RAYTHEON TECHNOLOGIES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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, 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
September 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 September 27, 2020 while Collins
Aerospace Systems (Collins Aerospace) and Pratt & Whitney continue to use a
quarter calendar end of September 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 Annual Report to Shareowners (2019
Annual Report), which is incorporated by reference in our Annual Report on Form
10-K for calendar year 2019 (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.
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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 $7.7 billion and $2.3 billion for the quarters ended
September 30, 2020 and 2019, or 53% and 20% of total sales for those periods,
respectively. Total sales to the U.S. government were $17.6 billion and $6.8
billion for the nine months ended September 30, 2020 and 2019, or 44% 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.
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. These conditions, which began in
the second quarter of 2020, have continued in the third quarter of 2020. In
particular, the unprecedented 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 ending December 31, 2020 could decline by more than
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, furloughing employees when
needed, and personnel reductions. In the quarter and nine months ended September
30, 2020, we recorded total restructuring charges of $250 million and $685
million, respectively, primarily related to personnel reductions at our Collins
Aerospace and Pratt & Whitney businesses to preserve capital and at our
Corporate Headquarters due to consolidation from the Raytheon Merger. The former
Raytheon Company businesses have not experienced significant facility closures
or other significant business disruptions as a result of the COVID-19 pandemic.
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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 in the first and
second quarters of 2020 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.
Beginning in the second quarter of 2020, our revenue at Collins Aerospace and
Pratt & Whitney has been significantly negatively impacted by the decline in
flight hours, aircraft fleet utilization, shop visits and commercial OEM
deliveries. In order to evaluate the ongoing impact, in the second quarter of
2020 we updated our forecast assumptions of future business activity, which 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 was greater than its respective fair value, and
accordingly, recorded a goodwill impairment charge of $3.2 billion. In the third
quarter of 2020, we updated our forecast assumptions for Collins Aerospace and
determined that the resulting third quarter forecasts were in line with our
second quarter forecasts. As such, we determined we did not have an additional
goodwill impairment triggering event. 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 nine months ended September 30, 2020 we recorded
write-downs of non-goodwill assets and significant unfavorable Estimate at
Completion (EAC) adjustments in our Collins Aerospace and Pratt & Whitney
businesses primarily related to:
•increased estimated credit losses on both our receivables and contract assets
of $48 million and $357 million in the quarter and nine months ended September
30, 2020, respectively,
•an unfavorable EAC adjustment on a Pratt & Whitney commercial engine
aftermarket contract due to lower estimated revenues driven by a change in the
estimated maintenance coverage period of $334 million in both the quarter and
nine months ended September 30, 2020,
•contract asset and inventory impairments at Collins Aerospace due to the impact
of lower estimated future customer activity resulting from the expected
acceleration of fleet retirements of a commercial aircraft of $13 million and
$146 million in the quarter and nine months ended September 30, 2020,
•an unfavorable EAC adjustment of $129 million in both the quarter and nine
months ended September 30, 2020 related to lower estimated revenues due to the
restructuring of a customer contract at Pratt & Whitney,
•an $89 million impairment of commercial aircraft program assets at Pratt &
Whitney in both the quarter and nine months ended September 30, 2020,
•the impairment of a Collins Aerospace trade name of $57 million in total, in
the first and second quarters of 2020,
•unfavorable EAC adjustments on commercial aftermarket contracts at Pratt &
Whitney based on a change in estimated future customer activity of $48 million
in total, in the second and third quarters of 2020, and
•an unfavorable EAC adjustment at Pratt & Whitney related to a shift in overhead
costs to military contracts of $44 million in the second quarter of 2020second
quarter of 2020.
As described further in "Note 5: Commercial Aerospace Industry Assets and
Commitments" within the Notes to the Consolidated Financial Statements in our
2019 Annual Report, we have significant exposure related to our airline and
airframer customers, including significant accounts receivable and contract
assets balances. 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.
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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
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, in July 2019, the U.S. government suspended Turkey's participation
in the F-35 Joint Strike Fighter program because Turkey accepted delivery of the
Russian-built S-400 air and missile defense system. The U.S. has imposed, and
may impose additional, sanctions on Turkey as a result of this or other
political disputes. Turkish companies supply us with components, some of which
are sole-sourced, primarily in 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 sources of supply and could have a
material adverse effect on our results of operations, cash flows or financial
condition.
A change in the Administration or change in the makeup of Congress following the
outcome of the November 2020 elections, could result in changes to U.S.
Government policies that may impact regulatory approval of required licenses and
approvals for direct commercial sales contracts to certain foreign customers.
Likewise, licenses previously granted for prior sales could also be revoked by a
new Administration and/or Congress, if the products and services have not yet
been delivered to the customer. If we ultimately do not receive all of the
regulatory approvals and licenses, or those approvals or licenses are revoked,
it could have a material effect on our financial results.
In particular, we have direct commercial sales contracts for precision guided
munitions with certain Middle Eastern customers for which U.S. government
approvals from the State Department and Congress through the Congressional
Notification process have not yet been obtained. We had approximately $1.2
billion of total contract value, recognized approximately $400 million of sales
for work performed through the date of the Raytheon Merger and approximately
$150 million of sales subsequent to the date of the Raytheon Merger through
September 30, 2020, and received approximately $450 million in advances as of
September 30, 2020 on these contracts. On a contract-by-contract basis, we had
$200 million of net contract assets and $100 million of net contract liabilities
related to these contracts pending the U.S. government approvals.
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 of these items.
                         CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Management believes the most complex and sensitive
judgments, because of their significance to the Condensed Consolidated Financial
Statements, result primarily from the need to make estimates about the effects
of matters that are inherently uncertain. 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
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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, and current and past
service cost and frequency driven by estimated aircraft and engine utilization
and estimated useful lives of components, among others. 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:
                                                                                                                  Nine Months Ended
                                                        Quarter Ended September 30,                                 September 30,
(dollars in millions, except per share amounts)            2020               2019              2020                  2019
Operating profit                                      $      (462)         $      4          $  (592)         $             (77)
Income (loss) from continuing operations
attributable to common shareowners (1)                       (365)                3             (468)                       (61)
Diluted earnings (loss) per share from
continuing operations attributable to common
shareowners (1)                                       $     (0.24)         $      -          $ (0.36)         $           (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
that requires judgment by management. The estimated fair value of identifiable
intangible assets acquired in connection with the Raytheon Merger was
approximately $19.1 billion.
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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 September 30, 2020 was approximately $11.9
billion, of which approximately $3.3 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 impairment testing annually, or more frequently if
events or changes in circumstances indicate the asset might be impaired. The
impairment test compares carrying values of the reporting units to its estimated
fair values. If the carrying value exceeds the fair value then the carrying
value is reduced to fair value. 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 a discounted cash flow method and
relief from royalty method, 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, among other things, global market conditions.
The Company has been monitoring the deterioration in general economic and market
conditions primarily due to the COVID-19 pandemic. Beginning 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 in the second quarter of 2020, 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 $40 million and $17 million of impairment related to a
Collins Aerospace indefinite-lived tradename intangible, in the first and second
quarters of 2020, with no additional impairment recorded the quarter ended
September 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, announced program delays and expected changes to
contract terms. We also evaluated amortizable intangible assets and identified
no impairments.
In the second quarter of 2020, 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, a 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 weighted the three scenarios as
follows: 50% for the base case, 40% for the downside case, and 10% for the
upside case, and 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.
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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. In the third quarter of 2020, we updated our forecast assumptions
for Collins Aerospace and determined that the resulting third quarter forecasts
were in line with our second quarter forecasts. As such, we determined we did
not have an additional goodwill impairment triggering event. 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 $1,925 million as of April 3,
2020. A decrease of 25 basis points in the discount rate would have increased
our projected benefit obligation by $2,023 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
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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 (income) expense on our
Condensed Consolidated Statement of Operations.
We are also subject to the Employee Retirement Income Security Act of 1974
(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
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, either related to this
program or other programs, 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.
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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
                                                                                                             Nine Months Ended
                                              Quarter Ended September 30,                                      September 30,
(dollars in millions)                          2020                  2019                2020                   2019
Net Sales                                $       14,747          $   11,373          $   40,168          $         33,655

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

                                                                   Quarter Ended           Nine Months Ended
(dollars in millions)                                           September 30, 2020         September 30, 2020
Organic(1)                                                      $         (3,855)         $          (7,357)
Foreign currency translation                                                  14                        (14)
Acquisitions and divestitures, net                                         7,215                     13,884
Other                                                                          -                          -
Total change                                                    $          3,374          $           6,513


(1)  We provide the organic change in net sales for our consolidated results of
operations. We believe that this measure is useful to investors because it
provides transparency to the underlying performance of our business, which
allows for better year-over-year comparability. The organic change excludes the
effect of foreign currency exchange rate fluctuations; acquisitions and
divestitures, net; and other significant non-recurring and non-operational
items. A reconciliation of this measure to reported U.S. GAAP amounts are
provided in the table above.
Net sales decreased $3,855 million organically in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019. This
decrease reflects lower organic sales of $2.2 billion at Collins Aerospace,
primarily driven by lower commercial aerospace aftermarket sales and lower
commercial aerospace OEM sales, partially offset by higher military sales. The
declines in commercial aerospace OEM sales and commercial aerospace aftermarket
sales were 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 $1.8 billion at Pratt & Whitney primarily driven
by lower commercial aftermarket sales, primarily due to a significant reduction
in shop visits and related spare part sales, and lower commercial OEM sales,
primarily due to a significant reduction in commercial engine deliveries, all
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 F117 overhauls, F135 engine sales and aftermarket growth on
multiple fighter jet platforms. The $7,215 million sales increase in
Acquisitions and divestitures, net for the quarter ended September 30, 2020
compared to the quarter ended September 30, 2019, is primarily driven by the
Raytheon Merger on April 3, 2020. Included in the change in Acquisitions and
divestitures, net was the sale of the Collins Aerospace military Global
Positioning System (GPS) and space-based precision optics businesses sold in the
third quarter of 2020, as further discussed in "Note 2: Acquisitions,
Dispositions, Goodwill and Other Intangible Assets" within Item 1 of this Form
10-Q.
Net sales decreased $7,357 million organically for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019. This
decrease reflects lower organic sales of $4.6 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 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
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$2.9 billion at Pratt & Whitney primarily driven by lower commercial aftermarket
sales, primarily due to a significant reduction in shop visits and related spare
part sales, and lower commercial OEM sales, primarily due to a significant
reduction in commercial engine deliveries, all 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, F117
overhauls and aftermarket growth on multiple fighter jet platforms. The $13,884
million sales increase in Acquisitions and divestitures, net for the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019,
is primarily driven by the Raytheon Merger on April 3, 2020. Included in the
change in Acquisitions and divestitures, net was the sale of the Collins
Aerospace military GPS and space-based precision optics businesses sold in the
third quarter of 2020, as further discussed in "Note 2: Acquisitions,
Dispositions, Goodwill and Other Intangible Assets" within Item 1 of this Form
10-Q.
The composition of external net sales by products and services sales for the
quarter and nine months ended September 30, 2020 was approximately the
following:
                                         Collins Aerospace                                  Raytheon Intelligence &       Raytheon Missiles &
                                              Systems               Pratt & Whitney                  Space                      Defense

Products                                               80  %                    60  %                         75  %                     90  %
Services                                               20  %                    40  %                         25  %                     10  %



                                              Quarter Ended September 30,                                  % of Total Net Sales
(dollars in millions, except percentages)       2020                  2019                2020                  2019
Net Sales
Products                                  $       11,469          $   8,211                    78  %                 72  %
Services                                           3,278              3,162                    22  %                 28  %
Total net sales                           $       14,747          $  11,373                   100  %                100  %


Net products sales grew $3,258 million in the quarter ended September 30, 2020
compared to the quarter ended September 30, 2019 primarily due to an increase in
external product sales of $6.1 billion due to the Raytheon Merger on April 3,
2020, partially offset by decreases in external product sales of $1.7 billion at
Collins Aerospace and $1.1 billion at Pratt & Whitney.
Net services sales grew $116 million in the quarter ended September 30, 2020
compared to the quarter ended September 30, 2019 primarily due to an increase in
external services sales of $1.2 billion due to the Raytheon Merger on April 3,
2020, partially offset by decreases in external services sales of $0.7 billion
at Pratt & Whitney and $0.4 billion at Collins Aerospace.
                                          Nine Months Ended September 30,                              % of Total Net Sales
(dollars in millions, except percentages)     2020                2019                2020                  2019
Net Sales
Products                                  $   30,402          $  24,635                    76  %                 73  %
Services                                       9,766              9,020                    24  %                 27  %
Total net sales                           $   40,168          $  33,655                   100  %                100  %


Net products sales grew $5,767 million in the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 primarily due to an
increase in external product sales of $11.8 billion due to the Raytheon Merger
on April 3, 2020, partially offset by decreases in external product sales of
$3.8 billion at Collins Aerospace and $2.2 billion at Pratt & Whitney.
Net services sales grew $746 million in the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019 primarily due to an
increase in external services sales of $2.2 billion due to the Raytheon Merger
on April 3, 2020, partially offset by decreases in external services sales of
$0.7 billion at Collins Aerospace and $0.7 billion at Pratt & Whitney.
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Our sales to major customers were as follows:
                                               Quarter Ended September 30,                                  % of Total Net Sales
(dollars in millions, except percentages)        2020                  2019                2020                  2019
Sales to the U.S. government(1)            $        7,747          $   2,313                    53  %                 20  %
Foreign military sales through the U.S.
government                                          1,372                399                     9  %                  4  %
Foreign government direct commercial sales          1,186                315                     8  %                  3  %
Commercial aerospace and other commercial
sales                                               4,442              8,346                    30  %                 73  %
Total net sales                            $       14,747          $  11,373                   100  %                100  %

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

                                           Nine Months Ended September 30,                              % of Total Net Sales
(dollars in millions, except percentages)      2020                2019                2020                  2019
Sales to the U.S. government(1)            $   17,603          $   6,777                    44  %                 20  %
Foreign military sales through the U.S.
government                                      3,040              1,091                     8  %                  3  %
Foreign government direct commercial sales      2,653              1,082                     7  %                  3  %
Commercial aerospace and other commercial
sales                                          16,872             24,705                    42  %                 73  %
Total net sales                            $   40,168          $  33,655                   100  %                100  %


(1)  Excludes foreign military sales through the U.S. government.
                      Cost of Products and Services Sold
                                                                                                                 Nine Months Ended
                                                  Quarter Ended September 30,                                      September 30,
(dollars in millions)                               2020                  2019               2020                   2019
Total cost of products and services sold     $       13,004           $    8,509          $ 33,790          $        25,482
Percentage of net sales                                88.2   %             74.8  %           84.1  %                  75.7     %


The factors contributing to the change year-over-year for the quarter and nine
months ended September 30, 2020 in total cost of products and services sold are
as follows:
                                                                   Quarter Ended           Nine Months Ended
(dollars in millions)                                           September 30, 2020         September 30, 2020
Organic(1)                                                      $         (1,833)         $          (3,456)
Foreign currency translation                                                  19                        (25)
Acquisitions and divestitures, net                                         5,777                     11,019
Restructuring                                                                122                        211
Acquisition accounting adjustments                                           301                        622
Other                                                                        109                        (63)
Total change                                                    $          4,495          $           8,308


(1)  We provide the organic change in cost of sales for our consolidated results
of operations. We believe that this measure is useful to investors because it
provides transparency to the underlying performance of our business, which
allows for better year-over-year comparability. The organic change excludes the
effect of foreign currency exchange rate fluctuations; acquisitions and
divestitures, net; restructuring costs; costs related to certain acquisition
accounting adjustments and other significant non-recurring and non-operational
items. A reconciliation of this measure to reported U.S. GAAP amounts is
provided in the table above.
The organic decrease in total cost of products and services sold for the quarter
ended September 30, 2020 compared to the quarter ended September 30, 2019, of
$1,833 million was primarily driven by the organic sales decreases noted above.
The increase in Acquisitions and divestitures, net of $5,777 million for the
quarter ended September 30, 2020 compared to the quarter ended September 30,
2019 is primarily driven by the Raytheon Merger on April 3, 2020. Included in
the change in Acquisitions and divestitures, net is the sale of the Collins
Aerospace military GPS and space-based precision optics businesses sold in the
third quarter of 2020, as further discussed in "Note 2: Acquisitions,
Dispositions, Goodwill and Other Intangible Assets" within Item 1 of this Form
10-Q. The increase in Other of $109 million for the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019, reflects an
$89 million impairment of commercial aircraft program assets at Pratt & Whitney.
The organic decrease in total cost of products and services sold for the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019, of $3,456 million was primarily driven by the organic sales decreases
noted above. The increase in Acquisitions and divestitures, net of $11,019
million for the nine months ended September 30, 2020
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compared to the nine months ended September 30, 2019 is primarily driven by the
Raytheon Merger on April 3, 2020. Included in the change in Acquisitions and
divestitures, net is the sale of the Collins Aerospace military GPS and
space-based precision optics businesses sold in the third quarter of 2020, as
further discussed in "Note 2: Acquisitions, Dispositions, Goodwill and Other
Intangible Assets" within Item 1 of this Form 10-Q. The decline in Other of $63
million for the nine months ended September 30, 2020 compared to the nine months
ended September 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, partially offset by an $89 million
impairment of commercial aircraft program assets at Pratt & Whitney.
                                               Quarter Ended September 30,                                    % of Total Net Sales
(dollars in millions, except percentages)        2020                  2019                 2020                   2019
Cost of sales
Products                                  $        10,322          $   6,498                   70.0  %                57.1  %
Services                                            2,682              2,011                   18.2  %                17.7  %
Total cost of sales                       $        13,004          $   8,509                   88.2  %                74.8  %


Net products cost of sales grew $3,824 million in the quarter ended
September 30, 2020 compared to the quarter ended September 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 $671 million in the quarter ended
September 30, 2020 compared to the quarter ended September 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 a decrease in external services cost of
sales at Collins Aerospace.
                                          Nine Months Ended September 30,                                % of Total Net Sales
(dollars in millions, except percentages)     2020                2019                 2020                   2019
Cost of sales
Products                                  $   26,571          $  19,897                   66.1  %                59.1  %
Services                                       7,219              5,585                   18.0  %                16.6  %
Total cost of sales                       $   33,790          $  25,482                   84.1  %                75.7  %

Net products cost of sales grew $6,674 million in the nine months ended September 30, 2020 compared to the nine months ended September 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 $1,634 million in the nine months ended September 30, 2020 compared to the nine months ended September 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 a decrease in external services cost of sales at Collins Aerospace.

                           Research and Development
                                                                                                                       Nine Months Ended
                                                    Quarter Ended September 30,                                          September 30,
(dollars in millions)                                2020                    2019                 2020                    2019
Company-funded                                $               642       $          592       $        1,872       $               1,784
Percentage of net sales                                    4.4  %               5.2  %               4.7  %                      5.3  %
Customer-funded (1)                           $             1,207       $          583       $        3,032       $               1,708
Percentage of net sales                                    8.2  %               5.1  %               7.5  %                      5.1  %


(1)  Customer-funded research and development costs are included in cost of
sales in our Condensed Consolidated Statement of Operations.
Research and development spending is subject to the variable nature of program
development schedules and, therefore, year-over-year fluctuations in spending
levels are expected. The increase in company-funded research and development of
$50 million for the quarter ended September 30, 2020 compared to the quarter
ended September 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 $88 million for the nine months ended September 30, 2020 compared
to the nine months ended September 30, 2019, was primarily driven by $0.4
billion related to the Raytheon Merger on April 3, 2020, partially offset by
lower expenses of $0.2 billion across various commercial programs at Pratt &
Whitney and $0.1 billion across various commercial programs at Collins
Aerospace, both principally driven by cost reduction measures due to the current
economic environment primarily due to COVID-19.
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The increase in customer-funded research and development of $624 million for the
quarter ended September 30, 2020 compared to the quarter ended September 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
$1,324 million for the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2019, was primarily driven by $1.2 billion related to
the Raytheon Merger on April 3, 2020. The remaining increase was primarily
driven by higher military development program expenses of $0.1 billion at Pratt
& Whitney.
                      Selling, General and Administrative
                                                                                                                        Nine Months Ended
                                                       Quarter Ended September 30,                                        September 30,
(dollars in millions)                                   2020                    2019                2020                   2019
Selling, general and administrative expenses     $             1,401       $          902       $      4,189       $               2,672
Percentage of net sales                                       9.5  %               7.9  %            10.4  %                      7.9  %


Selling, general and administrative expenses increased $499 million in the
quarter ended September 30, 2020 compared to the quarter ended September 30,
2019, primarily driven by $0.5 billion related to the Raytheon Merger on April
3, 2020, excluding the impact of restructuring costs. The increase in Selling,
general and administrative expenses also includes higher general and
administrative restructuring costs of $0.1 billion.
Selling, general and administrative expenses increased $1,517 million in the
nine months ended September 30, 2020 compared to the nine months ended September
30, 2019, primarily driven by $1.0 billion related to the Raytheon Merger on
April 3, 2020, excluding the impact of restructuring costs, and higher general
and administrative restructuring costs of $0.3 billion. The increase 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 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 (Expense), Net
                                                                                                                    Nine Months Ended
                                                    Quarter Ended September 30,                                       September 30,
(dollars in millions)                                2020                    2019               2020                   2019
Other income (expense), net                  $           734             $       60          $    835          $              241


Other income (expense), net includes equity earnings in unconsolidated entities,
royalty income, foreign exchange gains and losses, as well as other ongoing and
nonrecurring items. The increase in Other income (expense), net of $674 million
for the quarter ended September 30, 2020 compared to the quarter ended
September 30, 2019 was primarily due to $608 million of gains on the sales of
the Collins Aerospace businesses, as further discussed in "Note 2: Acquisitions,
Dispositions, Goodwill and Other Intangible Assets" within Item 1 of this Form
10-Q.
The increase in Other income (expense), net of $594 million for the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019,
was primarily due to $608 million of gains from the sales of the Collins
Aerospace businesses.
                            Operating Profits (loss)
                                                                                                                     Nine Months Ended
                                                  Quarter Ended September 30,                                          September 30,
(dollars in millions)                              2020                    2019                 2020                    2019
Operating profits (loss)                    $               434       $        1,430       $      (2,031)       $               3,958
Operating profit (loss) margin                           2.9  %              12.6  %            (5.1)   %                     11.8  %


The decrease in Operating profits of $996 million for the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019 was
primarily driven by the operating performance at our segments as described below
in the individual segment results. Included in the decrease in Operating profits
was an increase in acquisition accounting adjustments of $359 million related to
the Raytheon Merger and an increase in restructuring costs of $222 million
primarily related to restructuring actions taken at our Collins Aerospace and
Pratt & Whitney segments and the Raytheon Merger on April 3, 2020.
The change in Operating profits (loss) of $5,989 million for the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019
was primarily driven by the $3,183 million goodwill impairment loss in the
second
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quarter of 2020 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 (loss) was an increase in
acquisition accounting adjustments of $712 million related to the Raytheon
Merger and an increase in restructuring costs of $582 million primarily related
to actions taken at our Collins Aerospace and Pratt & Whitney segments and the
Raytheon Merger on April 3, 2020.
                      Non-service Pension (Income) Expense
                                                                                                                 Nine Months Ended
                                                   Quarter Ended September 30,                                     September 30,
(dollars in millions)                                2020                  2019               2020                   2019

Non-service pension (income) expense $ (253) $

  (289)         $   (658)         $            (681)


The change in Non-service pension (income) expense of $36 million for the
quarter ended September 30, 2020 compared to the quarter ended September 30,
2019 was primarily driven by a one-time curtailment gain of $98 million in the
quarter ended September 30, 2019 and an increase in the recognition of net
actuarial loss in the quarter ended September 30, 2020 compared to the quarter
ended September 30, 2019 for the UTC plans, partially offset by the inclusion of
the Raytheon Company plans as a result of the Raytheon Merger. The one-time
curtailment gain was due to the recognition of previously unrecognized prior
service credits as a result of an amendment to the UTC domestic defined benefit
plans to cease accrual of additional benefits for future service and
compensation for non-union participants effective December 31, 2019.
The change in Non-service pension (income) expense of $23 million for the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019 was primarily driven by a one-time curtailment gain of $98 million in the
quarter ended September 30, 2019 and an increase in the recognition of net
actuarial loss in the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2019 for the UTC plans, partially offset by the
inclusion of the Raytheon Company plans as a result of the Raytheon Merger.
                             Interest Expense, Net
                                                                                                                   Nine Months Ended
                                                  Quarter Ended September 30,                                        September 30,
(dollars in millions)                              2020                    2019                2020                   2019
Interest expense                            $               356       $          424       $      1,041       $               1,275
Interest income                                             (6)                 (22)               (24)                       (101)
Interest expense, net                       $               350       $          402       $      1,017       $               1,174
Average interest expense rate                            4.2  %               3.6  %             4.0  %                      3.7  %


Interest expense, net decreased $52 million for the quarter ended
September 30, 2020, compared to the quarter ended September 30, 2019, primarily
due to a decrease in interest expense principally driven by the repayment of
long-term debt. Interest expense, net decreased $157 million for the nine months
ended September 30, 2020, compared to the nine months ended September 30, 2019,
primarily due to a decrease in interest expense principally driven by the
repayment of long-term debt, partially offset by a decrease in interest income
principally driven by interest income of $63 million related to tax settlements
in the prior year. Included in the decrease in interest expense for the quarter
and nine months ended September 30, 2020 was a $8 million change and $52 million
change, respectively, 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 trusts acquired as part of
the Raytheon Merger. The average maturity of our long-term debt at September 30,
2020 is approximately 14 years.
                                  Income Taxes
                                                                                                                              Nine Months Ended
                                                      Quarter Ended September 30,                                               September 30,
                                                     2020                       2019                    2020                      2019
Effective tax rate                                          45.1  %                 23.2  %               (31.5) %                      13.4  %


The effective tax rate for the quarter ended September 30, 2020 included the 21%
tax expense on pretax income and a 61.1% increase in the rate associated with
the sales of the Collins Aerospace businesses, partially offset by a 16.8%
decrease in the rate associated with the state and non-U.S. tax rates related to
the charges in the quarter driven by the current economic environment primarily
due to the COVID-19 pandemic and restructuring costs, and a 13.6% decrease in
the rate associated with an update to the forecasted annualized effective tax
rate (AETR) impact on prior quarter earnings. For further discussion of these
charges refer to "Note 1: Basis of Presentation and Summary of Accounting
Principles" and "Note 11: Restructuring Costs" within Item 1 of this Form 10-Q.
The remaining 6.6% decrease to the rate is composed of various unrelated items,
which individually and collectively are not significant.
The effective tax rate for the nine months ended September 30, 2020 included the
21% tax benefit on pretax loss, a 27.6% decrease in the rate associated with the
primarily non-deductible goodwill impairment, a 16.3% decrease in the rate for
the
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impairment of deferred tax assets as a result of the Separation Transactions or
the Raytheon Merger and a 9.5% decrease to the rate primarily related to the
sales of the Collins Aerospace businesses. The remaining 0.9% 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 nine months ended September 30, 2019
included the 21% tax expense on pretax income offset by a decrease to the rate
of 0.7% and 8.3%, respectively, associated with audit settlements related to the
Examination Division of the Internal Revenue Service (IRS) 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 2.9%
increase for the quarter ended September 30, 2019 and 0.7% increase for the nine
months ended September 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
continue to review the impact to the effective tax rate and intend to record the
final impact in the fourth quarter. On September 29, 2020, the U.S. Treasury
Department released proposed and final foreign tax credit regulations; we are
reviewing the impact to the effective tax rate.
Net Income (Loss) from Continuing Operations Attributable to Common Shareowners
                                                                                                                  Nine Months Ended
                                                    Quarter Ended September 30,                                     September 30,
(dollars in millions, except per share
amounts)                                              2020                  2019               2020                   2019
Net income (loss) from continuing operations
attributable to common shareowners             $           151          $      958          $ (3,255)         $           2,853
Diluted earnings (loss) per share from
continuing operations                          $          0.10          $     1.11          $  (2.48)         $            3.31


Net income from continuing operations attributable to common shareowners for the
quarter ended September 30, 2020 includes the following:
•acquisition accounting adjustments primarily related to the Raytheon Merger of
$401 million, net of tax, which had an unfavorable impact on diluted earnings
per share from continuing operations of $0.27;
•restructuring charges of $189 million, net of tax, which had an unfavorable
impact on diluted earnings per share from continuing operations of $0.12;
•significant unfavorable contract adjustments primarily at Pratt & Whitney of
$430 million, net of tax, which had an unfavorable impact on diluted earnings
per share from continuing operations of $0.28; and
•gains on the sales of the Collins Aerospace businesses of $253 million, net of
tax, as further discussed in "Note 2: Acquisitions, Dispositions, Goodwill and
Other Intangible Assets" within Item 1 of this Form 10-Q, which had a favorable
impact on diluted earnings per share from continuing operations of $0.17.
Net income from continuing operations attributable to common shareowners for the
quarter ended September 30, 2019 includes the following:
•acquisition accounting adjustments of $176 million, net of tax, which had an
unfavorable impact on diluted earnings per share from continuing operations of
$0.20; and
•restructuring charges, net of tax, of $21 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
nine months ended September 30, 2020 includes the following:
•acquisition accounting adjustments primarily related to the Raytheon Merger of
$1,004 million, net of tax, which had an unfavorable impact on diluted earnings
per share from continuing operations of $0.77;
•restructuring charges of $517 million, net of tax, which had an unfavorable
impact on diluted earnings per share from continuing operations of $0.39;
•$3,240 million of non-deductible 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 $2.47;
•significant unfavorable contract adjustments at Collins Aerospace and Pratt &
Whitney of $630 million, net of tax, which had an unfavorable impact on diluted
earnings per share from continuing operations of $0.48;
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•$415 million of tax charges in connection with the Company's Separation
Transactions, including the impairment of deferred tax assets not expected to be
utilized, which had an unfavorable impact on diluted earnings per share from
continuing operations of $0.32;
•increased estimates of expected credit losses driven by customer bankruptcies
and additional allowances for credit losses of $272 million, net of tax, which
had an unfavorable impact on diluted earnings per share from continuing
operations of $0.21; and
•gains on the sales of the Collins Aerospace businesses of $253 million, net of
tax, which had a favorable impact on diluted earnings per share from continuing
operations of $0.19.
Net income from continuing operations attributable to common shareowners for the
nine months ended September 30, 2019 includes the following:
•acquisition accounting adjustments of $521 million, net of tax, which had an
unfavorable impact on diluted earnings per share from continuing operations of
$0.60;
•restructuring charges of $77 million, net of tax, which had an unfavorable
impact on diluted earnings per share from continuing operations of $0.09;
•tax settlements and related interest income on tax settlements of $335 million,
which had a favorable impact on diluted earnings per share from continuing
operations of $0.39; and
•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.
     Net Income (Loss) from Discontinued Operations Attributable to Common
                                  Shareowners
                                                                                                                  Nine Months Ended
                                                    Quarter Ended September 30,                                     September 30,
(dollars in millions, except per share
amounts)                                              2020                  2019               2020                   2019
Net income (loss) from discontinued operations
attributable to common shareowners             $           113          $      190          $   (399)         $           1,541
Diluted earnings (loss) per share from
discontinued operations                        $          0.08          $     0.22          $  (0.30)         $            1.78


On April 3, 2020, we completed the separation of our 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 change in net income (loss) from discontinued operations attributable to
common shareowners of $77 million and the related change in diluted earnings
(loss) per share from discontinued operations of $0.14 in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019 was
primarily due to prior year Otis and Carrier operating activity, as the
Separation Transactions occurred on April 3, 2020, partially offset by higher
prior year costs associated with the separation of our commercial businesses as
discussed below.
The change in net income (loss) from discontinued operations attributable to
common shareowners of $1,940 million and the related change in diluted earnings
(loss) per share from discontinued operations of $2.08 in the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 was
primarily due to prior year Otis and Carrier operating activity, as the
Separation Transactions occurred on April 3, 2020 and the increased costs
associated with the separation of our commercial businesses in the nine months
ended September 30, 2020 as discussed below.
Net income (loss) from discontinued operations for the quarter ended
September 30, 2020 included a benefit associated with the separation of our
commercial businesses of $113 million, net of tax, primarily related to tax
benefits on prior period costs associated with the separation of our commercial
businesses. Net income (loss) from discontinued operations for the nine months
ended September 30, 2020 included costs associated with the separation of our
commercial businesses of $877 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 nine
months ended September 30, 2019 included costs associated with the separation of
our commercial businesses of $637 million, net of tax and $931 million, net of
tax, respectively.
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             Net Income (Loss) Attributable to Common Shareowners
                                                                                                                Nine Months Ended
                                                 Quarter Ended September 30,                                      September 30,
(dollars in millions, except per share
amounts)                                          2020                  2019                2020                    2019
Net income (loss) attributable to common
shareowners                                 $          264          $    1,148          $   (3,654)         $           4,394
Diluted earnings (loss) per share from
operations                                  $         0.17          $     1.33          $    (2.79)         $            5.09


The decrease in net income (loss) attributable to common shareowners and diluted
earnings per share from operations for the quarter and nine months ended
September 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
                                                                                                                         Nine Months Ended
                                                          Quarter Ended September 30,                                      September 30,
(dollars in millions)                                       2020                   2019              2020                   2019

Restructuring costs                                 $           250             $     28          $    685          $              103


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 nine months ended September 30, 2020, we
recorded net pre-tax restructuring charges of $240 million and $686 million,
respectively, primarily related 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, the Raytheon Merger, and ongoing cost reduction
efforts initiated in 2020. We expect to incur additional restructuring charges
of $34 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
$1.0 billion annually within one to two years. Approximately 75% 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 nine months
ended September 30, 2020, we had cash outflows of $222 million related to the
2020 actions.
2019 Actions. During the quarters ended September 30, 2020 and 2019, we recorded
$9 million and $8 million respectively, of net pre-tax restructuring charges for
actions initiated in 2019. During the nine months ended September 30, 2020 and
2019, we recorded $5 million and $41 million, respectively, of net pre-tax
restructuring charges for actions initiated in 2019. We expect to incur
additional restructuring charges of $62 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 $200 million annually within two years of initiating these
actions, and we realized approximately $115 million during the nine months ended
September 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 nine months ended September 30, 2020 and
2019, we had cash outflows of $35 million and $29 million, respectively related
to the 2019 actions.
In addition, during the quarters ended September 30, 2020 and 2019, we recorded
$1 million and $20 million, respectively, of net pre-tax restructuring charges
for restructuring actions initiated in 2018 and prior. During the nine months
ended September 30, 2020 and 2019, we reversed $6 million and recorded
$62 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.
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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.
Segments are generally based on the management structure of the businesses and
the grouping of similar operations, based on capabilities and technologies,
where each management organization has general operating autonomy over
diversified products and services. Segment total net sales and operating profit
include intercompany sales and profit, which are ultimately eliminated within
Eliminations and other, which also includes certain smaller non-reportable
segments. 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.
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Total Net Sales. Total net sales by segment were as follows:
                                                                                                              Nine Months Ended
                                               Quarter Ended September 30,                                      September 30,
(dollars in millions)                           2020                  2019                2020                   2019
Collins Aerospace Systems                 $        4,274          $    6,495          $   14,914          $         19,584
Pratt & Whitney                                    3,494               5,285              12,334                    15,257
Raytheon Intelligence & Space                      3,674                   -               6,988                         -
Raytheon Missiles & Defense                        3,794                   -               7,384                         -
Total segment                                     15,236              11,780              41,620                    34,841
Eliminations and other                              (489)               (407)             (1,452)                   (1,186)

Consolidated                              $       14,747          $   11,373          $   40,168          $         33,655

Operating Profits. Operating profits by segment was as follows:

                                                                                                         Nine Months Ended
                                           Quarter Ended September 30,                                     September 30,
(dollars in millions)                       2020                 2019                2020                    2019
Collins Aerospace Systems              $        526          $    1,259          $    1,455          $           3,499
Pratt & Whitney                                (615)                520                (597)                     1,447
Raytheon Intelligence & Space                   348                   -                 659                          -
Raytheon Missiles & Defense                     453                   -                 850                          -
Total segment                                   712               1,779               2,367                      4,946
Eliminations and other                          (51)                (46)               (104)                      (115)
Corporate expenses and other
unallocated items                               (84)                (83)               (491)                      (216)
FAS/CAS operating adjustment                    380                   -                 736                          -
Acquisition accounting adjustments             (523)               (220)             (4,539)                      (657)
Consolidated                           $        434          $    1,430          $   (2,031)         $           3,958


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:
                                                                                                                        Nine Months Ended
                                                     Quarter Ended September 30,                                          September 30,
(dollars in millions)                                  2020                

  2019                 2020                    2019
Gross favorable                                $             281          $       98          $       569          $              317
Gross unfavorable                                           (743)                (94)              (1,161)                       (394)
Total net EAC adjustments                      $            (462)         $        4          $      (592)         $              (77)


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 $466 million in the
quarter ended September 30, 2020 compared to the quarter ended September 30,
2019 was primarily due to a change in net unfavorable EAC adjustments of
$451 million at Pratt & Whitney. The change in net EAC adjustments of
$515 million in the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2019 was primarily due to a change in net unfavorable
EAC adjustments of $469 million at Pratt & Whitney. Significant EAC adjustments
in the quarters and nine months ended September 30, 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 defense backlog and defense
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 and operations in the defense businesses within our Collins
Aerospace and Pratt & Whitney segments. Defense backlog was approximately $70.2
billion and $22.3 billion as of September 30, 2020 and December 31, 2019,
respectively. Defense bookings were approximately $8.4 billion and $3.6 billion
for the quarters ended September 30,
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2020 and 2019, respectively, and approximately $21.8 billion and $12.4 billion
for the nine months ended September 30, 2020 and 2019, respectively.
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.
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
period. 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 also 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.
Collins Aerospace Systems
                                                                                                                                          Nine Months Ended
                                                         Quarter Ended September 30,                                                        September 30,
(dollars in millions)                                2020                 2019       Change              2020              2019            Change
Net Sales                                      $           4,274       $    6,495        (34) %       $    14,914       $    19,584               (24) %
Operating Profits                                            526            1,259        (58) %             1,455             3,499               (58) %
Operating Profit Margins                                 12.3  %          19.4  %                         9.8   %          17.9   %

Quarter Ended September 30, 2020 Compared with Quarter Ended September 30, 2019

                                                             Factors 

Contributing to Total Change

                                                      FX                 Acquisitions /             Restructuring
                            Organic(1)            Translation           Divestitures, net               Costs                Other             Total Change
Net Sales                $      (2,161)         $         14          $              (74)         $            -          $       -          $      (2,221)

Operating Profits               (1,181)                   (3)                        (25)                   (111)               587                   (733)


(1)  We provide the organic change in net sales and operating profit for our
Collins Aerospace and Pratt & Whitney segments. We believe that these measures
are useful to investors because they provide transparency to the underlying
performance of our business, which allows for better year-over-year
comparability. The organic change excludes the effect of foreign currency
exchange rate fluctuations; acquisitions and divestitures, net; restructuring
costs and other significant non-recurring and non-operational items. A
reconciliation of these measures to reported U.S. GAAP amounts is provided in
the table above.
The organic sales decrease of $2.2 billion in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019 primarily
relates to lower commercial aerospace aftermarket sales of $1.3 billion,
including declines across all aftermarket sales channels, and lower commercial
aerospace OEM sales of $1.0 billion. These reductions were 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
$0.1 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 organic profit decrease of $1.2 billion in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019 was
primarily due to lower commercial aerospace operating profit of $1.3 billion
principally driven by the lower commercial aerospace aftermarket and OEM sales
volume discussed above. This decrease was partially offset by lower Selling,
general and administrative expenses and Research and development costs of
$0.1 billion, which includes the impact of cost reduction initiatives.
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Included in organic profit in the quarter ended September 30, 2020 was $32
million of foreign government wage subsidies due to COVID-19 and $24 million of
increased estimates of expected credit losses due to customer bankruptcies and
additional allowances for credit losses.
The decrease in net sales and operating profit due to acquisitions /
divestitures, net primarily relates to the sale of our Collins Aerospace
military GPS and space-based precision optics businesses in the third quarter of
2020 as further discussed in "Note 2: Acquisitions, Dispositions, Goodwill and
Other Intangible Assets" within Item 1 of this Form 10-Q.
The increase in Other operating profits of $0.6 billion in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019 primarily
relates to gains of $608 million on the sales of the Collins Aerospace
businesses discussed above, and a gain of $13 million on a real estate
transaction in the current quarter, partially offset by a $15 million impairment
loss on a building lease in the current quarter.
In the quarter ended September 30, 2020, Collins Aerospace booked $320 million
for a multi-year Extravehicular Space Operations Contract (ESOC) to provide
services, upgrades and sustainment in support of NASA's Extra Vehicular Activity
(EVA) on the International Space Station.
 Nine Months Ended September 30, 2020 Compared with Nine Months Ended September
                                    30, 2019
                                                             Factors Contributing to Total Change
                                                      FX                 Acquisitions /             Restructuring
                            Organic(1)            Translation           Divestitures, net               Costs                Other             Total Change
Net Sales                $      (4,587)         $         (6)         $              (77)         $            -          $       -          $      (4,670)

Operating Profits               (2,685)                    8                          25                    (212)               820                 (2,044)


(1)  We provide the organic change in net sales and operating profit for our
Collins Aerospace and Pratt & Whitney segments. We believe that these measures
are useful to investors because they provide transparency to the underlying
performance of our business, which allows for better year-over-year
comparability. The organic change excludes the effect of foreign currency
exchange rate fluctuations; acquisitions and divestitures, net; restructuring
costs and other significant non-recurring and non-operational items. A
reconciliation of these measures to reported U.S. GAAP amounts is provided in
the table above.
The organic sales decrease of $4.6 billion in the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019
primarily relates to lower commercial aerospace OEM sales of $2.8 billion and
lower commercial aerospace aftermarket sales of $2.3 billion, including declines
across all aftermarket sales channels. These reductions were 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 $0.5 billion. Included in the organic sales decrease were lower
commercial aerospace OEM and aftermarket sales of approximately $0.8 billion
related to the Boeing 737 Max program and fewer upgrades due to certain
regulatory mandates that were primarily completed in early 2020.
The organic profit decrease of $2.7 billion in the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 is
primarily due to lower commercial aerospace operating profit of $2.9 billion
principally driven by the lower commercial aerospace OEM and aftermarket sales
volume discussed above. Included in the lower commercial OEM operating profit
were $157 million of significant unfavorable adjustments principally driven by
the expected acceleration of fleet retirements of a certain aircraft. The
decrease was also due to higher Selling, general and administrative expenses of
$0.1 billion primarily driven by $123 million of increased estimates of expected
credit losses due to customer bankruptcies and additional allowances for credit
losses, partially offset by lower Research and development expenses of
$0.1 billion, which includes the impact of cost reduction initiatives.
Included in organic profit in the nine months ended September 30, 2020 was $56
million of foreign government wage subsidies due to COVID-19 and $12 million
related to the favorable impact of a contract related matter in the first
quarter of 2020.
The decrease in net sales and operating profit due to acquisitions /
divestitures, net primarily relates to the sale of our Collins Aerospace
military GPS and space-based precision optics businesses in the third quarter of
2020 as further discussed in "Note 2: Acquisitions, Dispositions, Goodwill and
Other Intangible Assets" within Item 1 of this Form 10-Q.
The increase in Other operating profits of $0.8 billion in the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019
primarily relates to gains of $608 million on the sales of the Collins Aerospace
businesses discussed above, the absence of prior year amortization of inventory
fair value step-up associated with the Rockwell Collins acquisition of $181
million, the absence of a prior year loss on the sale of a business of $25
million, and a current year gain of $13 million on a real estate transaction,
partially offset by a $15 million impairment loss on a building lease in the
current year.
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Pratt & Whitney
                                                                                                                                          Nine Months Ended
                                                         Quarter Ended September 30,                                                        September 30,
(dollars in millions)                                2020                 2019       Change              2020              2019            Change
Net Sales                                      $           3,494       $    5,285        (34) %       $    12,334       $    15,257               (19) %
Operating Profits                                          (615)              520       (218) %             (597)             1,447              (141) %
Operating Profit Margins                                (17.6) %           9.8  %                        (4.8)  %           9.5   %

Quarter Ended September 30, 2020 Compared with Quarter Ended September 30, 2019

                                                                Factors 

Contributing to Total Change

                                                          FX                  Acquisitions /             Restructuring
                             Organic(1)             Translation(2)           Divestitures, net               Costs                Other             Total Change
Net Sales                $        (1,791)         $             -          $                -          $            -          $       -          $      (1,791)

Operating Profits                   (977)                       -                           -                     (63)               (95)                (1,135)


(1)  We provide the organic change in net sales and operating profit for our
Collins Aerospace and Pratt & Whitney segments. We believe that these measures
are useful to investors because they provide transparency to the underlying
performance of our business, which allows for better year-over-year
comparability. The organic change excludes the effect of foreign currency
exchange rate fluctuations; acquisitions and divestitures, net; restructuring
costs and other significant non-recurring and non-operational items. A
reconciliation of these measures to reported U.S. GAAP amounts is provided in
the table above.
(2)  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 $1.8 billion in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019 primarily
reflects lower commercial aftermarket sales of $1.6 billion, primarily due to a
significant reduction in shop visits and related spare part sales, and lower
commercial OEM sales of $0.3 billion, primarily due to a significant reduction
in commercial engine deliveries, all principally driven by the current economic
environment primarily due to the COVID-19 pandemic. These declines were
partially offset by higher military sales of $0.2 billion primarily driven by an
increase in F117 overhauls, F135 engine sales and aftermarket growth on multiple
fighter jet platforms. Included in the lower commercial aftermarket sales was a
$0.3 billion impact to sales from the unfavorable contract adjustments discussed
further below.
The organic profit decrease of $1.0 billion in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019 was
primarily driven by lower commercial aftermarket operating profits of $1.1
billion driven by the sales volume decrease discussed above, unfavorable mix, a
$334 million unfavorable EAC adjustment on a commercial engine aftermarket
contract due to lower estimated revenues driven by a change in the estimated
maintenance coverage period and an unfavorable EAC adjustment of $129 million
related to lower estimated revenues due to the restructuring of a customer
contract. This decrease was partially offset by lower research and development
costs of $0.1 billion, which includes the impact of cost reduction initiatives,
and other income of $58 million related to foreign government wage subsidies due
to COVID-19.
Included in organic profit in the quarter ended September 30, 2020 was an
increase in net unfavorable EAC adjustments of $451 million, primarily driven by
the adjustments discussed above, and $24 million of increased estimates of
expected credit losses due to customer bankruptcies and additional allowances
for credit losses.
The decrease in Other operating profits of $95 million in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019 was
primarily due to an $89 million impairment of commercial aircraft program assets
in the current quarter.
In the quarter ended September 30, 2020, Pratt & Whitney booked $473 million for
the F-135 program.
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Nine Months Ended September 30, 2020 Compared with Nine Months Ended September

                                    30, 2019
                                                                              Factors Contributing to Total Change
                                                                FX                          Acquisitions /                   Restructuring
                              Organic(1)                  Translation(2)                  Divestitures, net                      Costs                      Other               Total Change
Net Sales                 $           (2,887)       $                     (36)       $                          -       $                      -       $              -       $      (2,923)

Operating Profits                     (1,747)                             (12)                                  -                          (153)                  (132)              (2,044)


(1)  We provide the organic change in net sales and operating profit for our
Collins Aerospace and Pratt & Whitney segments. We believe that these measures
are useful to investors because they provide transparency to the underlying
performance of our business, which allows for better year-over-year
comparability. The organic change excludes the effect of foreign currency
exchange rate fluctuations; acquisitions and divestitures, net; restructuring
costs and other significant non-recurring and non-operational items. A
reconciliation of these measures to reported U.S. GAAP amounts is provided in
the table above.
(2)  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 $2.9 billion in the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019
primarily reflects lower commercial aftermarket sales of $2.9 billion, primarily
due to a significant reduction in shop visits and related spare part sales, and
lower commercial OEM sales of $0.5 billion, primarily due to a significant
reduction in commercial engine deliveries, all principally driven by the current
economic environment primarily due to the COVID-19 pandemic. These declines were
partially offset by higher military sales of $0.5 billion primarily driven by an
increase in F135 engine sales, F117 overhauls and aftermarket growth on multiple
fighter jet platforms. Included in the lower commercial aftermarket sales a $0.3
billion impact to sales from the unfavorable contract adjustments discussed
further below.
The organic profit decrease of $1.7 billion in the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 was
primarily driven by lower commercial aftermarket operating profits of $1.8
billion driven by the sales volume decrease discussed above, unfavorable mix, a
$334 million unfavorable EAC adjustment on a commercial engine aftermarket
contract due to lower estimated revenues driven by a change in the estimated
maintenance coverage period and an unfavorable EAC adjustment of $129 million
related to lower estimated revenues due to the restructuring of a customer
contract. The decrease was also driven by higher Selling, general and
administrative expenses of $0.2 billion primarily driven by $229 million of
increased estimates of expected credit losses due to customer bankruptcies and
additional allowances for credit losses. This decrease was partially offset by
lower research and development costs of $0.2 billion, which includes the impact
of cost reduction initiatives, and other income of $117 million related to
foreign government wage subsidies due to COVID-19.
Included in organic profit was an increase in net unfavorable EAC adjustments of
$469 million, which included the unfavorable EAC adjustments discussed above and
significant net unfavorable EAC adjustments of $62 million based on a portfolio
review of our commercial aftermarket programs in the second quarter of 2020 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 in the second quarter of 2020
on a military program primarily driven by a shift in estimated overhead costs
due to the lower commercial engine activity discussed above.
  The decrease in Other operating profits of $132 million in the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019
was primarily due to an $89 million impairment of commercial aircraft program
assets in the current year, 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
                                                       Quarter Ended September 30,                                                      Nine Months Ended September 30,
(dollars in millions)                               2020                   2019      Change             2020             2019       Change
Net Sales                                   $               3,674             -             NM       $    6,988             -               NM
Operating Profits                                             348             -             NM              659             -               NM
Operating Profit Margins                                   9.5  %             -                          9.4  %             -
Bookings                                    $               2,859             -             NM       $    6,375             -               NM


NM = Not meaningful
The increase in net sales of $3,674 million and $6,988 million in the quarter
and nine months ended September 30, 2020 compared to the quarter and nine months
ended September 30, 2019, respectively, was due to the Raytheon Merger on April
3, 2020.
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The increase in operating profits of $348 million and $659 million and the
related increase in operating profit margins in the quarter and nine months
ended September 30, 2020 compared to the quarter and nine months ended September
30, 2019, respectively, was due to the Raytheon Merger. Included in operating
profit in the quarter and nine months ended September 30, 2020 was a $33 million
unfavorable EAC adjustment in the third quarter of 2020 on a domestic classified
program.
Backlog and Bookings- Backlog was $18,272 million at September 30, 2020 compared
to zero at December 31, 2019. The increase in backlog of $18,272 million was due
to the Raytheon Merger. In the quarter ended September 30, 2020, RIS booked $928
million on a number of classified contracts and $176 million to perform
operations and sustainment for the U.S. Air Force's Launch and Test Range System
(LTRS).
In addition to the bookings noted above, in the nine months ended September 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
                                                       Quarter Ended September 30,                                                      Nine Months Ended September 30,
(dollars in millions)                               2020                   2019      Change             2020             2019       Change
Net Sales                                   $               3,794             -             NM       $    7,384             -               NM
Operating Profits                                             453             -             NM              850             -               NM
Operating Profit Margins                                  11.9  %             -                         11.5  %             -
Bookings                                    $               2,585             -             NM       $    6,890             -               NM


NM = Not meaningful
The increase in net sales of $3,794 million and $7,384 million in the quarter
and nine months ended September 30, 2020 compared to the quarter and nine months
ended September 30, 2019, respectively, was due to the Raytheon Merger on April
3, 2020.
The increase in operating profits of $453 million and $850 million and the
related increase in operating profit margins in the quarter and nine months
ended September 30, 2020 compared to the quarter and nine months ended September
30, 2019, respectively, was due to the Raytheon Merger.
Backlog and Bookings- Backlog was $31,572 million at September 30, 2020 compared
to zero at December 31, 2019. The increase in backlog of $31,572 million was due
to the Raytheon Merger. In the quarter ended September 30, 2020, RMD booked $186
million on the Army Navy/Transportable Radar Surveillance-Model 2 (AN/TPY-2)
radar program for the Kingdom of Saudi Arabia (KSA).
In addition to the bookings noted above, in the nine months ended September 30,
2020, RMD booked $2,253 million on the AN/TPY-2 radar program for the KSA and
$321 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.
                                                                Net Sales                                            Operating Profits
                                                                                                                       Quarter Ended
                                                       Quarter Ended September 30,                                     September 30,
(dollars in millions)                                    2020                  2019               2020                   2019
Inter segment eliminations                        $          (668)         $    (410)         $     (39)         $             (57)
Other non-reportable segments                                 179                  3                (12)                        11
Eliminations and other                            $          (489)         $    (407)         $     (51)         $             (46)


The increase in other non-reportable segments sales for the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019, was
primarily related to Forcepoint sales.
The decrease in other non-reportable segments operating profit for the quarter
ended September 30, 2020 compared to the quarter ended September 30, 2019, was
primarily due to restructuring costs in the third quarter of 2020 and the impact
of foreign currency translation, partially offset by operating profit related to
Forcepoint.
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                                                             Net Sales                                          Operating Profits
                                                                                                                Nine Months Ended
                                                  Nine Months Ended September 30,                                 September 30,
(dollars in millions)                                 2020                2019               2020                   2019
Inter segment eliminations                        $   (1,780)         $  (1,195)         $     (76)         $            (172)
Other non-reportable segments                            328                  9                (28)                        57
Eliminations and other                            $   (1,452)         $  (1,186)         $    (104)         $            (115)


The increase in other non-reportable segment sales for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019, was
primarily related to Forcepoint sales.
The decrease in other non-reportable segments operating profit for the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019, was primarily due to the impact of foreign currency translation.
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.
                                                                                                          Nine Months Ended
                                           Quarter Ended September 30,                                      September 30,
(dollars in millions)                       2020                  2019                2020                    2019
Corporate expenses and other
unallocated items                     $          (84)         $      (83)         $     (491)         $            (216)


Corporate expenses and other unallocated items was relatively consistent for the
quarter ended September 30, 2020 compared to the quarter ended September 30,
2019. Included in the change was $45 million of net expenses related to the
LTAMDS project acquired as part of the Raytheon Merger, an increase in
restructuring costs of $20 million, and an increase in merger-related costs for
the Raytheon Merger of $21 million. These increases were partially offset by
other unallocated items with no individual or common significant driver.
The change in Corporate expenses and other unallocated items of $275 million for
the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019 was primarily driven by increased restructuring costs of $189
million, an increase in merger-related costs for the Raytheon Merger of $94
million and $80 million of net expenses related to the LTAMDS project acquired
as part of the Raytheon Merger, partially offset by other unallocated items with
no individual or common significant driver.
FAS/CAS operating adjustment
The segment results of RIS and RMD only include pension and 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:
                                                                                                        Nine Months Ended
                                          Quarter Ended September 30,                                     September 30,
(dollars in millions)                      2020                  2019                2020                  2019
FAS service cost (expense)            $       (118)         $         -          $     (227)         $            -
CAS expense                                    498                    -                 963                       -
FAS/CAS operating adjustment          $        380          $         -          $      736          $            -


The change in our FAS/CAS Operating Adjustment of $380 million in the quarter
ended September 30, 2020 compared to the quarter ended September 30, 2019 and of
$736 million in the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2019 was due to 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.
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The components of Acquisition accounting adjustments were as follows:
                                                                                                            Nine Months Ended
                                            Quarter Ended September 30,                                       September 30,
(dollars in millions)                         2020                  2019                2020                    2019
Goodwill impairment charge             $             -          $        -          $   (3,183)         $               -
Amortization of acquired intangibles              (596)               (309)             (1,547)                      (906)
Amortization of property, plant and
equipment fair value adjustment                    (19)                  3                 (46)                       (19)
Amortization of customer contractual
obligations related to acquired
loss-making and below-market contracts              92                  86                 237                        268

Acquisition accounting adjustments $ (523) $ (220)

$   (4,539)         $            (657)


Acquisition accounting adjustments related to acquisitions in each segment were
as follows:
                                                                                                                 Nine Months Ended
                                                 Quarter Ended September 30,                                       September 30,
(dollars in millions)                              2020                  2019                2020                    2019
Collins Aerospace Systems                   $          (157)         $     (138)         $   (3,736)         $            (439)
Pratt & Whitney                                          (7)                (82)                (91)                      (218)
Raytheon Intelligence & Space                          (130)                  -                (258)                         -
Raytheon Missiles & Defense                            (204)                  -                (404)                         -
Total segment                                          (498)               (220)             (4,489)                      (657)
Eliminations and other                                  (25)                  -                 (50)                         -

Acquisition accounting adjustments $ (523) $ (220) $ (4,539) $

            (657)


The change the Acquisition accounting adjustments of $303 million for the
quarter ended September 30, 2020 compared to the quarter ended September 30,
2019 respectively, is primarily driven by $359 million related to the Raytheon
Merger, primarily related to the amortization of intangibles. The change the
Acquisition accounting adjustments of $3,882 million for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019
respectively, is primarily driven by the $3.2 billion goodwill impairment loss
in the second quarter of 2020 related to two Collins Aerospace reporting units
and $712 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)                                                 September 30, 2020         December 31, 2019
Cash and cash equivalents                                            $         10,001           $          4,937

Total debt                                                                     32,781                     43,252
Total equity                                                                   70,080                     44,231
Total capitalization (total debt plus total equity)                           102,861                     87,483
Total debt to total capitalization                                                 32   %                     49  %


Liquidity and Financial Condition as of September 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 September 30, 2020.
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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 taken 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,
furloughing employees when needed, and personnel reductions. 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 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), along with
earlier issued IRS guidance, provides for a net deferral of payroll tax
payments. In the quarter ended September 30, 2020, we had cash outflows of $300
million related to previously deferred payroll taxes, and expect to pay any
remaining deferred payroll taxes in the fourth quarter of 2020. As a result, we
no longer expect a cash flows benefit in 2020, or an impact to future years'
cash flows, from the net deferral of payroll tax payments. 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 our understanding of the impact of the CARES Act on our
business, and ongoing government guidance related to COVID-19 that may be
issued.
At September 30, 2020, we had cash and cash equivalents of $10.0 billion, of
which approximately 20% 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 $1.8
billion of cash for the nine months ended September 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
September 30, 2020 and December 31, 2019, the amount of such restricted cash was
$31 million and $24 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 September 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
September 30, 2020. The maximum amount of short-term commercial paper borrowings
outstanding at any point in time during the nine months ended September 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.
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 September 30, 2020 we had revolving credit agreements with various banks
permitting aggregate borrowings of up to $7.0 billion.
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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.
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. 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.
The Company has offered a voluntary supply chain finance (SCF) program with a
global financial institution for more than 10 years, which enables our
suppliers, at their sole discretion, to sell their receivables from the Company
to the financial institution at a rate that leverages our credit rating, which
might be beneficial to them. Our suppliers' participation in the SCF program
does not impact or change our terms and conditions with those suppliers, and
therefore, we have no economic interest in a supplier's decision to participate
in the program. In addition, we provide no guarantees or otherwise pay for any
of the costs of the program incurred by those suppliers that choose to
participate, and have no direct financial relationship with the financial
institution, as it relates to the program. As such, amounts due to suppliers
that have elected to participate in the SCF program are included in Accounts
payable on our Condensed Consolidated Balance Sheet and all payment activity
related to amounts due to suppliers that elected to participate in the SCF
program are reflected in cash flows from operating activities in our Condensed
Consolidated Statement of Cash Flows. As of September 30, 2020, and December 31,
2019, the amount due to suppliers participating in the SCF program and included
in Accounts payable was approximately $348 million and $460 million,
respectively. The decrease from December 31, 2019 to September 30, 2020 is due
to decreases in our underlying supply chain purchases. The SCF program does not
impact our overall liquidity.
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.

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