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. Unless the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” and “RTX” mean RTX Corporation and its subsidiaries. As previously announced, effective July 1, 2023, we streamlined the structure of our core businesses to three principal business segments: Collins Aerospace (Collins), Pratt & Whitney, and Raytheon. All segment information is reflective of this new structure and prior period information has been recast to conform to our current period presentation. Raytheon follows 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 September 30, 2023 and 2022 with respect to Raytheon, we are referring to their October 1, 2023 and October 2, 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 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 Powder Metal Matter. As described further in “Note 15: Commitments and Contingencies,” within Item 1 32 Table of Contents of this Form 10-Q, Pratt & Whitney has determined that a rare condition in powder metal used to manufacture certain engine parts requires accelerated inspection of the PW1100G-JM (PW1100) Geared Turbofan (GTF) fleet, which powers the A320neo family of aircraft (A320neo) (herein referred to as the “Powder Metal Matter”). 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. U.S. Government’s Continuing Resolution . On September 30, 2023, President Biden signed a continuing resolution that funds federal agencies until November 17, 2023. A continuing resolution authorizes federal agencies to operate generally at the same funding levels from the prior year, but typically does not authorize new spending initiatives during this period. If Congress is unable to enact formal fiscal year 2024 appropriation bills by November 17, 2023, it may pass another continuing resolution. However, if Congress fails to pass the formal appropriations bills or a continuing resolution, then the U.S. government would shut down during which federal agencies would cease all non-essential functions. In the event of a U.S. government shutdown, our business, program performance and results of operations could be impacted by the resulting disruptions to federal government offices, workers, and operations, including risks relating to the funding of certain programs, stop work orders, as well as delays in contract awards, new program starts, payments for work performed, and other actions. We also may experience similar impacts in the event of an extended period of continuing resolutions. Generally, the significance of these impacts will primarily be based on the length of the continuing resolution or shutdown. Furthermore, under the Fiscal Responsibility Act of 2023, which imposes limits on discretionary spending for defense and non-defense programs in exchange for the lifting of the debt ceiling in June 2023, if Congress fails to enact appropriation bills by April 30, 2024, then the budget caps will be reduced and corresponding automatic reductions to agency budget accounts will be enforced through sequestration. 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 Raytheon Missiles & Defense (RMD) (a former RTX business segment which became part of Raytheon as a result of the July 1, 2023 RTX segment realignment) 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. 33 Table of Contents 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 September 30, 2023, our Contract liabilities include approximately $390 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. We are closely monitoring developments in the war between Israel and Hamas that began on October 7, 2023 including potential impacts to RTX’s business, customers, suppliers, employees, and operations in Israel, the Middle East and elsewhere. At this time, impacts to RTX are uncertain and subject to change given the volatile nature of the situation. 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 demand. 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. Other than disclosed below, there have been no significant changes to our critical accounting estimates during the nine months ended September 30, 2023. Contingent Liabilities. As described in “Note 15: Commitments and Contingencies” within Item 1 of this Form 10-Q, contractual, regulatory and other matters in the normal course of business may arise that subject us to claims or litigation, including with respect to matters relating to technical issues on programs, government contracts, performance and operating cost guarantees, employee benefit plans, legal, and environmental, health and safety matters. In particular, the design, development, production and support of aerospace technologies is inherently complex and subject to risk. Technical issues associated with these technologies may arise in the normal course and may result in financial impacts, including increased warranty provisions, customer contract settlements, and changes in contract performance estimates. These impacts could be material to the Company’s results of operations, financial condition, and liquidity. Additionally, we have significant contracts with the U.S. government, subject to government oversight and audit, which may require significant adjustment of contract prices. We accrue for liabilities associated with these matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. Estimating our liability based on both the likelihood of any adverse judgments or outcomes, and the costs associated with these matters, requires significant judgment. The inherent uncertainty related to the outcome of these matters could result in amounts materially different from any provisions made with respect to their resolution. Pratt & Whitney has determined that a rare condition in powder metal used to manufacture certain engine parts requires accelerated inspection of the PW1100G-JM (PW1100) Geared Turbofan (GTF) fleet, which powers the A320neo family of aircraft (A320neo) (herein referred to as the “Powder Metal Matter”). This determination was made pursuant to Pratt & Whitney’s safety management system. On August 4, 2023, Pratt & Whitney issued a special instruction (SI), to operators of PW1100 GTF powered A320neo aircraft, which required accelerated inspections and engine removals covering an initial subset of operational engines, no later than September 15, 2023. During the third quarter, through its safety management system, Pratt & Whitney continued its engineering and industrial assessment which resulted in an updated fleet management plan for the remaining PW1100 fleet. This updated plan requires a repetitive inspection protocol for high pressure turbine disks as well as part life limits for high pressure turbine disks and high pressure compressor disks. This fleet management plan is expected to be released in one or more service bulletins (SB) beginning in the fourth quarter of 2023, following alignment with regulators. The actions set forth 34 Table of Contents in the SI and SBs are expected to result in significant incremental shop visits through the end of 2026. These incremental shop visits are above Pratt & Whitney's prior estimates as of June 30, 2023. As a result, Pratt & Whitney expects a significant increase in aircraft on ground levels for the PW1100 powered A320neo fleet through 2026. As a result of anticipated increased aircraft on ground levels and expected compensation to customers for this disruption, as well as incremental maintenance costs resulting from increased inspections and shop visits, RTX recorded a pre-tax operating profit charge in the third quarter of 2023 of $2.9 billion, reflecting Pratt & Whitney’s net 51% program share of the PW1100 program. This reflects our current best estimate of expected customer compensation for the estimated duration of the disruption as well as the third quarter Estimate-at-Completion (EAC) adjustment impact of this matter to Pratt & Whitney’s long-term maintenance contracts. The incremental costs to the business’s long-term maintenance contracts include the estimated cost of additional inspections, replacement of parts, and other related impacts. The $2.9 billion charge is reflected in the Condensed Consolidated Statement of Operations as a reduction of sales of $5.4 billion which was partially offset by a net reduction of cost of sales of $2.5 billion primarily representing our partners’ 49% share of this charge. This resulted in a net increase in Other accrued liabilities of $2.8 billion, which principally relates to our 51% share of an accrual for expected customer compensation. While the timing of settlement is subject to a number of variables, we expect the $2.8 billion of Other accrued liabilities to be paid consistent with the timing of execution of the fleet management plan and period of increased aircraft on ground levels referenced above. While Pratt & Whitney continues to evaluate the impact of this powder metal issue on other engine models within its fleet, we do not currently believe there will be any significant financial impact with respect to these other engine models. The financial impact of the powder metal issue is based on historical experience and is subject to various assumptions and judgments, most notably, the number and expected timing of shop visits, inspection results and scope of work to be performed, turnaround time, availability of new parts, available capacity at overhaul facilities and outcomes of negotiations with impacted customers. While these assumptions reflect our best estimates at this time, they are subject to variability. Potential changes to these assumptions and actual incurred costs could significantly affect the estimates inherent in our financial statements and could have a material effect on the Company’s results of operations for the periods in which they are recognized. 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. 35 Table of Contents Net Sales Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Net sales $ 13,464 $ 16,951 $ 48,993 $ 48,981 The factors contributing to the change year-over-year in total net sales for the quarter and nine months ended September 30, 2023 are as follows: (dollars in millions) Quarter Ended September 30, 2023 Nine Months Ended September 30, 2023 Organic (1) $ 2,000 $ 5,609 Acquisitions and divestitures, net (29) (111) Other (5,458) (5,486) Total change $ (3,487) $ 12 (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 September 30, 2023 compared to the quarter ended September 30, 2022 primarily due to higher organic sales of $0.9 billion at Collins, $0.9 billion at Pratt & Whitney, and $0.2 billion at Raytheon. Other sales decreased $5.5 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 primarily driven by the net sales charge of $5.4 billion associated with the Powder Metal Matter. Net sales increased $5.6 billion organically in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to higher organic sales of $2.4 billion at Collins, $2.4 billion at Pratt & Whitney, and $1.0 billion at Raytheon. Other sales decreased $5.5 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily driven by the net sales charge of $5.4 billion associated with the Powder Metal Matter. See “Segment Review” below for further information by segment. Quarter Ended September 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Net Sales Products $ 8,615 $ 12,756 64.0 % 75.3 % Services 4,849 4,195 36.0 % 24.7 % Total net sales $ 13,464 $ 16,951 100 % 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 decreased $4.1 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 primarily driven by a net sales charge of $5.3 billion associated with the Powder Metal Matter, partially offset by increases in external products sales of $0.6 billion at Pratt & Whitney and $0.6 billion at Collins. Net services sales increased $0.7 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 primarily due to increases in external services sales of $0.3 billion at Collins, $0.3 billion at Pratt & Whitney, and $0.2 billion at Raytheon, partially offset by a net sales charge of $0.1 billion associated with the Powder Metal Matter. 36 Table of Contents Nine Months Ended September 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Net Sales Products $ 34,813 $ 36,876 71.1 % 75.3 % Services 14,180 12,105 28.9 % 24.7 % Total net sales $ 48,993 $ 48,981 100 % 100 % Net products sales decreased $2.1 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily driven by a net sales charge of $5.3 billion associated with the Powder Metal Matter, partially offset by increases in external products sales of $1.5 billion at Collins, $1.3 billion at Pratt & Whitney, and $0.5 billion at Raytheon. Net services sales increased $2.1 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 due to increases in external services sales of $1.1 billion at Pratt & Whitney, $0.6 billion at Collins, and $0.4 billion at Raytheon, partially offset by a net sales charge of $0.1 billion associated with the Powder Metal Matter. Our sales to major customers were as follows: Quarter Ended September 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Sales to the U.S. government (1) $ 7,678 $ 7,555 57.0 % 44.6 % Foreign military sales through the U.S. government 1,317 1,275 9.8 % 7.5 % Foreign government direct commercial sales 1,020 1,064 7.6 % 6.3 % Commercial aerospace and other commercial sales (2) 3,449 7,057 25.6 % 41.6 % Total net sales $ 13,464 $ 16,951 100 % 100 % (1) Excludes foreign military sales through the U.S. government. (2) Includes the reduction in sales from the Powder Metal Matter. Nine Months Ended September 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Sales to the U.S. government (1) $ 23,193 $ 22,452 47.3 % 45.8 % Foreign military sales through the U.S. government 3,820 3,632 7.8 % 7.4 % Foreign government direct commercial sales 3,113 3,118 6.4 % 6.4 % Commercial aerospace and other commercial sales (2) 18,867 19,779 38.5 % 40.4 % Total net sales $ 48,993 $ 48,981 100 % 100 % (1) Excludes foreign military sales through the U.S. government. (2) Includes the reduction in sales from the Powder Metal Matter Cost of Sales Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Total cost of sales $ 12,750 $ 13,464 $ 40,913 $ 38,880 Percentage of net sales 94.7 % 79.4 % 83.5 % 79.4 % 37 Table of Contents The factors contributing to the change year-over-year in total cost of sales for the quarter and nine months ended September 30, 2023 are as follows: (dollars in millions) Quarter Ended September 30, 2023 Nine Months Ended September 30, 2023 Organic (1) $ 1,633 $ 4,446 Acquisitions and divestitures, net (28) (101) Restructuring 45 87 FAS/CAS operating adjustment 67 175 Acquisition accounting adjustments 36 86 Other (2,467) (2,660) Total change $ (714) $ 2,033 (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 $1.6 billion for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022, was primarily driven by the organic sales increases at Pratt & Whitney, Collins, and Raytheon noted above. Other cost of sales decreased $2.5 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 primarily driven by a net reduction in cost of sales of $2.5 billion primarily reflecting our partners’ 49% share of the Powder Metal Matter. The organic increase in total cost of sales of $4.4 billion for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, was primarily driven by the organic sales increases at Pratt & Whitney, Collins, and Raytheon noted above. Other cost of sales decreased $2.7 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily driven by a net reduction in cost of sales of $2.5 billion primarily reflecting our partners’ 49% share of the Powder Metal Matter. Restructuring actions relate to ongoing cost reduction efforts including workforce reductions and the consolidation of facilities. 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 September 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Cost of sales Products $ 9,289 $ 10,493 69.0 % 61.9 % Services 3,461 2,971 25.7 % 17.5 % Total cost of sales $ 12,750 $ 13,464 94.7 % 79.4 % Net products cost of sales decreased $1.2 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022, primarily driven by a net reduction in cost of sales of $2.5 billion primarily reflecting our partners’ 49% share of the Powder Metal Matter. This was partially offset by increases in external products cost of sales at Pratt & Whitney, Collins, and Raytheon, all driven by the products sales changes noted above. Net services cost of sales increased $0.5 billion in the quarter ended September 30, 2023 compared to the quarter ended September 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. 38 Table of Contents Nine Months Ended September 30, % of Total Net Sales (dollars in millions) 2023 2022 2023 2022 Cost of sales Products $ 31,078 $ 30,353 63.4 % 62.0 % Services 9,835 8,527 20.1 % 17.4 % Total cost of sales $ 40,913 $ 38,880 83.5 % 79.4 % Net products cost of sales increased $0.7 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily driven by increases in external products cost of sales at Pratt & Whitney, Collins, and Raytheon, all driven by the products sales changes noted above, partially offset by a decrease in net products cost of sales driven by a net reduction in cost of sales of $2.5 billion primarily reflecting our partners’ 49% share of the Powder Metal Matter. Net services cost of sales increased $1.3 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to increases in external services cost of sales at Pratt & Whitney, Collins, and Raytheon, all driven by the services sales changes noted above. Research and Development Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Company-funded $ 712 $ 662 $ 2,048 $ 1,995 Percentage of net sales 5.3 % 3.9 % 4.2 % 4.1 % Customer-funded (1) $ 1,107 $ 1,125 $ 3,417 $ 3,300 Percentage of net sales 8.2 % 6.6 % 7.0 % 6.7 % (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 $50 million for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily driven by increased spending on commercial program development at Pratt & Whitney and higher program expenses at Collins. Customer-funded research and development for the quarter ended September 30, 2023 was relatively consistent with the quarter ended September 30, 2022. The increase in company- funded research and development of $53 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily driven by increased spending on commercial program development at Pratt & Whitney and higher program expenses at Collins, partially offset by decreased spend on the Lower Tier Air and Missile Defense Sensor (LTAMDS) program. The increase in customer-funded research and development of $117 million for the nine months ended September 30, 2023 compared to the nine months ended September 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 Raytheon. Selling, General and Administrative Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Selling, general and administrative $ 1,401 $ 1,351 $ 4,364 $ 4,184 Percentage of net sales 10.4 % 8.0 % 8.9 % 8.5 % Selling, general and administrative expenses increased $50 million in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022, primarily driven by an increase in restructuring costs, increased employee-related costs, and increased portfolio and segment realignment costs. Selling, general and administrative expenses increased $180 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily driven by a charge at our Pratt & Whitney segment related to a customer 39 Table of Contents insolvency in the second quarter of 2023, increased employee-related costs, an increase in restructuring costs, and increased portfolio and segment realignment 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. Therefore, the amounts reflected above include the beneficial impact of previous restructuring actions on Selling, general and administrative expenses. Other Income, Net Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Other income, net $ 3 $ 46 $ 116 $ 91 Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, and other ongoing and non-recurring items. The decrease in Other income, net of $43 million for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily due to a net unfavorable year-over-year impact of foreign exchange gains and losses. The increase in Other income, net of $25 million for the nine months ended September 30, 2023 compared to the nine months ended September 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. Operating Profit (Loss) Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Operating profit (loss) $ (1,396) $ 1,520 $ 1,784 $ 4,013 Operating profit (loss) margin (10.4) % 9.0 % 3.6 % 8.2 % The change in Operating profit (loss) of $2.9 billion for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily driven by the charges associated with the Powder Metal Matter. The change in Operating profit (loss) of $2.2 billion for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily driven by the charges associated with the Powder Metal Matter, and the change in our FAS/CAS operating adjustment, partially offset by an increase in Operating profit due to the remaining operating performance of our segments, all of which are described below in “Segment Review.” Non-service Pension Income Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Non-service pension income $ (443) $ (468) $ (1,334) $ (1,422) The change in Non-service pension income of $25 million for the quarter ended September 30, 2023 compared to the quarter ended September 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 $88 million for the nine months ended September 30, 2023 compared to the nine months ended September 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. 40 Table of Contents Interest Expense, Net Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Interest expense $ 391 $ 326 $ 1,102 $ 968 Interest income (19) (10) (46) (54) Other non-operating expense (income) (1) (3) (5) (39) 44 Interest expense, net $ 369 $ 311 $ 1,017 $ 958 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 increased $58 million in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022. The increase in Interest expense of $65 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. Interest expense, net increased $59 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in Interest expense of $134 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 $83 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 dividend income. Income Taxes Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Effective income tax rate 29.4 % 16.8 % 9.2 % 13.8 % Our effective tax rate for the quarter and nine months ended September 30, 2023 was 29.4% and 9.2%, respectively, as compared to 16.8% and 13.8% for the quarter and nine months ended September 30, 2022, respectively. The change in our effective tax rate for the quarter and nine months ended September 30, 2023 primarily relates to a $2.9 billion charge related to the Powder Metal Matter. We recorded a deferred income tax benefit related to this charge of $663 million. The remaining change 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. Net Income (Loss) from Continuing Operations Attributable to Common Shareowners Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions, except per share amounts) 2023 2022 2023 2022 Net income (loss) from continuing operations attributable to common shareowners $ (984) $ 1,387 $ 1,769 $ 3,794 Diluted earnings (loss) per share from continuing operations $ (0.68) $ 0.94 $ 1.21 $ 2.55 Net loss from continuing operations attributable to common shareowners for the quarter ended September 30, 2023 includes the following: • charge associated with the Powder Metal Matter of $2.2 billion, net of tax and partner share, which had an unfavorable impact on diluted earnings (loss) per share (EPS) from continuing operations of $1.53; and • acquisition accounting adjustments of $406 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.28. Net income from continuing operations attributable to common shareowners for the quarter ended September 30, 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 $0.26. Net loss from continuing operations attributable to common shareowners for the nine months ended September 30, 2023 includes the following: • charge associated with the Powder Metal Matter of $2.2 billion, net of tax and partner share, which had an unfavorable impact on diluted EPS from continuing operations of $1.52; 41 Table of Contents • acquisition accounting adjustments of $1,175 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.80; 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 nine months ended September 30, 2022 includes the following: • acquisition accounting adjustments of $1,107 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.74; 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 (Loss) Attributable to Common Shareowners Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions, except per share amounts) 2023 2022 2023 2022 Net income (loss) attributable to common shareowners $ (984) $ 1,387 $ 1,769 $ 3,775 Diluted earnings (loss) per share from operations $ (0.68) $ 0.94 $ 1.21 $ 2.54 The change in net income (loss) attributable to common shareowners and diluted earnings (loss) per share from operations for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 and for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily driven by the change in continuing operations, as discussed above. SEGMENT REVIEW As previously announced, effective July 1, 2023, we streamlined the structure of our core businesses to three principal business segments: Collins Aerospace (Collins), Pratt & Whitney, and Raytheon. All segment information is reflective of this new structure and prior period information has been recast to conform to our current period presentation. 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. Given the nature of our business, we believe that total net sales and operating profit (loss) (and the related operating profit (loss) 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 (loss) 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 September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Collins Aerospace $ 6,629 $ 5,718 $ 19,133 $ 16,821 Pratt & Whitney (1) 926 5,380 11,857 14,878 Raytheon 6,472 6,308 19,464 18,515 Total segment 14,027 17,406 50,454 50,214 Eliminations and other (563) (455) (1,461) (1,233) Consolidated $ 13,464 $ 16,951 $ 48,993 $ 48,981 (1) Includes the reduction in sales from the Powder Metal Matter. 42 Table of Contents Operating Profit (Loss). Operating profit (loss) by segment was as follows: Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Collins Aerospace $ 903 $ 742 $ 2,699 $ 1,973 Pratt & Whitney (1) (2,482) 316 (1,837) 769 Raytheon 560 686 1,775 1,920 Total segment (1,019) 1,744 2,637 4,662 Eliminations and other (69) (13) (34) (25) Corporate expenses and other unallocated items (2) (63) (77) (165) (255) FAS/CAS operating adjustment 272 348 845 1,045 Acquisition accounting adjustments (517) (482) (1,499) (1,414) Consolidated $ (1,396) $ 1,520 $ 1,784 $ 4,013 (1) Includes the impacts from the Powder Metal Matter. (2) 2022 included the net expenses related to the U.S. Army’s LTAMDS program. Beginning in 2023, LTAMDS results are included in the Raytheon segment. Included in segment operating profit (loss) 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 September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Gross favorable $ 247 $ 339 $ 851 $ 1,002 Gross unfavorable (526) (332) (1,284) (1,000) Total net EAC adjustments $ (279) $ 7 $ (433) $ 2 The change in net EAC adjustments of $286 million in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily due to unfavorable changes in net EAC adjustments at Pratt & Whitney and Raytheon, including the unfavorable impact of $133 million recorded at Pratt & Whitney in the quarter ended September 30, 2023 as a result of increased cost to our aftermarket contracts resulting from the Powder Metal Matter. The change in net EAC adjustments of $435 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to unfavorable changes in net EAC adjustments at Pratt & Whitney, including the unfavorable impact of $133 million recorded at Pratt & Whitney in the quarter ended September 30, 2023 as a result of increased cost to our aftermarket contracts resulting from the Powder Metal Matter. The change in net EAC adjustments also includes 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. Significant EAC adjustments, when they occur, are discussed in each business segment’s discussion below. Backlog and Bookings. Total backlog was approximately $190 billion and $175 billion as of September 30, 2023 and December 31, 2022, respectively, which includes defense backlog of $75 billion and $69 billion as of September 30, 2023 and December 31, 2022, respectively. Our defense operations consist primarily of our Raytheon business and operations in the defense businesses within our Collins and Pratt & Whitney segments. Defense bookings were approximately $12 billion and $12 billion for the quarters ended September 30, 2023 and 2022, and approximately $37 billion and $34 billion for the nine months ended September 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 43 Table of Contents 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 September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 Change 2023 2022 Change Net sales $ 6,629 $ 5,718 16 % $ 19,133 $ 16,821 14 % Operating profit 903 742 22 % 2,699 1,973 37 % Operating profit margins 13.6 % 13.0 % 14.1 % 11.7 % Quarter Ended September 30, 2023 Compared with Quarter Ended September 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 945 $ (2) $ — $ (32) $ 911 Operating profit 299 — (50) (88) 161 (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 September 30, 2023 compared to the quarter ended September 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 $0.4 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 primarily due to increased production rates within both narrow-body and wide-body aircraft. Military sales decreased $0.1 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 primarily due to the timing of deliveries. The decrease in Other net sales in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily due to a $57 million charge related to a litigation matter. The organic operating profit increase of $0.3 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily due to higher commercial aerospace operating profit of $0.4 billion, principally driven by the higher sales volume discussed above. This increase in commercial aerospace operating profit was partially offset by higher production costs, unfavorable military mix, and higher selling, general, and administrative expenses primarily due to increased employee-related costs. The decrease in Other operating profit of $0.1 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily due to a charge related to the litigation matter discussed above. Restructuring actions relate to ongoing cost reduction efforts including workforce reductions. Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 2,420 $ (48) $ — $ (60) $ 2,312 Operating profit 666 (2) (53) 115 726 (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 $2.4 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily relates to higher commercial aerospace aftermarket sales of $1.6 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 $0.8 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 due to increased production rates in 44 Table of Contents narrow-body, wide-body, and business jets. Military sales were relatively consistent in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in Other net sales in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to a $57 million charge related to a litigation matter recorded in the third quarter of 2023. The organic profit increase of $0.7 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to higher commercial aerospace operating profit of $1.0 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. Military operating profit decreased $0.1 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to unfavorable mix and higher production costs. The increase in Other operating profits of $0.1 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the absence of $141 million of pretax charges recorded in the first quarter of 2022 related 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, partially offset by a charge in the third quarter of 2023 related to the litigation matter discussed above. See “Note 1: Basis of Presentation” within Item 1 of this Form 10-Q for additional information on Russia sanctions. Restructuring actions relate to ongoing cost reduction efforts including workforce reductions. Pratt & Whitney Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 Change 2023 2022 Change Net sales $ 926 $ 5,380 (83) % $ 11,857 $ 14,878 (20) % Operating profit (loss) (2,482) 316 NM (1,837) 769 NM Operating profit (loss) margins (268.0) % 5.9 % (15.5) % 5.2 % NM = Not Meaningful Quarter Ended September 30, 2023 Compared with Quarter Ended September 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 928 $ — $ — $ (5,382) $ (4,454) Operating profit (loss) 83 — (5) (2,877) (2,799) (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 September 30, 2023 compared to the quarter ended September 30, 2022 reflects higher commercial aftermarket sales of $0.5 billion, primarily due to an increase in volume, content, and favorable mix as the commercial aerospace environment continues to recover. The increase also includes higher commercial OEM sales of $0.3 billion, primarily driven by volume and favorable mix on commercial engine shipments. Military sales were up $0.1 billion primarily driven by higher F135 development and sustainment volume. The Other sales decrease of $5.4 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 is primarily due to the charge recognized in the third quarter related to the Powder Metal Matter. The organic operating profit increase of $0.1 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily driven by higher commercial aerospace operating profit of $0.1 billion, principally due to the aftermarket sales volume increase and favorable mix discussed above, partially offset by lower commercial OEM operating profit driven by the volume increases noted above and higher production costs. Military operating profit was relatively consistent as the increases from the sales volume discussed above were offset by higher production costs and unfavorable mix. The Other operating profit (loss) change of $2.9 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 is primarily due to a charge recognized in the third quarter related to the Powder Metal Matter. 45 Table of Contents Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 2,367 $ — $ — $ (5,388) $ (3,021) Operating profit (loss) 316 — (46) (2,877) (2,607) (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 $2.4 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 reflects higher commercial aftermarket sales of $1.4 billion, primarily due to an increase in volume, content, and favorable mix as the commercial aerospace environment continues to recover. The increase also includes higher commercial OEM sales of $0.7 billion, primarily driven by volume and favorable mix. Military sales increased $0.2 billion, primarily due to higher F135 sustainment volume. The Other sales decrease of $5.4 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is primarily due to the charge recognized in the third quarter related to the Powder Metal Matter. The organic operating profit increase of $0.3 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily driven by higher commercial aerospace operating profit of $0.4 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. Commercial aerospace operating profit for the nine months ended September 30, 2023 also benefited from two favorable contract matters totaling approximately $120 million, which was partially offset by the absence of a prior year $50 million favorable contract adjustment resulting from a contract modification on a commercial aftermarket contract in the nine months ended September 30, 2022. The increase in commercial aerospace operating profit was partially offset by higher research and development costs of $0.1 billion. Military operating profit was relatively consistent as the increases from the sales volume discussed above were offset by higher production costs. The Other operating profit (loss) change of $2.9 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is primarily due to the charge recognized in the third quarter related to the Powder Metal Matter and a $181 million charge related to a customer insolvency during the second quarter of 2023, 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 September 30, 2023, Pratt & Whitney booked $1.1 billion for F135 sustainment and $616 million for F135 production. In addition to these bookings, in the six months ended June 30 2023, Pratt & Whitney booked $1.9 billion for F135 production Lots 15-17 and $1.7 billion for F117 sustainment, $308 million for F119 sustainment, $217 million for tanker production Lots 8 and 9, and $213 million for F135 sustainment. Raytheon Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 Change 2023 2022 Change Net sales $ 6,472 $ 6,308 3 % $ 19,464 $ 18,515 5 % Operating profit 560 686 (18) % 1,775 1,920 (8) % Operating profit margins 8.7 % 10.9 % 9.1 % 10.4 % Bookings $ 7,442 $ 8,396 (11) % $ 22,750 $ 21,823 4 % 46 Table of Contents Quarter Ended September 30, 2023 Compared with Quarter Ended September 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 189 $ (27) $ — $ 2 $ 164 Operating Profit $ (123) $ (1) $ (1) $ (1) $ (126) (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. The organic sales increase of $0.2 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily due to higher net sales of $0.2 billion from Naval Power programs and $0.1 billion from Advanced Technology programs. The increase in Naval Power programs was due to higher volumes on AIM-9X and Naval Strike Missile (NSM) programs. The increase in Advanced Technology programs includes higher net sales on certain classified programs awarded in 2022. The organic operating profit decrease of $0.1 billion in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022, was primarily due to an unfavorable change in mix and other performance of $0.1 billion and an unfavorable change in net EAC adjustments of $52 million, partially offset by the higher volume noted above. The unfavorable change in mix and other performance was spread across numerous programs and includes higher volume on lower margin programs. The unfavorable change in net EAC adjustments was spread across numerous programs with no individual or common significant driver. Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022 Factors Contributing to Total Change (dollars in millions) Organic (1) Acquisitions / Divestitures, net Restructuring Costs Other Total Change Net sales $ 1,039 $ (63) $ — $ (27) $ 949 Operating Profit $ (106) $ — $ (25) $ (14) $ (145) (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. The organic sales increase of $1.0 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to higher net sales of $0.3 billion from Advanced Technology programs, $0.2 billion from Naval Power programs, $0.2 billion from Air Power programs, and $0.2 billion from Cybersecurity, Intelligence and Services programs. The increase in Advanced Technology programs includes higher net sales on certain classified programs awarded in 2022. The increase in Naval Power programs was due to higher volumes on AIM-9X and NSM programs. The increase in Air Power programs includes higher net sales on the Advanced Medium Range Air-to-Air Missile (AMRAAM) program, driven by an award in the second quarter of 2023. The increase in Cybersecurity, Intelligence and Services programs was driven by certain classified and federal and civil programs. The organic operating profit decrease of $0.1 billion in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to an unfavorable change in mix and other performance of $0.2 billion, and an unfavorable net change in EAC adjustments of $49 million, partially offset by higher volume. The unfavorable change in mix and other performance was primarily due to higher volume on lower margin programs and an expected decline in certain program volumes that resulted in an unfavorable impact to margins . The increase in volume was principally driven by the higher net sales discussed above. The net change in EAC adjustments was primarily due to $51 million of unfavorable EAC adjustments related to significant contract options exercised in the nine months ended September 30, 2023. Backlog and Bookings – Backlog was $50 billion at September 30, 2023 and $48 billion at December 31, 2022. In addition to a number of smaller bookings, in the quarter ended September 30, 2023, Raytheon booked $1.9 billion on a number of classified contracts, including a major award, $412 million on Next Generation Short Range Interceptor (NGSRI) for the U.S. Army, $383 million to provide training and technical support for HAWK and Patriot Air Defense Systems for an international customer, $368 million for Tube-Launched, Optically-Tracked, Wireless-Guided (TOW) Missiles for the U.S. Army, U.S. Marine Corps, and international customers, $297 million to provide National Advanced Surface-to-Air Missile System (NASAMS) to Ukraine, and $277 million on Excalibur for the U.S. Army and international customers. In addition to these bookings, in the six months ended June 30 2023 Raytheon booked $3.5 billion on a number of classified contracts, $1.2 billion for AMRAAM for the U.S. Air Force and Navy and international customers, $1.2 billion to provide Patriot Air Defense system to Switzerland, $650 million on Next Generation Jammer Mid-Band (NGJ-MB) for the U.S. Navy and the government of Australia, $619 million on the SPY-6 Hardware Production and Sustainment contract for the U.S. Navy, $332 million on cyber defense services contracts for certain federal and civil customers, $320 million on StormBreaker for the U.S. Air Force and 47 Table of Contents Navy, $275 million on a seven-vehicle missile tracking satellite constellation for the Space Development Agency, $266 million to deliver airborne radars to an international customer, $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, $237 million for CLEAVAR, an integrated U.S. Army Counter- Unmanned Aircraft Systems (C-UAS) defense system, $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 operations. 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 Raytheon segment. Net Sales Operating Profit Quarter Ended September 30, Quarter Ended September 30, (dollars in millions) 2023 2022 2023 2022 Eliminations and other $ (563) $ (455) $ (69) $ (13) Corporate expenses and other unallocated items — — (63) (77) The increase in eliminations and other sales of $108 million in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily due to an increase in intersegment eliminations, principally driven by Collins. The change in eliminations and other operating profit of $56 million in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was primarily due to the impact of the September 2023 IRS notice related to the research and experimental expenditures capitalization. Corporate expenses and other unallocated items operating profit in the quarter ended September 30, 2023 was relatively consistent with the quarter ended September 30, 2022. Net Sales Operating Profit Nine months ended September 30, Nine months ended September 30, (dollars in millions) 2023 2022 2023 2022 Eliminations and other $ (1,461) $ (1,233) $ (34) $ (25) Corporate expenses and other unallocated items — — (165) (255) The increase in eliminations and other sales of $228 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to an increase in intersegment eliminations, principally driven by Collins. Eliminations and other operating profit in the nine months ended September 30, 2023 was relatively consistent with the nine months ended September 30, 2022. The decrease in Corporate expenses and other unallocated items of $90 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, was primarily due to a decrease in expenses related to the LTAMDS program, which are included in the Raytheon 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 Raytheon segment. 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 Raytheon 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 . In connection with the segment realignment, prior period results were recast in order to maintain the segment cost recognition patterns described above. 48 Table of Contents The components of the FAS/CAS operating adjustment were as follows: Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 FAS service cost (expense) $ (38) $ (84) $ (110) $ (253) CAS expense 310 432 955 1,298 FAS/CAS operating adjustment $ 272 $ 348 $ 845 $ 1,045 The change in our FAS/CAS operating adjustment of $76 million in the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 was driven by a $122 million decrease in CAS expense, partially offset by a $46 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 $200 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was driven by a $343 million decrease in CAS expense, partially offset by a $143 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 September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Amortization of acquired intangibles $ (527) $ (486) $ (1,518) $ (1,421) Amortization of property, plant and equipment fair value adjustment (14) (20) (45) (73) Amortization of customer contractual obligations related to acquired loss-making and below-market contracts 24 24 64 80 Acquisition accounting adjustments $ (517) $ (482) $ (1,499) $ (1,414) Acquisition accounting adjustments related to acquisitions in each segment were as follows: Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2023 2022 2023 2022 Collins Aerospace $ (213) $ (217) $ (644) $ (653) Pratt & Whitney (92) (72) (218) (168) Raytheon (212) (193) (637) (593) Total segment (517) (482) (1,499) (1,414) Eliminations and other — — — — Acquisition accounting adjustments $ (517) $ (482) $ (1,499) $ (1,414) Acquisition accounting adjustments for the quarter and nine months ended September 30, 2023 were relatively consistent with the quarter and nine months ended September 30, 2022, respectively. 49 Table of Contents LIQUIDITY AND FINANCIAL CONDITION (dollars in millions) September 30, 2023 December 31, 2022 Cash and cash equivalents $ 5,456 $ 6,220 Total debt 35,260 31,914 Total equity 71,213 74,178 Total capitalization (total debt plus total equity) 106,473 106,092 Total debt to total capitalization 33 % 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 September 30, 2023, we had cash and cash equivalents of $5.5 billion, of which approximatel y 34% 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. Our ability to access global debt markets and the related cost of these borrowings depends on the strength of our credit rating and market conditions. In August 2023, S&P Global downgraded our credit rating from A- / negative to BBB+/ stable. There has been no change in our credit rating with Moody’s Investors Service since the merger and remains at Baa1 / stable. Though the Company expects to continue having adequate access to funds, further declines in our credit ratings or company outlook could result in higher borrowing costs. As of September 30, 2023, we had a revolving credit agreement with various banks permitting aggregate borrowings of up to $5.0 billion. This agreement was renewed in August 2023 and expires in August 2028. As of September 30, 2023, there were no borrowings outstanding under this agreement. The Company’s $2.0 billion revolving credit agreement scheduled to expire September 2023, was terminated in August 2023, and there were no outstanding borrowings at the time of termination. 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 September 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 September 30, 2023. At September 30, 2023 short-term commercial paper borrowings outstanding had a weighted-average interest rate of 5.6%. We had the following issuances of long-term debt during the nine months ended September 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 We made the following repayment of long-term debt during the nine months ended September 30, 2023: Repayment Date Description of Notes Aggregate Principal Balance (in millions) August 16, 2023 3.650% notes due 2023 (1) $ 171 (1) The net proceeds from the 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. On October 21, 2023, our Board of Directors authorized a $10 billion accelerated share repurchase program (ASR), and on October 24, 2023 we entered into a $10 billion bridge loan facility. The proceeds of the bridge loan facility are expected to be used to fund the ASR. We intend to repay the bridge loan with long-term debt. While the cost of borrowing combined with 50 Table of Contents expected increases in long-term debt to fund the ASR are expected to increase interest expense in future periods, we do not believe this will have any material impact on our liquidity. 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 Nine Months Ended September 30, (dollars in millions) 2023 2022 Net cash flows provided by operating activities from continuing operations $ 3,172 $ 2,540 Net income from continuing operations for the nine months ended September 30, 2023 included a $2.9 billion charge related to the Powder Metal Matter, which had no effect on cash flow in the period. This charge also had the effect of increasing Accrued liabilities by $2.8 billion in the nine months ended September 30, 2023. Excluding the impact of this charge, the $0.6 billion favorable change in cash flows provided by operating activities from continuing operations in the nine months ended September 30, 2023 compared to in the nine months ended September 30, 2022, is primarily driven by higher net income from continuing operations after adjustments for depreciation and amortization, deferred income tax benefit, stock compensation cost, and net periodic pension and other postretirement income. Also contributing to the change in cash flows provided by operating activities from continuing operations was a net decrease in tax payments further discussed below, and a net favorable change in contract assets and contract liabilities due to the timing of collections. These favorable changes were partially offset by higher accounts receivable as a result of increased sales volume and related factoring activity. The Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Factoring activity resulted in an increase of approximately $0.4 billion in cash provided by operating activities during the nine months ended September 30, 2023, compared to an increase of approximately $1.5 billion in cash provided by operating activities during the nine months ended September 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 $1.3 billion and $2.2 billion in the nine months ended September 30, 2023 and 2022, respectively. Cash Flow - Investing Activities Nine Months Ended September 30, (dollars in millions) 2023 2022 Net cash flows used in investing activities from continuing operations $ (2,061) $ (1,891) 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 $0.2 billion change in cash flows used in investing activities from continuing operations in the nine months ended September 30, 2023 compared to the nine months ended September 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. 51 Table of Contents Capital expenditures in the nine months ended September 30, 2023 increased by $177 million from the nine months ended September 30, 2022 primarily due to investments in production facilities across all our business segments. Customer financing assets receipts, net were $41 million and $25 million in the nine months ended September 30, 2023 and 2022, respectively, and include leased asset pool activity as well as customer financing activity. During the nine months ended September 30, 2023 and 2022, we increased other intangible assets by $536 million and $318 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 nine months ended September 30, 2023 and 2022, we had net cash payments of $18 million and $259 million, respectively, from the settlement of these derivative instruments not designated as hedging instruments. Cash Flow - Financing Activities Nine Months Ended September 30, (dollars in millions) 2023 2022 Net cash flows used in financing activities from continuing operations $ (1,909) $ (3,010) 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 $1.1 billion change in cash flows used in financing activities from continuing operations in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, was primarily driven by long-term debt issuances of $3.0 billion, partially offset by repayments of commercial paper, net, of $1.6 billion, higher share repurchases of $0.2 billion as discussed below, and repayment of long-term debt of $0.2 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. On October 21, 2023, our Board of Directors authorized a share repurchase program for up to $11 billion of our common stock, replacing the previous program announced on December 12, 2022. This $11 billion share repurchase authorization is inclusive of authority to enter into a $10 billion accelerated share repurchase program (ASR). Under the 2023 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 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: Nine Months Ended September 30, (dollars in millions; shares in thousands) 2023 2022 $ Shares $ Shares Shares of common stock repurchased (1) $ 2,587 29,397 $ 2,395 25,452 (1) Relates to share repurchases that were settled in cash during the period. Our Board of Directors authorized the following cash dividends: Nine Months Ended September 30, (dollars in millions, except per share amounts) 2023 2022 Dividends paid per share of common stock $ 1.730 $ 1.610 Total dividends paid $ 2,472 $ 2,337 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. Also, on October 11, 2023, the Board of Directors declared a dividend of $0.59 per share payable December 14, 2023 to shareowners of record at the close of business on November 17, 2023. 52 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no significant change in our exposure to market risk during the nine months ended September 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.