# RTX Corp: Form 10-Q for the period ended Jun 30, 2020

- Company: [RTX Corp](/companies/rtx.md) (CIK 101829)
- Form: 10-Q
- Filed: 2020-07-29
- Accepted by EDGAR: Jul 28, 2020, 19:50 ET
- Period: 2020-06-30
- Accession: 0000101829-20-000055
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/101829/000010182920000055/utx-20200630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/101829/000010182920000055/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $14.06bn | us-gaap:Revenues |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $25.42bn | us-gaap:Revenues |
| Research and development | 3 months, 2020-04-01 to 2020-06-30 | $695.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2020-01-01 to 2020-06-30 | $1.23bn | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-04-01 to 2020-06-30 | $1.81bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-01-01 to 2020-06-30 | $2.79bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | −$3.76bn | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | −$2.46bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-04-01 to 2020-06-30 | $335.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-01-01 to 2020-06-30 | $667.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | −$38.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $601.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | −$3.83bn | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | −$3.92bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | −$2.55 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | −$3.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | −$2.55 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | −$3.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 1,501,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 1,225,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $1.34bn | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $783.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2020-01-01 to 2020-06-30 | $1.34bn | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2020-01-01 to 2020-06-30 | $47.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-06-30 | $6.97bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $42.27bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $161.52bn | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $35.29bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $92.59bn | us-gaap:Liabilities |
| Short-term borrowings | at 2020-06-30 | $243.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2020-06-30 | $67.22bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 144,778 characters.

### BUSINESS OVERVIEW

We are a global premier systems provider of high technology products and services to the aerospace and defense industries. On April 3, 2020, United Technologies Corporation (UTC) completed the Separation Transactions as defined below, and on April 3, 2020, completed the Raytheon Merger as defined below, to form the new company, Raytheon Technologies Corporation. As a result of these transactions, we now operate in four principal business segments: Collins Aerospace Systems (Collins Aerospace), Pratt & Whitney, Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD).

*Separation Transactions and Distributions.* On April 3, 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) (such separations, the “Separation Transactions”). UTC distributed all of the outstanding shares of Carrier common stock and all of the outstanding shares of Otis common stock to UTC shareowners who held shares of UTC common stock as of the close of business on March 19, 2020, the record date for the distributions (the Distributions). UTC distributed 866,158,910 and 433,079,455 shares of common stock of Carrier and Otis, respectively in the Distributions, each of which was effective at 12:01 a.m., Eastern Time, on April 3, 2020. The historical results of Otis and Carrier are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Throughout this Quarterly Report on Form 10-Q, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.

*Raytheon Merger.* On April 3, 2020, following the completion of the Separation Transactions and the Distributions, 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). Upon closing of the Raytheon Merger, Raytheon Company became a wholly-owned subsidiary of UTC, which 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,” or “Raytheon” mean Raytheon Company and its subsidiaries prior to the Raytheon Merger.

UTC was determined to be the accounting acquirer in the merger, and as a result the financial statements of Raytheon Technologies for the period ended and as of June 30, 2020 include Raytheon Company’s financial position and results of operations for the period subsequent to the completion of the Raytheon Merger on April 3, 2020. Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD) follow a 4-4-5 fiscal calendar with results recorded from the April 3, 2020 merger close date through June 28, 2020 while Collins Aerospace Systems (Collins Aerospace) and Pratt & Whitney continue to use a quarter calendar end of June 30, 2020. The historical results of Otis and Carrier are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. See “Note 3: Discontinued Operations” within Item 1 of this Form 10-Q for additional information.

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 our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

### Industry Considerations

Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. Our operations include original equipment manufacturer (OEM) and extensive related aftermarket parts and services related to our aerospace operations. Our defense business serves both domestic and international customers primarily as a prime contractor or subcontractor on a broad portfolio of defense and related programs for government customers. Our business mix also reflects the combination of shorter cycles in our commercial aerospace spares contracts and certain service contracts in our defense business primarily at RIS, and longer cycles in our aerospace OEM and aftermarket maintenance contracts and on our defense contracts to design, develop, manufacture or modify complex equipment. Our customers are in the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization.

Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, government imposed travel restrictions, and government procurement practices can impact our businesses.

Collins Aerospace and Pratt & Whitney serve both commercial and government aerospace customers. Revenue passenger miles (RPMs), available seat miles and the general economic health of airline carriers are key barometers for our commercial aerospace operations. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits. Our commercial aftermarket operations continue to evolve as a significant portion of our aerospace operations’ customers are covered under long-term aftermarket service agreements at both Collins Aerospace and Pratt & Whitney. These agreements are comprehensive long-term spare part and service agreements with our customers.

RIS, RMD, and the defense operations of Collins Aerospace and Pratt & Whitney are affected by U.S. Department of Defense (DoD) budget and spending levels, changes in market demand and the global political environment. Total sales to the U.S. government were $7.3 billion and $2.4 billion for the quarters ended June 30, 2020 and 2019, or 52% and 21% of total sales for those periods, respectively. Total sales to the U.S. government were $9.9 billion and $4.5 billion for the six months ended June 30, 2020 and 2019, or 39% and 20% of total 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 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, mandated facility closures and shelter-in-place and social distancing 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 and 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. Additionally, public sentiments regarding air travel have also had a significant impact. 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 Collins Aerospace and Pratt & Whitney businesses. However, our customers continued to receive our products and services during the first quarter and the outbreak did not have a significant impact on our operating results for the quarter ended March 31, 2020.

In the second quarter of 2020 and subsequent to 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 airline 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 Collins Aerospace and Pratt & Whitney businesses. Based on recent public data and estimates, revenue passenger miles (RPMs) for the year ended December 31, 2020 could decline by approximately 60% 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 have shifted to cash conservation behaviors such as deferring engine maintenance due to lower flight hours and aircraft utilization, requesting extended payment terms, deferring delivery of new aircraft and spare engines and requesting discounts on engine maintenance. Some airline customers have filed for bankruptcy due to their inability to meet their financial obligations. Additionally, we are seeing purchase order declines in line with publicly communicated aircraft production volumes as original equipment manufacturer (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 been 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, suspending our share buybacks, deferring merit increases and implementing temporary pay reductions, freezing non-essential hiring, repositioning employees to defense work, and furloughing employees when needed. In the quarter ended June 30, 2020, we recorded total restructuring charges of $427 million primarily related to personnel reductions. Thus far, most of these actions have been taken at our Collins Aerospace and Pratt & Whitney businesses. The former Raytheon Company businesses have not experienced significant facility closures or other business disruptions.

Given the significant reduction in business and leisure passenger air travel, the number of planes temporarily grounded, and continued travel restrictions that have resulted from the pandemic, we expect our future operating results, particularly those of our Collins Aerospace and Pratt & Whitney businesses to continue to be significantly negatively impacted. Our expectations regarding the COVID-19 pandemic and its potential financial impact are based on available information and assumptions that we believe are reasonable at this time; however, the actual financial impact is highly uncertain and subject to a wide range of factors and future developments. While we believe that the long-term outlook for the aerospace industry remains positive due to the fundamental drivers of air travel demand, there is significant uncertainty with respect to when and if 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. Our latest estimates are that this recovery may occur in 2023 or 2024. New information may emerge concerning the scope, severity and duration of the COVID-19 pandemic, as well as any worsening of the pandemic and whether there will be additional outbreaks of the 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 deterioration in general economic and market conditions primarily due to the COVID-19 pandemic to be a triggering event requiring us to reassess our commercial aerospace business goodwill and intangibles valuations, as well as our significant assumptions of future cash flows from our underlying assets and potential changes in our liabilities in both the first and second quarters of 2020. In the second quarter of 2020, our revenue at Collins Aerospace and Pratt & Whitney was significantly impacted by the decline in flight hours, aircraft fleet utilization, shop visits and commercial OEM deliveries. In order to evaluate the ongoing impact, we updated our forecast assumptions of future business activity that are subject to a wide range of uncertainties, including those noted above.

Based upon our analysis, we concluded that the carrying value of two of our Collins Aerospace reporting units as of June 30, 2020 was greater than its fair value, and accordingly, we recorded a goodwill impairment charge of $3.2 billion in the quarter ended June 30, 2020. Refer to “Note 2: Acquisitions, Dispositions, Goodwill and Other Intangible Assets” within Item 1 of this Form 10-Q for additional information. Additionally, in the quarter and six months ended June 30, 2020 we recorded write-downs of assets in our Collins Aerospace and Pratt & Whitney businesses primarily related to increased estimated credit losses of $237 million and $309 million in the quarter and six months ended June 30, 2020, respectively, a reduction in expected future billings or revenues on commercial contracts, based on a change in estimated customer activity during the current period, of $179 million and $190 million in the quarter and six months ended June 30, 2020, respectively, the impairment of a Collins Aerospace trade name of $17 million and $57 million in the quarter and six months ended June 30, 2020, respectively, and a change in contract estimates related to a shift in overhead costs to military contracts of $44 million in both the quarter and six months ended June 30, 2020. Given the uncertainty related to the severity and length of the pandemic, as well as any worsening of the pandemic and whether there will be additional outbreaks of the pandemic and its impact across the aerospace industry, we may be required to record additional charges or impairments in future periods.

Although the impact of COVID-19 on our commercial markets is 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.

### Other Matters

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 operations 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 operations’ 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 our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 for further discussion.

The following activity is disclosed as required by Section 13(r)(1)(D) of the Securities Exchange Act of 1934, as amended, as transactions or dealings with the government of Iran that have not been specifically authorized by a U.S. federal department or agency.

In January 2020, Raytheon Company inadvertently misdirected a vendor payment for $105,000 to Bank Saderat Iran as the result of a data entry error. Bank Saderat Iran is sanctioned by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) as a financial institution owned or controlled by the Government of Iran and is blocked under the Iranian Transactions and Sanctions Regulations (31 CFR Part 560) and Global Terrorism Sanctions Regulations (31 CFR Part 594). The misdirected payment, which occurred prior to the Raytheon Merger, was blocked by Raytheon Company’s U.S. bank in accordance with OFAC requirements. Raytheon Company subsequently determined that a data entry error had resulted in its vendor being assigned incorrect bank routing information associated with the sanctioned Iranian bank. Neither Raytheon Company’s vendor, nor the intended recipient bank, are or were subject to U.S. government sanctions. On March 2, 2020, Raytheon Company submitted a license request to OFAC seeking release of the blocked funds, and OFAC issued the license on July 1, 2020. Raytheon Company did not receive any revenues or profits associated with the inadvertent payment.

### CRITICAL ACCOUNTING ESTIMATES

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because of their significance to the Condensed Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below and reflect updates from our 2019 Form 10-K as a result of the Raytheon Merger and Separation Transactions. Actual results in these areas could differ from management’s estimates.

**Long-Term Contract Accounting.** We recognize revenue on an over-time basis for substantially all defense contracts and certain long-term aerospace aftermarket contracts. We measure progress toward completion of these contracts on a percentage of completion basis, using costs incurred to date relative to total estimated costs at completion. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management’s judgment. We review our Estimate at Completion (EACs) on significant contracts on a periodic basis and for others, no less than annually or when a change in circumstances warrant a modification to a previous estimate. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment by management on a contract by contract basis. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule including consideration of 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. Management’s judgment related to these considerations has become increasingly more significant given the current economic environment primarily caused by the COVID-19 pandemic. Management must make assumptions and estimates regarding contract revenue and costs, including estimates of labor productivity and availability, the complexity and scope of the work to be performed, the availability and cost of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer, overhead cost rates, estimated aircraft and engine utilization and estimated useful lives of components, among other variables. Cost estimates may also include the estimated cost of satisfying our industrial cooperation agreements, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements, required under certain contracts. These obligations may or may not be distinct depending on their nature. If cash is paid to a customer to satisfy our offset obligations it is recorded as a reduction in the transaction price. Changes in estimates of net sales, cost of sales and the related impact to operating profit are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation’s percentage of completion in the current period. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. Our EAC adjustments also include the establishment of loss provisions on our contracts accounted for on a percentage of completion basis.

Net EAC adjustments had the following impact on our operating results:

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

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Operating profit | $(151) | $(69) | $(130) | $(81) |
| Income (loss) from continuing operations attributable to common shareowners (1) | (119) | (55) | (103) | (64) |
| Diluted earnings (loss) per share from continuing operations attributable to common shareowners (1) | $(0.08) | $(0.06) | $(0.08) | $(0.07) |

(1) Amounts reflect a U.S. statutory tax rate of 21%, which approximates our effective tax rate on our EAC adjustments.

As a result of the Raytheon Merger, Raytheon Company’s contracts accounted for on a percentage of completion basis were reset to zero percent complete as of the merger date, since only the unperformed portion of the contract at the merger date represents the obligation of the Company. For additional information related to the Raytheon Merger, see “Note 2: Acquisitions, Dispositions, Goodwill and Other Intangible Assets” within Item 1 of this Form 10-Q.

Costs incurred for engineering and development of aerospace products under contracts with customers are capitalized as contract fulfillment costs, to the extent recoverable from the associated contract margin, and subsequently amortized as the OEM products are delivered to the customer. The estimation of contract margin requires management’s judgment. We regularly assess capitalized contract fulfillment costs for impairment.

**Goodwill and Intangible Assets.** The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets consist of patents, trademarks/tradenames, exclusivity assets, developed technology, customer relationships, and other intangible assets including a collaboration asset established in connection with our 2012 agreement to acquire Rolls-Royce’s ownership and collaboration interests in International Aero Engines AG (IAE). The fair value for acquired customer relationship intangibles is determined as of the acquisition date based on estimates and judgments regarding expectations for the future after-tax cash flows arising from the follow-on revenue from customer relationships that existed on the acquisition date over their estimated lives, including the probability of expected future contract renewals and revenue, less a contributory assets charge, all of which is discounted to present value. The fair value of the trademark and tradename intangible assets are determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the tradename and discounted to present value using an appropriate discount rate. See “Note 1: Basis of Presentation and Accounting Principles Update” within Item 1 of this Form 10-Q for further details.

We applied these approaches to the valuation of intangibles for the Raytheon Merger, for which the most significant intangible assets identified were customer relationships and tradenames. Specific to these intangible assets, our estimates of market participant future cash flows included forecasted revenue growth rates, remaining developmental effort, operational performance including company specific synergies, program life cycles, material and labor pricing, and other relevant customer, contractual and market factors. For the customer relationships, where appropriate, the net cash flows were probability-adjusted to reflect the uncertainties associated with the underlying assumptions, including cancellation rates related to backlog, government demand for sole-source and recompete contracts and win rates for recompete contracts, as well as the risk profile of the net cash flows utilized in the valuation. In addition, the net cash flows were discounted using an appropriate discount rate. The estimated fair value of identifiable intangible assets acquired in connection with the Raytheon Merger was approximately $19.1 billion.

Also included within other intangible assets are exclusivity assets, which are payments made to secure certain contractual rights to provide products on new commercial aerospace platforms. Such payments are capitalized when there are distinct rights obtained and there are sufficient incremental cash flows to support the recoverability of the assets established. Otherwise, the applicable portion of the payments are expensed. Capitalized payments made on these contractual commitments are amortized as a reduction of sales. We amortize these intangible assets based on the pattern of economic benefit, which typically results in an amortization method other than straight-line. In the aerospace industry, amortization based on the pattern of economic benefit generally results in lower amortization expense during the development period with increasing amortization expense as programs enter full production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined, a straight-line amortization method is used. The gross value of these contractual commitments at June 30, 2020 was approximately $12.3 billion, of which approximately $3.2 billion has been paid to date. We record these payments as intangible assets when such payments are no longer conditional. We regularly assess the recoverability of these intangibles, which is dependent upon the future success and profitability of the underlying aircraft platforms including the associated aftermarket revenue streams.

Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual, or more frequent if necessary, impairment testing using the guidance and criteria described in the Intangibles—Goodwill and Other Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). A goodwill impairment loss is measured at the amount by which a reporting unit’s carrying value exceeds its fair value, without exceeding the recorded amount of goodwill. In developing our estimates for the fair value of our reporting units, significant judgment is required in the determination of the appropriateness of using a qualitative assessment or quantitative assessment. For these quantitative assessments that are performed, fair value is primarily based on income approaches using discounted cash flow models and relief from royalty models, which have significant assumptions including sales growth rates, projected operating profit, terminal growth rates, discount rates and royalty rates. Such assumptions are subject to variability from year to year and are directly impacted by global market conditions. The Company reviews goodwill for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired.

The Company has been monitoring the deterioration in general economic and market conditions primarily due to the COVID-19 pandemic. In the second quarter of 2020, we observed several airline customer bankruptcies, delays and cancellations of aircraft purchases by airlines, fleet retirements and repositioning of OEM production schedules. These factors contributed to a deterioration of our expectations regarding the timing of a return to pre-COVID-19 commercial flight activity, which further reduced our expectations regarding future sales and cash flows. We considered these factors to be a triggering event requiring impairment evaluation of goodwill, intangible assets and other assets in our commercial aerospace businesses, Collins Aerospace and Pratt & Whitney.

Impairment evaluations at Collins Aerospace and Pratt & Whitney resulted in several other charges as further discussed in the “Business Overview” section above, and includes $17 million and $57 million of impairment related to a Collins Aerospace indefinite-lived tradename intangible, in the quarter and six months ended June 30, 2020. These charges were primarily due to declines in expected future commercial air traffic, airline bankruptcies, or other impacts such as accelerated fleet retirements and the shift in overhead costs to our military production contracts in joint military/commercial production facilities due to the decline in commercial sales volumes. We also evaluated amortizable intangible assets and identified no impairments.

Finally, we evaluated the Collins Aerospace and Pratt & Whitney reporting units for goodwill impairment and determined that the carrying values of two of the six Collins Aerospace reporting units exceeded the sum of discounted future cash flows, resulting in goodwill impairments of $3.2 billion. Collins Aerospace discounted future cash flow estimates were developed for three scenarios: a base case, downside case, and an upside case. These scenarios included assumptions regarding future airline flight activity, out of warranty hours on original equipment, expected repairs, upgrades and replacements, future OEM manufacturing schedules and related environmental assumptions, including individuals’ desire to return to normal travel, business needs to travel, and potential cures or vaccines to prevent or reduce the effects of COVID-19. These estimates require a significant amount of judgment and are subject to change based upon factors outside our control.

We recorded total goodwill impairments of $3.2 billion related to the two Collins Aerospace reporting units by weighting the three scenarios as follows: 50% for the base case, 40% for the downside case, and 10% for the upside case. We used these weightings, as we believe they reflect the risks and opportunities relative to our current estimates. Goodwill impairment was not indicated for any of the other reporting units evaluated for impairment in any of these scenarios. For these other reporting units, the reporting unit that was closest to impairment was a reporting unit at Collins Aerospace, with a fair value in excess of book value, including goodwill, of $1.4 billion or 19%. Material changes in these estimates could occur and result in additional impairments in future periods. If the discount rate used for the impairment analysis increased or decreased by 25 basis points, the impairments of the two Collins Aerospace reporting units would have increased by $1.2 billion or decreased by $1.3 billion, respectively. If the cash flows were decreased or increased by 10% the impairments would have increased by $2.5 billion or decreased by $2.1 billion, respectively.

The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term revenue growth projections, profitability, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company’s market capitalization, and general industry, market and macro-economic conditions. It is possible that future changes in such circumstances, including a more prolonged and/or severe COVID-19 pandemic than anticipated, or future changes in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, would require the Company to record a non-cash impairment charge.

**Employee Benefit Plans**. We sponsor domestic and foreign defined benefit pension and postretirement benefit (PRB) plans. Assumptions used to calculate our funded status are determined based on company data and appropriate market indicators. They are evaluated annually at December 31 and when significant events require a mid-year remeasurement. A change in any of these assumptions or actual experience that differs from these assumptions are subject to recognition in pension and postretirement net periodic benefit (income) cost reported in the Condensed Consolidated Financial Statements.

Assumptions used in the accounting for these employee benefit plans require judgement. Major assumptions include the discount rate and expected return on plan assets (EROA). Other assumptions include mortality rates, demographic assumptions (such as retirement age), rate of increase in employee compensation levels, and health care cost increase projections.

The weighted-average discount rates used to measure pension and PRB liabilities are based on yield curves developed using high-quality corporate bonds as well as plan specific cash flows. For our significant plans, we utilize a full yield curve approach in the estimation of the service cost and interest cost components of net periodic benefit costs by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant discounted projected cash flows.

As a result of the Raytheon Merger we have updated our sensitivity analysis as of the merger date. An increase of 25 basis points in the discount rate would have decreased our projected benefit obligation by $1,921 million as of April 3, 2020. A decrease of 25 basis points in the discount rate would have increased our projected benefit obligation by $2,018 million as of April 3, 2020.

The discount rate sensitivities assume no change in the shape or steepness of the company-specific yield curve used to plot the individual spot rates that will be applied to the projected cash outflows for future benefit payments in order to calculate interest and service cost. A flattening of the yield curve, results in a narrowing of the spread between interest and obligation discount rates and would increase our net periodic benefit cost. Conversely, a steepening of the yield curve would result in an increase in the spread between interest and obligation discount rates and would decrease our net periodic benefit cost.

The EROA is the average rate of earnings expected over the long term on assets invested to fund anticipated future benefit payment obligations. In determining the EROA assumption, we consider the target asset allocation of plan assets, economic and other indicators of future performance, and the historical performance of total plan assets and individual asset classes. In addition, we may consult with and consider the opinions of financial and other professionals in developing the appropriate capital market assumptions. Return projections are also validated using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns. Differences between actual asset returns in a given year and the EROA do not necessarily indicate a change in the assumption is required, as the EROA represents the expected average returns over a long-term horizon.

We must apply both Financial Accounting Standards (FAS) requirements under U.S. Generally Accepted Accounting Principles (GAAP) (as described above) and U.S. government Cost Accounting Standards (CAS) requirements to calculate pension and PRB expense. Both FAS and CAS expense use long term assumptions requiring judgement, but the CAS expense calculation is different from the FAS requirements and calculation methodology. While the ultimate liability for pension costs under FAS and CAS is similar, the pattern of cost recognition is different. Our CAS pension expense is comprised primarily of CAS service cost as well as amortization amounts resulting from demographic or economic experience different than expected, changes in assumptions, or changes in plan provisions. CAS requires contractors to compare the liability using a discount rate based on the EROA to a liability using a discount rate based on high-quality corporate bonds, and use the greater of the two liability calculations in developing CAS expense. Additionally, unlike FAS, CAS expense is only recognized for plans that are not fully funded. Consequently, if plans become or cease to be fully funded under CAS due to our asset or liability experience, our CAS expense will change accordingly.

The segment results of RIS and RMD only include pension and PRB expense as determined under CAS, which we generally recover through the pricing of our products and services to the U.S. government. The difference between our CAS expense and the FAS service cost attributable to these segments is the FAS/CAS operating adjustment and is reported as a separate line in our segment results. The FAS/CAS operating adjustment results in consolidated pension expense in operating profit equal to the service cost component of FAS expense under U.S. GAAP. The segment results of Collins Aerospace and Pratt & Whitney include FAS service cost. The other components of FAS expense for all segments are recorded in non-operating income under Non-service pension (benefit) on our Condensed Consolidated Statement of Operations.

We are also subject to ERISA funding rules, which require us to fully fund our pension plans over a rolling seven-year period as determined annually based on the Pension Protection Act of 2006 (PPA) calculated funded status at the beginning of each year. The funding requirements are primarily based on the year’s expected service cost and amortization of other previously unfunded liabilities. Due to the differences in requirements and calculation methodologies, neither our FAS expense nor our CAS expense is indicative of the PPA funding requirements.

**Income Taxes.** Management believes that our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits, which may be realized over an extended period of time. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.

In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through an increase to tax expense in the period in which that determination is made or when tax law changes are enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to tax expense in the period in which that determination is made.

In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. In addition, we have entered into certain internal legal entity restructuring transactions necessary to effectuate the Separation Transactions. We have accrued tax on these transactions based on our interpretation of the applicable tax laws and our determination of appropriate entity valuations. See “Note 1: Basis of Presentation and Summary of Accounting Principles” and “Note 9: Income Taxes” within Item 1 of this Form 10-Q for further discussion.

Management has determined that the distributions of Carrier and Otis on April 3, 2020, and certain related internal business separation transactions, qualified as tax-free under applicable law. In making these determinations, we applied the tax law in the relevant jurisdictions to our facts and circumstances and either obtained tax rulings from the relevant taxing authorities, tax opinions, and/or other external tax advice related to the concluded tax treatment. If the completed distributions of Carrier or Otis, in each case, or certain internal business separation transactions, were to fail to qualify for tax-free treatment, the Company could be subject to significant liabilities, and there could be material adverse impacts on the Company’s business, financial condition, results of operations and cash flows in future reporting periods.

**Contingent Liabilities.** Our operating units include businesses which sell products and services and conduct operations throughout the world. As described in “Note 17: Commitments and Contingencies” within Item 1 of this Form 10-Q, contractual, regulatory and other matters in the normal course of business may arise that subject us to claims or litigation. Of note, the design, development, production and support of new aerospace technologies is inherently complex and subject to risk. Since the PW1000G Geared Turbofan engine entered into service in 2016, technical issues have been identified and experienced with the engine, which is typical for new engines and new aerospace technologies. Pratt & Whitney has addressed these issues through various improvements and modifications. These issues have resulted in financial impacts, including increased warranty provisions, customer contract settlements, and reductions in contract performance estimates. Additional technical issues may also arise in the normal course, which may result in financial impacts that could be material to the Company’s financial position, results of operations and cash flows.

Additionally, we have significant contracts with the U.S. government, subject to government oversight and audit, which may require significant adjustment of contract prices. We accrue for liabilities associated with these matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of then currently available facts with respect to each matter. When no amount within a range of estimates is more likely, the minimum is accrued. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.

### RESULTS OF OPERATIONS

As described in our “Cautionary Note Regarding Forward-Looking Statements” in this Form 10-Q, our interim period results of operations and period-to-period comparisons of such results, particularly at a segment level, may not be indicative of our future operating results. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context. As discussed further above in Business Overview, the results of RIS and RMD reflect the period subsequent to the completion of the Raytheon Merger on April 3, 2020. In addition, as a result of the Separations Transactions and the Distributions, beginning in the second quarter of 2020, the historical results of Otis and Carrier are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

### Net Sales

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | **$14,061** | $11,329 | **$25,421** | $22,282 |

The factors contributing to the total change year-over-year in total net sales for the quarter and six months ended June 30, 2020 are as follows:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | Six Months Ended June 30, 2020 |
| --- | ---: | ---: |
| Organic change | **$(4,098)** | **$(3,560)** |
| Foreign currency translation | **(75)** | **(201)** |
| Acquisitions and divestitures, net | **6,905** | **6,900** |
| Other | **—** | **—** |
| Total change | **$2,732** | **$3,139** |

Net sales decreased $4,098 million organically in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019. This decrease reflects lower organic sales of $2.4 billion at Collins Aerospace, primarily driven by lower commercial aerospace OEM sales and lower commercial aerospace aftermarket sales, partially offset by higher military sales. The declines in commercial aerospace OEM sales and commercial aerospace aftermarket sales were both primarily due to the current economic environment principally driven by the COVID-19 pandemic which has resulted in lower flight hours, aircraft fleet utilization and commercial OEM deliveries. The decrease in net sales also reflects lower organic sales of $1.7 billion at Pratt & Whitney primarily driven by lower commercial aftermarket sales and lower commercial OEM sales, both primarily due to a significant reduction in shop visits and related spare part sales and commercial engine deliveries, principally driven by the current economic environment primarily due to the COVID-19 pandemic, partially offset by higher military sales primarily driven by an increase in F135 engine sales. The $6,905 million sales increase due to acquisitions and divestitures, net for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, is primarily driven by the Raytheon Merger on April 3, 2020.

Net sales decreased $3,560 million organically for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. This decrease reflects lower organic sales of $2.4 billion at Collins Aerospace, primarily driven by lower commercial aerospace OEM sales and lower commercial aerospace aftermarket sales, partially offset by higher military sales. The declines in commercial aerospace OEM sales and commercial aerospace aftermarket sales were both primarily due to the current economic environment principally driven by the COVID-19 pandemic, which has resulted in lower flight hours, aircraft fleet utilization and commercial OEM deliveries. The decrease in net sales also reflects lower organic sales of $1.1 billion at Pratt & Whitney primarily driven by lower commercial aftermarket sales and lower commercial OEM sales, both primarily due to a significant reduction in shop visits and related spare part sales and commercial engine deliveries, principally driven by the current economic environment primarily due to the COVID-19 pandemic, partially offset by higher military sales primarily driven by an increase in F135 engine sales. The $6,900 million sales increase due to acquisitions and divestitures, net for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, is primarily driven by the Raytheon Merger on April 3, 2020.

The composition of external net sales by products and services sales for the quarter and six months ended June 30, 2020 was approximately the following:

| Quarter Ended June 30, 2020 | Collins Aerospace Systems | Pratt & Whitney | Raytheon Intelligence & Space | Raytheon Missiles & Defense |
| --- | ---: | ---: | ---: | ---: |
| Products | 85% | 55% | 75% | 90% |
| Services | 15% | 45% | 25% | 10% |
| Six Months Ended June 30, 2020 |  |  |  |  |
| Products | 80% | 60% | 75% | 90% |
| Services | 20% | 40% | 25% | 10% |

*(dollars in millions, except percentages)*

| Net Sales | Quarter Ended June 30, 2020 | 2019 | % of Total Net Sales 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Products | **$10,768** | $8,389 | **77%** | 74% |
| Services | **3,293** | 2,940 | **23%** | 26% |
| Total net sales | **$14,061** | $11,329 | **100%** | 100% |

Net products sales grew $2,379 million in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 primarily due to an increase in external product sales of $5.6 billion due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external product sales of $1.9 billion at Collins Aerospace and $1.4 billion at Pratt & Whitney.

Net services sales grew $353 million in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 primarily due to an increase in external services sales of $1.0 billion due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external services sales of $0.4 billion at Collins Aerospace and $0.2 billion at Pratt & Whitney.

*(dollars in millions, except percentages)*

| Net Sales | Six Months Ended June 30, 2020 | 2019 | % of Total Net Sales 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Products | **$18,933** | $16,424 | **74%** | 74% |
| Services | **6,488** | 5,858 | **26%** | 26% |
| Total net sales | **$25,421** | $22,282 | **100%** | 100% |

61

Net products sales grew $2,509 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to an increase in external product sales of $5.6 billion due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external product sales of $2.0 billion at Collins Aerospace and $1.1 billion at Pratt & Whitney.

Net services sales grew $630 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to an increase in external services sales of $1.0 billion due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external services sales of $0.4 billion at Collins Aerospace.

Our sales to major customers were as follows:

*(dollars in millions, except percentages)*

|  | Quarter Ended June 30, 2020 | 2019 | % of Total Net Sales 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Sales to the U.S. government(1) | **$7,328** | $2,434 | **52%** | 21% |
| Foreign military sales through the U.S. government | **1,342** | 390 | **10%** | 3% |
| Foreign government direct commercial sales | **1,104** | 382 | **8%** | 3% |
| Commercial aerospace and other commercial sales | **4,287** | 8,123 | **30%** | 72% |
| Total net sales | **$14,061** | $11,329 | **100%** | 100% |

(1) Excludes foreign military sales through the U.S. government.

*(dollars in millions, except percentages)*

|  | Six Months Ended June 30, 2020 | 2019 | % of Total Net Sales 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Sales to the U.S. government(1) | **$9,856** | $4,464 | **39%** | 20% |
| Foreign military sales through the U.S. government | **1,668** | 692 | **7%** | 3% |
| Foreign government direct commercial sales | **1,467** | 767 | **6%** | 3% |
| Commercial aerospace and other commercial sales | **12,430** | 16,359 | **49%** | 73% |
| Total net sales | **$25,421** | $22,282 | **100%** | 100% |

(1) Excludes foreign military sales through the U.S. government.

### Cost of Products and Services Sold

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Total cost of products and services sold | **$12,214** | $8,554 | **$20,786** | $16,973 |
| Percentage of net sales | **86.9%** | 75.5% | **81.8%** | 76.2% |

The factors contributing to the change year-over-year for the quarter and six months ended June 30, 2020 in total cost of products and services sold are as follows:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | Six Months Ended June 30, 2020 |
| --- | ---: | ---: |
| Organic change | **$(2,368)** | **$(1,846)** |
| Foreign currency translation | **(72)** | **(168)** |
| Acquisitions and divestitures, net | **5,593** | **5,542** |
| Restructuring | **171** | **133** |
| Acquisition accounting adjustments | **325** | **322** |
| Other | **11** | **(170)** |
| Total change | **$3,660** | **$3,813** |

The organic decrease in total cost of products and services sold for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, of $2,368 million was primarily driven by the organic sales decreases noted above. The increase in Acquisitions and divestitures, net of $5,593 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 is primarily driven by the Raytheon Merger on April 3, 2020.

The organic decrease in total cost of products and services sold for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, of $1,846 million was primarily driven by the organic sales decreases noted above. The increase in Acquisitions and divestitures, net of $5,542 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 is primarily driven by the Raytheon Merger on April 3, 2020. The decline in Other of $170 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, reflects the absence of prior year amortization of inventory fair value step-up associated with the Rockwell Collins acquisition of $181 million at Collins Aerospace.

*(dollars in millions, except percentages)*

| Cost of sales | Quarter Ended June 30, 2020 | 2019 | % of Total Net Sales 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Products | **$9,620** | $6,736 | **68.4%** | 59.5% |
| Services | **2,594** | 1,818 | **18.4%** | 16.0% |
| Total cost of sales | **$12,214** | $8,554 | **86.9%** | 75.5% |

Net products cost of sales grew $2,884 million in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 primarily due to an increase in external product cost of sales due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external product cost of sales at Pratt & Whitney and Collins Aerospace.

Net services cost of sales grew $776 million in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 primarily due to an increase in external services cost of sales due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external services cost of sales at Collins Aerospace and Pratt & Whitney.

*(dollars in millions, except percentages)*

| Cost of sales | Six Months Ended June 30, 2020 | 2019 | % of Total Net Sales 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Products | **$16,249** | $13,399 | **63.9%** | 60.1% |
| Services | **4,537** | 3,574 | **17.8%** | 16.0% |
| Total cost of sales | **$20,786** | $16,973 | **81.8%** | 76.2% |

Net products cost of sales grew $2,850 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to an increase in external product cost of sales due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external product cost of sales at Collins Aerospace and Pratt & Whitney.

Net services cost of sales grew $963 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to an increase in external services cost of sales due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external services cost of sales at Collins Aerospace.

### Research and Development

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Company-funded | **$695** | $605 | **$1,230** | $1,192 |
| Percentage of net sales | **4.9%** | 5.3% | **4.8%** | 5.3% |
| Customer-funded (1) | **$1,198** | $574 | **$1,825** | $1,125 |
| Percentage of net sales | **8.5%** | 5.1% | **7.2%** | 5.0% |

(1) Customer-funded research and development costs are included in cost of sales in our consolidated statement of operations.

Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected. The increase in company-funded research and development of $90 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, was primarily driven by $0.2 billion related to the Raytheon Merger on April 3, 2020, partially offset by lower expenses of $0.1 billion across various commercial programs at Pratt & Whitney principally driven by cost reduction measures due to the current economic environment primarily due to COVID-19. The increase in company-funded research and development of $38 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was primarily driven by $0.2 billion related to the Raytheon Merger on April 3, 2020, partially offset by lower expenses of $0.1 billion across various commercial programs at Pratt & Whitney principally driven by cost reduction measures due to the current economic environment primarily due to COVID-19.

The increase in customer-funded research and development of $624 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, was primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020. The increase in customer-funded research and development of $700 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was also primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020. The remaining increase was driven by higher military development program expenses of $0.1 billion at Pratt & Whitney and $0.1 billion at Collins Aerospace.

### Selling, General and Administrative

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | **$1,811** | $902 | **$2,788** | $1,770 |
| Percentage of net sales | **12.9%** | 8.0% | **11.0%** | 7.9% |

Selling, general and administrative expenses increased $909 million in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020 and higher general and administrative restructuring costs of $0.2 billion. The growth in Selling, general and administrative expenses also includes increases of $0.1 billion at Pratt & Whitney and $0.1 billion at Collins Aerospace principally driven by increased estimates of expected credit losses primarily due to customer bankruptcies and additional general allowances for credit losses.

Selling, general and administrative expenses increased $1,018 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020 and higher general and administrative restructuring costs of $0.2 billion. The growth in Selling, general and administrative expenses also includes higher expenses of $0.2 billion at Pratt & Whitney and $0.1 billion at Collins Aerospace principally driven by increased estimates of expected credit losses primarily due to customer bankruptcies and additional general allowances for credit losses.

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 previous restructuring actions on Selling, general and administrative expenses. See “Note 11: Restructuring Costs” within Item 1 of this Form 10-Q and Restructuring Costs, below, for further discussion.

### Other Income (Loss), Net

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Other income (loss), net | **$82** | $118 | **$101** | $181 |

Other income (loss), net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, as well as other ongoing and nonrecurring items. The decrease in other income (loss), net of $36 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was primarily due to net unfavorable year-over-year impact of foreign exchange gains and losses of $45 million, $19 million related to the absence of a prior year licensing sale at Pratt & Whitney, $17 million related to the impairment of a tradename related to Collins Aerospace resulting from the projected impact of COVID-19 and $16 million of lower equity earnings in unconsolidated entities, partially offset by $83 million related to foreign government wage subsidies due to COVID-19 at Pratt & Whitney and Collins Aerospace, with the remaining change spread across multiple items with no individual common or significant driver.

The decrease in Other income (loss), net of $80 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was primarily due to $59 million of net unfavorable year-over-year impact of foreign exchange gains and losses, $57 million related to the impairment of a tradename related to Collins Aerospace resulting from the projected impact of COVID-19, $19 million related to the absence of a prior year licensing sale at Pratt & Whitney and $18 million related to the absence of a prior year gain on divestiture at Pratt & Whitney, partially offset by $83 million related to foreign government wage subsidies due to COVID-19 at Pratt & Whitney and Collins Aerospace.

### Operating Profits

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Operating profits (loss) | **$(3,760)** | $1,386 | **$(2,465)** | $2,528 |
| Operating profit (loss) margin | **(26.7)%** | 12.2% | **(9.7)%** | 11.3% |

The decrease in operating profits of $5,146 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was primarily driven by the $3,183 million goodwill impairment loss related to two Collins Aerospace reporting units and operating performance at our segments as described below in the individual segment results. Included in the decrease in operating profits was an increase in restructuring costs of $406 million primarily related to the Raytheon Merger on April 3, 2020 and restructuring actions taken at our Collins Aerospace and Pratt & Whitney segments, and an additional increase in acquisition accounting adjustments of $353 million related to the Raytheon Merger.

The decrease in operating profits of $4,993 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily driven by the $3,183 million goodwill impairment loss related to two Collins Aerospace reporting units. Included in the decrease in operating profits was an increase in restructuring costs of $360 million primarily related to the Raytheon Merger on April 3, 2020 and restructuring actions taken at our Collins Aerospace and Pratt & Whitney segments and an increase in acquisition accounting adjustments of $353 million related to the Raytheon Merger.

### Non-service Pension (Benefit)

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Non-service pension (benefit) | **$(237)** | $(200) | **$(405)** | $(392) |

The change in Non-service pension (benefit) of $37 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was primarily driven by the inclusion of the Raytheon Company plans as a result of the Raytheon Merger, partially offset by an increase in the amortization of net actuarial loss in quarter ended June 30, 2020 compared to the quarter ended June 30, 2020 for the UTC plans.

The change in Non-service pension (benefit) of $13 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily driven by the inclusion of the Raytheon Company plans as a result of the Raytheon Merger, partially offset by an increase in the amortization of net actuarial loss in six months ended June 30, 2020 compared to the six months ended June 30, 2019 for the UTC plans.

### Interest Expense, Net

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | **$346** | $420 | **$685** | $851 |
| Interest income | **(11)** | (68) | **(18)** | (79) |
| Interest expense, net | **$335** | $352 | **$667** | $772 |
| Average interest expense rate | **3.8%** | 3.6% | **3.8%** | 3.6% |

Interest expense, net decreased $17 million and $105 million for the quarter and six months ended June 30, 2020, compared to the quarter and six months ended June 30, 2019, respectively. The decrease in interest expense was primarily due to the repayment of long-term debt. Included in the decrease was a $44 million change in the mark-to-market fair value of marketable securities held in trusts associated with certain of our nonqualified deferred compensation and employee benefit plans, primarily related to the Raytheon Merger. The average maturity of our long-term debt at June 30, 2020 is approximately 14 years. The decrease in interest income for the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019 and for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was primarily driven by interest income of $58 million related to tax settlements in the prior year.

### Income Taxes

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Effective tax rate | **1.0%** | 0.5% | **(22.0)%** | 7.4% |

Included in the effective tax rate for the quarter ended June 30, 2020 was the 21% tax benefit from the pretax loss, offset by a 17.4% increase in the rate associated with the non-deductible goodwill impairment, a 1.6% increase to the rate related to the debt exchange, and a 1.2% increase in the rate associated with a revaluation of certain international tax incentives. The remaining 0.2% decrease to the rate is composed of various unrelated items, which individually and collectively are not significant.

The effective tax rate for the six months ended June 30, 2020 included the 21% tax benefit on the pretax loss, offset by a 24.6% increase in the rate associated with the non-deductible goodwill impairment, a 14.3% increase in the rate for the impairment of deferred tax assets as a result of the Separation Transactions or the Raytheon Merger, a 2.2% increase to the rate related to the debt exchange, and a 1.7% increase in the rate associated with a revaluation of certain international tax incentives. The remaining 0.2% increase to the rate is composed of various unrelated items, which individually and collectively are not significant.

The effective tax rate for the quarter and six months ended June 30, 2019 included the 21% tax expense from the pretax income offset by a net decrease to the rate of 22.5% and 12.9%, respectively, associated with audit settlements related to the

Examination Division of the Internal Revenue Service for the UTC 2014-2016 tax years and the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority. The remaining 2.0% increase for the quarter ended June 30, 2019 and 0.7% decrease for the six months ended June 30, 2019 is composed of various unrelated items, which individually and collectively are not significant.

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. On July 20, 2020, the U.S. Treasury Department released final global intangible low-taxed income (GILTI) and proposed subpart F income regulations. The GILTI regulations provide guidance with respect to provisions enacted in the TCJA and allow for retroactive application. We are reviewing the impact and currently estimate a tax benefit in the range of $80 to $120 million to be recorded in third quarter of 2020.

### Net Income (Loss) from Continuing Operations Attributable to Common Shareowners

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

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) from continuing operations attributable to common shareowners | **$(3,844)** | $1,183 | **$(3,406)** | $1,895 |
| Diluted earnings (loss) per share from continuing operations | **$(2.56)** | $1.37 | **$(2.78)** | $2.20 |

Net loss from continuing operations attributable to common shareowners for the quarter ended June 30, 2020 includes $3,200 million of goodwill and intangibles impairment charges related to our Collins Aerospace segment, which had an unfavorable impact on diluted earnings per share from continuing operations of $2.13, acquisition accounting adjustments primarily related to the Raytheon Merger of $424 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.28, restructuring charges of $322 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.21, increased estimates of expected credit losses driven by customer bankruptcies and additional general allowances for credit losses of $189 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.13, significant unfavorable adjustments principally driven by the expected acceleration of fleet retirements of certain aircrafts and the impact of EAC adjustments related to estimated lower flight hours, a change in the estimated number of shop visits and the related amount of estimated costs of $183 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.12, the tax related items noted in Income Taxes above, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.06, foreign government wage subsidies income related to COVID-19 at Pratt & Whitney and Collins Aerospace of $67 million, net of tax, which had a favorable impact on diluted earnings per share from continuing operations of $0.04, and transaction costs related to the Raytheon Merger of $62 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.04.

Net income from continuing operations attributable to common shareowners for the quarter ended June 30, 2019 includes $322 million of tax settlements and related interest income on tax settlements, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.37, acquisition accounting adjustments of $165 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.19, transaction and integration costs related to the Raytheon Merger and Rockwell Collins acquisition of $34 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.04 and restructuring charges, net of tax, of $16 million, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.02.

Net loss from continuing operations attributable to common shareowners for the six months ended June 30, 2020 includes $3,240 million of goodwill and intangibles impairment charges related to our Collins Aerospace segment, which had an unfavorable impact on diluted earnings per share from continuing operations of $2.63, acquisition accounting adjustments primarily related to the Raytheon Merger of $603 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.49, the tax related items noted in Income Taxes above, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.42, restructuring charges of $328 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.27, increased estimates of expected credit losses driven by customer bankruptcies and additional general allowances for credit losses of $244 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.16, significant unfavorable adjustments principally driven by the expected acceleration of fleet retirements of certain aircrafts and the impact of EAC adjustments related to estimated lower flight hours, a change in the estimated number of shop visits and the related amount of estimated costs of $200 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.13, transaction costs related to the Raytheon Merger of $88 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.07, and foreign government wage subsidies income related to COVID-19 at Pratt & Whitney and Collins Aerospace of $67 million, net of tax, which had a favorable impact on diluted earnings per share from continuing operations of $0.04.

Net income from continuing operations attributable to common shareowners for the six months ended June 30, 2019 includes acquisition accounting adjustments of $345 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.40, tax settlements and related interest income on tax settlements of $322 million, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.37, amortization on the inventory fair value step-up associated with the Rockwell Collins acquisition of $141 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.16, restructuring charges of $56 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.07, transaction and integration costs related to the Raytheon Merger and Rockwell Collins acquisition of $42 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.05 and a loss on the sale of a business at Collins Aerospace of $19 million, net of tax, which had an unfavorable impact on diluted earnings per share from continuing operations of $0.02.

### Net Income (Loss) from Discontinued Operations Attributable to Common Shareowners

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

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) from discontinued operations attributable to common shareowners | **$9** | $717 | **$(512)** | $1,351 |
| Diluted earnings (loss) per share from discontinued operations | **$0.01** | $0.83 | **$(0.42)** | $1.56 |

On April 3, 2020, UTC completed the separation of its commercial businesses, Otis and Carrier. Effective as of such date, the historical results of the Otis and Carrier segments have been reclassified to discontinued operations for all periods presented. See “Note 3: Discontinued Operations” within Item 1 of this Form 10-Q for additional information. The decrease of net income (loss) from discontinued operations attributable to common shareowners of $708 million and the related decrease in diluted earnings (loss) per share from discontinued operations of $0.82 in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was primarily due to the separation of Otis and Carrier on April 3, 2020. The decrease of net income (loss) from discontinued operations attributable to common shareowners of $1,863 million and $1.98, respectively, in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to the costs associated with the separation of our commercial businesses as discussed below.

Net income (loss) from discontinued operations for the quarter ended June 30, 2020 included a benefit associated with the separation of our commercial businesses of $9 million, net of tax. Net income (loss) from discontinued operations for the six months ended June 30, 2020 included costs associated with the separation of our commercial businesses of $895 million, net of tax, primarily related to debt extinguishment costs in connection with the early repayment of outstanding principal of $611 million.

Net income (loss) from discontinued operations for the quarter and the six months ended June 30, 2019 included costs associated with the separation of our commercial businesses of $87 million, net of tax.

### Net Income (Loss) Attributable to Common Shareowners

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

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) attributable to common shareowners | **$(3,835)** | $1,900 | **$(3,918)** | $3,246 |
| Diluted earnings (loss) per share from operations | **$(2.55)** | $2.20 | **$(3.20)** | $3.76 |

Net loss attributable to common shareowners and diluted earnings per share from operations for the quarter and six months ended June 30, 2020 was driven by the decrease in continuing operations, as discussed above in Net Income (Loss) from Continuing Operations Attributable to Common Shareowners and the decrease from discontinued operations, as discussed above in Net Income (Loss) from Discontinued Operations.

### Restructuring Costs

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Restructuring costs | **$427** | $21 | **$435** | $75 |

67

Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and recent mergers and acquisitions. 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 and six months ended June 30, 2020, we recorded net pre-tax restructuring charges of $444 million and $446 million, respectively, primarily related to severance and restructuring actions resulting from the Raytheon Merger, severance and restructuring actions at Pratt & Whitney and Collins Aerospace in response to the anticipated impact on our operating results related to the current economic environment primarily caused by the COVID-19 pandemic, and ongoing cost reduction efforts initiated in 2020. We expect to incur additional restructuring charges of $38 million to complete these actions. We are targeting to complete the majority of the actions initiated in 2020 in 2021. We expect recurring pre-tax savings in continuing operations related to these actions to reach approximately $780 million annually within one to two years. Approximately 70% of the restructuring costs will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the six months ended June 30, 2020, we had cash outflows of $50 million related to the 2020 actions.

**2019 Actions.** During the quarters ended June 30, 2020 and 2019, we reversed $9 million and recorded $4 million respectively, of net pre-tax restructuring charges for actions initiated in 2019. During the six months ended June 30, 2020 and 2019, we reversed $4 million and recorded $33 million, respectively, of net pre-tax restructuring charges for actions initiated in 2019. We expect to incur additional restructuring charges of $77 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 annual recurring pre-tax savings in continuing operations related to these actions to reach approximately $250 million annually within two years of initiating these actions, and we realized approximately $70 million during the six months ended June 30, 2020. Almost all of the restructuring costs will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the six months ended June 30, 2020 and 2019, we had cash outflows of $25 million and $14 million, respectively related to the 2019 actions.

In addition, during the quarters ended June 30, 2020 and 2019, we reversed $8 million and recorded $17 million, respectively, of net pre-tax restructuring charges for restructuring actions initiated in 2018 and prior. During the six months ended June 30, 2020 and 2019, we reversed $7 million and recorded $42 million, respectively of net pre-tax restructuring charges for restructuring actions initiated in 2018 and prior. For additional discussion of restructuring, see “Note 11: Restructuring Costs” within Item 1 of this Form 10-Q.

### Segment Review

As discussed further above in Business Overview, on April 3, 2020, United Technologies Corporation (UTC) completed the Separation Transactions as defined below, and on April 3, 2020, completed the Raytheon Merger as defined below, to form the new company, Raytheon Technologies Corporation. As a result of these transactions, we now operate in four principal business segments: Collins Aerospace Systems (Collins Aerospace), Pratt & Whitney, Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD). The results of RIS and RMD reflect the period subsequent to the completion of the Raytheon Merger on April 3, 2020. The historical results of Otis and Carrier are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

Collins Aerospace and Pratt & Whitney were historically the aerospace businesses under UTC, and these segments remained unchanged as a result of the merger. The RIS and RMD segments were created based on the reorganization of Raytheon’s historical business segments, where Raytheon’s Intelligence, Information and Services and Space and Airborne Systems segments were combined to form the RIS segment, and Raytheon’s Integrated Defense Systems and Missiles Systems segments were combined to form the RMD segment. For a more detailed description of our Collins Aerospace and Pratt & Whitney businesses, see “Business” within Item 1 of our 2019 Annual Report on Form 10-K.

**Raytheon Intelligence & Space** is a leading developer and provider of integrated sensor and communication systems for advanced missions, including space-enabled information and multi-domain intelligence solutions, as well as electronic warfare solutions, advanced training and logistic services, and cyber and software solutions to intelligence, defense, federal and commercial customers worldwide.

**Raytheon Missiles & Defense** is a leading designer, developer, integrator and producer of missile and combat systems for the armed forces of the U.S. and allied nations and a leader in integrated air and missile defense, large land- and sea-based radar solutions, command, control, communications, computers, cyber and intelligence solutions, naval combat and ship electronic and sensing systems, and undersea sensing and effects solutions.

In conjunction with the Raytheon Merger, we revised our measurement of segment performance to reflect how management now reviews and evaluates operating performance. Under the new segment performance measurement, certain acquisition accounting adjustments are now excluded from segments’ results in order to better represent the ongoing operational performance of those segments. In addition, the majority of Corporate expenses are now allocated to the segments, excluding certain items that remain at Corporate because they are not included in management’s review of the segments’ results. Historical results, discussion and presentation of our business segments reflect the impact of these adjustments for all periods presented. Also as a result of the Raytheon Merger, we now present a FAS/CAS operating adjustment outside of segment results, which represents the difference between our service cost component of our pension and PRB expense under the Financial Accounting Standards (FAS) requirements of U.S. GAAP and our pension and PRB expense under U.S. government Cost Accounting Standards (CAS) primarily related to our RIS and RMD segments. Because the Collins Aerospace and Pratt & Whitney segments generally record pension and PRB expense on a FAS basis, historical results were not impacted by this change in segment reporting.

Recast segment sales and operating profit, reflecting the performance measurement changes described above, were as follows:

*(dollars in millions)*

| Total Net Sales | Quarter Ended March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | Twelve Months Ended December 31, 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Collins Aerospace Systems | $6,438 | $6,444 | $6,495 | $6,576 | $6,513 | $26,028 |
| Pratt & Whitney | 5,353 | 5,645 | 5,285 | 5,154 | 4,818 | $20,902 |
| Raytheon Intelligence & Space | — | — | — | — | — | — |
| Raytheon Missiles & Defense | — | — | — | — | — | — |
| Total segment | 11,791 | 12,089 | 11,780 | 11,730 | 11,331 | $46,930 |
| Eliminations and other | (431) | (395) | (407) | (401) | (378) | (1,581) |
| Consolidated | $11,360 | $11,694 | $11,373 | $11,329 | $10,953 | $45,349 |

*(dollars in millions)*

| Operating Profit | Quarter Ended March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | Twelve Months Ended December 31, 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Collins Aerospace Systems | $1,246 | $1,009 | $1,259 | $1,276 | $964 | $4,508 |
| Pratt & Whitney | 475 | 354 | 520 | 449 | 478 | 1,801 |
| Raytheon Intelligence & Space | — | — | — | — | — | — |
| Raytheon Missiles & Defense | — | — | — | — | — | — |
| Total segment | 1,721 | 1,363 | 1,779 | 1,725 | 1,442 | 6,309 |
| Eliminations and other | (25) | (25) | (46) | (42) | (27) | (140) |
| Corporate expenses and other unallocated items | (130) | (151) | (83) | (87) | (46) | (367) |
| FAS/CAS operating adjustment | — | — | — | — | — | — |
| Acquisition accounting adjustments | (271) | (231) | (220) | (210) | (227) | (888) |
| Consolidated | $1,295 | $956 | $1,430 | $1,386 | $1,142 | $4,914 |

Segments are generally based on the management structure of the businesses and the grouping of similar operating companies, based on capabilities and technologies, where each management organization has general operating autonomy over diversified products and services. Segment total net sales and operating profit include intercompany sales and profit, which are ultimately eliminated within Eliminations and other, which also includes certain smaller non-reportable segments. For our defense contracts, where the primary customer is the U.S. government, our intercompany sales and profit is generally recorded at cost-plus a specified fee, which may differ from what the selling entity would be able to obtain on sales to external customers. Segment results exclude certain acquisition accounting adjustments, the FAS/CAS operating adjustment and certain corporate expenses, as further discussed below.

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.

Given the nature of our business, total net sales and operating profits (and the related operating profit margin percentage), which we disclose and discuss at the segment level, are most relevant to an understanding of management’s view of our segment performance, as described below.

*Total Net Sales—*Total net sales by segment were as follows:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Collins Aerospace Systems | **$4,202** | $6,576 | **$10,640** | $13,089 |
| Pratt & Whitney | **3,487** | 5,154 | **8,840** | 9,972 |
| Raytheon Intelligence & Space | **3,314** | — | **3,314** | — |
| Raytheon Missiles & Defense | **3,590** | — | **3,590** | — |
| Total segment | **14,593** | 11,730 | **26,384** | 23,061 |
| Eliminations and other | **(532)** | (401) | **(963)** | (779) |
| Consolidated | **$14,061** | $11,329 | **$25,421** | $22,282 |

*Operating Profits—*Operating profits by segment was as follows:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Collins Aerospace Systems | **$(317)** | $1,276 | **$929** | $2,240 |
| Pratt & Whitney | **(457)** | 449 | **18** | 927 |
| Raytheon Intelligence & Space | **311** | — | **311** | — |
| Raytheon Missiles & Defense | **397** | — | **397** | — |
| Total segment | **(66)** | 1,725 | **1,655** | 3,167 |
| Eliminations and other | **(28)** | (42) | **(53)** | (69) |
| Corporate expenses and other unallocated items | **(277)** | (87) | **(407)** | (133) |
| FAS/CAS operating adjustment | **356** | — | **356** | — |
| Acquisition accounting adjustments | **(3,745)** | (210) | **(4,016)** | (437) |
| Consolidated | **$(3,760)** | $1,386 | **$(2,465)** | $2,528 |

Included in segment operating profits are EAC adjustments, which relate to changes in operating profits and margin due to revisions to total estimated revenues and costs at completion. These changes reflect improved or deteriorated operating performance or award fee rates. For a full description of our EAC process, refer to “Note 1: Basis of Presentation and Summary of Accounting Principles” within Item 1 of this Form 10-Q. Given that we have thousands of individual contracts and the types and complexity of the assumptions and estimates we must make on an on-going basis, we have both favorable and unfavorable EAC adjustments. We had the following aggregate EAC adjustments for the periods presented:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Gross favorable | **$151** | $109 | **$288** | $219 |
| Gross unfavorable | **$(302)** | $(178) | **$(418)** | $(300) |
| Total net EAC adjustments | **$(151)** | $(69) | **$(130)** | $(81) |

70

As a result of the Raytheon Merger, RIS’s and RMD’s long-term contracts that are accounted for on a percentage of completion basis, were reset to zero percent complete as of the merger date since only the unperformed portion of the contract at the merger date represents the obligation of the Company. This will have the impact of reducing gross favorable and unfavorable EAC adjustments for these segments in the short-term, with the exception of EAC adjustments related to loss reserves. The change in net EAC adjustments of $82 million in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was primarily due to $56 million of net unfavorable EAC adjustments for RIS and RMD in the quarter ended June 30, 2020 due to the impact of purchase accounting for the Raytheon Merger. The change in net EAC adjustments of $49 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to $56 million of net unfavorable EAC adjustments for RIS and RMD in the six months ended June 30, 2019 due to the impact of the Raytheon Merger and a decrease in net EAC adjustments of $18 million at Pratt & Whitney, partially offset by an increase in net EAC adjustments of $25 million at Collins Aerospace. Significant EAC adjustments in the second quarters and first six months of 2020 and 2019 are discussed in each business segment’s discussion below. Refer to the individual segment results for further information.

*Defense Backlog and Defense Bookings—*We believe backlog and bookings are relevant to an understanding of management’s view of our defense operations’ performance. Our defense operations consist primarily of our RIS and RMD businesses, but also to a lesser extent, includes operations in the defense space at our Collins Aerospace and Pratt & Whitney businesses.

Backlog, which is essentially equivalent to our remaining performance obligations for our defense contracts, represents the dollar value of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ) type contracts). Backlog is affected by changes in foreign exchange rates.

Defense backlog as of June 30, 2020 and December 31, 2019 was as follows:

*(dollars in millions)*

|  | June 30, 2020 | December 31, 2019 |
| --- | ---: | ---: |
| Collins Aerospace Systems - defense contracts | **$8,022** | $7,502 |
| Pratt & Whitney - defense contracts | **13,354** | 14,787 |
| Raytheon Intelligence & Space | **18,983** | — |
| Raytheon Missiles & Defense | **32,775** | — |
| Total defense backlog | **$73,134** | $22,289 |

Bookings generally represent the dollar value of new external contracts awarded to us during the reporting period and include firm orders for which funding has not been appropriated. We believe bookings are an important measure of future performance for our defense operations and are an indicator of potential future changes in these operations’ total net sales, because we cannot record revenues under a new contract without first having a booking in the current or a preceding period.

Bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ type contracts), and are reduced for contract cancellations and terminations of bookings recognized in the current year. We reflect contract cancellations and terminations from prior year bookings, as well as the impact of changes in foreign exchange rates, directly as an adjustment to backlog in the period in which the cancellation or termination occurs and the impact is determinable. Contract cancellations and terminations include contract underruns on cost-type programs.

Bookings are impacted by the timing and amounts of awards in a given period, which are subject to numerous factors, including: (1) the desired capability by the customer and urgency of customer needs; (2) customer budgets and other fiscal constraints; (3) political and economic and other environmental factors; (4) the timing of customer negotiations; (5) the timing of governmental approvals and notifications; and (6) the timing of option exercises or increases in scope. In addition, due to these factors, quarterly bookings tend to fluctuate from period to period, particularly on a segment basis. As a result, we believe comparing bookings on a quarterly basis or for periods less than one year is less meaningful than for longer periods and that shorter term changes in bookings may not necessarily indicate a material trend.

Defense bookings for the quarters and six months ended June 30, 2020 and 2019 were as follows:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Collins Aerospace Systems - defense contracts | **$1,600** | $2,056 | **$3,703** | $3,266 |
| Pratt & Whitney - defense contracts | **739** | 4,402 | **1,828** | 5,525 |
| Raytheon Intelligence & Space | **3,516** | — | **3,516** | — |
| Raytheon Missiles & Defense | **4,305** | — | **4,305** | — |
| Total defense bookings | **$10,160** | $6,458 | **$13,352** | $8,791 |

### Collins Aerospace Systems

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Change | Six Months Ended June 30, 2020 | 2019 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | **$4,202** | $6,576 | (36)% | **$10,640** | $13,089 | (19)% |
| Operating Profits | **(317)** | 1,276 | (125)% | **929** | 2,240 | (59)% |
| Operating Profit Margins | **(7.5)%** | 19.4% |  | **8.7%** | 17.1% |  |

### Quarter Ended June 30, 2020 Compared with Quarter Ended June 30, 2019

|  | Factors Contributing to Total Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other | Total Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $(2,366) | $(9) | $1 | $— | $— | $(2,374) |
| Operating Profits | (1,456) | 8 | — | (134) | (11) | (1,593) |

The organic sales decrease of $2.4 billion in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 primarily relates to lower commercial aerospace OEM sales of $1.4 billion and lower commercial aerospace aftermarket sales of $1.1 billion, both primarily due to the current economic environment principally driven by the COVID-19 pandemic which has resulted in lower flight hours, aircraft fleet utilization and commercial OEM deliveries. This decrease was partially offset by higher military sales of $0.2 billion. Included in the organic sales decrease were lower commercial aerospace OEM and aftermarket sales of approximately $0.3 billion related to the Boeing 737 Max program and fewer upgrades due to certain regulatory mandates that were primarily completed in early 2020.

The operational profit decrease of $1.5 billion in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 primarily reflects:

- lower commercial aerospace operating profit of $1.4 billion driven by the lower commercial aerospace OEM and aftermarket sales volume discussed above. Included in the lower commercial OEM operating profit were $122 million of significant unfavorable adjustments principally driven by the expected acceleration of fleet retirements of a certain aircraft.
- higher selling, general and administrative expenses of $0.1 billion primarily driven by $89 million of increased estimates of expected credit losses due to customer bankruptcies and additional general allowances for credit losses.

Included in operational profit in the quarter ended June 30, 2020 was other income of $24 million related to foreign government wage subsidies due to COVID-19.

Other operating profits in the quarter ended June 30, 2020 was relatively consistent with the quarter ended June 30, 2019.

### Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019

|  | Factors Contributing to Total Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other | Total Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $(2,425) | $(20) | $(4) | $— | $— | $(2,449) |
| Operating Profits | (1,497) | 11 | 50 | (101) | 226 | (1,311) |

The organic sales decrease of $2.4 billion in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily relates to lower commercial aerospace OEM sales of $1.7 billion and lower commercial aerospace aftermarket sales of $1.0 billion, both primarily due to the current economic environment principally driven by the COVID-19 pandemic, which has resulted in lower flight hours, aircraft fleet utilization and commercial OEM deliveries. This decrease was partially offset by higher military sales of $0.4 billion. Included in the organic sales decrease were lower commercial aerospace OEM and aftermarket sales of approximately $0.5 billion related to the Boeing 737 Max program and fewer upgrades due to certain regulatory mandates that were primarily completed in early 2020.

The operational profit decrease of $1.5 billion in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily reflects:

- lower commercial aerospace operating profit of $1.5 billion driven by the lower commercial aerospace OEM and aftermarket sales volume discussed above. Included in the lower commercial OEM operating profit were $144 million of significant unfavorable adjustments principally driven by the expected acceleration of fleet retirements of a certain aircraft.
- higher selling, general and administrative expenses of $0.1 billion primarily driven by $99 million of increased estimates of expected credit losses due to customer bankruptcies and additional general allowances for credit losses.

Included in operational profit in the six months ended June 30, 2020 was other income of $24 million related to foreign government wage subsidies due to COVID-19 and other income of $12 million related to the favorable impact of a contract related matter.

The increase in Other operating profits of $0.2 billion in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily relates to the absence of prior year amortization of inventory fair value step-up associated with the Rockwell Collins acquisition of $181 million and the absence of a prior year loss on the sale of a business of $25 million.

### Pratt & Whitney

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Change | Six Months Ended June 30, 2020 | 2019 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | **$3,487** | $5,154 | (32)% | **$8,840** | $9,972 | (11)% |
| Operating Profits | **(457)** | 449 | (202)% | **18** | 927 | (98)% |
| Operating Profit Margins | **(13.1)%** | 8.7% |  | **0.2%** | 9.3% |  |

### Quarter Ended June 30, 2020 Compared with Quarter Ended June 30, 2019

|  | Factors Contributing to Total Change Organic / Operational | FX Translation(1) | Acquisitions / Divestitures, net | Restructuring Costs | Other | Total Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $(1,652) | $(15) | $— | $— | $— | $(1,667) |
| Operating Profits | (796) | (1) | — | (104) | (5) | (906) |

(1) 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 decrease of $1.7 billion in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 primarily reflects lower commercial aftermarket sales of $1.3 billion and lower commercial OEM sales of $0.5 billion, both primarily due to a significant reduction in shop visits and related spare part sales and commercial engine deliveries, principally driven by the current economic environment primarily due to the COVID-19 pandemic, partially offset by higher military sales of $0.1 billion primarily driven by an increase in F135 engine sales.

The operational profit decrease of $0.8 billion in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was primarily driven by:

- lower commercial aftermarket operating profits of $0.7 billion driven by the sales volume decrease discussed above and unfavorable mix.
- higher selling, general and administrative expenses of $0.1 billion primarily driven by $148 million of increased estimates of expected credit losses due to customer bankruptcies and additional general allowances for credit losses.

This increase was partially offset by:

- lower research and development costs of $0.1 billion.
- other income of $59 million related to foreign government wage subsidies due to COVID-19 in the quarter ended June 30, 2020.

Included in operational profit was an increase in net unfavorable EAC adjustments of $16 million, which included significant net unfavorable EAC adjustments of $71 million based on a portfolio review of our commercial aftermarket programs in consideration of the estimated lower flight hours, a change in the estimated number of shop visits and the related amount of estimated costs. Also included was an unfavorable EAC adjustment of $44 million on a military program primarily driven by a shift in estimated overhead costs due to the lower commercial engine activity discussed above, partially offset by unfavorable net EAC adjustments in the prior year.

Other operating profits in the quarter ended June 30, 2020 was relatively consistent with the quarter ended June 30, 2019.

### Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019

|  | Factors Contributing to Total Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other | Total Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $(1,096) | $(36) | $— | $— | $— | $(1,132) |
| Operating Profits | (770) | (12) | — | (90) | (37) | (909) |

The organic sales decrease of $1.1 billion in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily reflects lower commercial aftermarket sales of $1.2 billion and lower commercial OEM sales of $0.2 billion, both primarily due to a significant reduction in shop visits and related spare part sales and commercial engine deliveries, principally driven by the current economic environment primarily due to the COVID-19 pandemic, partially offset by higher military sales of $0.4 billion primarily driven by an increase in F135 engine sales.

The operational profit decrease of $0.8 billion in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily driven by:

- lower commercial aftermarket operating profits of $0.7 billion driven by the sales volume decrease discussed above and unfavorable mix.
- higher selling, general and administrative expenses of $0.2 billion primarily driven by $210 million of increased estimates of expected credit losses due to customer bankruptcies and additional general allowances for credit losses.

This increase was partially offset by:

- lower research and development costs of $0.1 billion.
- other income of $59 million related to foreign government wage subsidies due to COVID-19 in the six months ended June 30, 2020.

Included in operational profit was an increase in net unfavorable EAC adjustments of $18 million, which included significant net unfavorable EAC adjustments of $71 million based on a portfolio review of our commercial aftermarket programs in consideration of the estimated lower flight hours, a change in the estimated number of shop visits and the related amount of estimated costs. Also included was an unfavorable EAC adjustment of $44 million on a military program primarily driven by a shift in estimated overhead costs due to the lower commercial engine activity discussed above, partially offset by unfavorable net EAC adjustments in the prior year.

The decrease in Other operating profits of $37 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 relates to the absence of a prior year licensing sale of $19 million and the absence of a prior year gain on divestiture of $18 million.

### Raytheon Intelligence & Space

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Change | Six Months Ended June 30, 2020 | 2019 | Change |
| --- | ---: | ---: | --- | ---: | ---: | --- |
| Net Sales | **$3,314** | — | NM | **$3,314** | — | NM |
| Operating Profits | **311** | — | NM | **311** | — | NM |
| Operating Profit Margins | **9.4%** | — |  | **9.4%** | — |  |
| Bookings | **$3,516** | — | NM | **$3,516** | — | NM |

NM = Not meaningful

The increase in net sales of $3,314 million in both the quarter and six months ended June 30, 2020 compared to the quarter and six months ended June 30, 2019, respectively, was due to the Raytheon Merger on April 3, 2020.

The increase in operating profits of $311 million and the related increase in operating profit margins in both the quarter and six months ended June 30, 2020 compared to the quarter and six months ended June 30, 2019, respectively, was due to the Raytheon Merger.

*Backlog and Bookings–* Backlog was $18,983 million at June 30, 2020 compared to zero at December 31, 2019. The increase in backlog of $18,983 million was due to the Raytheon Merger. In the quarter ended June 30, 2020, RIS booked $1,418 million on a number of classified contracts and $166 million on the Global Aircrew Strategic Network Terminal (Global ASNT) program for the U.S. Air Force.

### Raytheon Missiles & Defense

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Change | Six Months Ended June 30, 2020 | 2019 | Change |
| --- | ---: | ---: | --- | ---: | ---: | --- |
| Net Sales | **$3,590** | — | NM | **$3,590** | — | NM |
| Operating Profits | **397** | — | NM | **397** | — | NM |
| Operating Profit Margins | **11.1%** | — |  | **11.1%** | — |  |
| Bookings | **$4,305** | — | NM | **$4,305** | — | NM |

NM = Not meaningful

The increase in net sales of $3,590 million in both the quarter and six months ended June 30, 2020 compared to the quarter and six months ended June 30, 2019, respectively, was due to the Raytheon Merger on April 3, 2020.

The increase in operating profits of $397 million and the related increase in operating profit margins in both the quarter and six months ended June 30, 2020 compared to the quarter and six months ended June 30, 2019, respectively, was due to the Raytheon Merger.

*Backlog and Bookings–* Backlog was $32,775 million at June 30, 2020 compared to zero at December 31, 2019. The increase in backlog of $32,775 million was due to the Raytheon Merger. In the quarter ended June 30, 2020, RMD booked $2,253 million on the Army Navy/Transportable Radar Surveillance-Model 2 (AN/TPY-2) radar program for the Kingdom of Saudi Arabia (KSA) and $299 million for Standard Missile-3 (SM-3®) for the Missile Defense Agency (MDA) and an international customer.

### Eliminations and other

Eliminations and other reflects the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller non-reportable business segments, including Forcepoint, LLC, which was acquired as part of the Raytheon Merger.

*(dollars in millions)*

|  | Net Sales Quarter Ended June 30, 2020 | 2019 | Operating Profits Quarter Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Inter segment eliminations | **$(682)** | $(403) | **$(24)** | $(65) |
| Other non-reportable segments | **150** | 2 | **(4)** | 23 |
| Eliminations and other | **$(532)** | $(401) | **$(28)** | $(42) |

The increase in other non-reportable segments sales for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, was primarily due to the Forcepoint sales related to the Raytheon Merger on April 3, 2020.

The decrease in other non-reportable segments operating profit for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, was primarily due to the impact of foreign currency translation of $24 million.

*(dollars in millions)*

|  | Net Sales Six Months Ended June 30, 2020 | 2019 | Operating Profits Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Inter segment eliminations | **$(1,118)** | $(785) | **$(37)** | $(115) |
| Other non-reportable segments | **155** | 6 | **(16)** | 46 |
| Eliminations and other | **$(963)** | $(779) | **$(53)** | $(69) |

The increase in other non-reportable segment sales for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was primarily due to the Forcepoint sales related to the Raytheon Merger on April 3, 2020.

The decrease in other non-reportable segments operating profit for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was primarily due to the impact of foreign currency translation of $63 million.

### Corporate expenses and other unallocated items

Corporate expenses and other unallocated items consists of costs and certain other unallowable corporate costs not considered part of management’s evaluation of reportable segment operating performance including restructuring and merger costs related to the Raytheon Merger, net costs associated with corporate research and development, including the Lower Tier Air and Missile Defense Sensor (LTAMDS) program which was acquired as part of the Raytheon Merger, and certain reserves. See Restructuring Costs, above, for a more detailed discussion of our restructuring costs.

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Corporate expenses and other unallocated items | **$(277)** | $(87) | **$(407)** | $(133) |

The change in Corporate expenses and other unallocated items of $190 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was primarily driven by increased restructuring costs of $168 million, and an increase in merger-related costs for the Raytheon Merger of $44 million.

The change in Corporate expenses and other unallocated items of $274 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily driven by increased restructuring costs of $169 million and an increase in merger-related costs for the Raytheon Merger of $73 million.

### FAS/CAS operating adjustment

The segment results of RIS and RMD only include pension and postretirement benefit (PRB) expense as determined under U.S. government CAS, which we generally recover through the pricing of our products and services to the U.S. government. The difference between our CAS expense and the FAS service cost attributable to these segments under U.S. GAAP is the FAS/CAS operating adjustment. The FAS/CAS operating adjustment results in consolidated pension expense in operating profit equal to the service cost component of FAS expense under U.S. GAAP. The segment results of Collins Aerospace and Pratt & Whitney include FAS service cost.

The pension and PRB components of the FAS/CAS Operating Adjustment were as follows:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| FAS service cost (expense) | **$(109)** | $— | **$(109)** | $— |
| CAS expense | **465** | — | **465** | — |
| FAS/CAS operating adjustment | **$356** | $— | **$356** | $— |

The change in our FAS/CAS Operating Adjustment of $356 million in the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 and in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily driven by the Raytheon Merger on April 3, 2020.

### Acquisition accounting adjustments

Acquisition accounting adjustments include the amortization of acquired intangible assets related to historical acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through historical acquisitions and the amortization of customer contractual obligations related to loss making or below market contracts acquired. These adjustments are not considered part of management’s evaluation of segment results.

The components of Acquisition accounting adjustments were as follows:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Goodwill impairment charge | **$(3,183)** | $— | **$(3,183)** | $— |
| Amortization of acquired intangibles | **(611)** | (290) | **(951)** | (597) |
| Amortization of property, plant and equipment fair value adjustment | **(20)** | (11) | **(27)** | (22) |
| Amortization of customer contractual obligations related to acquired loss-making and below-market contracts | **69** | 91 | **145** | 182 |
| Acquisition accounting adjustments | **$(3,745)** | $(210) | **$(4,016)** | $(437) |

Acquisition accounting adjustments related to acquisitions in each segment were as follows:

*(dollars in millions)*

|  | Quarter Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Collins Aerospace Systems | **$(3,211)** | $(59) | **$(3,324)** | $(136) |
| Pratt & Whitney | **(181)** | (151) | **(339)** | (301) |
| Raytheon Intelligence & Space | **(128)** | — | **(128)** | — |
| Raytheon Missiles & Defense | **(200)** | — | **(200)** | — |
| Total segment | **(3,720)** | (210) | **(3,991)** | (437) |
| Eliminations and other | **(25)** | — | **(25)** | — |
| Acquisition accounting adjustments | **$(3,745)** | $(210) | **$(4,016)** | $(437) |

The change the Acquisition accounting adjustments of $3,535 million and $3,579 million for the quarter and six months ended June 30, 2020 compared to the quarter and six months ended June 30, 2019 respectively, is primarily driven by the $3,183 million goodwill impairment loss related to two Collins Aerospace reporting units and $353 million related to the Raytheon Merger primarily related to the amortization of intangibles. Refer to “Note 2: Acquisitions, Dispositions, Goodwill and Other Intangible Assets” within Item 1 of this Form 10-Q for additional information on the goodwill impairment loss.

### LIQUIDITY AND FINANCIAL CONDITION

*(dollars in millions)*

|  | June 30, 2020 | December 31, 2019 |
| --- | ---: | ---: |
| Cash and cash equivalents | **$6,975** | $4,937 |
| Total debt | **32,750** | 43,252 |
| Total equity | **68,892** | 44,231 |
| Total capitalization (total debt plus total equity) | **101,642** | 87,483 |
| Total debt to total capitalization | **32%** | 49% |

### Liquidity and Financial Condition as of June 30, 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 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. We had $6.84 billion available under our various credit facilities at June 30, 2020.

As discussed above in Business Overview, 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, suspending share repurchases, deferring merit increases, freezing non-essential hiring, repositioning employees to defense work, and furloughing employees when needed. 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.

The CARES Act, along with earlier issued IRS guidance, provides for a net deferral of payroll tax payments. As a result, we have deferred cash outflows of approximately $200 million during the six months ended June 30, 2020, and expect a full year 2020 cash flows benefit of approximately $450 million. This will have the effect of increasing cash outflows for payroll taxes during 2021 and 2022. In addition, deferrals of required estimated federal, foreign and state income tax payments due to the CARES Act and other similar state and foreign stimulus incentives could impact the timing of these payments within the year. The CARES Act, among other things, also contains numerous other provisions which may impact us. We continue to refine the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.

At June 30, 2020, we had cash and cash equivalents of $7.0 billion, of which approximately 28% 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 does not intend 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 six months ended June 30, 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, including certain customer payments related to factored receivables that we collect on behalf of the financing institutions. As of June 30, 2020 and December 31, 2019, the amount of such restricted cash was approximately $42 million and $25 million, respectively, which is excluded from cash and cash equivalents.

Historically, our strong credit ratings and financial position have enabled us to issue long-term debt at favorable interest rates.

As of June 30, 2020, our maximum commercial paper borrowing limit was $5.0 billion as the commercial paper is backed by our $5.0 billion revolving credit agreement. We had $160 million of commercial paper borrowings as of June 30, 2020. The maximum amount of short-term commercial paper borrowings outstanding at any point in time during the six months ended June 30, 2020 was $1,904 million. 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. The commercial paper notes outstanding have original maturities of not more than 90 days from the date of issuance.

In preparation for and in anticipation of the Separation Transactions, the Distributions and the Raytheon Merger, the Company entered into and terminated a number of credit agreements in the six months ended June 30, 2020.

On February 11, 2020 and March 3, 2020, we terminated a $2.0 billion revolving credit agreement and a $4.0 billion term loan credit agreement, respectively. Upon termination, we repaid the $2.1 billion of borrowings outstanding on the $4.0 billion term loan credit agreement. On April 3, 2020, upon the completion of the Raytheon Merger, we terminated a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement.

On March 20, 2020 and March 23, 2020, we entered into two $500 million term loan credit agreements and borrowed $1.0 billion under these agreements in the first quarter of 2020. We terminated these agreements on May 5, 2020 and April 28, 2020, respectively, upon repayment.

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. 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.

As of June 30, 2020 we had revolving credit agreements with various banks permitting aggregate borrowings of up to $7.0 billion.

On February 10, 2020, Otis entered into a term loan credit agreement providing for a $1.0 billion unsecured, unsubordinated 3-year term loan credit facility which matures on February 10, 2023. Also on February 10, 2020, Carrier entered into a term loan credit agreement providing for a $1.75 billion unsecured, unsubordinated 3-year term loan credit facility which matures February 10, 2023. On March 27, 2020, Otis and Carrier drew on the full amounts of the term loans and distributed the full proceeds to Raytheon Technologies in connection with the Separation Transactions. UTC utilized those amounts to extinguish Raytheon Technologies’ short-term and long-term debt in order to not exceed the maximum applicable net indebtedness required by the Raytheon Merger Agreement.

We have an existing universal shelf registration statement, which we filed with the SEC on September 27, 2019, for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitation on the amount of debt to be issued under this shelf registration statement.

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)*

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash flows provided by operating activities from continuing operations from continuing operations | **$1,342** | $2,769 |
| Net cash (used in) provided by operating activities from discontinued operations | **(661)** | 841 |

*Operating Activities - Continuing Operations.* Cash generated by operating activities from continuing operations in the six months ended June 30, 2020 was $1,427 million lower than the same period in 2019 primarily due to operating cash flows generated from the RIS and RMD segments as a result of the Raytheon Merger on April 3, 2020, which was more than offset by the net decrease in operating cash flows at Pratt & Whitney and Collins Aerospace Systems resulting from the current economic environment primarily driven by COVID-19. Included in the decrease in operating cash flows was a reduction in accounts payable at Collins Aerospace and Pratt & Whitney due to a decline in volume principally driven by the current economic environment primarily driven by COVID-19, partially offset by a favorable change in contract assets principally driven by the timing of milestones on certain international direct commercial sales contracts and contractual billings terms on U.S. government contracts at RMD.

Factoring activity resulted in an increase of approximately $1.1 billion in cash generated from operating activities for the six months ended June 30, 2020, as compared to the prior year. This increase was primarily driven by an increase in factoring levels at Pratt & Whitney. 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 $106 million in cash generated from operating activities for the six months ended June 30, 2020, as compared to the prior year.

We made the following contributions to our global defined benefit pension plans:

*(dollars in millions)*

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Pension contributions | **$42** | $37 |
| PRB contributions | **—** | — |
| Total | **$42** | $37 |

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 made (received) net tax payments of $37 million and $428 million in the six months ended June 30, 2020 and 2019, respectively. We expect full-year net federal, foreign and state tax payments to be approximately $1.0 billion in 2020 on a continuing operations basis.

*Operating Activities - Discontinued Operations.* Cash used in operating activities from discontinued operations in the six months ended June 30, 2020 was $1,502 million lower than the same period in 2019 primarily driven by the absence of second quarter 2020 activity as the Separation Transactions occurred on April 3, 2020 and increased costs of separation.

### Cash Flow - Investing Activities

*(dollars in millions)*

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash flows provided by (used in) investing activities from continuing operations from continuing operations | **$2,056** | $(1,103) |
| Net cash used in investing activities from discontinued operations | **(241)** | (114) |

Our investing activities primarily include 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 not designated as hedging instruments.

*Investing Activities - Continuing Operations.* The $3,159 million change in cash flows provided by (used in) investing activities from continuing operations in the six months ended June 30, 2020 compared to June 30, 2019 primarily relates to the Raytheon Merger, in which cash of $3.2 billion was acquired on April 3, 2020.

Additions to property, plant and equipment were as follows:

*(dollars in millions)*

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Additions to property, plant and equipment | **$(783)** | $(678) |

Capital expenditures for the six months ended June 30, 2020 of $783 million primarily relate to several projects at Collins Aerospace and investments in production and aftermarket capacity at Pratt & Whitney.

Dispositions of businesses in the six months ended June 30, 2020 were $234 million.

Customer financing activities in the six months ended June 30, 2020 were a net use of cash of $129 million, primarily driven by additional Geared Turbofan engines leased to support customer fleets. We had commercial aerospace financing and other contractual commitments of approximately $15.0 billion at June 30, 2020 related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which up to $1.0 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 six months ended June 30, 2020, our collaboration intangible assets increased by approximately $106 million, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce’s collaboration interest in IAE.

As discussed in “Note 12: Financial Instruments” within Item 1 of this Form 10-Q, we enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments under the Derivatives and Hedging (Topic 815) 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 $286 million during the six months ended June 30, 2020 compared to a net cash inflow of $61 million during the six months ended June 30, 2019.

*Investing Activities - Discontinued Operations.* The $127 million decrease in cash flows used in investing activities from discontinued operations in the six months ended June 30, 2020 compared to June 30, 2019 primarily relates to short-term investment activity.

### Cash Flow - Financing Activities

*(dollars in millions)*

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash flows used in financing activities from continuing operations from continuing operations | **$(1,332)** | $(1,067) |
| Net cash used in financing activities from discontinued operations | **(1,481)** | (698) |

Our financing activities primarily include the issuance and repayment of short-term and long-term debt, payment of dividends and stock repurchases.

*Financing Activities - Continuing Operations.* The $265 million decrease in cash provided by (used in) financing activities from continuing operations in the six months ended June 30, 2020 compared to June 30, 2019 is driven by increases in long-term debt repayments of $15.2 billion, a $2.6 billion change in net transfers to discontinued operations, consisting of, among other things, cash transfers and distributions, and an increase in short-term borrowing repayments of $1.7 billion, partially offset by an increase in long-term debt issuances of $19.3 billion. The debt issuances and term loan draws as of June 30, 2020 reflect debt incurred by Otis and Carrier of approximately $6 billion and $11 billion, respectively. The net proceeds of these issuances and draws were primarily utilized by UTC to extinguish Raytheon Technologies short-term and long-term debt in order to not exceed the maximum applicable net indebtedness required by the Raytheon Merger Agreement.

In preparation for and in anticipation of the Separation Transactions and Distributions, the Company, Otis and Carrier issued and the Company repaid long-term debt in the six months ended June 30, 2020, which are included in the tables below.

We had the following issuances of long-term debt during the six months ended June 30, 2020, which is inclusive of issuances made by Otis and Carrier which were primarily used by the Company to extinguish Raytheon Technologies short-term and long-term debt, and therefore were treated as a distribution from discontinued operations within financing activities from continuing operation on our Condensed Consolidated Statement of Cash Flows:

*(dollars in millions)*

| Issuance Date | Description of Notes | Aggregate Principal Balance |
| --- | --- | ---: |
| May 18, 2020 | 2.250% notes due 2030 | $1,000 |
|  | 3.125% notes due 2050 | 1,000 |
| March 27, 2020 | Term Loan due 2023 (Otis) (1) | 1,000 |
|  | Term Loan due 2023 (Carrier) (1) | 1,750 |
| 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) | 750 |
|  | 3.577% notes due 2050 (1) | 2,000 |
|  |  | $19,300 |

(1) The debt issuances and term loan draws reflect debt incurred by Otis and Carrier. The net proceeds of these issuances were primarily utilized to extinguish Raytheon Technologies short-term and long-term debt in order to not exceed the maximum applicable net indebtedness required by the Raytheon Merger Agreement.

We had the following repayments of long-term debt during the six months ended June 30, 2020:

*(dollars in millions)*

| Repayment Date | Description of Notes | Aggregate Principal Balance |
| --- | --- | ---: |
| May 19, 2020 | 3.650% notes due 2023 (1)(2) | $410 |
| May 15, 2020 | EURIBOR plus 0.20% floating rate notes due 2020 (€750 million principal value)(2) | 817 |
| March 29, 2020 | 4.500% notes due 2020 (1)(2) | 1,250 |
|  | 1.125% notes due 2021 (€950 million principal value) (1)(2) | 1,082 |
|  | 1.250% notes due 2023 (€750 million principal value) (1)(2) | 836 |
|  | 1.150% notes due 2024 (€750 million principal value) (1)(2) | 841 |
|  | 1.875% notes due 2026 (€500 million principal value) (1)(2) | 567 |
| March 3, 2020 | 1.900% notes due 2020 (1)(2) | 1,000 |
|  | 3.350% notes due 2021 (1)(2) | 1,000 |
|  | LIBOR plus 0.650% floating rate notes due 2021 (1)(2) | 750 |
|  | 1.950% notes due 2021 (1)(2) | 750 |
|  | 2.300% notes due 2022 (1)(2) | 500 |
|  | 3.100% notes due 2022 (1)(2) | 2,300 |
|  | 2.800% notes due 2024 (1)(2) | 800 |
| March 2, 2020 | 4.875% notes due 2020 (1)(2) | 171 |
| February 28, 2020 | 3.650% notes due 2023 (1)(2) | 1,669 |
|  | 2.650% notes due 2026 (1)(2) | 431 |
|  |  | $15,174 |

(1) In connection with the early repayment of outstanding principal, Raytheon Technologies recorded debt extinguishment costs of $43 million and $703 million for the quarter and six months ended June 30, 2020, respectively, which are classified as discontinued operations in our Condensed Consolidated Statement of Operations as we would not have had to redeem the debt, except for the Separation Transactions. No proceeds of the notes issued May 18, 2020 were used to fund the May 19, 2020 redemption.

(2) Extinguishment of Raytheon Technologies short-term and long-term debt in order to not exceed the maximum net indebtedness required by the Raytheon Merger Agreement.

We had no long-term debt issuances or repayments of long-term debt during the six months ended June 30, 2019.

At June 30, 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 Exchange Act. 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 currently do not anticipate any additional share repurchases in 2020.

Our share repurchases were as follows:

*(dollars in millions; shares in thousands)*

|  | Six Months Ended June 30, 2020 $Shares |  | 2019 $Shares |  |
| --- | ---: | ---: | ---: | ---: |
| Shares of Common Stock repurchased | **$47** | **330** | $69 | 553 |

Our Board of Directors authorized the following cash dividends:

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

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Dividends per share of Common Stock | **$1.210** | $1.470 |
| Total dividends paid | **$1,338** | 1,219 |

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. Also, on June 8, 2020 the Board of Directors declared a dividend of $0.475 per share payable September 10, 2020 to shareowners of record at the close of business on August 14, 2020.

*Financing Activities - Discontinued Operations.* The $783 million decrease in cash used in financing activities from discontinued operations in the six months ended June 30, 2020 compared to June 30, 2019 is driven by $703 million of debt extinguishment costs related to the early repayment of debt in the six months ended June 30, 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 June 30, 2020, there have been no material changes to these off-balance sheet arrangements and contractual obligations outside the ordinary course of business except for those disclosed in “Note 8: Borrowings and Lines of Credit,” “Note 16: Guarantees,” and “Note: 17 Commitments and Contingencies” within Item 1 of this Form 10-Q and described below as a result of the Raytheon Merger and Separation Transactions. As a result of the Raytheon Merger, we added approximately $11 billion of purchase obligations, the majority of which we expect to fulfill over the next 12 months. These purchase obligations represent enforceable and legally binding agreements with suppliers to purchase goods or services. We enter into contracts with customers, primarily the U.S. government, which entitle us to full recourse for costs incurred, including purchase obligations, in the event the contract is terminated by the customer for convenience. These purchase obligations are included notwithstanding the amount for which we are entitled to full recourse from our customers. As a result of the Separation Transactions, we no longer have approximately $2 billion of purchase obligations which were previously outstanding as of December 31, 2019.

## Market risk

As filed, 2,313 characters.

Our primary market exposures are to fluctuations in foreign currency exchange rates and interest rates as it relates to our market risk sensitive instruments, which are primarily cash, debt and derivative instruments. To quantify our market risk exposure, we perform a sensitivity analysis based on hypothetical changes in foreign currency exchange rates and interest rates. We changed our methodology for quantifying our market risk exposure in the second quarter of 2020 to better align with how we manage our risk exposure.

### Foreign Currency Exchange Rate Risk

We are subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies and to various internal or external financing arrangements. We use foreign currency forward contracts to hedge the price risk associated with firmly committed and forecasted foreign denominated payments and receipts related to our ongoing business and financing. The aggregate notional amount of our outstanding foreign currency hedges was $13.5 billion and $13.0 billion at June 30, 2020 and December 31, 2019, respectively. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates. A 10% unfavorable exchange rate movement in our portfolio of foreign currency contracts would have resulted in an increase in unrealized losses of $1.1 billion and $1.2 billion at June 30, 2020 and December 31, 2019, respectively. Such losses or gains would be offset by corresponding gains or losses in the remeasurement of the underlying transactions being hedged. We believe these foreign currency forward exchange contracts and the offsetting underlying commitments, when taken together, do not create material market risk.

### Interest Rate Risk

We have financial instruments that are subject to interest rate risk, principally fixed-rate debt obligations. A 100 basis points unfavorable interest rate movement would have had an approximate $4 billion impact on the fair value of our fixed-rate debt at both June 30, 2020 and December 31, 2019. The investors in our fixed-rate debt obligations do not generally have the right to demand we pay off these obligations prior to maturity. Therefore, exposure to interest rate risk is not believed to be material for our fixed-rate debt.

## Controls and procedures

As filed, 11,590 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 and Chief Financial Officer (CFO) and the Corporate Vice President and Controller (Controller), of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 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 June 30, 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.

On April 3, 2020, we completed the Raytheon Merger and prior to the merger, we completed the Separation Transactions. We have incorporated Raytheon’s controls to the extent that they are better suited for Raytheon’s operations and extended our oversight and monitoring processes that support our internal control over financial reporting to include Raytheon’s operations. We are continuing to integrate the operations of Raytheon into our overall internal control over financial reporting process. There has been no other change in our internal control over financial reporting during the quarter ended June 30, 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 Raytheon Technologies Corporation (RTC) of United Technologies Corporation’s (UTC) Rockwell Collins acquisition, the merger between UTC and Raytheon Company (Raytheon, and such merger, the Raytheon Merger) or the spin-offs by UTC of Otis and Carrier 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 have been suspended through the end of the calendar year and may continue to be suspended, or discontinued or delayed, 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 TCJA), 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 (1) the Raytheon Merger as a tax-free reorganization and (2) 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 17: Commitments and Contingencies,” 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, 607 characters.

### Risk Factors

You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. There have been no material changes from the factors disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission (SEC).

Filed Jul 29, 2020.
Source: SEC EDGAR, the filing index for accession 0000101829-20-000055. Last ingested by Listed: Nov 3, 2026, 21:25 ET. No prices; not investment advice.