# RTX Corp: Form 10-Q for the period ended Mar 31, 2020

- Company: [RTX Corp](/companies/rtx.md) (CIK 101829)
- Form: 10-Q
- Filed: 2020-05-07
- Accepted by EDGAR: May 7, 2020, 16:54 ET
- Period: 2020-03-31
- Accession: 0000101829-20-000034
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/101829/000010182920000034/utx-20200331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/101829/000010182920000034/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $18.21bn | us-gaap:Revenues |
| Research and development | 3 months, 2020-01-01 to 2020-03-31 | $671.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-01-01 to 2020-03-31 | $2.25bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | $1.81bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-01-01 to 2020-03-31 | $380.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | $941.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-01-01 to 2020-03-31 | −$83.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | −$0.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | −$0.10 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 858,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | $661.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $412.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2020-01-01 to 2020-03-31 | $614.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2020-01-01 to 2020-03-31 | $47.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-03-31 | $8.00bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-03-31 | $38.88bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-03-31 | $139.57bn | us-gaap:Assets |
| Current liabilities | at 2020-03-31 | $31.50bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-03-31 | $97.54bn | us-gaap:Liabilities |
| Short-term borrowings | at 2020-03-31 | $1.73bn | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2020-03-31 | $39.41bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2020-03-31 | 866,160,621 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 70,872 characters.

### BUSINESS OVERVIEW

We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations for the periods presented herein are classified into four principal business segments: Otis, Carrier, Pratt & Whitney, and Collins Aerospace Systems. Otis and Carrier are referred to as the "commercial businesses," while Pratt & Whitney and Collins Aerospace Systems are referred to as the "aerospace businesses."

*Separation Transactions and Distributions.* On April 2, 2020, United Technologies Corporation (“UTC”) (since renamed Raytheon Technologies Corporation) completed the previously announced separation of its business into three independent, publicly traded companies – UTC, Carrier Global Corporation (“Carrier”) and Otis Worldwide Corporation (“Otis”) (the “Separation”). The Separation was effected by the distributions (the “Distributions”) of all of the outstanding shares of Carrier common stock and all of the outstanding shares of Otis common stock to UTC shareowners who held shares of UTC common stock as of the close of business on March 19, 2020, the record date for the Distributions. UTC distributed 866,158,910 and 433,079,455 shares of common stock of Carrier and Otis, respectively in the Distributions, which was effective at 12:01 a.m., Eastern Time, on April 3, 2020. The financial statements of Raytheon Technologies Corporation for the period ended and as of March 31, 2020 include the financial position and results of Otis and Carrier. However, with the completion of the Separation Transactions and Distributions, the historical results of Otis and Carrier will be presented as discontinued operations in our second quarter financial statements.

*Raytheon Merger.* On April 3, 2020, pursuant to an Agreement and Plan of Merger dated June 9, 2019, as amended, UTC and Raytheon Company ("Raytheon") completed their previously announced all-stock merger of equals transaction (the "Raytheon Merger"), following the completion by UTC of its previously announced Separation Transactions and Distributions. Upon closing of the Raytheon Merger, UTC changed its name to “Raytheon Technologies Corporation”.

Unless the context otherwise requires, the terms “we,” “our,” “us,” “the Company”, “Raytheon Technologies", and "RTC" mean United Technologies Corporation and its subsidiaries when referring to periods prior to the Raytheon Merger and to the combined company, Raytheon Technologies Corporation, when referring to periods after the Raytheon Merger. Unless the context otherwise requires, the terms "Raytheon Company," "Raytheon," or "RTN" mean Raytheon Company and its subsidiaries prior to the Raytheon merger. The financial statements of Raytheon Technologies Corporation for the period ended and as of March 31, 2020 include the financial position and results of Otis and Carrier and do not include the financial position or operations of Raytheon since the Separation Transactions, the Distributions and the Raytheon Merger occurred subsequent to the end of the reporting period.

The current status of significant factors affecting our business environment in 2020 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 2019 Annual Report, which is incorporated by reference in our 2019 Form 10-K, and the “Risk Factors” in Part II, Item IA of this Form 10-Q.

### General

Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. Our operations include original equipment manufacturing (OEM) and extensive related aftermarket parts and services in both our commercial and aerospace businesses. Our business mix also reflects the combination of shorter cycles at Carrier and in our commercial aerospace spares businesses, and longer cycles at Otis and in our aerospace OEM and aftermarket maintenance businesses. Our customers are in the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization.

Our military businesses' sales are affected by U.S. Department of Defense budget and spending levels, changes in market demand and the global political environment. Total sales to the U.S. Government were $2.9 billion and $2.4 billion for the quarters ended March 31, 2020 and 2019, or 16% and 13% of total Raytheon Technologies sales for those periods, respectively. Our participation in long-term production, development and sustainment programs for the U.S. Government has and is expected to contribute positively to our results in 2020.

### Impact of the COVID-19 pandemic on first quarter results and forward looking impacts

In March 2020, the coronavirus disease 2019 ("COVID-19") was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government. The pandemic has negatively affected the U.S. and global economy, disrupted global supply chains and financial markets, and resulted in significant travel restrictions, including mandated facility closures and shelter-in-place orders in numerous jurisdictions around the world. Raytheon Technologies is taking all prudent measures to protect the health and safety of our employees, such as practicing social distancing, performing deep cleaning in all of our facilities, and enabling our employees to work from home where possible. We have also taken appropriate actions to help support our communities in addressing the challenges posed by the pandemic, including the production and donation of personal protective equipment.

Our business, operations and the industries in which we operate have been significantly impacted by public and private sector policies and initiatives in the U.S. and worldwide to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote working. We began to experience issues related to COVID-19 in the first quarter, primarily related to a limited number of facility closures, less than full staffing, and disruptions in supplier deliveries, most significantly in our Aerospace businesses. However, our customers continued to receive our products during the quarter and the outbreak did not have a significant impact on our operating results for the three months ended March 31, 2020.

Subsequent to the quarter end, the continued disruption to air travel and commercial activities and the significant restrictions and limitations on businesses, particularly within the aerospace and commercial airlines industries, have negatively impacted global supply, demand and distribution capabilities. In particular, the significant decrease in air travel resulting from the COVID-19 pandemic is adversely affecting our airline and airframer customers, and their demand for the products and services of our Aerospace businesses. As of April 14, 2020, the International Air Transport Association had estimated that RPMs for the year ended December 31, 2020 could decline by 48% in comparison to the prior year due to the pandemic. As a result, our airline customers have reported significant reductions in fleet utilization, aircraft grounding and unplanned retirements, and have deferred and, in some cases, cancelled new aircraft deliveries. Airlines are shifting to cash conservation behaviors such as deferring engine maintenance, requesting extended payment terms, deferring delivery of new aircraft and spare engines and requesting discounts on engine maintenance. Additionally, we are seeing purchase order declines in line with publically communicated aircraft production volumes as OEM customers delay and cancel orders. We continue to monitor these trends and are working closely with our customers. We are actively mitigating costs and adjusting production schedules to accommodate these declines in demand. We have also begun taking actions to preserve capital and protect the long-term needs of our businesses, including cutting discretionary spending, significantly reducing capital expenditures and research and development spend, deferring merit increases, freezing non-essential hiring, repositioning employees to defense work, and furloughing a large percentage of our employees. Thus far, while some of the actions have impacted the former Raytheon Company businesses, most of these actions have been taken at our Aerospace businesses. We’re monitoring the environment closely and are prepared to take further actions if necessary. However, given the significant reduction in air travel, increased numbers of planes temporarily grounded, and continued travel restrictions that have resulted from the pandemic, we expect our future operating results, particularly those of our Aerospace businesses to be significantly impacted starting in the second quarter of 2020.

The financial impact of the COVID-19 pandemic cannot be reasonably estimated at this time as its impact depends on future developments, which are highly uncertain and cannot be predicted. While the long term outlook for the aerospace industry remains positive due the fundamental drivers of air travel demand, there is significant uncertainty with respect to when commercial air traffic levels will begin to recover, and whether and at what point capacity will return to and/or exceed pre-COVID-19 levels. Estimates of a return to pre-COVID-19 levels have generally fallen in the range of two or more years and are based on a wide-range of assumptions. New information may emerge concerning the scope, severity and duration of the COVID-19 pandemic, actions to contain its spread or treat its impact, and governmental, business and individuals’ actions taken in response to the pandemic (including restrictions and limitations on travel and transportation) among others.

We considered the outbreak and subsequent impacts to be a trigger to reassess our goodwill and intangibles valuations as well as significant assumptions of future income from our underlying assets and potential changes in our liabilities. In order to evaluate the impact, we had to make forecast assumptions of future business activity that are subject to a wide range of uncertainties, including those noted above. Based upon the dynamic environment, we will continue to evaluate in future periods whether these assumptions continue to be reasonable and will update the forecasts as needed.

Based upon our analysis, we have determined that none of our goodwill has been impaired as of March 31, 2020. The reporting unit that was closest to impairment was a reporting unit at Collins Aerospace Systems with a fair value in excess of net book value, including goodwill, of approximately $1.5 billion or 15%. The Company did however record a total of $144 million ($82 million at Collins Aerospace Systems and $62 million at Pratt & Whitney) in write-downs of assets in our aerospace businesses primarily related to the impairment of a trade name, increased estimated credit losses, and the impact of lower estimated future customer activity that reduced our assumptions of variable consideration and caused a write-off of manufacturing overhead in inventory in certain closed facilities.

Although the impact of COVID 19 on our commercial businesses and markets will be significant, we currently believe we have sufficient liquidity to withstand the potential impacts of COVID-19. With the completion of the Separation Transactions, the Distributions and the Raytheon Merger, we have a balanced and diversified portfolio of both aerospace and defense businesses which we believe will help mitigate the impacts of the COVID-19 pandemic and future business cycles. The former Raytheon Company businesses have not experienced significant facility closures and are taking all prudent measures similar to those discussed above.

### Other

Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government regulation of refrigerants and energy efficiency standards, elevator safety codes and fire protection regulations are important to our commercial businesses. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, and government procurement practices can impact our aerospace and defense businesses.

Global economic and political conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates, energy costs, levels of end market demand in construction, 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 earnings outlook for the remainder of 2020. With regard to political conditions, the U.S. Government suspended Turkey’s participation in the F-35 Joint Strike Fighter program because Turkey accepted delivery of the Russian-built S-400 air and missile defense system. The U.S. has imposed, and may impose additional, sanctions on Turkey as a result of this or other political disputes. Turkish companies supply components, some of which are sole-sourced, to our aerospace businesses for commercial and military engines and aerospace products. Depending upon the scope and timing of U.S. sanctions on Turkey and potential reciprocal actions, if any, such sanctions or actions could impact our aerospace businesses’ sources of supply and could have a material adverse effect on our results of operations, cash flows or financial condition. See Part II, Item 1A, "Risk Factors" in this Form 10-Q for further discussion.

### Acquisition Activity

Our growth strategy contemplates acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated, and anticipated synergies or cost savings are achieved. During the quarter ended March 31, 2020, our investment in business acquisitions was $5 million. As previously discussed, on April 3, 2020 the Company completed the Raytheon Merger. During the quarter ended March 31, 2020, the Company incurred transaction expenses associated with the Raytheon Merger of $29 million.

### CRITICAL ACCOUNTING ESTIMATES

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 2019 Annual Report, incorporated by reference in our 2019 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting estimates during the quarter ended March 31, 2020.

### RESULTS OF OPERATIONS

### Net Sales

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net Sales | $18,210 | $18,365 |

The factors contributing to the total percentage change year-over-year in total net sales for the Quarter ended March 31, 2020 are as follows:

|  | Quarter Ended March 31, 2020 |
| --- | ---: |
| Organic change | —% |
| Foreign currency translation | (1)% |
| Acquisitions and divestitures, net | —% |
| Other | —% |
| Total % change | (1)% |

Net sales declined 1% during the quarter ended March 31, 2020 in comparison to the prior year, primarily reflecting the unfavorable impact of foreign currency translation. Organic sales growth of 12% at Pratt & Whitney, driven by higher sales across all channels, was offset by organic sales declines at each of the other segments. Organic sales at Collins Aerospace

Systems declined 1%, primarily driven by lower commercial aerospace OEM sales reflecting lower sales related to the Boeing 737 Max program, partially offset by higher military sales and higher commercial aerospace aftermarket sales. At Otis, organic sales declined 2% reflecting lower new equipment sales driven by declines in Asia and the Americas, partially offset by broad-based service sales growth. Organic sales at Carrier declined 9% driven by decreases in HVAC, refrigeration and fire & security.

### Cost of Products and Services Sold

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Total cost of products and services sold | $13,408 | $13,707 |
| Percentage of net sales | 73.6% | 74.6% |

The factors contributing to the percentage change year-over-year for the quarter ended March 31, 2020 in total cost of products and services sold are as follows:

|  | Quarter Ended March 31, 2020 |
| --- | ---: |
| Organic change | 1% |
| Foreign currency translation | (1)% |
| Acquisitions and divestitures, net | (1)% |
| Other | (1)% |
| Total % change | (2)% |

Total cost of products and services sold for the quarter ended March 31, 2020 increased 1% organically as growth driven by the organic sales increase at Pratt & Whitney was largely offset by the impact of declines in organic sales at Carrier and Otis. On an organic basis, Total cost of products and services sold at Collins Aerospace Systems was consistent with the prior year. The 1% decline in Acquisitions and divestitures, primarily reflects the impact of a prior year divestiture at Collins Aerospace Systems. The decline in Other of 1% reflects the absence of prior year inventory step-up amortization at Collins Aerospace Systems recorded in connection with the acquisition of Rockwell Collins.

### Gross Margin

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Gross margin | $4,802 | $4,658 |
| Percentage of net sales | 26.4% | 25.4% |

The increase in gross margin as a percentage of sales for the quarter ended March 31, 2020 reflects a 310 basis point improvement at Collins Aerospace Systems primarily driven by the absence of prior year inventory step-up amortization recorded in connection with the acquisition of Rockwell Collins. Otis gross margin increased 110 basis points primarily driven by favorable new equipment margins and overall sales mix. Gross margin at Carrier increased 30 basis points as favorable material productivity and lower year-over-year commodity costs were largely offset by the impact of lower volumes and unfavorable mix. These increases were partially offset by a 50 basis point decline in gross margin at Pratt & Whitney as a decline in product margins was largely offset by higher service margins.

### Research and Development

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Company-funded | $671 | $728 |
| Percentage of net sales | 3.7% | 4.0% |
| Customer-funded | $626 | $551 |
| Percentage of net sales | 3.4% | 3.0% |

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 majority of the company-funded spending is incurred by the aerospace businesses. The year-over-year decrease (8%) in company-funded research and development for the quarter ended March 31, 2020 was driven by lower expenses across various programs at Pratt & Whitney (5%) and Collins Aerospace

Systems (3%). For the quarter ended March 31, 2020 customer-funded research and development increased 14%, driven by higher expenses across various programs at Pratt & Whitney (8%) and Collins Aerospace Systems (6%).

### Selling, General and Administrative

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Selling, general and administrative expenses | $2,248 | $1,997 |
| Percentage of net sales | 12.3% | 10.9% |

Selling, general and administrative expenses increased 13% in the quarter ended March 31, 2020. The increase in expenses primarily reflects costs associated with the Separation Transactions (10%), and costs associated with the Raytheon Merger (1%). The growth in Selling, general and administrative expenses also includes higher expenses at Pratt & Whitney (4%) driven by increased credit reserves related to the impact of COVID-19 and increased headcount and employee compensation related expenses. These increases were partially offset by lower expenses at Carrier (1%) primarily driven by lower restructuring charges. Selling, general and administrative expenses at Collins Aerospace Systems and Otis were consistent with the prior year.

We are continuously evaluating our cost structure and have implemented restructuring actions as a method of keeping our cost structure competitive. As appropriate, the amounts reflected above include the beneficial impact of restructuring actions on Selling, general and administrative expenses. See Note 9: Restructuring Costs and the Restructuring Costs section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

### Other (Loss) Income, Net

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Other (loss) income, net | $(76) | $112 |

Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, as well as other ongoing and nonrecurring items. The year-over-year decrease in Other income (168%) for the quarter ended March 31, 2020 primarily reflects the impairment of an investment at Carrier (63%), an asset impairment at Otis (60%), the impairment of a tradename at Collins Aerospace Systems resulting from the projected impact of COVID-19 (36%) and lower equity earnings in unconsolidated entities (17%), primarily at Carrier. These decreases were partially offset by the absence of a prior-year loss on the sale of a business at Collins Aerospace Systems (22%).

### Interest Expense, Net

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Interest expense | $400 | $450 |
| Interest income | (20) | (19) |
| Interest expense, net | $380 | $431 |
| Average interest expense rate | 3.6% | 3.6% |
| Debt extinguishment costs | $660 | $— |

Interest expense, net decreased 11% for the quarter ended March 31, 2020. Debt extinguishment costs of $660 million were incurred in the quarter in connection with the early repayment of outstanding principal associated with the Separation Transactions. The Average interest expense rate in the table above excludes these debt extinguishment costs. The average maturity of our long-term debt at March 31, 2020 is approximately 14 years.

### Income Taxes

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Effective tax rate | 98.5% | 21.8% |

As a result of the Separation Transactions and the Raytheon Merger, coupled with the impact of the wide range of uncertainties of the COVID-19 pandemic, rather than applying a forecasted annualized effective tax rate, the Company recorded its first quarter tax expense based upon income and tax items as they occurred in the quarter. The increase in the effective tax rate for the quarter ended March 31, 2020 is primarily the result of tax charges in connection with the Company’s Separation Transactions, including the impairment of deferred tax assets not expected to be utilized.

As shown in the table above, the effective tax rate for the quarter ended March 31, 2020 is 98.5%; the effective income tax rate for the same period, excluding restructuring, and non-operational nonrecurring items is 22.4%. The full year rate is subject to change as guidance and interpretations related to the Tax Cuts and Jobs Act of 2017 (TCJA) continue to be finalized. Additionally, we anticipate variability in the tax rate quarter to quarter from potential discrete items.

### Net Income Attributable to Common Shareowners

*(dollars in millions, except per share amounts)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net (loss) income attributable to common shareowners | $(83) | $1,346 |
| Diluted (loss) earnings per share from operations | $(0.10) | $1.56 |

Net income attributable to common shareowners for the quarter ended March 31, 2020 includes restructuring charges, net of tax benefit, of $14 million, as well as a net charge for significant non-operational and/or nonrecurring items, including the impact of taxes, of $1,614 million primarily reflecting costs associated with the Separation Transactions. The effect of restructuring charges and significant non-operational and/or nonrecurring items was a charge of $1.88 per diluted share for the quarter ended March 31, 2020. The effect of foreign currency translation and Pratt & Whitney Canada hedging generated an unfavorable impact of $0.02 on diluted earnings per share.

Net income attributable to common shareowners for the quarter ended March 31, 2019 includes restructuring charges, net of tax benefit, of $83 million as well as a net charge for significant non-operational and/or nonrecurring items, net of tax, of $218 million. The effect of restructuring charges and significant non-operational and/or nonrecurring items on diluted earnings per share for the quarter ended March 31, 2019 was a charge of $0.35 per share while the effect of foreign currency translation and Pratt & Whitney Canada hedging generated an unfavorable impact of $0.03 per diluted share.

### Restructuring Costs

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Restructuring costs | $19 | $112 |

Restructuring actions are an essential component of our operating margin improvement efforts and relate to existing and recently acquired operations. Charges generally arise from severance related to workforce reductions, facility exit and lease termination costs associated with the consolidation of field and manufacturing operations and costs to exit legacy programs. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.

**2020 Actions.** During the quarter ended March 31, 2020, we recorded net pre-tax restructuring charges of $8 million relating to ongoing cost reduction actions initiated in 2020. We expect to incur additional restructuring charges of $9 million to complete these actions. We are targeting to complete in 2020 and 2021 the majority of the actions initiated in 2020. We expect recurring pre-tax savings in continuing operations to increase to approximately $11 million annually over the two-year period subsequent to initiating the actions. Approximately 92% of the total expected pre-tax charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the quarter ended March 31, 2020, we had cash outflows of approximately $2 million related to the 2020 actions.

**2019 Actions.** During the quarters ended March 31, 2020 and 2019, we recorded net pre-tax restructuring charges of $10 million and $73 million, respectively, for actions initiated in 2019. We expect to incur additional restructuring charges of $109 million to complete these actions. We are targeting to complete in 2020 the majority of the remaining workforce and facility related cost reduction actions initiated in 2019. We expect recurring pre-tax savings in continuing operations to increase over the two-year period subsequent to initiating the actions by approximately $223 million annually, of which, approximately $79 million was realized during the quarter ended March 31, 2020. Approximately 84% of the total expected pre-tax charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the quarter ended March 31, 2020, we had cash outflows of approximately $34 million related to the 2019 actions.

In addition, during the quarter ended March 31, 2020, we recorded net pre-tax restructuring costs totaling $1 million for restructuring actions initiated in 2018 and prior. For additional discussion of restructuring, see Note 9 to the Condensed Consolidated Financial Statements.

### Segment Review

Segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. Adjustments to reconcile segment reporting to the consolidated results for the quarters ended March 31, 2020 and 2019 are included in "Eliminations and other", which also includes certain smaller subsidiaries. We attempt to quantify material factors within our discussion of the results of each segment whenever those factors are determinable. However, in some instances, the factors we cite within our segment discussion are based upon input measures or qualitative information that does not lend itself to quantification when discussed in the context of the financial results measured on an output basis and are not, therefore, quantified in the below discussions.

### Commercial Businesses

Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, and Carrier also serves customers in the commercial and transport refrigeration industries. Sales in the commercial businesses are influenced by a number of external factors, including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, credit markets and other global and political factors including the impact of the COVID-19 pandemic. As previously discussed, the COVID-19 pandemic has negatively affected the U.S. and global economy, disrupted global supply chains and financial markets, and resulted in significant travel and transport restrictions. The extent of the pandemic's impact on our Commercial businesses will depend on a wide range of future developments as previously discussed, all of which are uncertain and cannot be accurately predicted. Carrier's financial performance can also be influenced by production and utilization of transport equipment and, in the case of its residential business, weather conditions. To ensure adequate supply of products in the distribution channel, Carrier customarily offers its customers incentives to purchase products. The principal incentive program provides reimbursements to distributors for offering promotional pricing on Carrier products. We account for incentive payments made as a reduction to sales.

At constant currency and excluding the effect of acquisitions and divestitures, Carrier equipment orders in the quarter ended March 31, 2020 decreased 10% in comparison to the same period of the prior year, driven by decreases in residential HVAC (11%), transport refrigeration (23%), commercial HVAC (8%) and Fire and Security products (5%) equipment orders. At constant currency, Otis new equipment orders in the quarter were consistent with the prior year.

Summary performance for each of the commercial businesses for the quarters ended March 31, 2020 and 2019 was as follows:

*(dollars in millions)*

|  | Otis 2020 | 2019 | Change | Carrier 2020 | 2019 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $2,966 | $3,096 | (4)% | $3,888 | $4,323 | (10)% |
| Cost of Sales | 2,069 | 2,195 | (6)% | 2,766 | 3,088 | (10)% |
|  | 897 | 901 | —% | 1,122 | 1,235 | (9)% |
| Operating Expenses and Other | 526 | 475 | 11% | 759 | 706 | 8% |
| Operating Profits | $371 | $426 | (13)% | $363 | $529 | (31)% |

Operating Profit Margins 12.5 % 13.8 % 9.3 % 12.2 %

### Otis –

### Quarter Ended March 31, 2020 Compared with Quarter Ended March 31, 2019

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | (2)% | (2)% | —% | —% | —% |
| Cost of Sales | (3)% | (2)% | (1)% | —% | —% |
| Operating Profits | 6% | (2)% | —% | 4% | (21)% |

The organic sales decrease of 2% primarily reflects lower new equipment sales (4%) driven by declines in Asia and the Americas, partially offset by broad-based service sales growth (2%).

The operational profit increase of 6% was driven by:

- favorable price and mix (3%)
- favorable transactional foreign exchange gains from mark-to-market adjustments and embedded foreign currency derivatives within certain new equipment contracts (3%)

The 21% decrease in "Other" primarily reflects an asset impairment (16%) and costs associated with the Company's separation of the Otis business (6%).

### Carrier –

### Quarter Ended March 31, 2020 Compared with Quarter Ended March 31, 2019

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | (9)% | (1)% | —% | —% | —% |
| Cost of Sales | (9)% | (1)% | —% | —% | —% |
| Operating Profits | (20)% | —% | —% | 5% | (16)% |

The organic sales decrease of 9% was driven by decreases in HVAC (5%), refrigeration (3%) and fire & security (1%). The decrease includes the unfavorable impact of the COVID-19 pandemic across all Carrier businesses.

Operational profit decreased 20% as the favorable net impact of cost and productivity, including lower commodities and tariffs (8%, combined) was more than offset by lower volume and unfavorable mix, net of favorable price (23%, net). Lower joint venture income (4%), primarily driven by a product issue, also contributed to the decline.

The 16% decrease in "Other" primarily reflects the impairment of an investment (13%) and costs associated with the Company's separation of the Carrier business (3%).

### Aerospace Businesses

The aerospace businesses serve both commercial and government aerospace customers. Revenue passenger miles (RPMs), U.S. Government military and space spending, and the general economic health of airline carriers are all barometers for our aerospace businesses. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits. As previously discussed, the COVID-19 pandemic has negatively affected the U.S. and global economy, disrupted global supply chains and financial markets, and resulted in significant travel restrictions which have a significant and direct impact on the operational and financial performance of our Aerospace businesses. We have begun to experience issues in our Aerospace businesses related to COVID-19, primarily related to a few facility closures, less than full staffing, and disruptions in supplier deliveries. However, our customers continued to receive our products during the quarter and the outbreak did not have a significant impact on our operating results for the three months ended March 31, 2020. Given the significant reduction in worldwide flights, increased numbers of planes temporarily grounded and continued travel restrictions that have resulted from the pandemic, we expect our future operating results to be significantly impacted beginning in the second quarter of 2020. As of April 14, 2020, the International Air Transport Association had estimated that RPMs for the year ending December 31, 2020 could decline by 48% in comparison to the prior year as a result of the pandemic. The extent of this impact will depend on a wide range of future developments as previously discussed, all of which are uncertain and cannot be accurately predicted.

Our commercial aftermarket businesses continue to evolve as a significant portion of our aerospace businesses' customers are covered under long-term aftermarket service agreements at Pratt & Whitney and Collins Aerospace Systems. These agreements are comprehensive long-term spare part and service agreements with our customers. We expect a continued shift to long-term aftermarket service agreements in lieu of transactional spare part sales as new aerospace products enter our customers' fleets under long-term service agreements and legacy fleets are retired. However, this trend may be impacted by actions taken by customers as a result of the COVID-19 pandemic as described above. For the first three months of 2020, as compared with 2019, total commercial aerospace aftermarket sales increased 3% at Collins Aerospace Systems and 4% at Pratt & Whitney.

Operating profit in the quarter ended March 31, 2020 included net favorable changes in aerospace contract estimates totaling $10 million, reflecting net favorable contract adjustments at Collins Aerospace Systems of $28 million, partially offset by net unfavorable contract adjustments of $18 million at Pratt & Whitney. Operating profit in the quarter ended March 31,

2019 included significant net unfavorable changes in aerospace contract estimates totaling $12 million, primarily reflecting unfavorable net contract adjustments at Pratt & Whitney.

Summary performance for each of the aerospace businesses for the quarters ended March 31, 2020 and 2019 was as follows:

*(dollars in millions)*

|  | Pratt & Whitney 2020 | 2019 | Change | Collins Aerospace Systems 2020 | 2019 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $5,351 | $4,817 | 11% | $6,438 | $6,513 | (1)% |
| Cost of Sales | 4,393 | 3,931 | 12% | 4,576 | 4,830 | (5)% |
|  | 958 | 886 | 8% | 1,862 | 1,683 | 11% |
| Operating Expenses and Other | 519 | 453 | 15% | 770 | 827 | (7)% |
| Operating Profits | $439 | $433 | 1% | $1,092 | $856 | 28% |

Operating Profit Margins 8.2 % 9.0 % 17.0 % 13.1 %

### Pratt & Whitney –

### Quarter Ended March 31, 2020 Compared with Quarter Ended March 31, 2019

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 12% | (1)% | —% | —% | —% |
| Cost of Sales | 12% | —% | —% | —% | —% |
| Operating Profits | 8% | (3)% | —% | 3% | (7)% |

\* *For Pratt & Whitney only, the transactional impact of foreign exchange hedging at Pratt & Whitney Canada has been netted against the translational foreign exchange impact for presentation purposes in the table above. For all other segments these foreign exchange transactional impacts are included within the organic/operational caption in their respective tables. Due to its significance to Pratt & Whitney's overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial performance.*

The organic sales growth of 12% primarily reflects higher commercial OEM sales (5%), higher military sales (5%), and higher commercial aftermarket sales (2%).

The operational profit increase of 8% was primarily driven by:

- higher military margin contribution (13%) driven by the sales increase noted above
- the favorable impact of a customer contract settlement (9%)
- lower research and development costs (9%)

These increases were partially offset by:

- higher selling, general and administrative expenses (21%), primarily driven by an increase in estimated credit loss reserves resulting from the impact of the COVID-19 pandemic

The 7% decrease in "Other" primarily reflects the absence of a prior year licensing sale (4%) and the absence of a prior year gain on a divestiture (3%).

### Collins Aerospace Systems –

### Quarter Ended March 31, 2020 Compared with Quarter Ended March 31, 2019

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | (1)% | —% | —% | —% | —% |
| Cost of Sales | —% | —% | (1)% | (1)% | (3)% |
| Operating Profits | (5)% | —% | 6% | 4% | 23% |

43

The organic sales decrease of 1% reflects lower commercial aerospace OEM sales (5%) primarily driven by lower sales related to the Boeing 737 Max program (3%). This decline was partially offset by higher military sales (3%), and higher commercial aerospace aftermarket sales (1%).

The decrease in operational profit of 5% primarily reflects:

- lower commercial aerospace margin contribution (15%) driven by lower commercial aerospace OEM sales and charges related to the unfavorable impact of the COVID-19 pandemic, partially offset by the commercial aftermarket sales growth noted above

This decrease was partially offset by:

- gains on the revaluation of net monetary assets to their functional currencies (3%)
- higher military margin contribution (2%) driven by the sales growth noted above
- lower research and development costs (2%)
- the favorable impact of a contract related matter (2%)

The 23% increase in "Other" primarily reflects the absence of prior year amortization of inventory fair value step-up associated with the Rockwell Collins acquisition (21%), and the absence of a prior year loss on the sale of a business (3%), partially offset by a partial impairment of a tradename primarily resulting from the projected impact of COVID-19 (5%).

### Eliminations and other –

*(dollars in millions)*

|  | Net Sales Quarter Ended March 31, 2020 | 2019 | Operating Profits Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(433) | $(384) | $(343) | $(101) |
| General corporate expenses | — | — | (115) | (98) |

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 businesses. The year-over-year increase in sales eliminations for the quarter ended March 31, 2020, as compared to the same periods of 2019, reflects an increase in the amount of inter-segment eliminations, principally between our aerospace businesses. The decrease in operating profits related to Eliminations and other for the quarter ended March 31, 2020 is primarily driven by costs associated with the Separation Transactions as well as costs associated with the Raytheon Merger.

### LIQUIDITY AND FINANCIAL CONDITION

*(dollars in millions)*

|  | March 31, 2020 | December 31, 2019 | March 31, 2019 |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $8,001 | $7,378 | $6,240 |
| Total debt | 46,319 | 43,648 | 45,186 |
| Net debt (total debt less cash and cash equivalents) | 38,318 | 36,270 | 38,946 |
| Total equity | 41,935 | 44,231 | 41,946 |
| Total capitalization (total debt plus total equity) | 88,254 | 87,879 | 87,132 |
| Net capitalization (total debt plus total equity less cash and cash equivalents) | 80,253 | 80,501 | 80,892 |

|  |  |  |  |
| --- | ---: | ---: | ---: |
| Total debt to total capitalization | 52% | 50% | 52% |
| Net debt to net capitalization | 48% | 45% | 48% |

### Liquidity and Financial Condition as of March 31, 2020

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows. In the first quarter of 2020, our cash flows from operations, net of capital expenditures was $249 million. The March 31, 2020 cash flows from operations reflect cash payments associated with the Company's portfolio separation costs of approximately $730 million. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, redemptions of debt, and the ability to attract long-term capital at satisfactory terms.

At March 31, 2020, we had cash and cash equivalents of $8.0 billion, of which approximately 43% was held by 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 no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, we will continue to permanently reinvest these earnings. We have repatriated approximately $1.3 billion of cash for the quarter ended March 31, 2020.

On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions, divestitures or other legal obligations. As of March 31, 2020 and December 31, 2019, the amount of such restricted cash was approximately $65 million and $42 million, respectively.

Historically, our strong credit ratings and financial position have enabled us to issue long-term debt at favorable interest rates. Our ability to obtain debt financing is partly a function of our existing debt-to-total-capitalization level as well as our credit standing. Our debt-to-total-capitalization of 52% at March 31, 2020 is up 200 basis points from December 31, 2019 and flat compared to March 31, 2019. As of March 31, 2020, these ratios are inclusive of Otis and Carrier cash and debt balances which have been distributed on April 3, 2020 and exclude cash and debt balances of Raytheon Company.

In preparation for and in anticipation of the Separation Transactions, the Distributions and the Raytheon Merger, the Company, Otis and Carrier, entered into, and the Company terminated, a number of credit agreements in the quarter ended March 31, 2020.

As of March 31, 2020, we had credit agreements with various banks permitting aggregate borrowings of up to $4.35 billion, including: a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which were terminated on April 3, 2020 upon the completion of the Raytheon Merger. On March 16, 2020, we entered into a revolving credit agreement with various banks permitting aggregate borrowings of up to $5.0 billion which became available upon completion of the Raytheon Merger on April 3, 2020. This credit agreement matures on April 3, 2025.

As of March 31, 2020, our maximum commercial paper borrowing limit was $4.35 billion. There was $500 million of commercial paper borrowings as of March 31, 2020. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock. Generally, the need for commercial paper borrowings arises when the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.

On March 23, 2020, we entered into a $500 million term loan credit agreement which matures on the earlier of June 18, 2020 and the date that is 30 days after the Raytheon Merger. On March 20, 2020, we entered into a $500 million term loan credit agreement which will mature on June 18, 2020. As of March 31, 2020, we had borrowed $1.0 billion under these term loan credit agreements.

As of March 31, 2020, Carrier entered into a revolving credit agreement with various banks permitting aggregate borrowings of up to $2.0 billion pursuant to an unsecured, unsubordinated 5-year revolving credit agreement, maturing on February 10, 2025. This credit agreement became available upon Carrier's separation on April 3, 2020.

As of March 31, 2020, Otis entered into a revolving credit agreement with various banks permitting aggregate borrowings of up to $1.5 billion pursuant to an unsecured, unsubordinated 5-year revolving credit agreement, maturing on February 10, 2025. This credit agreement became available upon Otis' separation on April 3, 2020.

On February 10, 2020, Otis entered into a term loan credit agreement providing for a $1.0 billion unsecured, unsubordinated 3-year loan credit agreement which matures on February 10, 2023. On March 27, 2020 Otis drew on the full amount of the term loan and distributed the full proceeds to Raytheon Technologies in connection with the separation. The borrowings under the term loan agreement are classified as long-term debt on the Condensed Consolidated Balance Sheet as of March 31, 2020.

On February 10, 2020, Carrier entered into a term loan credit agreement providing for a $1.75 billion unsecured, unsubordinated 3-year loan credit agreement which matures February 10, 2023. On March 27, 2020, Carrier drew on the full amount of the term loan and distributed the full proceeds to Raytheon Technologies in connection with the separation. The borrowings under the term loan agreement is classified as long-term debt on the Condensed Consolidated Balance Sheet as of March 31, 2020.

During the quarter ended March 31, 2020, we had a $2.0 billion revolving credit agreement and a $4.0 billion term loan credit agreement, both of which we entered into on March 15, 2019 and which would have matured on March 15, 2021, or if earlier, the date that is 180 days after the date on which each of the separations of Otis and Carrier have been consummated. As of December 31, 2019, there were borrowings of $2.1 billion under the $4.0 billion term credit agreement, which were repaid during the quarter ended March 31, 2020. As of March 31, 2020, the $2.0 billion revolving credit agreement and the $4.0 billion term loan credit agreement were terminated.

Long-term debt consisted of the following:

*(dollars in millions)*

|  | March 31, 2020 | December 31, 2019 |
| --- | ---: | ---: |
| 4.875% notes due 2020 | $— | $171 |
| 4.500% notes due 2020 | — | 1,250 |
| 1.900% notes due 2020 | — | 1,000 |
| EURIBOR plus 0.20% floating rate notes due 2020 (€750 million principal value) 2 | 824 | 831 |
| 8.750% notes due 2021 | 250 | 250 |
| 3.100% notes due 2021 4 | 250 | 250 |
| 3.350% notes due 2021 | — | 1,000 |
| LIBOR plus 0.650% floating rate notes due 2021 3 | — | 750 |
| 1.950% notes due 2021 | — | 750 |
| 1.125% notes due 2021 (€950 million principal value) | — | 1,053 |
| 2.300% notes due 2022 | — | 500 |
| 2.800% notes due 2022 4 | 1,100 | 1,100 |
| 3.100% notes due 2022 | — | 2,300 |
| 1.923% notes due 2023 6 | 500 | — |
| LIBOR plus 1.125% Term Loan due 2023 (Otis) 6 | 1,000 | — |
| LIBOR plus 0.45% floating rates due 2023 6 | 500 | — |
| 1.250% notes due 2023 (€750 million principal value) | — | 831 |
| LIBOR plus 1.125% Term Loan due 2023 (Carrier) 6 | 1,750 | — |
| 3.650% notes due 2023 1 | 581 | 2,250 |
| 3.700% notes due 2023 4 | 400 | 400 |
| 2.800% notes due 2024 | — | 800 |
| 3.200% notes due 2024 4 | 950 | 950 |
| 1.150% notes due 2024 (€750 million principal value) | — | 831 |
| 2.056% notes due 2025 6 | 1,300 | — |
| 2.242% notes due 2025 6 | 2,000 | — |
| 3.950% notes due 2025 1 | 1,500 | 1,500 |
| 1.875% notes due 2026 (€500 million principal value) | — | 554 |
| 2.650% notes due 2026 1 | 719 | 1,150 |
| 2.293% notes due 2027 6 | 500 | — |
| 2.493% notes due 2027 6 | 1,250 | — |
| 3.125% notes due 2027 1 | 1,100 | 1,100 |
| 3.500% notes due 2027 4 | 1,300 | 1,300 |
| 7.100% notes due 2027 | 141 | 141 |
| 6.700% notes due 2028 | 400 | 400 |
| 4.125% notes due 2028 1 | 3,000 | 3,000 |
| 7.500% notes due 2029 1 | 550 | 550 |
| 2.150% notes due 2030 (€500 million principal value) 1 | 549 | 554 |
| 2.565% notes due 2030 6 | 1,500 | — |
| 2.722% notes due 2030 6 | 2,000 | — |
| 5.400% notes due 2035 1 | 600 | 600 |
| 6.050% notes due 2036 1 | 600 | 600 |
| 6.800% notes due 2036 1 | 134 | 134 |
| 7.000% notes due 2038 | 159 | 159 |

46

|  |  |  |
| --- | ---: | ---: |
| 6.125% notes due 2038 1 | 1,000 | 1,000 |
| 4.450% notes due 2038 1 | 750 | 750 |
| 3.112% notes due 2040 6 | 750 | — |
| 3.377% notes due 2040 6 | 1,500 | — |
| 5.700% notes due 2040 1 | 1,000 | 1,000 |
| 4.500% notes due 2042 1 | 3,500 | 3,500 |
| 4.800% notes due 2043 4 | 400 | 400 |
| 4.150% notes due 2045 1 | 850 | 850 |
| 3.750% notes due 2046 1 | 1,100 | 1,100 |
| 4.050% notes due 2047 1 | 600 | 600 |
| 4.350% notes due 2047 4 | 1,000 | 1,000 |
| 4.625% notes due 2048 1 | 1,750 | 1,750 |
| 3.362% notes due 2050 6 | 750 | — |
| 3.577% notes due 2050 6 | 2,000 |  |
| Project financing obligations 5 | 316 | 309 |
| Other (including finance leases) | 268 | 331 |
| Total principal long-term debt | 44,941 | 41,599 |
| Other (fair market value adjustments, discounts and debt issuance costs) | (347) | (315) |
| Total long-term debt | 44,594 | 41,284 |
| Less: current portion | 1,362 | 3,496 |
| Long-term debt, net of current portion | $43,232 | $37,788 |

We had no debt issuances in 2019 and had the following issuances of debt during the quarter ended March 31, 2020:

*(dollars and Euro in millions)*

| Issuance Date | Description of Notes | Aggregate Principal Balance |
| --- | --- | ---: |
| February 27, 2020 | 1.923% notes due 2023 1 | $500 |
|  | Libor plus 0.450% floating rate notes due 2023 1 | 500 |
|  | 2.056% notes due 2025 1 | 1,300 |
|  | 2.242% notes due 2025 1 | 2,000 |
|  | 2.293% notes due 2027 1 | 500 |
|  | 2.493% notes due 2027 1 | 1,250 |
|  | 2.565% notes due 2030 1 | 1,500 |
|  | 2.722% notes due 2030 1 | 2,000 |
|  | 3.112% notes due 2040 1 | 750 |
|  | 3.377% notes due 2040 1 | 1,500 |
|  | 3.362% notes due 2050 1 | 2,000 |
|  | 3.577% notes due 2050 1 | 750 |
| March 27, 2020 | Term Loan due 2023 (Otis) 1 | 1,000 |
|  | Term Loan due 2023 (Carrier) 1 | 1,750 |
|  |  | $17,300 |

1 The debt issuances and term loan draws reflect additional debt incurred by Otis and Carrier and attributed to those businesses post Separation Transactions. The net proceeds of these issuances were primarily utilized to extinguish Raytheon Technologies short term and long term debt in order to achieve the applicable net indebtedness required by the merger agreement with Raytheon.

We had the following repayments of debt during the quarter ended March 31, 2020 and the year-ended December 31, 2019:

*(dollars and Euro in millions)*

| Repayment Date | Description of Notes | Aggregate Principal Balance |
| --- | --- | ---: |
| March 29, 2020 | 4.500% notes due 2020 2,3 | $1,250 |
|  | 1.125% notes due 2021 (€950,000,000 million principal value) 2,3 | 1,082 |
|  | 1.250% notes due 2023 (€750,000,000 million principal value) 2,3 | 836 |
|  | 1.150% notes due 2024 (€750,000,000 million principal value) 2,3 | 841 |
|  | 1.875% notes due 2026 (€500,000,000 million principal value) 2,3 | 567 |
| March 3, 2020 | 1.900% notes due 2020 2,3 | 1,000 |
|  | 3.350% notes due 2021 2,3 | 1,000 |
|  | LIBOR plus 0.650% floating rate notes due 2021 2,3 | 750 |
|  | 1.950% notes due 2021 2,3 | 750 |
|  | 2.300% notes due 2022 2,3 | 500 |
|  | 3.100% notes due 2022 2,3 | 2,300 |
|  | 2.800% notes due 2024 2,3 | 800 |
| March 2, 2020 | 4.875% notes due 2020 2,3 | 171 |
| February 28, 2020 | 3.650% notes due 2023 2,3 | 1,669 |
|  | 2.650% notes due 2026 2,3 | 431 |
|  |  | $13,947 |
| November 15, 2019 | 8.875% notes due 2019 | $271 |
| November 13, 2019 | EURIBOR plus 0.15% floating rate notes due 2019 | $831 |
| November 1, 2019 | LIBOR plus 0.350% floating rate notes due 2019 | $350 |
|  | 1.500% notes due 2019 | $650 |
| July 15, 2019 | 1.950% notes1 | $300 |
|  | 5.250% notes1 | $300 |
|  |  | $2,702 |

1 The notes and term loan were acquired in connection with the Rockwell Collins acquisition and have been subsequently repaid.

2 Extinguishment of Raytheon Technologies short term and long term debt in order to achieve the net indebtedness required by the merger agreement with Raytheon

3 In connection with the early repayment of outstanding principal, Raytheon Technologies paid approximately $660 million of debt extinguishment costs.

### Liquidity and Financial Condition, Post Separation Transactions, Distributions and Raytheon Merger

As discussed in the “Business Overview section of MD&A,” the COVID-19 pandemic has negatively affected the U.S. and global economy, disrupted global supply chains and financial markets, and resulted in significant travel restrictions, including mandated facility closures and shelter-in-place orders in numerous jurisdictions around the world. In response, we have begun taking actions to preserve capital and protect the long-term needs of our business, including cutting discretionary spending, significantly reducing capital expenditures and research and development spend, deferring merit increases, freezing non-essential hiring, repositioning employees to defense work, and furloughing a large percentage of our employees. We will monitor the environment closely and are prepared to take further actions if necessary. Although our business will be significantly impacted, we currently believe we have sufficient liquidity to withstand the potential impacts.

On April 3, 2020, we completed the Separation Transactions, the Distributions and the Raytheon Merger, as described in further detail in the Business Overview. The liquidity of the newly formed Raytheon Technologies Corporation will change substantially from that which was presented as of March 31, 2020 due to the Separation Transactions, the Distributions and the Raytheon Merger.

*(dollars in millions)*

|  | Raytheon Technologies March 31, 2020 | Separation Transactions & Distributions April 3, 2020 | Addition of Raytheon Company April, 3 2020 | Raytheon Technologies April 3, 2020 |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $8,001 | $(2,756) | $3,208 | **$8,453** |
| Total debt | 46,319 | (17,606) | 4,700 | **$33,413** |
| Net debt (total debt less cash and cash equivalents) | $38,318 | $(14,850) | $1,492 | **$24,960** |

After the completion of the transactions, on April 3, 2020, our cash increased to approximately $8.5 billion and our total debt decreased to approximately $33.4 billion, which includes long-term debt of $31.6 billion. The $31.6 billion in long-term debt matures as follows:

*(dollars in millions)*

|  |  |
| --- | ---: |
| 2020 | $1,824 |
| 2021 | 535 |
| 2022 | 2,200 |
| 2023 | 981 |
| 2024 | 1,250 |
| Thereafter | 24,858 |
| Total | $31,648 |

Post the Separation Transactions, the Distributions and the Raytheon Merger, factors that will affect our overall management of liquidity will continue to be operating cash flows, capital expenditures, customer financing requirements, 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. Operating cash flows will continue to be the Raytheon Technologies’ main source of liquidity. Upon the completion of the Raytheon Merger we have over $8.0 billion of cash on hand and access to a $5.0 billion revolving credit agreement. Our current debt maturities are approximately $3.5 billion. Additionally, on May 6, 2020, we entered into a revolving credit agreement with various banks permitting aggregate borrowings of up to $2.0 billion. This credit agreement matures on May 5, 2021. On April 28, 2020, we repaid $500 million borrowed under the term loan credit agreement entered into on March 23, 2020. On May 5, 2020, we repaid $500 million borrowed under the term loan credit agreement entered into on March 20, 2020. We expect to refinance current debt maturities during the second quarter of 2020 to mitigate potential refinancing risks later in the year. We believe that we have access to sufficient sources of liquidity in the near term to meet all of our commitments.

We expect to make total contributions of approximately $275 million to our qualified pension plans in 2020. Contributions to our qualified pension plans in 2020 are expected to meet or exceed the current funding requirements.

We believe our 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

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash flows provided by operating activities | $661 | $1,500 |

Cash generated from operating activities in the quarter ended March 31, 2020 was $839 million lower than the same period in 2019 primarily driven by the decrease in Net income from operations and working capital. Cash outflows from working capital increased $442 million in the quarter ended March 31, 2020 over the prior period. Factoring activity resulted in an increase of approximately $1.5 billion in cash generated from operating activities for the quarter ended March 31, 2020, as compared to the prior year. This increase was primarily driven by an increase in factoring levels at Pratt & Whitney and Collins Aerospace Systems. Factoring activity does not reflect the factoring of certain receivables performed at customer request for which we are compensated by the customer for the extended collection cycle. Including these receivables, factoring activity resulted in an increase of approximately $532 million in cash generated from operating activities for the quarter ended March 31, 2020, as compared to the prior year.

In the quarter ended March 31, 2020, cash outflows from working capital were $887 million. Inventory increased $707 million driven by an increase at Carrier to support seasonal build, at Pratt & Whitney driven by an increase in production engines across multiple programs, aftermarket services, and disruptions related to COVID-19 and at Collins Aerospace Systems due to disruptions related to COVID-19. Contract assets, current increased $220 million primarily due to work performed in excess of billings at Pratt & Whitney. Other current assets increased $191 million due to increases in prepaid expenses. Accounts payable and other accruals decreased $318 million primarily due to portfolio separation payments, incentive compensation payments, and a reduction in payables at Otis which was partially offset by increases in Accounts payable at Carrier, Pratt & Whitney and Collins Aerospace Systems corresponding to inventory build and timing of disbursements. These outflows were partially offset by increases in Contract liabilities, current of $353 million and decreases in Accounts receivable of $196 million. The increase in Contract liabilities, current is driven by timing of billings at Otis. The decrease in Accounts receivable is primarily driven by Pratt & Whitney due to increased collections and higher factoring activity, partially offset by an increase at Otis due to timing of billing.

In the quarter ended March 31, 2019, cash outflows from working capital were $445 million. Contract assets, current increased $215 million due to work performed in excess of billings at Collins Aerospace Systems, Pratt & Whitney, and Carrier. Inventory increased $697 million primarily driven by an increase in production work in process for the Geared Turbo Fan at Pratt & Whitney, seasonal build in the HVAC businesses at Carrier, and increases at Collins Aerospace Systems. Other assets increased $165 million due to an increase in prepaid expense. Accounts payable and accrued liabilities decreased $588 million primarily due to higher collaborator share payments at Pratt & Whitney. These outflows were partially offset by decreases in Accounts receivable of $849 million primarily due to improved collections at Pratt & Whitney and increases in Contract liabilities, current of $371 million driven by seasonality of billings at Otis.

Total cash contributions to our global defined benefit pension plans during the quarters ended March 31, 2020 and 2019 were approximately $39 million and $32 million, respectively.

### Cash Flow - Investing Activities

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash flows used in investing activities | $(1,283) | $(394) |

Cash flows used in investing activities for the quarters ended March 31, 2020 and 2019 primarily reflect capital expenditures, cash investments in customer financing assets, investments/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. The $889 million increase in cash flows used in investing activities in the quarter ended March 31, 2020 compared to March 31, 2019 primarily relates to an increase in payments resulting from settlements of derivative contracts of $731 million, and the absence of small divestitures of $133 million.

Capital expenditures for the quarter ended March 31, 2020 of $412 million primarily relate to several projects at Collins Aerospace Systems and investments in production and aftermarket capacity at Pratt & Whitney.

Cash investments in businesses in the quarter ended March 31, 2020 of $5 million. There were no dispositions of businesses in the quarter ended March 31, 2020.

Customer financing activities in the quarter ended March 31, 2020 were a net use of cash of $88 million, primarily driven by additional Geared Turbofan engines to support customer fleets. We had commercial aerospace financing and other contractual commitments of approximately $14.8 billion at March 31, 2020 related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which up to $1.2 billion may be required to be disbursed during the remainder of 2020. We had commercial aerospace financing and other contractual commitments of approximately $15.0 billion at December 31, 2019.

During the quarter ended March 31, 2020, our collaboration intangible assets increased by approximately $78 million, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce's collaboration interest in IAE.

As discussed in Note 10 to the Condensed Consolidated Financial Statements, we enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures. The settlement of these derivative instruments resulted in a net cash outflow of approximately $639 million during the quarter ended March 31, 2020 compared to a net cash inflow of $92 million during the quarter ended March 31, 2019.

### Cash Flow - Financing Activities

*(dollars in millions)*

|  | Quarter Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash flows provided by (used in) financing activities | $1,362 | $(1,077) |

Our financing activities primarily include the issuance and repayment of short-term and long-term debt, payment of dividends and stock repurchases. Financing activities was a cash inflow of $1.4 billion in the quarter ended March 31, 2020 compared to a cash outflow of $1.1 billion in the quarter ended March 31, 2019. The increase in cash provided by financing activities from the prior year of $2.4 billion is driven by an increase in debt issuances of $17.2 billion, partially offset by increases in debt repayments of $13.8 billion, debt extinguishment cost payments of $0.7 billion, and an increase in short term borrowing repayments of $0.3 billion. The debt issuances as of March 31, 2020 reflect additional debt incurred by Otis and Carrier of approximately $6 billion and $11 billion, respectively. The net proceeds of these issuances were primarily utilized to extinguish Raytheon Technologies short-term and long-term debt in order to achieve the applicable net indebtedness required by the merger agreement with Raytheon.

Commercial paper borrowings and revolving credit facilities provide short-term liquidity to supplement operating cash flows and are used for general corporate purposes, including the funding of potential acquisitions and repurchases of our stock. We had approximately $500 million of outstanding commercial paper at March 31, 2020.

At March 31, 2020, management had remaining authority to repurchase approximately $1.8 billion of our common stock under the October 14, 2015 share repurchase program. Under this 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. We made cash payments of approximately $47 million to repurchase approximately 330 thousand shares of our common stock for our employee stock ownership plan during the quarter ended March 31, 2020.

We paid dividends on common stock of $0.735 per share, totaling approximately $614 million in the aggregate for the quarter ended March 31, 2020. On April 27, 2020, the Board of Directors declared a dividend of $0.475 per share payable June 18, 2020 to shareowners of record at the close of business on May 15, 2020.

### Off-Balance Sheet Arrangements and Contractual Obligations

In our 2019 Annual Report, incorporated by reference in our 2019 Form 10-K, we disclosed our off-balance sheet arrangements and contractual obligations. As of March 31, 2020, there have been no material changes to these off-balance sheet arrangements and contractual obligations outside the ordinary course of business.

## Market risk

As filed, 1,203 characters.

We have evaluated our exposure to changes in foreign currency exchange rates, interest rates and commodity prices in our market risk sensitive instruments, which are primarily cash, debt, and derivative instruments, using a value at risk analysis. Based on a 95% confidence level and a one-day holding period, at March 31, 2020, the potential loss in fair value on our market risk sensitive instruments was $1.1 billion. Our calculated value at risk exposure represents an estimate of reasonably possible net losses based on volatilities and correlations and is not necessarily indicative of actual results.

The significant change in our exposure to market risk during the quarter ended March 31, 2020 is attributable to the negative effects of COVID-19 on the U.S. and global economy, disrupted supply chains and financial markets. As discussed in Liquidity, we currently believe we have sufficient liquidity to withstand the potential impact of COVID-19. In addition, the completion of the Separation Transactions, the Distributions and the Raytheon Merger have resulted in a diversified portfolio of both aerospace and defense businesses which allows us to better balance risks across the portfolio.

## Controls and procedures

As filed, 11,006 characters.

As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation under the supervision and with the participation of our management, including the President and Chief Executive Officer (CEO), the Executive Vice President & Chief Financial Officer (CFO) and the Corporate Vice President, Controller (Controller), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our CEO, our CFO and our Controller have concluded that, as of March 31, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO, our CFO and our Controller, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

### Cautionary Note Concerning Factors That May Affect Future Results

This Form 10-Q contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other information released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “expectations,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “outlook,” “confident,” “on track” and other words of similar meaning. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash, share repurchases, tax rates, R&D spend, other measures of financial performance, potential future plans, strategies or transactions, credit ratings and net indebtedness, other anticipated benefits to RTC of United Technologies Corporation’s (“UTC”) Rockwell Collins acquisition, the merger between UTC and Raytheon Company (“Raytheon”, and such merger, the “merger”) or the spin-offs by UTC of Otis Worldwide Corporation and Carrier Global Corporation into separate independent companies (the “separation transactions”), including estimated synergies and customer cost savings resulting from the Raytheon Merger and the separation transactions and other statements that are not solely historical facts. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation:

- the effect of economic conditions in the industries and markets in which RTC operates in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, levels of end market demand in construction and in both the commercial and defense segments of the aerospace industry, levels of air travel, financial condition of commercial airlines, and the impact of pandemic health issues (including COVID-19 and its effects, among other things, on global supply, demand and distribution capabilities as the COVID-19 outbreak continues and results in an increasingly prolonged period of disruption to air travel and commercial activities generally, and significant restrictions and limitations on businesses, particularly within the aerospace and commercial airlines industries), aviation safety concerns, weather conditions and natural disasters, the financial condition of our customers and suppliers, and the risks associated with U.S. government sales (including changes or shifts in defense spending due to budgetary constraints, spending cuts resulting from sequestration or the allocation of funds to governmental responses to COVID-19, a government shutdown, or otherwise, and uncertain funding of programs);
- challenges in the development, production, delivery, support, performance and realization of the anticipated benefits (including our expected returns under customer contracts) of advanced technologies and new products and services;
- the scope, nature, impact or timing of acquisition and divestiture activity, including among other things the integration of UTC’s and Raytheon’s businesses or the integration of RTC with other businesses and realization of synergies and opportunities for growth and innovation and incurrence of related costs and expenses;
- RTC’s levels of indebtedness, capital spending and research and development spending;
- future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure;
- the timing and scope of future repurchases by RTC of its common stock, which may be suspended at any time due to various factors, including market conditions and the level of other investing activities and uses of cash;
- delays and disruption in delivery of materials and services from suppliers;
- company and customer-directed cost reduction efforts and restructuring costs and savings and other consequences thereof (including the potential termination of U.S. government contracts and performance under undefinitized contract awards and the potential inability to recover termination costs);
- new business and investment opportunities;
- the ability to realize the intended benefits of organizational changes;
- the anticipated benefits of diversification and balance of operations across product lines, regions and industries;
- the outcome of legal proceedings, investigations and other contingencies;
- pension plan assumptions and future contributions;
- the impact of the negotiation of collective bargaining agreements and labor disputes;
- the effect of changes in political conditions in the U.S. and other countries in which RTC and its businesses operate, including the effect of changes in U.S. trade policies or the U.K.’s withdrawal from the European Union, on general market conditions, global trade policies and currency exchange rates in the near term and beyond;
- the effect of changes in tax (including U.S. tax reform enacted on December 22, 2017, which is commonly referred to as the Tax Cuts and Jobs Act of 2017), environmental, regulatory and other laws and regulations (including, among other things, export and import requirements such as the International Traffic in Arms Regulations and the Export Administration Regulations, anti-bribery and anti-corruption requirements, including the Foreign Corrupt Practices Act, industrial cooperation agreement obligations, and procurement and other regulations) in the U.S. and other countries in which RTC and its businesses operate;
- the possibility that the anticipated benefits from the combination of UTC’s and Raytheon’s businesses (including ongoing integration activities from historic UTC and Raytheon acquisitions prior to the merger) cannot be realized in full or at all or may take longer to realize than expected, or the possibility that costs or difficulties related to the integration of UTC’s businesses with Raytheon’s will be greater than expected or may not result in the achievement of estimated synergies within the contemplated time frame or at all;
- the ability of RTC to retain and hire key personnel and the ability of our personnel to continue to operate our facilities and businesses around the world in light of, among other factors, the COVID-19 outbreak;
- the expected benefits to RTC of the separation transactions;
- the intended qualification of (i) the Raytheon Merger as a tax-free reorganization and (ii) the separation transactions as tax-free to UTC and former UTC shareowners, in each case, for U.S. federal income tax purposes; and
- the risk that dis-synergy costs incurred in connection with the separation transactions will exceed legacy UTC’s or legacy Raytheon’s estimates.

In addition, this Form 10-Q includes important information as to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. See the "Notes to Condensed Consolidated Financial Statements" under the heading "Note 16: Contingent Liabilities," the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Business Overview," "Critical Accounting Estimates," "Results of Operations," and "Liquidity and Financial Condition," and the sections titled "Legal Proceedings" and "Risk Factors" in this Form 10-Q and in our 2019 Annual Report and 2019 Form 10-K. Additional important information as to these factors is included in our 2019 Annual Report in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Restructuring Costs," "Environmental Matters" and "Governmental Matters", in our 2019 Form 10-K in the "Business" section under the headings "General," "Description of Business by Segment" and "Other Matters Relating to Our Business as a Whole" and in our Form S-4 Registration Statements (Registration No. 333-220883) and (Registrations No. 333-232696) under the heading "Risk Factors". The forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information as to factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements is disclosed from time to time in our other filings with the SEC.

## Risk factors

As filed, 90,288 characters.

### Risk Factors

The Company is restating its Risk Factors for the purpose of addressing risks related to the Company following the completion of the Separation Transactions and the Raytheon Merger and the COVID-19 pandemic.

Our business, financial condition, operating results and cash flows can be impacted by the factors set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

***Our Business May be Adversely Affected by Changes in Global Economic, Capital Market and Political Conditions.***

Our business, financial condition, operating results and cash flows may be adversely affected by changes in global economic conditions and geopolitical risks, including credit market conditions, levels of consumer and business confidence, commodity prices, exchange rates, levels of government spending and deficits, the threat environment, trade policies, political conditions, actual or anticipated default on sovereign debt and other challenges that could affect the global economy. These economic conditions affect businesses such as ours in a number of ways. Tightening of credit in financial markets could adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations, could result in a decrease in or cancellation of orders for our products and services, and could impact the ability of our customers to make payments. Similarly, such tightening of credit may adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. In addition, geopolitical risks, including changes in the threat environment and political conditions, could affect government priorities, budgets and policies, which could impact sales of defense and other products and services. Our global business is also adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending, air travel, the financial strength of airlines and business jet operators, and government procurement.

***COVID-19 Has Affected and Will Continue to Affect our Business, Supply Chains, Operations and the Industries in which We Operate.***

The COVID-19 pandemic has significantly increased global economic and demand uncertainty. Public and private sector policies and initiatives in the U.S. and worldwide to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote working, have impacted the Company’s business, operations and the industries in which we operate. The disruption to air travel and commercial activities generally, and significant restrictions and limitations on businesses, attributable to the COVID-19 pandemic has negatively impacted the global supply, demand and distribution capabilities of the aerospace and commercial airlines industries. In particular, the decrease in air travel resulting from the COVID-19 pandemic has resulted in the loss of business and leisure passenger traffic and is adversely affecting our airline and airframer customers, and their demand for our products and services. Aircraft manufacturers are reducing production rates due to fewer expected aircraft deliveries and, as a result, demand for our products in the original equipment manufacturer market has decreased. In addition, significant declines in aircraft flight hours are resulting in reduced demand for our aftermarket parts and services. COVID-19 may also limit the ability of our customers generally to perform, including in making timely payment to us.

In addition, we provide aircraft financing commitments, in the form of debt or lease financing, to commercial aerospace customers. COVID-19 may increase the need for these customers to utilize these financing commitments due to its adverse impact on their businesses or their inability to obtain more favorable terms from other financing sources. If financing commitments are exercised, the Company will need to divert cash to satisfy them, and these customers may be unable to make payments.

The COVID-19 pandemic has impacted, and will continue to impact, the Company’s supply chains, including the ability of suppliers and vendors to provide their products and services to the Company. At this time, some of our suppliers have reduced or ceased operations as a result of COVID-19. This supply chain impact could also contribute to performance delays on our customer obligations and increase our costs.

We are facing increased operational challenges from the need to protect employee health and safety, workplace disruptions, and restrictions on the movement of people and goods, at our own facilities and at customers and suppliers. In addition, continued reduced operations and business disruption – including if significant portions of our workforce or our suppliers’ workforces are unable to work effectively due to facilities closures, illness, quarantines, government actions or other restrictions – could hinder or delay our production capabilities generally, and otherwise impede our ability to perform on our obligations to our customers, and may also result in increased costs to us. The continued spread of COVID-19 may also affect our ability to hire, develop and retain our talented and diverse workforce, and to maintain our corporate culture. Any costs associated with COVID-19 may not be fully recoverable or adequately covered by insurance.

The COVID-19 pandemic also may materially impact U.S. government sales, including changes or shifts in defense spending due to budgetary constraints, the allocation of funds to governmental responses to COVID-19, a failure to complete the government budget process resulting in a Continuing Resolution (CR) or a government shutdown, or otherwise, and uncertain funding of programs. COVID-19 has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, and creating volatility and unpredictability in financial and capital markets, foreign currency exchange rates, and interest rates. These impacts and the resulting volatility and disruption to the global capital markets may increase the cost of capital and may adversely impact access to capital for the Company and our suppliers and customers including heightened counter party risks associated with foreign exchange hedging transactions, interest rate swaps, solvency of revolving credit facility banks and the ability to raise capital both short-term and long-term.

Any of these factors, depending on the severity and duration of the outbreak and its effects, could have a material adverse effect on our business, results of operations, financial condition and cash flows. The financial impact of the COVID-19 pandemic cannot be reasonably estimated at this time. The extent of such impact depends on future developments, which are highly uncertain and cannot be predicted in the short- or long-term, including new information which may emerge concerning the scope, severity and duration of the COVID-19 pandemic, actions to contain its spread or treat its impact, and governmental, business and individuals’ actions taken in response to the pandemic (including restrictions and limitations on travel and transportation, and changes in travel patterns and work environments) among others.

***Changes in U.S. Government Defense Spending Could Negatively Impact our Financial Position, Results of Operations, Liquidity and Overall Business.***

U.S. government sales constitute a significant portion of our consolidated sales. Our U.S. government revenues largely result from contracts awarded under various U.S. government programs, primarily defense-related programs with the U.S. Department of Defense (DoD), and a broad range of programs with the U.S. Intelligence Community and other departments and agencies. Changes in U.S. government defense spending could negatively impact our results of operations, financial condition and liquidity. Our programs are subject to U.S. government policies, budget decisions and appropriation processes which are driven by numerous factors including: (1) geopolitical events; (2) macroeconomic conditions; and (3) the ability of the U.S. government to enact relevant legislation, such as appropriations bills. In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. In previous years the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both governmental shut-downs and CRs providing only enough funds for U.S. government agencies to continue operating at prior-year levels. Further, if the U.S. government debt ceiling is not raised and the national debt reaches the statutory debt ceiling, the U.S. government could default on its debts. As a result, U.S. government defense spending levels are subject to a wide range of outcomes and are difficult to predict beyond the near-term due to numerous factors, including the external threat environment, future governmental priorities and the state of governmental finances. Significant changes in U.S. government defense spending or changes in U.S. government priorities, policies and requirements could have a material adverse effect on our results of operations, financial condition and liquidity.

***We Face Risks Relating to Our U.S. Government Contracts and the Mix of our U.S. Government Contracts and Programs that Could Negatively Impact our Financial Condition, Results of Operations, Liquidity and Overall Business.***

The termination of one or more of our contracts, or the occurrence of performance delays, cost overruns, product failures, materials or components shortages, or contract definitization delays, could negatively impact our results of operations, financial condition and liquidity.

U.S. government contracts generally permit the government to terminate the contract, in whole or in part, without prior notice, at the U.S. government’s convenience or for default based on performance. If one of our contracts is terminated for convenience, we would generally be entitled to payments for our allowable costs and would receive some allowance for profit on the work performed. If one of our contracts is terminated for default, we would generally be entitled to payments for work accepted by the U.S. government. A termination arising out of our default could expose us to liability and have a negative impact on our ability to obtain future contracts and orders. In addition, we are a subcontractor and not the prime contractor on some contracts. In these arrangements, the U.S. government could terminate the prime contract for convenience or otherwise, without regard to our performance as a subcontractor. Further, we can give no assurance that we would be awarded new U.S. government contracts to offset the revenues lost as a result of the termination of any of our contracts.

In addition, because the funding of U.S. government programs is subject to congressional appropriations made on a fiscal year basis even for multi-year programs, programs are often only partially funded initially and may not continue to be funded in future years. Appropriation bills may be delayed, which may result in delays to funding, the collection of receivables and our contract performance due to lack of authorized funds to procure related products and services. Under certain circumstances, we may use our own funds to meet our customer’s desired delivery dates or other requirements, but we may not be reimbursed. Further, if appropriations for one of our programs become unavailable, reduced or delayed, the U.S. government may terminate for convenience our contract or subcontract under that program.

Our U.S. government contracts typically involve the development, application and manufacture of advanced defense and technology systems and products aimed at achieving challenging goals. New technologies may be untested or unproven and in some instances, product requirements or specifications may be modified. As a result, we may experience technological and other performance difficulties, which may result in delays, setbacks, cost overruns or product failures, and could divert our attention or resources from other projects. Our failure to execute effectively on our development programs could impact our future sales opportunities. Additionally, in order to win certain U.S. government contracts, we may be required to invest in development prior to award as our customers demand more mature and proven solutions. These additional investment amounts may not be worthwhile if we are not chosen for new contract awards.

Our U.S. government contracts are typically either fixed-priced contracts or cost reimbursement contracts. Fixed-price contracts are predominantly either firm fixed-price (FFP) contracts or fixed-price incentive (FPI) contracts. Under FFP contracts, we receive a fixed price irrespective of the actual costs we incur and we therefore carry the burden of any cost overruns. Under FPI contracts, we generally share with the U.S. government savings for cost underruns less than target costs and expenses for cost overruns exceeding target costs up to a negotiated ceiling price. We carry the entire burden of cost overruns exceeding the ceiling price amount under FPI contracts. Under cost reimbursable contracts, we are reimbursed for allowable costs and paid a fixed or performance-based fee, but we are generally not reimbursed for unauthorized costs exceeding a cost ceiling amount or costs not allowable under the contract or applicable regulations. If we are unable to control costs or if our initial cost estimates are incorrect, our profitability could be negatively affected, particularly under fixed-price development contracts. We may also experience cost underruns which would reduce contract value and related expected revenues, and we may be unable to expand the contract scope or secure additional work to offset the resulting lost revenues. While contracts for development programs with complex design and technical challenges are typically cost reimbursable, they can be FFP or FPI. In addition, other contracts in backlog are for the transition from development to production, which includes starting and stabilizing a manufacturing and test line while the final design is still being validated.

Over the past several years, the DoD has increased its use of Other Transaction Authority (OTA) contracts, under which it awards research and development work without all of the procurement requirements that typically apply to DoD contracts, including justification of sole source awards. For example, we were awarded an OTA contract for the Lower Tier Air and Missile Defense Sensor (LTAMDS) in late 2019. OTAs may use fixed-price contracts during all phases of the contract, or mandated contract cost sharing (e.g., one-third of program costs). They may also require non-traditional subcontractor participation and impose other requirements that differ from our other DoD contracts. If we are unable to perform on our OTA contracts, including any applicable non-traditional requirements, it could negatively impact our results of operations, financial condition and liquidity.

From time to time, we may begin performance under an undefinitized contract award with a not-to-exceed price prior to completing contract negotiations in order to support U.S. government priorities. Uncertainties in final contract price, specifications and terms, or loss of negotiating leverage associated with particularly long delays in contract definitization, may negatively affect our profitability.

In addition, as discussed more fully below, our U.S. government contracts also require us to comply with extensive and evolving procurement rules and regulations and subject us to potential U.S. government audits, investigations, and disputes.

We are also involved in programs that are classified by the U.S. government, which have security requirements that place limits on our ability to discuss our performance on these programs, including any risks, disputes and claims.

***Our International Operations Subject Us to Economic Risk As Our Results of Operations and Liquidity May Be Adversely Affected by Changes in Foreign Currency Fluctuations, Economic Conditions, Political Factors, Trade Policies, and Changes in Local Government Regulation.***

We conduct our business on a global basis, with a significant portion of sales derived from international operations, including U.S. export sales. Changes in local and regional economic conditions, including fluctuations in exchange rates, may affect product demand and reported profits in our non-U.S. operations where transactions may be denominated in local currencies. In addition, currency fluctuations may affect the prices we pay suppliers for materials used in our products. As a result, our operating margins also may be negatively impacted by worldwide currency fluctuations that result in higher costs for certain cross-border transactions. Our financial statements are denominated in U.S. Dollars. Accordingly, fluctuations in exchange rates may also give rise to translation gains or losses when financial statements of non-U.S. operating units are translated into U.S. Dollars. A strengthening of the U.S. Dollar against other major foreign currencies could adversely affect our results of operations.

In our commercial aerospace businesses, the majority of our sales are, consistent with established industry practice, transacted in U.S. Dollars, while the majority of costs at locations outside the U.S. are incurred in the applicable local currency (principally the Euro, the Canadian Dollar, the British Pound, and the Polish Zloty). For operating units with U.S. Dollar sales and local currency costs, there is foreign currency exposure that could impact our results of operations depending on market changes in the exchange rate of the U.S. Dollar against the applicable foreign currencies. In particular, Pratt & Whitney Canada is especially susceptible to fluctuations in exchange rates for this reason. To manage certain exposures, we employ long-term hedging strategies associated with U.S. Dollar sales.

Our international sales and operations are subject to risks associated with local government laws, regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls, capital controls, employment regulations, and repatriation of earnings. Government policies on international trade and investments such as import quotas, capital controls, taxes or tariffs, whether adopted by individual governments or regional trade blocs, can affect demand for our products and services, impact the competitive position of our products or prevent us from being able to manufacture or sell products in certain countries. The implementation of more restrictive trade policies, including the imposition of tariffs, or the renegotiation of existing trade agreements by the U.S. or by countries where we sell large quantities of products and services or procure supplies and other materials incorporated into our products, including in connection with the United Kingdom's withdrawal from the European Union, could negatively impact our business, results of operations and financial condition. For example, a government's adoption of "buy national" policies or retaliation by another government against such policies, such as tariffs, could have a negative impact on our results of operations.

Our international sales and operations are also sensitive to changes in foreign national priorities, including government budgets, as well as to regional and local political and economic factors, including volatility in energy prices, changes in threat environments and geopolitical uncertainties, and changes in U.S. foreign policy. International transactions may involve increased financial and legal risks due to differing legal systems and customs and contract laws and regulations, and include contractual terms that differ from those of similar contracts in the U.S. or that may be interpreted differently in foreign countries.

In addition, as discussed more fully below, our international sales also require us to comply with U.S. laws, regulations and policies, including the International Traffic in Arms Regulations (ITAR), the Export Administration Regulations (EAR), the Foreign Corrupt Practices Act (FCPA), and other anti-corruption, sanctions, and export laws and regulations.

In addition, we conduct business in certain countries primarily for our commercial aerospace businesses including Argentina, Brazil, China, India, Indonesia, Mexico, Poland, Russia, South Africa, Turkey, Ukraine and countries in the Middle East and Central Asia, that carry high levels of currency, political, compliance and economic risk. We expect that sales to these and other emerging markets will continue to account for a significant portion of our commercial aerospace sales in the long term as our businesses evolve and as these and other developing nations and regions around the world increase their demand for our products, particularly our aerospace products. Emerging market operations can present many risks, including cultural differences (such as employment and business practices), volatility in gross domestic product, economic and government instability, the imposition of exchange and capital controls, and the risks associated with exporting components manufactured in those countries for incorporation into finished products completed in other countries. While these factors and their impact are difficult to predict, any one or more of them could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. Of note, in 2019 the U.S. government suspended Turkey’s participation in the F-35 Joint Strike Fighter program because Turkey accepted delivery of the Russian-built S-400 air and missile defense system. The U.S. has imposed, and may impose additional, sanctions on Turkey as a result of this or other political disputes. Turkish companies supply components, some of which are sole-sourced, to our aerospace businesses for commercial and military engines and aerospace products, as well as to our defense businesses. Depending upon the scope and timing of U.S. sanctions on Turkey and potential reciprocal actions, if any, such sanctions or actions could impact our sources of supply and could have a material adverse effect on our results of operations, cash flows or financial condition.

Our international business faces substantial competition from both U.S. companies and foreign companies. In some instances, foreign companies may be owned by foreign governments or may receive loans, marketing subsidies and other assistance from their governments that may not be available to U.S. companies or our foreign subsidiaries. In addition, foreign companies may be subject to fewer restrictions on technology transfer than U.S. companies.

Our international contracts, particularly for sales of defense products and services, may include industrial cooperation agreements requiring specific local purchases, manufacturing agreements, technology transfer agreements or financial support obligations, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements. Approvals of offset or ICIP thresholds and requirements may be subjective and time-consuming and may delay contract awards. Offset requirements may, in certain countries, include the creation of a joint venture with a local company that may control the venture. In addition, certain customers’ demands are increasing for greater offset or ICIP commitment levels, higher-value content, including the transfer of technologies and capabilities, and local production and economic development.

We also are exposed to risks associated with using third-party foreign representatives and consultants for international sales, and teaming with international subcontractors, partners and suppliers in connection with international programs. As a result of the above factors, we could experience financial penalties and award and funding delays on international programs, our profitability on these programs could be negatively affected, and we could incur losses on these programs that could negatively impact our results of operations, financial condition and liquidity.

***Our Financial Performance Is Dependent on the Condition of the Aerospace Industry.***

Our aerospace businesses constitute a substantial portion of our financial results, and the performance of those businesses is directly tied to the economic conditions in the commercial aerospace industry, which is cyclical in nature. Capital spending and demand for aircraft engines, aerospace products and component aftermarket parts and services by commercial airlines, aircraft operators and aircraft manufacturers are influenced by a wide variety of factors, including current and predicted traffic levels, load factors, aircraft fuel prices, labor issues, airline profits, airline consolidation, bankruptcies, competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns, general economic conditions, corporate profitability, cost reduction efforts and remaining performance obligations levels. In particular, tightening of credit in financial markets could adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations, could result in a decrease in or cancellation of orders for our products and services, and could impact the ability of our customers to make payments. Similarly, such tightening of credit may adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. Any of these factors could reduce the sales and margins of our aerospace businesses. Other factors, including future terrorist actions, aviation safety concerns, pandemic health issues or major natural disasters, could also dramatically reduce the demand for commercial air travel, which could negatively impact the sales and margins of our aerospace businesses. For example, the COVID-19 pandemic has impacted, and continues to impact, our business, as described above.

Additionally, because a substantial portion of product deliveries to commercial aerospace customers is scheduled for delivery beyond 2020, changes in economic conditions may cause customers to request that firm orders be rescheduled or canceled. At times, our aerospace businesses also enter into firm fixed-price or cost-share development contracts, which may require us to bear cost overruns related to unforeseen technical and design challenges that arise during the development and early production stages of the program. In addition, our aerospace businesses face intense competition from domestic and foreign manufacturers of new equipment and spare parts. Spare parts sales and aftermarket service trends are affected by similar factors, including usage, pricing, technological improvements, regulatory changes and the retirement of older aircraft. Furthermore, because of the lengthy research and development cycle involved in bringing products in these business segments to market, we cannot predict the economic conditions that will exist when any new product is ready to enter into service. A reduction in spending in the commercial aviation industry could have a significant effect on the demand for our products, which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***We Use a Variety of Raw Materials, Supplier-Provided Parts, Components, Sub-Systems and Contract Manufacturing Services in Our Businesses, and Significant Shortages, Supplier Capacity Constraints, Supplier Production Disruptions or Price Increases Could Increase Our Operating Costs and Adversely Impact the Competitive Positions of Our Products.***

Our reliance on U.S. and non-U.S. suppliers (including third-party manufacturing suppliers, subcontractors and service providers) and commodity markets to secure raw materials, parts, components and sub-systems used in our products exposes us to volatility in the prices and availability of these materials and services. In many instances, we depend upon a single source of supply, manufacturing, services support or assembly, or participate in commodity markets that may be subject to allocations of limited supplies by suppliers. Our defense businesses are subject to specific procurement requirements that limit the types of materials they use, which may further limit the suppliers and subcontractors they may utilize. They also must require suppliers to comply with various DoD cybersecurity requirements. A disruption in deliveries from our suppliers, supplier capacity constraints, supplier production disruptions, supplier quality issues, closing, bankruptcy or financial difficulties of our suppliers, price increases, or decreased availability of raw materials or commodities, including as a result of war, natural disaster, health pandemic or other business continuity events, could have a material adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe that our supply management and production practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Nonetheless, price increases, supplier capacity constraints, supplier production disruptions or the unavailability of some raw materials may have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. For example, the COVID-19 pandemic has impacted, and continues to impact, our supply chain, as described above.

***We Design, Manufacture and Service Products that Incorporate Advanced Technologies; The Introduction of New Products and Technologies Involves Risks and We May Not Realize the Degree or Timing of Benefits Initially Anticipated; Competition within Our Markets May Reduce Our Revenues and Market Share and Limit Our Future Market Opportunities.***

We seek to achieve growth through the design, development, production, sale and support of innovative commercial aerospace and defense systems and products that incorporate advanced technologies. The product, program and service needs of our customers change and evolve regularly, and we invest substantial amounts in research and development efforts to pursue advancements in a wide range of technologies, products and services.

Of particular note, Pratt & Whitney is currently producing and delivering the PW1000G Geared Turbofan engine to power various aircraft, including the A320neo family of aircraft. The level of orders received for the Geared Turbofan family of engines, coupled with a requirement to achieve mature production levels in a very short time frame, require significant additional manufacturing and supply chain capacity. If any of our production ramp-up efforts are delayed, if suppliers cannot timely deliver or perform to our standards, and/or if we identify or experience issues with in-service engines, we may not meet customers’ delivery schedules, which could result in material additional costs, including liquidated damages or other liabilities that could be assessed under existing contracts.

Our defense businesses currently have significant development programs in key technological areas on which the U.S. government is focusing, such as interceptors, space-based sensors, high-energy lasers, hypersonics, counter-hypersonics and advanced propulsion systems.

Our ability to realize the anticipated benefits of our technological advancements depends on a variety of factors, including meeting development, production, certification and regulatory approval schedules; execution of internal and external performance plans; availability of supplier and internally produced parts and materials; performance of suppliers and subcontractors; availability of supplier and internal facility capacity to perform maintenance, repair and overhaul services on our products; hiring and training of qualified personnel; achieving cost and production efficiencies; identification of emerging technological trends in our target end-markets; validation of innovative technologies; the level of customer interest in new technologies and products; and customer acceptance of products we manufacture or that incorporate technologies we develop. For example, our customers manufacture end products and larger aerospace systems that incorporate certain of our aerospace products. These systems and end products may also incorporate additional technologies manufactured by third parties and involve additional risks and uncertainties. As a result, the performance and market acceptance of these larger systems and end products could affect the level of customer interest in and acceptance of our products in the marketplace.

Development efforts divert resources from other potential investments in our businesses, and these efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products or products that incorporate our technologies may not develop or grow as we anticipate. We or our customers, suppliers or subcontractors may encounter difficulties in developing and producing new products and services, and may not realize the degree or timing of benefits initially anticipated or may otherwise suffer significant adverse financial consequences. Due to the design complexity of our products or those of our customers or third party manufacturers that incorporate our products into theirs or our customers’ products, we may experience delays in completing the development and introduction of new products or we may experience the suspension of production after these products enter into service due to safety concerns. Delays and/or suspension of production could result in increased development costs or deflect resources from other projects. In particular, we cannot predict with certainty whether, when and in what quantities our aerospace businesses will produce and sell aircraft engines, aircraft systems and components, and other products currently in development, pending required certifications or after entry into service.

We operate in highly competitive markets and our competitors may have more extensive or more specialized engineering, manufacturing, marketing and servicing capabilities than we do. Our contracts are typically awarded on a competitive basis. Our bids are based upon, among other items, the cost to provide the products and services. To generate an acceptable return on our investment in these contracts, we must be able to accurately estimate our costs to provide the services and deliver the products and to be able to complete the contracts in a timely manner. If we fail to accurately estimate our costs or the time required to complete a contract, the profitability of our contracts may be materially and adversely affected. Some of our contracts provide for liquidated damages in the event that we are unable to perform and deliver in accordance with the contractual specifications and schedule. In addition, we may face customer-directed cost reduction targets that could have a material adverse effect on the profitability of our contracts if these targets are not achieved when required. Moreover, in certain cases for DoD awards, we have seen highly competitive pricing, in which a bidder may anticipate making a substantial investment in a program in order to win the work. In addition, bid protests from unsuccessful bidders on new program awards are frequent. Generally, a bid protest will delay the start of contract activities, delay earnings, and could result in the award decision being overturned and require a re-bid of the contract.

Furthermore, our competitors, including our customers, may develop competing technologies which gain market acceptance in advance of or instead of our products. The possibility also exists that our competitors or customers might develop new technologies or offerings that might cause our existing technologies and offerings to become obsolete. In addition, the possibility exists that competitors or customers will develop aftermarket services and aftermarket parts for our products that attract customers and adversely impact our return on investment on new products. We also anticipate companies continuing to enhance their competitive position against our defense businesses as a result of continued domestic and cross-border defense industry consolidation and the expansion of competitors’ capabilities throughout the supply chain through vertical integration. We are also facing heightened competition in our domestic and international markets from foreign and multinational firms. Additionally, some customers, including the DoD, are increasingly turning to commercial contractors, rather than traditional defense contractors, for information technology and other support work. If we are unable to continue to compete successfully against our current or future competitors in our core markets, we may experience declines in revenues and market share.

Any of the foregoing could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***Exports and Imports of Certain of Our Products Are Subject to Various Export Control, Sanctions and Import Regulations and May Require Authorization From the U.S. Department of State, the U.S. Department of Commerce, the U.S. Department of the Treasury, the U.S. Department of Homeland Security, the U.S. Department of Justice or Regulatory Agencies of Other Countries.***

We must comply with various laws and regulations relating to the export and import of products, services and technology from and into the U.S. and other countries having jurisdiction over our operations. In the U.S., these laws and regulations include, among others, the Export Administration Regulations (EAR) administered by the U.S. Department of Commerce, the International Traffic in Arms Regulations (ITAR) administered by the U.S. Department of State, embargoes and sanctions regulations administered by the U.S. Department of the Treasury, and import regulations administered by the U.S. Department of Homeland Security and the U.S. Department of Justice. Certain of our products, services and technologies have military or strategic applications and are on the U.S. Munitions List of the ITAR and the Commerce Control List of the EAR or are otherwise subject to the EAR, or on the U.S. Munitions Import List and we are required to obtain licenses and authorizations from the cognizant U.S. government agencies before selling these products outside of the U.S. or importing these products into the U.S. U.S. foreign policy may affect the licensing processor or otherwise prevent us from engaging in business dealings with certain individuals, entities or countries. Any failure by us, our customers or our suppliers to comply with these laws and regulations could result in civil or criminal penalties, fines, seizure of our products, adverse publicity, restrictions on our ability to export or import our products, or the suspension or debarment from doing business with the U.S. government. Moreover, any changes in export control, sanctions or import regulations may further restrict the export of our products or services, and the possibility of such changes requires constant monitoring to ensure we remain compliant. Our ability to obtain required licenses and authorizations on a timely basis or at all is subject to risks and uncertainties, including changing U.S. government policies or laws or delays in Congressional action due to geopolitical and other factors. Some of our direct commercial sale contracts with international customers have requirements relating to these licenses and authorizations and may permit the customer to terminate the contract if we fail to receive these approvals in a timely manner. If we are not successful in obtaining or maintaining the necessary licenses or authorizations in a timely manner, our sales relating to those approvals may be reversed, prevented or delayed. We have several direct commercial sales contracts for precision guided munitions with certain Middle Eastern customers for which U.S. government approvals had been delayed. Any restrictions on the export or import of our products or product lines could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***As a U.S. Government Contractor, We are Subject to Risks Relating to U.S. Government Audits, Investigations, and Disputes.***

We are subject to U.S. government investigations relating to our U.S. government contracts. Such U.S. government investigations often take years to complete and could result in administrative, civil or criminal liabilities, including repayments, fines, treble and other damages, forfeitures, restitution or penalties, or could lead to suspension or debarment of U.S. government contracting or of export privileges. For instance, if we or one of our business units were charged with wrongdoing in connection with a U.S. government investigation (including fraud, or violation of certain environmental or export laws, as further described below), the U.S. government could suspend us from bidding on or receiving awards of new U.S. government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. government could fine and debar us from new U.S. government contracting for a period generally not to exceed three years and could void any contracts found to be tainted by fraud. We also could suffer reputational harm if allegations of impropriety were made against us, even if such allegations are later determined to be unsubstantiated.

Further, our U.S. government contracts are subject to audit and we have received audit reports recommending the reduction of certain contract prices because, for example, cost or pricing data or cost accounting practices used to price and negotiate those contracts may not have conformed to government regulations. Some of these audit reports recommend that certain payments be repaid, delayed, or withheld, and may involve substantial amounts, which could, if the audit reports’ theories were to prevail in litigation, also have future impacts such as increasing the costs absorbed by our commercial engine businesses. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and, in some cases, continue to negotiate and/or litigate. We may be, and have been, required to make payments into escrow of disputed liabilities while the related litigation is pending. If the litigation is resolved in our favor, any such payments will be returned to us with interest. The Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA) also review the adequacy of and our compliance with our internal control systems and policies, including our accounting, purchasing, property, estimating, earned value management and material management accounting systems. Our final allowable incurred costs for each year are subject to audit and have from time to time resulted in disputes between us and the U.S. government, including DCMA claims against Pratt & Whitney to recover payments for alleged noncompliance with cost accounting standards. In some cases, the DOJ has convened grand juries to investigate possible irregularities in our costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. An adverse outcome of any audit or investigation could result in civil and criminal penalties and fines, which could negatively impact our results of operations, financial condition and liquidity. In addition, if allegations of impropriety were made against us, we could suffer serious reputational harm, which could negatively affect our financial position, results of operations and liquidity.

***We Are Subject to Litigation, Environmental, Product Safety, Anti-Corruption and Other Legal and Compliance Risks.***

We are subject to a variety of litigation and legal compliance risks. These risks relate to, among other things, product safety, personal injuries, intellectual property rights, contract-related claims, government contracts, taxes, environmental matters, competition laws and laws governing improper business practices. We or one of our businesses could be charged with wrongdoing as a result of such matters. If convicted or found liable, we could be subject to significant fines, penalties, repayments, or other damages (in certain cases, treble damages). As a global business, we are subject to complex laws and regulations in the U.S. and in other countries in which we operate. Those laws and regulations may be interpreted in different ways. They may also change from time to time, as may related interpretations and other guidance. Changes in laws or regulations could result in higher expenses. Uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights. Changes in environmental and climate change laws or regulations, including laws relating to greenhouse gas emissions, could lead to new or additional investment in product designs and could increase environmental compliance expenditures, including increased energy and raw materials costs. Climate-related events also could disrupt our businesses and require us to incur additional costs.

We use hazardous substances and generate hazardous wastes in our operations. As a result, we are subject to potentially material liabilities related to personal injuries or property damage that may be caused by hazardous substance releases and exposures. Personal injury lawsuits may involve individual and purported class actions alleging that contaminants originating from our current or former products or operating facilities caused or contributed to medical conditions, including cancers incurred by employees, former employees, third-parties' employees or residents in the area, and environmental damage or diminution of real estate values. For example, we are investigating and remediating contamination related to past practices at a number of properties and, in some cases, have in the past been named as a defendant in related “toxic tort” claims. We are also subject to laws and regulations that: (1) impose requirements for the proper management, treatment, storage and disposal of hazardous substances and wastes; (2) restrict air and water emissions from our operations (including U.S. government-owned facilities we manage); and (3) require maintenance of a safe workplace. These laws and regulations can lead to substantial fines and criminal sanctions for violations, and may require the installation of costly equipment or operational changes to limit pollution emissions, decrease the likelihood of accidental hazardous substance releases, and/or reduce the risks of injury to people. We incur, and expect to continue to incur, capital and other expenditures to comply with these laws and regulations. A criminal violation of certain U.S. environmental statutes such as the Clean Air Act and Clean Water Act could result in suspension, debarment or disqualification by the U.S. Environmental Protection Agency (EPA). A facility determined to be in violation of the criminal provisions of these statutes can be prohibited from performing any U.S. government contract work until the violation has been corrected and the EPA approves the reinstatement of the facility. Even in litigation where we believe our liability is remote, there is a risk that a negative finding or decision in a matter involving multiple plaintiffs or a purported class action could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition, in particular with respect to environmental claims in regions where we have, or previously had, significant operations. In addition, new laws, regulations, or governmental policies, sudden changes in the interpretation and enforcement of existing laws and regulations, the discovery of previously unknown contamination, or the imposition of new clean-up standards could require us to incur additional costs in the future that would have a negative effect on our results of operations, financial condition and liquidity.

Product recalls and product liability claims (including claims related to the safety or reliability of our products) also can result in significant costs, including fines, as well as negative publicity, management distraction and damage to our reputation that could reduce demand for our products and services.

In addition, the FCPA and other anti-bribery and -corruption laws generally prohibit companies and their intermediaries from making improper payments to U.S. and non-U.S. officials for the purpose of obtaining or retaining business. These laws apply to companies, individual directors, officers, employees and agents. U.S. companies also may be held liable for actions taken by strategic or local partners or representatives. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. Certain of our customer relationships outside of the U.S. are with governmental entities and are therefore subject to the FCPA and other anti-bribery and -corruption laws, including the anti-bribery and -corruption laws of non-U.S. countries. Our policies mandate compliance with these anti-bribery and -corruption laws. Despite meaningful measures that we undertake to ensure lawful conduct, which include training and internal control policies, these measures may not always prevent violations of the FCPA or similar laws. We have been subject to regulatory investigations for alleged violations of anti-bribery laws, and could be subject to such investigations in the future, which could result in criminal and civil penalties, disgorgement, further changes or enhancements to our procedures, policies and controls, personnel changes or other remedial actions. Violations of these laws, or allegations of such violations, could disrupt our operations, cause reputational harm, involve significant management distraction and result in a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Cybersecurity and data privacy and protection laws and regulations are evolving and present increasing compliance challenges, which may increase our costs, affect our competitiveness, cause reputational harm, and expose us to substantial fines or other penalties.

### Our Business and Financial Performance May Be Adversely Affected By Cyber-attacks on Information Technology Infrastructure and Products

Our business may be impacted by disruptions to our own or third-party information technology (IT) infrastructure, which could result from, among other causes, cyber-attacks on or failures of such infrastructure or compromises to its physical security. We also encounter attempts to infiltrate our products and services and sabotage or disable their use by our customers.

Cybersecurity threats are evolving and include, but are not limited to, both attacks on our IT infrastructure and attacks on the IT infrastructure of our customers, suppliers, subcontractors and other third parties with whom we do business routinely, both on premises and in the cloud, attempting to gain unauthorized access to our confidential or other proprietary information, classified information, or information relating to our employees, customers and other third parties, or to disrupt our systems or the systems of third parties. Cybersecurity threats also include attacks targeting the security, integrity and/or availability of the hardware, software and information installed, stored or transmitted in our products, including after the purchase of those products and when they are incorporated into third-party products, facilities or infrastructure, and insider threat attacks. Such attacks could disrupt our systems or those of third parties (including mission critical systems), impact business operations, result in unauthorized release of confidential or otherwise protected information, and corrupt our data or that of third parties.

We have experienced cyber-based attacks, and due to the evolving threat landscape, may continue to experience them going forward, potentially with more frequency. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries, including nation states, which target us and other defense contractors. We continue to make investments and adopt measures designed to enhance our protection, detection, response, and recovery capabilities, and to mitigate potential risks to our technology, products, services and operations from potential cybersecurity threats. However, given the unpredictability, nature and scope of cyber-attacks, it is possible that we are unable to prevent cyber attacks, that potential vulnerabilities could go undetected for an extended period, that we may be unsuccessful in defending an attack against those vulnerabilities, or that we may otherwise be unable to mitigate customer losses and other potential consequences of these attacks. In addition, some products and services that we provide to customers, particularly those related to public security, may raise potential liabilities related to privacy and intellectual property. In some cases we must rely on the safeguards put in place by our customers, suppliers, subcontractors and other third parties to protect against and report cyber threats. We could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromise of confidential information, intellectual property or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our or third-party systems, networks or products, financial losses from remedial actions, loss of business, or potential liability, penalties, fines and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. Some of these risks may be heightened due to the Company and its suppliers and other third parties operating with a significant number of employees working remotely. Due to the evolving nature of such risks, the impact of any potential incident cannot be predicted. Further, our insurance coverage may not be adequate to cover all related costs and we may not otherwise be fully indemnified for them.

### Our Business and Financial Performance May Be Adversely Affected By Threats to Our Physical Security and Other Events Outside Our Control

We could encounter threats to our physical security, including our facilities and personnel, and threats from terrorism or similar acts, any of which could disrupt our business. In addition, our business, and the businesses of our suppliers, subcontractors and service providers and customers, could be disrupted by public health crises, such as pandemics and epidemics, damaging weather or other acts of nature, or other events outside of our control. Our business may also be impacted by cyber-attacks on IT infrastructure and products, as discussed above. In addition, our business has been, and continues to be, impacted by the COVID-19 pandemic, as discussed above. Any such business disruption could subject us to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, financial losses from remedial actions, the diversion of management’s attention and resources, or loss of business, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. The impact of any such business disruption is difficult to predict.

***We Depend On Our Intellectual Property, and Have Access to Certain Intellectual Property and Information of Our Customers and Suppliers; Infringement or Failure to Protect Our Intellectual Property Could Adversely Affect Our Future Growth and Success.***

We rely on a combination of patents, trademarks, copyrights, trade secrets, nondisclosure agreements, IT security systems, internal controls and compliance systems and other measures to protect our intellectual property. We also rely on nondisclosure agreements, IT security systems and other measures to protect certain customer and supplier information and intellectual property that we have in our possession or to which we have access. The U.S. government and foreign governments have licenses under certain of our intellectual property, including certain patents, which are developed or used in performance of government contracts. Governments may use or authorize others (including our competitors) to use such patents and intellectual property for government and other purposes. Governments may challenge the sufficiency of intellectual property rights we have granted in government contracts and attempt to obtain greater rights, which could reduce our ability to protect our intellectual property rights and to compete. In some instances, we have augmented our technology base by licensing the proprietary intellectual property of others. Intellectual property obtained from third parties is also subject to challenge, invalidation, misappropriation or circumvention by third parties. In addition, we may not be able to obtain necessary licenses on commercially reasonable terms. In other instances, our ability to procure and perform government contracts requires us to obtain certain rights in the intellectual property of others through government grants. Governments may deny us the right to obtain such rights in the intellectual property of others, which may affect our ability to perform government contracts.

Our efforts to protect intellectual property and proprietary rights may not be sufficient. We cannot be sure that our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and patent applications. Our ability to protect and enforce our intellectual property rights may be limited in certain countries outside the U.S. In addition, we may be the target of competitor or other third-party patent enforcement actions seeking substantial monetary damages or seeking to prevent our sale and marketing of certain of our products or services. Our competitive position also may be adversely impacted by limitations on our ability to obtain possession of, and ownership or necessary licenses concerning, data important to the development or provision of our products or service offerings, or by limitations on our ability to restrict the use by others of data related to our products or services. We may also be subject to disruptions, losses and liability resulting from various cybersecurity attacks or information technology failures, as described above. Any of these events or factors could have a material adverse effect on our competitive position, subject us to judgments, penalties and significant litigation costs, or temporarily or permanently disrupt our sales and marketing of the affected products or services. Any of the foregoing could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***We Depend On the Recruitment and Retention of Qualified Personnel, and Our Failure to Attract, Train and Retain Such Personnel and to Maintain our Corporate Culture and High Ethical Standards Could Seriously Harm Our Business.***

Due to the specialized nature of our business, our future performance is highly dependent upon the continued services of our key technical personnel and executive officers, the development of additional management personnel, and the hiring of new qualified technical, manufacturing, marketing, sales and management personnel for our operations. Our expanded defense business increases the need for qualified personnel. Competition for personnel is intense and we may not be successful in attracting, training or retaining qualified personnel with the requisite skills or security clearances. In addition, certain personnel may be required to receive various security clearances and substantial training in order to work on certain programs or perform certain tasks. Necessary security clearances may be delayed, which may impact our ability to perform on our U.S. government contracts. Further, a significant percentage of our current workforce is nearing or eligible for retirement. To the extent that we lose experienced personnel, it is critical that we develop other employees, hire new qualified personnel and successfully manage the transfer of critical knowledge. We face competition in attracting new qualified personnel, particularly in low unemployment environments. In addition, new qualified personnel may have different expectations from our current workforce, which could result in difficulties attracting and retaining new employees. Loss of key employees, failure to attract new qualified employees or adequately train them, delays in receiving required security clearances, or delays in hiring key personnel could seriously harm our business.

We believe that a critical element of our ability to successfully attract, train and retain qualified personnel is our corporate culture, which we believe fosters innovation, collaboration and a focus on execution, all in an environment of high ethical standards. Our global operations may present challenges in maintaining these important aspects of our corporate culture. Any failure to maintain our corporate culture could negatively impact our ability to attract, train and retain essential qualified personnel who are vital to our business. Further, we rely on our key personnel to lead with integrity and to meet our high ethical standards. To the extent any of our leaders were to behave in a way that is inconsistent with our values, we could experience a materially adverse impact to our reputation and our operating results.

***We Use Estimates in Accounting For Many of Our Programs, and Changes in our Estimates Could Adversely Affect Our Future Financial Results.***

Accounting for long-term contracts and related assets requires estimates and judgments related to our progress toward completion and the long-term performance on the contract. Significant judgments include potential risks associated with the ability and cost to achieve program schedule, including customer-directed delays or reductions in scheduled deliveries, and technical and other specific contract requirements including customer activity levels and variable consideration based upon that activity. Due to the size and long-term nature of many of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Management must make assumptions and estimates regarding contract revenue and cost (such as estimates of variable consideration, including award fees and penalties), including with respect to: (1) labor productivity and availability; (2) the complexity and scope of the work to be performed; (3) the availability and cost of materials; (4) the length of time to complete the performance obligation; (5) execution by our subcontractors; (6) the availability and timing of funding from our customer; (7) overhead cost rates; (8) estimated aircraft and engine utilization; and (9) estimated part lives, among other variables. Because of the significance of management’s judgments and estimation processes described above, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future results of operations and financial condition.

***Significant changes in key estimates and assumptions, such as discount rates and assumed long-term return on plan assets (ROA), as well as our actual investment returns on our pension plan assets and other actuarial factors, could affect our earnings, equity and pension contributions in future periods.***

We must determine our pension and other postretirement benefit (PRB) plans’ expense or income, which involves significant judgment particularly with respect to our discount rate, long-term ROA and other actuarial assumptions. The discount rate assumption is set annually and we determine on an annual basis whether it is appropriate to change our long-term ROA assumption. These assumptions and other actuarial assumptions may change significantly due to changes in economic, legislative, and/or demographic experience or circumstances. Changes in our assumptions could result in negative changes to our pension and PRB plans’ expense and funded status, and our cash contributions to such plans, which would negatively impact our results of operations. In addition, differences between our actual investment returns and our long-term ROA assumption would result in a change to our pension and PRB plans’ expense and funded status and our required contributions to the plans. They may also be impacted by changes in regulatory, accounting and other requirements applicable to pensions.

***Additional Tax Expense or Additional Tax Exposures Could Affect Our Future Profitability.***

We are subject to income taxes in the United States and various international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are transactions and calculations where the ultimate tax determination is uncertain. Changes in tax laws and regulations, as well as changes and conflicts in related interpretations and other tax guidance, could materially impact our tax receivables and liabilities and our deferred tax assets and deferred tax liabilities. Additionally, in the ordinary course of business we are subject to examinations by various tax authorities. In addition to ongoing examinations, there could be additional examinations launched in the future by governmental authorities in various jurisdictions, and existing examinations could be expanded. The final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Additionally, changes in the geographic mix of our sales could impact our tax liabilities and affect our income tax expense and profitability. The global and diverse nature of our operations means that these risks will continue to exist and additional examinations, proceedings and contingencies will arise from time to time. Our competitive position, cash flows, results of operation or financial condition may be affected by the outcome of examinations, proceedings and other contingencies that cannot be predicted with certainty.

***Goodwill and Other Intangible Assets Represent a Significant Portion of Our Assets, and Any Impairment of These Assets Could Negatively Impact Our Results of Operations and Financial Condition.***

A significant portion of our assets consists of goodwill and other intangible assets, including amounts added subsequent to the Raytheon Merger. Our goodwill is subject to an impairment test annually and is also tested whenever events and circumstances indicate that goodwill may be impaired. In the event of an impairment any excess goodwill must be written off in the period of determination. Intangible assets (other than goodwill) are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an investment in a business which will require us to record goodwill and intangible assets based on the purchase price and the value of the acquired assets. We may subsequently experience unforeseen events that could adversely affect the value of our goodwill or intangible assets and trigger an impairment evaluation. Future determinations of significant impairments of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a negative impact on our results of operations and financial condition.

***We Face Certain Significant Risk Exposures and Potential Liabilities That May Not Be Adequately Covered By Indemnity or Insurance.***

A significant portion of our business relates to designing, developing and manufacturing advanced aerospace, defense and technology systems and products. New technologies may be untested or unproven. In addition, we may incur significant liabilities that are unique to our products and services. In some, but not all, circumstances, we may be entitled to indemnification from our customers through contractual provisions, and we may obtain limitations of liability and additional defenses for various reasons including the qualification of our products and services by the Department of Homeland Security (DHS) under the SAFETY Act provisions of the Homeland Security Act of 2002. The amount of the insurance coverage we maintain or indemnification to which we may be contractually or otherwise entitled may not be adequate to cover all claims or liabilities. Accordingly, we may be forced to bear substantial costs resulting from risks and uncertainties of our business, which would negatively impact our results of operations, financial condition and liquidity. Any accident, failure of, or defect in our products and services, even if fully indemnified or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete effectively. It could also affect the cost and availability of insurance in the future.

***We May Be Unable to Realize Expected Benefits From Our Cost Reduction and Restructuring Efforts and Our Profitability May Be Hurt or Our Business Otherwise Might Be Adversely Affected.***

In order to operate more efficiently and control costs, we announce from time to time restructuring plans, which include workforce reductions, global facility consolidations and other cost reduction initiatives. These plans are intended to generate operating expense savings through reductions in direct and indirect expenses as well as improved efficiencies. We may undertake further workforce reductions or restructuring actions in the future. These types of cost reduction and restructuring activities are complex. If we do not successfully manage our current restructuring activities, or any future restructuring activities, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. Risks associated with these actions and other workforce management issues include unfavorable political responses to such actions, unforeseen delays in the implementation of anticipated workforce reductions, additional unexpected costs, adverse effects on employee morale and the failure to meet operational targets due to the loss of employees or work stoppages, any of which may impair our ability to achieve anticipated cost reductions, or otherwise harm our business, or have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***We May Be Unable to Successfully Integrate the Legacy Businesses of UTC and Raytheon and Realize the Anticipated Benefits of the Raytheon Merger.***

The success of the Raytheon Merger will depend, in part, on our ability to successfully combine and integrate UTC’s and Raytheon’s legacy businesses, and realize the anticipated benefits, including synergies, cost savings, innovation and technological opportunities (including technology-driven revenue synergies) and operational efficiencies from the Raytheon Merger in a manner that does not materially disrupt existing customer, supplier and employee relations and does not result in decreased revenues due to losses of, or decreases in orders by, customers. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected, and the value of the Company common stock may decline. We may fail to realize some or all of the anticipated benefits of the Raytheon Merger if the integration process takes longer than expected or is more costly than expected.

The integration of the two companies may result in material challenges, including, without limitation:

- managing a larger, more complex combined aerospace and defense business;
- maintaining employee morale, retaining key management and other employees, and managing corporate culture;
- retaining existing business and operational relationships, including customers, suppliers and employees and other counterparties, as may be impacted by contracts containing consent and/or other provisions that may be triggered by the Raytheon Merger, and attracting new business and operational relationships;
- the diversion of management’s attention as a result of devoting attention to matters relating to the Raytheon Merger and/or the Separation and the Distributions following their consummation;
- consolidating corporate and administrative infrastructures and eliminating duplicative operations, including unanticipated issues in integrating information technology, communications and other systems;
- coordinating geographically separate organizations; and
- unforeseen expenses or delays associated with the Raytheon Merger.

Many of these factors will be outside of our control and may be exacerbated by the COVID-19 pandemic and public and private sector responses thereto, and any one of them could result in delays, increased costs, decreases in the amount of expected revenues, reduced expected cash generation, and diversion of management’s time and energy, which could materially affect our financial condition, results of operations and cash flows.

In addition, though we have completed the Separation Transactions and Distributions, we are subject to transition services arrangements under which we provide certain services to each of Otis and Carrier on a short-term, transitional basis. Providing these transition services is an additional burden on our personnel and management and may require significant amounts of their time, attention and resources, which could adversely affect our business, financial results and results of operations during this critical period of our integration.

Moreover, conditions imposed on us in connection with the regulatory approvals for the Raytheon Merger, including the divestiture of certain businesses of UTC and Raytheon and potential transition services arrangements to be entered into in connection with such divestitures, could adversely affect the Company and/or the expected benefits of the Raytheon Merger. In particular, such divestitures may divert the attention of our management and/or may not be consummated or effected to the satisfaction of regulatory authorities, which may impose additional conditions and costs on us in connection with the Raytheon Merger.

In addition, we must continue to manage the integration of other companies, assets and businesses, including the integration of Rockwell Collins, which UTC acquired on November 26, 2018. These ongoing integrations by each of UTC and Raytheon may increase the complexity of, and challenges associated with, the integration of UTC’s and Raytheon’s legacy businesses, which may make it more difficult for us to achieve the anticipated benefits of the Raytheon Merger fully or at all, or within the anticipated time frame.

The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized on a timely basis, if at all. Managing our significantly expanded commercial aerospace and defense businesses and operations will be a challenge for our employees because of, among other reasons, increased complexity of our operations and scale. We may also face increased scrutiny from governmental authorities and other third parties as a result of our increased size. While we have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of integration expenses. Moreover, many of the expenses that may be incurred are, by their nature, difficult to estimate accurately. These expenses could exceed benefits expected to be realized in connection with the Raytheon Merger.

***We May Not Be Able to Engage in Desirable Capital-Raising or Strategic Transactions.***

Under current U.S. federal income tax law, a spin-off that otherwise qualifies for tax-free treatment can be rendered taxable to the parent corporation and its stockholders as a result of certain post-spin-off transactions, including certain acquisitions of shares or assets of the parent corporation. To preserve the tax-free treatment of the Distributions, we may be limited in our ability to pursue certain equity issuances, strategic transactions, repurchases, or other transactions (including the certain dispositions of assets) that we may otherwise believe to be in the best interests of our stockholders or that might increase the value of our business.

***If Either Distribution, Together with Certain Related Transactions, Were to Fail to Qualify as a Transaction that is Generally Tax-Free, Including as a Result of Subsequent Acquisitions of Our Stock (Including Pursuant to the Raytheon Merger) or the Stock of Carrier or Otis, We Could Be Subject to Significant Tax Liabilities.***

We received (1) a private letter ruling from the IRS regarding certain U.S. federal income tax matters relating to the Separation Transactions and Distributions and (2) an opinion of outside counsel regarding the qualification of certain elements of the Distributions under Section 355 of the Code. Although we intend for the Distributions generally to be tax-free for U.S. federal income tax purposes, there can be no assurance that they will so qualify. Even if the Distributions were to otherwise qualify as tax-free transactions under Sections 355 and 368(a)(1)(D) of the Code, either Distribution or both Distributions may result in taxable gain to us (but not our stockholders) under Section 355(e) of the Code if such Distribution(s) were deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares representing a 50% or greater interest (by vote or value) in shares of Carrier, Otis, or us, as applicable. If the IRS were to determine that any post-Distribution acquisitions of Carrier stock, Otis stock, or our stock, as applicable, pursuant to such a plan (when aggregated with any pre-Distribution acquisitions of Carrier stock, Otis stock, or our stock, as applicable, pursuant to such a plan) would represent a 50% or greater interest in shares of Carrier, Otis, or us, as applicable, such determination could result in significant tax liabilities to us. For purposes of this test, even if the Raytheon Merger were treated as part of such plan, it did not result in an acquisition of a 50% or greater interest in our shares pursuant to a plan. Any such tax liabilities imposed on us may adversely affect an investment in us.

In addition, with respect to certain Separation Transactions, we obtained tax rulings in certain non-U.S. jurisdictions and/or opinions of external tax advisors, in each case, regarding the tax treatment of such Separation Transactions. Notwithstanding the receipt of such tax rulings and opinions, there can be no assurance that the relevant taxing authorities will not assert that the tax treatment of the relevant Separation Transactions differs from the conclusions reached therein. In the event the relevant taxing authorities prevail with any challenge in respect of any relevant Separation Transaction, we could be subject to significant tax liabilities, which may adversely affect an investment in us.

Under the tax matters agreement that we entered into with Otis and Carrier in connection with the Separation Transactions and Distributions, each of Otis and Carrier generally is required to indemnify us for any taxes we incur resulting from the Separation Transactions and/or the Distributions to the extent such amounts result from certain disqualifying actions by, or acquisition of equity securities of, Carrier or Otis, as applicable. Further, under the tax matters agreement, each of Otis and Carrier is generally required to indemnify us for a specified portion of any taxes we incur (a) arising as a result of the failure of either of the Distributions and certain related transactions to qualify as a transaction that is generally tax-free or a failure of any Separation Transaction that is intended to qualify as a transaction that is generally tax-free to so qualify, in each case, to the extent such amounts did not result from a disqualifying action by, or acquisition of equity securities of, Carrier, Otis, or us or (b) arising from certain audit or other adjustments to tax liabilities incurred with respect to Separation Transactions that were not intended to qualify as tax-free. In addition, under the tax matters agreement, each of Carrier and Otis is responsible for (i) a specified portion of any installment payment we are required to make pursuant to Section 965(h)(2) of the Code and (ii) specified taxes that exclusively relate to the Carrier business or the Otis business, as applicable. The amount of any such taxes for which we would be responsible may be significant, and if we were unable to obtain indemnification payments from Carrier or Otis to which we are entitled under the tax matters agreement and/or other agreements entered into in connection with the Separation Transactions and the Distributions, we could incur significant losses.

***If We Fail to Manage Potential Future Acquisitions, Investments, Divestitures, Joint Ventures and Other Transactions Successfully, These Activities Could Adversely Affect Our Future Financial Results.***

In pursuing our business strategies, we continually review, evaluate and consider potential investments, acquisitions, divestitures, joint ventures and other teaming and collaborative arrangements. We undertake to identify opportunities that will complement our existing products and services or customer base, as well as expand our offerings and market reach into new areas that naturally extend from our core capabilities. In evaluating such transactions, we are required to make difficult judgments regarding the value of business opportunities, technologies and other assets, and the risks and cost of potential liabilities.

Further, these transactions involve certain other risks and uncertainties including: (1) the risks involved with entering new markets; (2) the difficulty in integrating newly-acquired businesses and managing or monitoring other collaborative business arrangements; (3) challenges and failures in achieving strategic objectives and other expected benefits, which may result in certain liabilities to us for guarantees and other commitments; (4) unidentified issues not discovered in the Company’s due diligence; (5) the diversion of our attention and resources from our operations and other initiatives; (6) the potential impairment of acquired assets; (7) the performance of underlying products, capabilities or technologies; and (8) the potential loss of key employees and customers of acquired businesses. In addition, future transactions may impact our deployment of capital, including dividends, stock repurchases, pension contributions, and investments.

***Quarterly Cash Dividends and Share Repurchases May Be Discontinued or Modified, Are Subject to a Number of Uncertainties, and May Affect the Price of Our Common Stock.***

Quarterly cash dividends and share repurchases under our share repurchase program generally constitute components of our capital allocation strategy, which we fund with operating free cash flow, borrowings and divestitures. However, we are not required to declare dividends or make any share repurchases under our share repurchase program. Dividends and share repurchases may be discontinued, accelerated, suspended or delayed at any time without prior notice. Even if not discontinued, the amount of such dividends and repurchases may be changed, and the amount, timing and frequency of such dividends and repurchases may vary from historical practice or from the company’s stated expectations. Decisions with respect to dividends and share repurchases are subject to the discretion of our Board of Directors and will be based on a variety of factors. Important factors that could cause us to discontinue, limit, suspend, increase or delay our quarterly cash dividends or share repurchases include market conditions, the price of our common stock, the nature and timing of other investment opportunities, changes in our business strategy, the terms of our financing arrangements, our outlook as to the ability to obtain financing at attractive rates, the impact on our credit ratings and the availability of domestic cash. The Company has announced it does not plan to repurchases shares for the remainder of the calendar year as a result of the COVID-19 impact on our business. The reduction or elimination of our cash dividend, or longer suspension or elimination of our share repurchase program could adversely affect the market price of our common stock. Additionally, there can be no assurance that any share repurchases will enhance shareholder value because the market price of our common stock may decline below the levels at which we repurchased shares of common stock, and short-term stock price fluctuations could reduce the program’s effectiveness.

***The Company’s amended and restated by-laws designate the state courts within the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by Company stockholders, which could discourage lawsuits against the Company and its directors, officers and employees.***

Under the Company’s amended and restated by-laws, unless the Company determines otherwise, a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for:

- any derivative action or proceeding brought on behalf of the Company;
- any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Company to the Company or to Company stockholders;
- any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the Delaware General Corporation Law or the Company’s certificate of incorporation or the amended and restated by-laws (as either may be amended from time to time); or
- any action asserting a claim against the Company or any director or officer or other employee of the Company governed by the internal affairs doctrine.

To the fullest extent permitted by law, this exclusive forum provision will apply to state and federal law claims, including claims under the federal securities laws, including the Securities Act of 1933, as amended (the Securities Act) and the Securities Exchange Act of 1934, as amended (the Exchange Act), although Company stockholders will not be deemed to have waived the Company’s compliance with the federal securities laws and the rules and regulations thereunder. The enforceability of similar choice of forum provisions in other companies’ bylaws has been challenged in legal proceedings, and it is possible that, in connection with claims arising under federal securities laws or otherwise, a court could find the exclusive forum provision contained in the amended and restated by-laws to be inapplicable or unenforceable.

This exclusive forum provision may limit the ability of Company stockholders to commence litigation in a forum that they prefer, which may discourage such lawsuits against the Company and its current or former directors, officers and employees. Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, the Company may incur additional costs associated with resolving such matters in other jurisdictions, which could negatively affect its business, results of operations and financial condition.

Filed May 7, 2020.
Source: SEC EDGAR, the filing index for accession 0000101829-20-000034. Last ingested by Listed: Nov 3, 2026, 21:25 ET. No prices; not investment advice.