financing assets related to a customer insolvency of $114 million, net of tax and noncontrolling interest, which had an unfavorable impact on diluted EPS from continuing operations of $0.08. Net income from continuing operations attributable to common shareowners for the quarter ended June 30, 2022 includes the following: • acquisition accounting adjustments of $349 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.23. 38 Table of Contents Net income from continuing operations attributable to common shareowners for the six months ended June 30, 2023 includes the following: • acquisition accounting adjustments of $769 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.52; and • charges on our contract assets and customer financing assets related to a customer insolvency of $114 million, net of tax and noncontrolling interest, which had an unfavorable impact on diluted EPS from continuing operations of $0.08. Net income from continuing operations attributable to common shareowners for the six months ended June 30, 2022 includes the following: • acquisition accounting adjustments of $727 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.49; 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 June 30, Six Months Ended June 30, (dollars in millions, except per share amounts) 2023 2022 2023 2022 Net income attributable to common shareowners $ 1,327 $ 1,304 $ 2,753 $ 2,388 Diluted earnings per share from operations $ 0.90 $ 0.88 $ 1.87 $ 1.60 The increase in net income attributable to common shareowners and diluted earnings per share from operations for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 and for the six months ended June 30, 2023 compared to the six months ended June 30, 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. Effective July 1, 2023, we streamlined the structure of our core businesses from four principal business segments to three principal business segments: Collins Aerospace, Pratt & Whitney, and Raytheon. All segment information included in this Form 10-Q is reflective of the four segments of Collins, Pratt & Whitney, RIS, and RMD in accordance with the management structure in place as of June 30, 2023. See “Note 20: Subsequent Events” within Item 1 of this Form 10-Q for additional information. 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. 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. 39 Table of Contents Total Net Sales. Total net sales by segment were as follows: Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Collins Aerospace $ 5,850 $ 5,011 $ 11,431 $ 9,835 Pratt & Whitney 5,701 4,969 10,931 9,498 Raytheon Intelligence & Space 3,655 3,570 7,220 7,142 Raytheon Missiles & Defense 4,000 3,558 7,671 7,085 Total segment 19,206 17,108 37,253 33,560 Eliminations and other (891) (794) (1,724) (1,530) Consolidated $ 18,315 $ 16,314 $ 35,529 $ 32,030 Operating Profit. Operating profit by segment was as follows: Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Collins Aerospace $ 821 $ 546 $ 1,615 $ 986 Pratt & Whitney 230 302 645 453 Raytheon Intelligence & Space 291 315 615 693 Raytheon Missiles & Defense 415 348 743 735 Total segment 1,757 1,511 3,618 2,867 Eliminations and other (60) (47) (47) (81) Corporate expenses and other unallocated items (1) (59) (42) (102) (178) FAS/CAS operating adjustment 309 379 623 757 Acquisition accounting adjustments (489) (448) (982) (932) Consolidated $ 1,458 $ 1,353 $ 3,110 $ 2,433 (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 June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Gross favorable $ 301 $ 289 $ 604 $ 663 Gross unfavorable (331) (330) (758) (668) Total net EAC adjustments $ (30) $ (41) $ (154) $ (5) Net EAC adjustments in the quarter ended June 30, 2023 were relatively consistent with the quarter ended June 30, 2022. Included in the change in net EAC adjustments were favorable changes in net EAC adjustments of $63 million at RMD which was spread across numerous individual programs, partially offset by unfavorable changes in net EAC adjustments of $64 million at Pratt & Whitney principally driven by the absence of a $50 million favorable contract adjustment resulting from a contract modification on a commercial aftermarket program in the second quarter of 2022. The change in net EAC adjustments of $149 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to unfavorable changes in net EAC adjustments of $95 million at Pratt & Whitney principally driven by the absence of a $50 million favorable contract adjustment resulting from a contract modification on a commercial aftermarket program in the second quarter of 2022, and unfavorable changes in net EAC adjustments of $30 million at RIS spread across numerous individual programs. 40 Table of Contents Significant EAC adjustments, when they occur, are discussed in each business segment’s discussion below. Backlog and Bookings. Total backlog was approximately $185 billion and $175 billion as of June 30, 2023 and December 31, 2022, respectively, which includes defense backlog of $73 billion and $69 billion as of June 30, 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 $13 billion for both the quarters ended June 30, 2023 and 2022, and approximately $25 billion and $22 billion for the six months ended June 30, 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 June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 Change 2023 2022 Change Net sales $ 5,850 $ 5,011 17 % $ 11,431 $ 9,835 16 % Operating profit 821 546 50 % 1,615 986 64 % Operating profit margins 14.0 % 10.9 % 14.1 % 10.0 % Quarter Ended June 30, 2023 Compared with Quarter Ended June 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 859 $ (19) $ — $ (1) $ 839 Operating profit 219 (1) (3) 60 275 (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 $0.9 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 primarily relates to higher commercial aerospace aftermarket sales of $0.6 billion, including increases across all aftermarket sales channels. These increases were principally driven by the continued recovery of commercial air traffic which has resulted in an increase in flight hours. Commercial aerospace OEM sales increased $0.2 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 due to increased production rates within wide-body, narrow-body, and business jets. Military sales increased $0.1 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 primarily due to increased development program volume. The organic operating profit increase of $0.2 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was primarily due to higher commercial aerospace operating profit of $0.3 billion, principally driven by the higher sales volume discussed above as well as favorable mix, which was partially offset by higher production costs. This increase in commercial aerospace operating profit was further offset by higher research and development costs primarily due to higher program expenses, and higher selling, general and administrative expenses, primarily due to increased employee-related costs. The increase in Other operating profit of $0.1 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was primarily due to the absence of $69 million of charges associated with the disposition of two non-core businesses in the second quarter of 2022. 41 Table of Contents Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 1,670 $ (46) $ — $ (28) $ 1,596 Operating profit 431 (2) (3) 203 629 (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 $1.7 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily relates to higher commercial aerospace aftermarket sales of $1.1 billion, including increases across all aftermarket sales channels. These increases were principally driven by the continued recovery of commercial air traffic which has resulted in an increase in flight hours. Commercial aerospace OEM sales increased $0.4 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 due to increased production rates in narrow-body, wide-body, and business jets. Military sales increased $0.2 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily due to increased development program volume and higher material receipts. The organic profit increase of $0.4 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to higher commercial aerospace operating profit of $0.6 billion, principally driven by the higher sales volume discussed above as well as favorable mix, partially offset by higher production costs. This increase in commercial aerospace operating profit was further offset by higher selling, general and administrative expenses, primarily due to increased employee-related costs, and higher research and development costs, primarily due to higher program expenses. The increase in Other operating profits of $0.2 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 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 and the absence of $69 million of charges associated with the disposition of two non-core businesses in the second quarter of 2022. See “Note 1: Basis of Presentation” within Item 1 of this Form 10-Q for additional information on Russia sanctions. Pratt & Whitney Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 Change 2023 2022 Change Net sales $ 5,701 $ 4,969 15 % $ 10,931 $ 9,498 15 % Operating profit 230 302 (24) % 645 453 42 % Operating profit margins 4.0 % 6.1 % 5.9 % 4.8 % Quarter Ended June 30, 2023 Compared with Quarter Ended June 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 729 $ — $ — $ 3 $ 732 Operating profit 122 — (24) (170) (72) (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 June 30, 2023 compared to the quarter ended June 30, 2022 reflects higher commercial aftermarket sales of $0.6 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. These increases are partially offset by a decline in military sales of $0.1 billion primarily driven by the absence of a benefit in the second quarter of 2022 resulting from the timing of an F135 production contract award which resulted in the recognition of previously inventoried cost, which was partially offset by higher F135 sustainment volume in the second quarter of 2023. The organic operating profit increase of $0.1 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was primarily driven by higher commercial aerospace operating profit of $0.2 billion, principally due to the aftermarket sales volume increase and favorable mix discussed above, partially offset by higher production costs. Included in the organic operating profit is a favorable contract matter of approximately $60 million, which offsets a prior year $50 million favorable contract adjustment resulting from a contract modification on a commercial aftermarket contract in the second quarter of 2022. 42 Table of Contents The decrease in Other operating profit of $0.2 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 reflects a $181 million charge related to a customer insolvency during the second quarter of 2023. The charge primarily relates to Contract assets and Customer financing assets exposures with the customer. Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 1,439 $ — $ — $ (6) $ 1,433 Operating profit 233 — (41) — 192 (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 $1.4 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 reflects higher commercial aftermarket sales of $0.9 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 $0.4 billion, primarily driven by volume and favorable mix. Military sales increased $0.1 billion, primarily due to higher F135 sustainment volume. The organic profit increase of $0.2 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily driven by higher commercial aerospace operating profit of $0.3 billion, principally due to the aftermarket sales increase discussed above, partially offset by lower commercial OEM operating profit driven by the volume increases noted above and higher production costs. The six months ended June 30, 2023 also benefited from two favorable contract matters totaling approximately $120 million, which was partially offset by a prior year $50 million favorable contract adjustment resulting from a contract modification on a commercial aftermarket contract in the second quarter of 2022. Other operating profit in the six months ended June 30, 2023 was consistent with the six months ended June 30, 2022 and includes a $181 million charge related to a customer insolvency during the second quarter of 2023 as discussed above, partially offset by the absence of a $155 million charge recorded in 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. Restructuring actions relate to ongoing cost reduction efforts including the consolidation of facilities and workforce reductions. Defense Bookings – In addition to a number of smaller bookings, in the quarter ended June 30, 2023, Pratt & Whitney booked $2.0 billion for F135 production Lots 15-17 and $1.5 billion for F117 sustainment. Raytheon Intelligence & Space Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 Change 2023 2022 Change Net sales $ 3,655 $ 3,570 2 % $ 7,220 $ 7,142 1 % Operating profit 291 315 (8) % 615 693 (11) % Operating profit margins 8.0 % 8.8 % 8.5 % 9.7 % Bookings $ 3,148 $ 2,980 6 % $ 7,443 $ 5,572 34 % Quarter Ended June 30, 2023 Compared with Quarter Ended June 30, 2022 Factors Contributing to Total Change in Net Sales (dollars in millions) Organic (1) Acquisitions / Divestitures, net Other Total Change Net sales $ 89 $ — $ (4) $ 85 (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 $ 9 $ 19 $ — $ (52) $ (24) 43 Table of Contents Organic sales in the quarter ended June 30, 2023 were relatively consistent with the quarter ended June 30, 2022. Included in the organic change in sales were higher Sensing and Effects sales, higher Cyber and Services sales and lower Command, Control and Communications sales. The decrease in operating profit of $24 million, and the related decrease in operating profit margins, in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, were primarily due to a change in mix and other performance of $52 million principally driven by unfavorable program mix and higher operating expenses. Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 Factors Contributing to Total Change in Net Sales (dollars in millions) Organic (1) Acquisitions / Divestitures, net Other Total Change Net sales $ 95 $ — $ (17) $ 78 (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 $ 13 $ (30) $ — $ (61) $ (78) Organic sales in the six months ended June 30, 2023 were relatively consistent with the six months ended June 30, 2022. Included in the organic change in sales were higher Cyber and Services sales 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 six months ended June 30, 2023 compared to the six months ended June 30, 2022, were primarily due to an unfavorable change in mix and other performance of $61 million and an unfavorable net change in EAC adjustments of $30 million. The change in mix and other performance was primarily due to unfavorable program mix and higher operating expenses. The net change in EAC adjustments was spread across numerous individual programs. Backlog and Bookings – Backlog was $17 billion at June 30, 2023 and $16 billion at December 31, 2022. In addition to a number of smaller bookings, in the quarter ended June 30, 2023, RIS booked $1.1 billion on a number of classified contracts and $332 million on cyber defense services contracts for certain federal and civil customers. In addition to these bookings, in the six months ended June 30, 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. 44 Table of Contents Raytheon Missiles & Defense Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 Change 2023 2022 Change Net sales $ 4,000 $ 3,558 12 % $ 7,671 $ 7,085 8 % Operating profit 415 348 19 % 743 735 1 % Operating profit margins 10.4 % 9.8 % 9.7 % 10.4 % Bookings $ 3,636 $ 4,537 (20) % $ 8,836 $ 8,637 2 % Quarter Ended June 30, 2023 Compared with Quarter Ended June 30, 2022 Factors Contributing to Total Change in Net Sales (dollars in millions) Organic (1) Acquisitions / Divestitures, net Other Total Change Net sales $ 473 $ (29) $ (2) $ 442 (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 $ 53 $ 63 $ 2 $ (51) $ 67 The organic sales increase of $0.5 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was primarily due to higher net sales of $0.2 billion from our Air Power programs, $0.1 billion from our Advanced Technology programs, and $0.1 billion from our Land Warfare and Air Defense programs. The increase in Air Power programs is primarily driven by higher net sales on the Advanced Medium Range Air-to-Air Missile (AMRAAM) program driven by the award in the second quarter of 2023. The increase in Advanced Technology programs includes higher net sales on certain classified programs awarded in 2022. The increase in Land Warfare and Air Defense programs was due to higher volumes across multiple programs . The increase in operating profit of $0.1 billion in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, was primarily due to a favorable net change in EAC adjustments of $63 million and the impact of higher volume of $53 million, partially offset by an unfavorable change in mix and other performance of $51 million. The net change in EAC adjustments was spread across numerous individual programs. The increase in volume was principally driven by the higher net sales discussed above. The unfavorable change in mix and other performance was primarily due to higher relative volume of early stage production programs within Land Warfare and Air Defense and Air Power programs . The increase in operating profit margins in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, was primarily due to the net change in EAC adjustments, partially offset by the change in mix and other performance discussed above. Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 Factors Contributing to Total Change in Net Sales (dollars in millions) Organic (1) Acquisitions / Divestitures, net Other Total Change Net sales $ 633 $ (36) $ (11) $ 586 (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 $ 83 $ 2 $ 1 $ (78) $ 8 The organic sales increase of $0.6 billion in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to higher net sales of $0.2 billion from our Air Power programs, $0.2 billion from our Advanced Technology programs, and $0.1 billion from our Land Warfare and Air Defense programs. The increase in Air Power programs is primarily driven by higher net sales on the AMRAAM program driven by the award in the second quarter of 2023. The 45 Table of Contents increase in Advanced Technology programs includes higher net sales on certain classified programs awarded in 2022. The increase in Land Warfare and Air Defense programs was due to higher volumes across multiple programs . Operating profit in the six months ended June 30, 2023 was relatively consistent with the six months ended June 30, 2022. Included in the change in operating profit was higher volume of $83 million and an unfavorable change in mix and other performance of $78 million. The increase in volume was principally driven by the higher net sales on the Advanced Technology and Air Power programs discussed above. The unfavorable change in mix and other performance was primarily due to higher relative volume of early stage production programs within Land Warfare and Air Defense and Air Power . Included in the net change in EAC adjustments is an unfavorable impact related to a significant contract option exercised in the first quarter of 2023, which was more than offset by favorable changes in net EAC adjustments spread across numerous individual programs. The decrease in operating profit margins in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, was primarily due to the change in mix and other performance discussed above. Backlog and Bookings – Backlog was $35 billion at June 30, 2023 and $34 billion at December 31, 2022. In addition to a number of smaller bookings, in the quarter ended June 30, 2023, RMD booked $1.2 billion for AMRAAM for the U.S. Air Force and Navy and international customers, $294 million on a number of classified contracts, $265 million for Javelin for the U.S. Army and international customers, $251 million for AIM-9X Sidewinder short-range air-to-air missiles for the U.S. Navy and Air Force and international customers, and $237 million for CLEAVAR, an integrated U.S. Army Counter- Unmanned Aircraft Systems (C-UAS) defense system. In addition to these bookings, in the six months ended June 30, 2023 RMD booked $1.2 billion to provide Patriot Air Defense system to Switzerland, $827 million on a number of classified contracts, $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. 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 not considered part of management’s evaluation of reportable segment operating performance, including certain unallowable costs and reserves. In addition, in 2022, net costs associated with corporate research and development related to the LTAMDS program were included in Corporate expenses and other unallocated items. Beginning in 2023, the remaining net costs associated with the LTAMDS program are within the RMD segment. Net Sales Operating Profit Quarter Ended June 30, Quarter Ended June 30, (dollars in millions) 2023 2022 2023 2022 Eliminations and other $ (891) $ (794) $ (60) $ (47) Corporate expenses and other unallocated items — — (59) (42) The increase in eliminations and other sales of $97 million in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was primarily due to an increase in intersegment eliminations, principally driven by RIS and Collins. Eliminations and other operating profit in the quarter ended June 30, 2023 was relatively consistent with the quarter ended June 30, 2022. Corporate expenses and other unallocated items operating profit in the quarter ended June 30, 2023 was relatively consistent with the quarter ended June 30, 2022. Net Sales Operating Profit Six months ended June 30, Six months ended June 30, (dollars in millions) 2023 2022 2023 2022 Eliminations and other $ (1,724) $ (1,530) $ (47) $ (81) Corporate expenses and other unallocated items — — (102) (178) The increase in eliminations and other sales of $194 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to an increase in intersegment eliminations, principally driven by RIS and Collins. The change in eliminations and other operating profit of $34 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to a gain on sale of land in the first quarter of 2023. 46 Table of Contents The decrease in Corporate expenses and other unallocated items of $76 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, was primarily due to a decrease in expenses related to the LTAMDS project, which are included in the RMD segment beginning in 2023. 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 June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 FAS service cost (expense) $ (39) $ (92) $ (79) $ (183) CAS expense 348 471 702 940 FAS/CAS operating adjustment $ 309 $ 379 $ 623 $ 757 The change in our FAS/CAS operating adjustment of $70 million in the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was driven by a $123 million decrease in CAS expense, partially offset by a $53 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 were 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 were 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. The change in our FAS/CAS operating adjustment of $134 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was driven by a $238 million decrease in CAS expense, partially offset by a $104 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 were 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 were effective December 31, 2022. 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 . The components of Acquisition accounting adjustments were as follows: Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Amortization of acquired intangibles $ (496) $ (458) $ (991) $ (935) Amortization of property, plant and equipment fair value adjustment (15) (21) (31) (53) Amortization of customer contractual obligations related to acquired loss-making and below-market contracts 22 31 40 56 Acquisition accounting adjustments $ (489) $ (448) $ (982) $ (932) 47 Table of Contents Acquisition accounting adjustments related to acquisitions in each segment were as follows: Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2023 2022 2023 2022 Collins Aerospace $ (196) $ (197) $ (395) $ (403) Pratt & Whitney (62) (39) (126) (96) Raytheon Intelligence & Space (80) (74) (160) (158) Raytheon Missiles & Defense (151) (138) (301) (275) Total segment (489) (448) (982) (932) Eliminations and other — — — — Acquisition accounting adjustments $ (489) $ (448) $ (982) $ (932) The change in acquisition accounting adjustments of $41 million for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, was primarily driven by an increase at Pratt & Whitney related to collaborator intangibles and an increase in intangibles amortization at RMD and RIS related to the Raytheon merger. The change in acquisition accounting adjustments of $50 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, was primarily driven by an increase at Pratt & Whitney related to collaborator intangibles and an increase in intangibles amortization at RMD and RIS related to the Raytheon merger. LIQUIDITY AND FINANCIAL CONDITION (dollars in millions) June 30, 2023 December 31, 2022 Cash and cash equivalents $ 5,391 $ 6,220 Total debt 35,353 31,914 Total equity 74,056 74,178 Total capitalization (total debt plus total equity) 109,409 106,092 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 and the timing of such 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 June 30, 2023, we had cash and cash equivalents of $5.4 billion, of which approximatel y 41% was held by RTX’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, RTX 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 June 30, 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 June 30, 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 June 30, 2023, 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 $1.0 billion of commercial paper borrowings outstanding at June 30, 2023. At June 30, 2023 short-term commercial paper borrowings outstanding had a weighted-average interest rate of 5.5%. 48 Table of Contents We had the following issuances of long-term debt during the six months ended June 30, 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 Six Months Ended June 30, (dollars in millions) 2023 2022 Net cash flows (used in) provided by operating activities from continuing operations $ (144) $ 1,762 The $1.9 billion change in cash flows (used in) provided by operating activities from continuing operations in the six months ended June 30, 2023 compared to in the six months ended June 30, 2022, was primarily due to higher tax payments discussed below, a reduction in accounts payable and accrued liabilities primarily driven by timing of supplier and collaborator payments, higher accounts receivable as a result of increased sales volume and related factoring activity, partially offset by the timing of collaborator receivables, and the impact of the net change in contract assets and contract liabilities driven by the timing of collections, primarily at RMD. The change in accounts payable and accrued liabilities also reflects a $1.0 billion prior year increase related to the impact of the capitalization of research and experimental expenditures for tax purposes, with a related $1.0 billion prior year reduction in our deferred tax liability. 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 $0.3 billion in cash provided by operating activities during the six months ended June 30, 2023, compared to an increase of approximately $1.5 billion in cash provided by operating activities during the six months ended June 30, 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 $1.4 billion and $0.5 billion in the six months ended June 30, 2023 and 2022, respectively. Cash Flow - Investing Activities Six Months Ended June 30, (dollars in millions) 2023 2022 Net cash flows used in investing activities from continuing operations $ (1,202) $ (1,136) 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. 49 Table of Contents The $0.1 billion change in cash flows used in investing activities from continuing operations in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily related to an increase in other intangible assets and capital expenditures, both of which are described below, partially offset by the timing of our derivative contract settlements. Capital expenditures in the six months ended June 30, 2023 increased by $128 million from the six months ended June 30, 2022 primarily due to investments in production facilities at Pratt & Whitney and Collins. Customer financing assets receipts (payments), net were receipts of $42 million and payments of $7 million in the six months ended June 30, 2023 and 2022, respectively, and includes leased asset pool activity as well as customer financing activity. During the six months ended June 30, 2023 and 2022, we increased other intangible assets by approximately $314 million and $185 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 six months ended June 30, 2023 and 2022, we had net cash receipts of $45 million and net cash payments of $151 million, respectively, from the settlement of these derivative instruments not designated as hedging instruments. Cash Flow - Financing Activities Six Months Ended June 30, (dollars in millions) 2023 2022 Net cash flows provided by (used in) financing activities from continuing operations $ 468 $ (3,627) 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 $4.1 billion change in cash flows provided by (used in) financing activities from continuing operations in the six months ended June 30, 2023 compared to in the six months ended June 30, 2022 was primarily driven by long-term debt issuances of $3.0 billion, lower share repurchases of $0.6 billion, as discussed below, and issuance of commercial paper, net, of $0.5 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 June 30, 2023, management had remaining authority to repurchase approximately $4.8 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. Our share repurchases were as follows: Six Months Ended June 30, (dollars in millions; shares in thousands) 2023 2022 $ Shares $ Shares Shares of common stock repurchased (1) $ 1,158 11,821 $ 1,779 18,697 (1) Relates to share repurchases that were settled in cash during the period. 50 Table of Contents Our Board of Directors authorized the following cash dividends: Six Months Ended June 30, (dollars in millions, except per share amounts) 2023 2022 Dividends paid per share of common stock $ 1.140 $ 1.060 Total dividends paid $ 1,634 $ 1,543 On June 5, 2023, the Board of Directors declared a dividend of $0.59 per share payable September 7, 2023 to shareowners of record at the close of business on August 18, 2023. Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no significant change in our exposure to market risk during the six months ended June 30, 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.