Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

We are a global premier systems provider of high technology products and services to the aerospace and defense industries. On April 3, 2020, United Technologies Corporation (UTC) completed the separation of its business into three independent, publicly traded companies – UTC, Carrier Global Corporation (Carrier) and Otis Worldwide Corporation (Otis) (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) effective at 12:01 a.m., Eastern Time, on April 3, 2020. Immediately following the Separation Transactions and Distributions, on April 3, 2020, UTC and Raytheon Company completed their all-stock merger of equals transaction (the Raytheon Merger), pursuant to which Raytheon Company became a wholly-owned subsidiary of UTC and UTC was renamed Raytheon Technologies Corporation (RTC). 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).

UTC was determined to be the accounting acquirer in the Raytheon Merger, and, as a result, the financial statements of Raytheon Technologies include Raytheon Company’s financial position and results of operations for all periods subsequent to the completion of the Raytheon Merger on April 3, 2020. RIS and RMD follow a 4-4-5 fiscal calendar while Collins Aerospace and Pratt & Whitney continue to use a quarter calendar end of September 30, 2021. Throughout this Quarterly Report on Form 10-Q, when we refer to the quarters ended September 30, 2021 and September 30, 2020 with respect to RIS or RMD, we are referring to their October 3, 2021 and September 27, 2020 fiscal quarter ends, respectively. The historical results of Carrier and Otis 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. Throughout this Quarterly Report on Form 10-Q, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.

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.

The current status of significant factors affecting our business environment in 2021 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 2020 Annual Report on Form 10-K.

Industry Considerations

Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. Our operations include original equipment manufacturer (OEM) and extensive related aftermarket parts and services related to our aerospace operations. Our defense business serves both domestic and international customers primarily as a prime contractor or subcontractor on a broad portfolio of defense and related programs for government customers. Our business mix also reflects the combination of shorter cycles on 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, including regulations related to global warming, carbon footprint and fuel efficiency, can have a negative impact on our worldwide operations. Government and industry-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, government imposed travel restrictions, and government procurement practices can impact our businesses.

Collins 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. Many of our aerospace operations’ customers are covered under long-term aftermarket service agreements at both Collins Aerospace and Pratt & Whitney, which are inclusive of both spare parts and services.

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 demand, changes in policy positions or priorities from a new U.S. Administration and the global political environment. Total sales to the U.S. government, excluding foreign military sales, were $7.7 billion for

both the quarters ended September 30, 2021 and 2020, or 48% and 53% of total net sales for those periods, respectively. Total sales to the U.S. government were $23.2 billion and $17.6 billion for the nine months ended September 30, 2021 and 2020, or 49% and 44% of total sales for those periods, respectively.

Impact of the COVID-19 Pandemic

Beginning in 2020, the coronavirus disease 2019 (COVID-19) negatively impacted the global economy, our business and operations, and the industries in which we operate. The continued disruption to air travel and commercial activities and the significant restrictions and limitations on businesses, particularly within the aerospace and commercial airline industries, have negatively impacted global supply, demand and distribution capabilities. In particular, the unprecedented decrease in air travel resulting from the COVID-19 pandemic has adversely affected our airline and airframer customers, and their demand for the products and services of our Collins Aerospace and Pratt & Whitney businesses.

In the nine months ended September 30, 2020 we recorded write-downs of assets and significant unfavorable Estimate at Completion (EAC) adjustments in our Collins Aerospace and Pratt & Whitney businesses primarily related to:

Goodwill impairment charges of $3.2 billion in the quarter ended June 30, 2020 related to two of our Collins Aerospace reporting units. Refer to “Note 2: Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 1 of this Form 10-Q for additional information,
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 $334 million on a Pratt & Whitney commercial engine aftermarket contract due to lower estimated revenues driven by a change in the estimated maintenance coverage period 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, respectively,
an unfavorable EAC adjustment of $129 million related to lower estimated revenues due to the restructuring of a customer contract at Pratt & Whitney in both the quarter and nine months ended September 30, 2020,
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 2020.

Our RIS and RMD businesses, although experiencing minor impacts, have not experienced significant business disruptions as a result of the COVID-19 pandemic.

Given the significant reduction in business and leisure passenger air travel, continued travel restrictions that have resulted from the ongoing COVID-19 pandemic, and the resulting impacts on our customers and their business activities, we expect our future operating results, particularly those of our Collins Aerospace and Pratt & Whitney businesses, to continue to be negatively impacted when compared to pre-COVID-19 (2019) results. 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 continues to be uncertainty with respect to the point at which commercial air traffic capacity will return to and/or exceed pre-COVID-19 levels. We have seen indications that commercial air travel is continuing to recover in certain areas of demand; however, other areas continue to lag. In addition, while global vaccination rates have increased, infection from COVID-19 variants have continued, which may impact the pace of the commercial aerospace recovery. However, we continue to estimate that a full recovery may occur in 2023 or 2024. New information may continue to emerge concerning the scope, severity and duration of the COVID-19 pandemic, as well as any worsening of the pandemic, the effect of additional variants, the efficacy, acceptance, distribution and availability of vaccines, new or continued actions to contain the pandemic’s spread or treat its impact, and governmental, business and individual personal actions taken in response to the pandemic (including restrictions and limitations on travel and transportation, and changes in leisure and business travel patterns and work environments) among others. Some of these actions and related impacts may be trends that continue in the future even after the pandemic no longer poses a significant public health risk. As our commercial aerospace business begins to recover, we expect certain employee-related and discretionary costs, which were subject to prior year cost reduction actions, to return in 2021 and beyond. A recovery may also impact our judgments around credit risk related to estimated credit losses.

On September 24, 2021, in furtherance of an executive order, the U.S. Safer Federal Workforce Task Force (Task Force) issued guidance requiring federal contractors and subcontractors to comply with COVID-19 safety protocols, including requiring certain employees to be fully vaccinated against COVID-19 by December 8, 2021 except in limited circumstances. The vaccination requirements will be incorporated in new government contracts, renewals, extensions and other modifications signed on and after October 15, 2021, and will apply to employees working on or in connection with such contracts, as well as to employees working at a location at which an employee working on such contract is likely to be present. We had previously announced an internal vaccine mandate with a January 1, 2022 deadline for all U.S. based employees. We do not expect all of our employees who are covered by the U.S. federal contractor mandate to become fully vaccinated by December 8, 2021, but we will comply with the requirements of the Task Force’s implementing guidance and the associated executive order. While this mandate may have an impact on our operations, we do not expect this to have a material adverse effect on our financial condition, results of operations or liquidity. Our ability to perform on our contracts is also dependent upon our subcontractors and suppliers. Our subcontractors and suppliers who are subject to the U.S. federal contractor vaccine mandate may be impacted by an inability to comply or loss of personnel, which could disrupt subcontractor or supplier performance or deliveries, and negatively impact our business.

In addition, in March 2021, Congress passed the American Rescue Plan Act of 2021 (ARPA) which included pension funding relief provisions. For further discussion, refer to the “FAS/CAS operating adjustment” subsection under the “Segment Review” section below. We continue to monitor for any ongoing government guidance related to COVID-19 that may be issued.

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 business for the remainder of 2021 and in the future. 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. In addition, in October 2020, the People’s Republic of China (China) announced that it may sanction RTC in connection with a possible Foreign Military Sale to Taiwan of six MS-110 Reconnaissance Pods and related equipment manufactured by Collins Aerospace. Foreign Military Sales are government-to-government transactions that are initiated by, and carried out at the direction of, the U.S. government. To date, the Chinese government has not imposed sanctions on RTC or indicated the nature or timing of any future potential sanctions or other actions. If China were to impose sanctions or take other regulatory action against RTC, our suppliers, affiliates or partners, it could potentially disrupt our business operations. The impact of potential sanctions or other actions by China cannot be determined at this time.

The change in the U.S. administration could result in changes to the U.S. government’s foreign policies that may impact regulatory approval for direct commercial sales contracts for certain of our products and services to certain foreign customers. Likewise, regulatory approvals previously granted for prior sales can be paused or revoked if the products and services have not yet been delivered to the customer. If we ultimately do not receive all of the regulatory approvals, or those approvals are revoked, it could have a material effect on our financial results. In particular, as of September 30, 2021, our contract liabilities include approximately $440 million of advance payments received from a Middle East customer on contracts for which we no longer believe we will be able to execute on or obtain required regulatory approvals. These advance payments may become refundable to the customer if the contracts are ultimately terminated.

Changes in U.S. (federal or state) or international tax laws and regulations, or their interpretation and application, including the amortization for research or experimental expenditures, could significantly impact our provision for income taxes, the amount of taxes payable, and our deferred tax asset and liability balances. Recent proposals to increase the U.S. corporate income tax rate would require us to revalue our deferred tax assets and liabilities upon enactment of new tax legislation, which may result in a material, one-time, noncash increase in income tax expense as well as material increases to our income tax expense and payments in subsequent years.

See Part II, Item 1A, “Risk Factors” in our 2020 Annual Report on Form 10-K for further discussion of these items.

CRITICAL ACCOUNTING ESTIMATES

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because

of their significance to the Condensed Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. See “Critical Accounting Estimates” within Item 7 and “Note 1: Basis of Presentation and Summary of Accounting Principles” within Item 8 of our 2020 Annual Report on Form 10-K, which describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2021.

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. As such, the results of RIS and RMD for the second quarter of 2020 exclude results prior to the merger date, the estimated impact of which is approximately $400 million of sales and approximately $45 million of operating profit. These amounts have been excluded from the nine months ended September 30, 2021 organic changes disclosed throughout our Results of Operations discussion. In addition, as a result of the Separation Transactions and the Distributions, the historical results of Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

Net Sales


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Net Sales	$	16,213	$	14,747	$	47,344	$	40,168

The factors contributing to the total change year-over-year in total net sales for the quarter and nine months ended September 30, 2021 are as follows:


(dollars in millions)	Quarter Ended September 30, 2021		Nine Months Ended September 30, 2021
Organic(1)	$	1,664	$	66
Acquisitions and divestitures, net	(215)		6,988
Other	17		122
Total change	$	1,466	$	7,176

(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 acquisitions and divestitures, net and the effect of foreign currency exchange rate fluctuations and other significant non-recurring and non-operational items (“Other”). A reconciliation of this measure to reported U.S Generally Accepted Accounting Principles (GAAP) amounts is provided in the table above.

Net sales increased $1,664 million organically in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 primarily due to higher organic sales of $1.2 billion at Pratt & Whitney and $0.4 billion at Collins Aerospace. The increase at Pratt & Whitney was primarily driven by higher commercial aftermarket sales, primarily due to an increase in shop visits and related spare part sales, and higher commercial OEM sales, primarily due to an increase in commercial engine deliveries, all driven by the recovery from the prior year’s unfavorable economic environment largely due to the COVID-19 pandemic. The increase in Pratt & Whitney commercial aftermarket sales was also due to the absence of unfavorable contract adjustments of $0.3 billion in the prior year. The increase at Collins Aerospace was primarily driven by higher commercial aerospace aftermarket sales primarily due to an increase in flight hours and aircraft fleet utilization as commercial aerospace continues to recover from the prior year’s unfavorable economic environment principally driven by the COVID-19 pandemic. The $215 million decrease in net sales related to Acquisitions and divestitures, net for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, was primarily driven by the sale of our Forcepoint business in the first quarter of 2021.

Organic sales in the nine months ended September 30, 2021 were relatively consistent compared to the nine months ended September 30, 2020 as higher organic sales of $0.6 billion at Pratt & Whitney and $0.5 billion at RMD were offset by lower organic sales of $1.1 billion at Collins Aerospace. The higher organic sales at Pratt & Whitney were primarily driven by higher commercial aftermarket sales, primarily due to an increase in shop visits and related spare part sales, principally driven by recovery from the prior year’s unfavorable economic environment principally driven by the COVID-19 pandemic. The increase in Pratt & Whitney commercial aftermarket sales was also due to the absence of unfavorable contract adjustments of $0.3 billion in the prior year. The higher organic sales at RMD were primarily driven by higher sales on an international Patriot

program, higher sales to an international customer primarily for National Advanced Surface to Air Missile System (NASAMS), higher sales on the Advanced Medium-Range Air-to-Air Missile (AMRAAM) program and higher sales on the StormBreaker program, partially offset by lower sales on direct commercial sales contracts for precision guided munitions with a Middle East customer. The lower organic sales at Collins Aerospace was primarily driven by lower commercial aerospace OEM sales and lower commercial aerospace aftermarket sales, primarily due to the change in the economic environment principally driven by the COVID-19 pandemic. The $6,988 million increase in net sales related to Acquisitions and divestitures, net for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was primarily driven by the Raytheon Merger on April 3, 2020, partially offset by the sale of our Forcepoint business in the first quarter of 2021.


	Quarter Ended September 30,				% of Total Net Sales
(dollars in millions)	2021		2020		2021		2020
Net Sales
Products	$	12,331	$	11,469	76.1	%	77.8	%
Services	3,882		3,278		23.9	%	22.2	%
Total net sales	$	16,213	$	14,747	100	%	100	%

Refer to “Note 19: Segment Financial Data” within Item 1 of this Form 10-Q for the composition of external net sales by products and services by segment.

Net products sales increased $862 million in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 primarily due to an increase in external products sales of $0.7 billion at Pratt & Whitney.

Net services sales increased $604 million in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 primarily due to an increase in external services sales of $0.5 billion at Pratt & Whitney.


	Nine Months Ended September 30,				% of Total Net Sales
(dollars in millions)	2021		2020		2021		2020
Net Sales
Products	$	36,174	$	30,402	76.4	%	75.7	%
Services	11,170		9,766		23.6	%	24.3	%
Total net sales	$	47,344	$	40,168	100	%	100	%

Net products sales increased $5,772 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in external products sales of $4.0 billion at RMD and $2.9 billion at RIS, both primarily due to the Raytheon Merger on April 3, 2020, and an increase in external products sales of $0.6 billion at Pratt & Whitney, partially offset by a decrease in external products sales of $1.5 billion at Collins Aerospace.

Net services sales increased $1,404 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in external services sales of $0.9 billion at RIS and $0.4 billion at RMD, both primarily due to the Raytheon Merger on April 3, 2020.

Our sales to major customers were as follows:


	Quarter Ended September 30,				% of Total Net Sales
(dollars in millions)	2021		2020		2021		2020
Sales to the U.S. government(1)	$	7,737	$	7,747	47.7	%	52.5	%
Foreign military sales through the U.S. government	1,364		1,372		8.4	%	9.3	%
Foreign government direct commercial sales	1,242		1,186		7.7	%	8.0	%
Commercial aerospace and other commercial sales	5,870		4,442		36.2	%	30.1	%
Total net sales	$	16,213	$	14,747	100	%	100	%

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


	Nine Months Ended September 30,				% of Total Net Sales
(dollars in millions)	2021		2020		2021		2020
Sales to the U.S. government(1)	$	23,155	$	17,603	48.9	%	43.8	%
Foreign military sales through the U.S. government	4,156		3,040		8.8	%	7.6	%
Foreign government direct commercial sales	3,735		2,653		7.9	%	6.6	%
Commercial aerospace and other commercial sales	16,298		16,872		34.4	%	42.0	%
Total net sales	$	47,344	$	40,168	100	%	100	%

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

Cost of Sales


	Quarter Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Total cost of sales	$	13,089		$	13,004		$	38,281		$	33,790
Percentage of net sales	80.7		%	88.2		%	80.9		%	84.1		%

The factors contributing to the change year-over-year in total cost of sales for the quarter and nine months ended September 30, 2021 are as follows:


(dollars in millions)	Quarter Ended September 30, 2021		Nine Months Ended September 30, 2021
Organic(1)	$	416	$	(818)

Acquisitions and divestitures, net	(53)		5,854
Restructuring	(138)		(305)
FAS/CAS operating adjustment	(117)		(565)
Acquisition accounting adjustments	63		322
Other	(86)		3
Total change	$	85	$	4,491

(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 acquisitions and divestitures, net; restructuring costs; the FAS/CAS operating adjustment; costs related to certain acquisition accounting adjustments; and the effect of foreign currency exchange rate translation fluctuations and other significant non-recurring and non-operational items (“Other”). A reconciliation of this measure to reported U.S. GAAP amounts is provided in the table above.

The organic increase in total cost of sales of $416 million for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily driven by the organic sales increases at Pratt & Whitney noted above. The change in organic cost of sales includes a decrease primarily due to favorable commercial aerospace aftermarket and OEM product mix at Collins Aerospace.

The decrease in other cost of sales of $86 million for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, is primarily driven by the absence of a prior year impairment of commercial aircraft program assets at Pratt & Whitney for $89 million.

The organic decrease in total cost of sales of $818 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was primarily driven by due to the organic sales decrease at Collins Aerospace noted above, partially offset by the organic sales increases at RMD and Pratt & Whitney noted above. The increase in cost of sales related to Acquisitions and divestitures, net of $5,854 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 is primarily driven by the Raytheon Merger on April 3, 2020, partially offset by the sale of our Forcepoint business in the first quarter of 2021 and the sale of the Collins Aerospace military GPS and space-based precision optics businesses in the third quarter of 2020.

Other cost of sales for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, includes the absence of a prior year impairment of commercial aircraft program assets at Pratt & Whitney for $89 million, which was more than offset by an unfavorable impact of foreign exchange.

For further discussion on Restructuring costs see the “Restructuring Costs” section below. For further discussion on FAS/CAS operating adjustment see the “FAS/CAS operating adjustment” subsection under the “Segment Review” section below. For

further discussion on Acquisition accounting adjustments, see the “Acquisition accounting adjustments” subsection under the “Segment Review” section below.


	Quarter Ended September 30,				% of Total Net Sales
(dollars in millions)	2021		2020		2021		2020
Cost of sales
Products	$	10,296	$	10,322	63.5	%	70.0	%
Services	2,793		2,682		17.2	%	18.2	%
Total cost of sales	$	13,089	$	13,004	80.7	%	88.2	%

Net products cost of sales in the quarter ended September 30, 2021 was relatively consistent compared to the quarter ended September 30, 2020. Included in the change was an increase in external products cost of sales at Pratt & Whitney principally driven by the product sales increase noted above and a decrease in products cost of sales at Collins Aerospace primarily due to favorable commercial aerospace aftermarket and OEM product mix, a decrease in restructuring costs, and the impact of the sale of the military GPS and space-based precision optics businesses in the third quarter of 2020.

Net services cost of sales in the quarter ended September 30, 2021 was relatively consistent compared to the quarter ended September 30, 2020. Included in the change was an increase in external services cost of sales at Pratt & Whitney principally driven by the services sales increase noted above, largely offset by the absence of prior year significant unfavorable contract adjustments as discussed in the “Segment Review” section below.


	Nine Months Ended September 30,				% of Total Net Sales
(dollars in millions)	2021		2020		2021		2020
Cost of sales
Products	$	30,267	$	26,571	63.9	%	66.1	%
Services	8,014		7,219		16.9	%	18.0	%
Total cost of sales	$	38,281	$	33,790	80.9	%	84.1	%

Net products cost of sales increased $3,696 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in external products cost of sales at RMD and RIS principally due to the Raytheon Merger on April 3, 2020, partially offset by a decrease in external products cost of sales at Collins Aerospace, principally driven by the products sales decrease noted above.

Net services cost of sales increased $795 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in external services cost of sales at RIS and RMD principally due to the Raytheon Merger on April 3, 2020, partially offset by a decrease in external services cost of sales at Pratt & Whitney, principally driven by the absence of prior year significant unfavorable contract adjustments as discussed in the “Segment Review” section below.

Research and Development


	Quarter Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Company-funded	$	676		$	642		$	1,922		$	1,872
Percentage of net sales	4.2		%	4.4		%	4.1		%	4.7		%
Customer-funded (1)	$	1,125		$	1,207		$	3,414		$	3,032
Percentage of net sales	6.9		%	8.2		%	7.2		%	7.5		%

(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 $34 million for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily driven by higher expenses of $37 million spread across various commercial programs at Pratt & Whitney and higher expenses of $28 million at RIS related to continued investment in classified advanced capabilities, partially offset by lower expenses of $32 million within Eliminations and other primarily due to the sale of our Forcepoint business in the first quarter of 2021.

The decrease in customer-funded research and development of $82 million for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, was primarily driven by lower expenses of $80 million on various commercial and military programs at Pratt & Whitney.

The increase in company-funded research and development of $50 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 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 Collins Aerospace, which includes the impact of cost reduction initiatives.

The increase in customer-funded research and development of $382 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020, partially offset by lower expenses of $0.1 billion on various commercial and military programs at Pratt & Whitney and lower expenses of $0.1 billion at Collins Aerospace primarily related to the sale of the military GPS and space-based precision optics businesses in the third quarter of 2020.

Selling, General and Administrative


	Quarter Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Selling, general and administrative expenses	$	1,229		$	1,401		$	3,817		$	4,189
Percentage of net sales	7.6		%	9.5		%	8.1		%	10.4		%

Selling, general and administrative expenses decreased $172 million in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 primarily driven by lower costs of $101 million due to the sale of our Forcepoint business in the first quarter of 2021, and lower selling, general and administrative restructuring costs of $88 million primarily related to restructuring actions taken at our Collins Aerospace and Pratt & Whitney segments in the prior year.

Selling, general and administrative expenses decreased $372 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily driven by $352 million of prior year charges related to increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses at our Pratt & Whitney and Collins Aerospace segments, lower general and administrative restructuring costs of $257 million primarily related to restructuring actions taken at Collins Aerospace and Corporate in the prior year and lower costs of $184 million due to the sale of our Forcepoint business in the first quarter of 2021, partially offset by an increase in expenses of $0.4 billion related to the Raytheon Merger.

We are continuously evaluating our cost structure and have implemented restructuring actions in an effort to keep our cost structure competitive. As appropriate, the amounts reflected above include the beneficial impact of previous restructuring actions on Selling, general and administrative expenses. See “Note 12: Restructuring Costs” within Item 1 of this Form 10-Q and Restructuring Costs, below, for further discussion.

Other Income, Net


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Other income, net	$	124	$	734	$	314	$	835

Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, and other ongoing and nonrecurring items. The decrease in Other income, net of $610 million for the quarter ended September 30, 2021, compared to the quarter ended September 30, 2020 was primarily due to the absence of $608 million of gains on the sales of the Collins Aerospace 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. Included in the change in Other income, net was a decrease of approximately $90 million of foreign government wage subsidies related to COVID-19 at Pratt & Whitney and Collins Aerospace, with the remaining change spread across multiple items with no common or significant driver.

The decrease in Other income, net of $521 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to the absence of $608 million of gains on the sales of the Collins Aerospace businesses in the third quarter of 2020, and a $121 million decrease in foreign government wage subsidies related to COVID-19 at Pratt & Whitney and Collins Aerospace, partially offset by the absence of a prior year impairment of a Collins Aerospace tradename of $57 million resulting from the projected impact of COVID-19 with the remaining change spread across multiple items with no common or significant driver.

Operating Profit (Loss)


	Quarter Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Operating profit (loss)	$	1,343		$	434		$	3,638		$	(2,031)
Operating profit (loss) margin	8.3		%	2.9		%	7.7		%	(5.1)		%

The increase in Operating profit (loss) of $909 million for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily driven by the operating performance at our segments as described below in the individual segment results. Included in the increase in Operating profit was a decrease in restructuring costs of $226 million primarily related to restructuring actions taken at our Collins Aerospace and Pratt & Whitney segments in the prior year.

The change in Operating profit (loss) of $5,669 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily driven by the absence of the prior year goodwill impairment loss of $3,183 million related to two Collins Aerospace reporting units, the operating performance at our operating segments almost half of which was due to the Raytheon Merger, and an increase in our FAS/CAS operating adjustment of $611 million primarily as a result of the Raytheon Merger. Included in the increase in Operating profit was a decrease in restructuring costs of $562 million primarily related to restructuring actions taken at our Collins Aerospace and Pratt & Whitney segments in the prior year.

Non-service Pension (Income) Expense


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Non-service pension (income) expense	$	(491)	$	(253)	$	(1,472)	$	(658)

The change in Non-service pension (income) expense of $238 million for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily driven by a decrease in the discount rate, the Raytheon domestic defined benefit pension plan amendment described below, and prior year pension asset returns exceeding our expected return on assets (EROA) assumption.

The change in Non-service pension (income) expense of $814 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily driven by the inclusion of the Raytheon Company plans as a result of the Raytheon Merger, and to a lesser extent, a decrease in the discount rate, prior year pension asset returns exceeding our EROA assumption and the Raytheon domestic defined benefit pension plan amendment described below.

In December 2020, we approved a change to the Raytheon domestic defined benefit pension plans for non-union participants to cease future benefit accruals based on an employee’s years of service and compensation effective December 31, 2022. The plan change does not impact participants’ historical benefit accruals. Benefits for service after December 31, 2022 will be based on a cash balance formula.

Interest Expense, Net


	Quarter Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Interest expense	$	367		$	356		$	1,070		$	1,041
Interest income	(9)			(6)			(24)			(24)
Interest expense, net	$	358		$	350		$	1,046		$	1,017
Average interest expense rate	4.2		%	4.2		%	4.1		%	4.0		%

Interest expense, net in the quarter ended September 30, 2021, was relatively consistent with the quarter ended September 30, 2020. Included in interest expense was $32 million of net debt extinguishment costs in connection with the early repayment of outstanding principal, and a decrease in interest expense primarily due the repayment of long-term debt. The average maturity of long-term debt at September 30, 2021 is approximately 15 years.

Interest expense, net in the nine months ended September 30, 2021, was relatively consistent with the nine months ended September 30, 2020. Included in interest expense was a $74 million unfavorable change in the mark-to-market fair value of marketable securities held in trusts associated with certain of our nonqualified deferred compensation and employee benefit plans and $32 million of net debt extinguishment costs in connection with the early repayment of outstanding principal, partially offset by a decrease in interest expense primarily due the repayment of long-term debt.

Income Taxes


	Quarter Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Effective income tax rate	0.2	%	45.1	%	17.0	%	(31.5)	%

The effective tax rate for the quarter ended September 30, 2021 includes deferred tax benefits of $244 million associated with legal entity and operational reorganizations implemented in the third quarter. The effective tax rate for the quarter ended September 30, 2020 includes tax charges incremental to the U.S. statutory rate of $206 million associated with the sales of the Collins Aerospace businesses, as described in “Note 2: Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 1 of this Form 10-Q.

The effective tax rate for the nine months ended September 30, 2021 includes deferred tax benefits of $244 million associated with legal entity and operational reorganizations implemented in the third quarter, tax charges of $148 million associated with the sale of the Forcepoint business and tax charges of $73 million associated with the revaluation of deferred taxes resulting from the increase in the United Kingdom (U.K.) corporate tax rate to 25% effective in 2023. The loss from continuing operations before income taxes for the nine months ended September 30, 2020 includes the $3.2 billion goodwill impairment, as described in “Note 2: Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 1 of this Form 10-Q, most of which is non-deductible for tax purposes. The effective tax rate for the nine months ended September 30, 2020 also includes tax charges of $430 million resulting from the Separation Transactions or the Raytheon Merger, primarily related to the impairment of deferred tax assets and the revaluation of certain international tax incentives, and $228 million of tax charges incremental to the U.S. statutory rate associated with the sales of the Collins Aerospace and RIS businesses.

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


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions, except per share amounts)	2021		2020		2021		2020
Net income (loss) from continuing operations attributable to common shareowners	$	1,400	$	151	$	3,212	$	(3,255)
Diluted earnings (loss) per share from continuing operations	$	0.93	$	0.10	$	2.13	$	(2.48)

Net income (loss) from continuing operations attributable to common shareowners for the quarter ended September 30, 2021 includes the following:

acquisition accounting adjustments primarily related to the Raytheon Merger of $456 million, net of tax, which had an unfavorable impact on diluted earnings per share (EPS) from continuing operations of $0.30; and
tax benefits of $244 million associated with legal entity and operational reorganizations implemented in the third quarter 2021, which had a favorable impact on diluted EPS from continuing operations of $0.16.

Net income (loss) 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 EPS from continuing operations of $0.27;
restructuring charges of $189 million, net of tax, which had an unfavorable impact on diluted EPS 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 EPS 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 Intangible Assets” within Item 1 of this Form 10-Q, which had a favorable impact on diluted EPS from continuing operations of $0.17.

Net income (loss) from continuing operations attributable to common shareowners for the nine months ended September 30, 2021 includes the following:

acquisition accounting adjustments primarily related to the Raytheon Merger of $1,257 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.83;
tax benefits of $244 million associated with legal entity and operational reorganizations implemented in the third quarter 2021, which had a favorable impact on diluted EPS from continuing operations of $0.16;
tax expense of $148 million related to the sale of our Forcepoint business, which had an unfavorable impact on diluted EPS from continuing operations of $0.10;
restructuring charges of $97 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.06; and
tax expense of $73 million associated with the revaluation of deferred taxes resulting from the increase in the U.K. corporate tax rate to 25% effective in 2023, which had an unfavorable impact on diluted EPS from continuing operations of $0.05.

Net income (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 EPS from continuing operations of $0.77;
restructuring charges of $517 million, net of tax, which had an unfavorable impact on diluted EPS 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 EPS from continuing operations of $2.47;
significant unfavorable contract adjustments at Collins Aerospace and Pratt & Whitney of $603 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.48;
$415 million of tax charges in connection with the Separation Transactions, including the impairment of deferred tax assets not expected to be utilized, which had an unfavorable impact on diluted EPS from continuing operations of $0.32;
increased estimates of expected credit losses driven by customer bankruptcies and additional general allowances for credit losses of $272 million, net of tax, which had an unfavorable impact on diluted EPS 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 EPS from continuing operations of $0.19.

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


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions, except per share amounts)	2021		2020		2021		2020
Net income (loss) from discontinued operations attributable to common shareowners	$	(7)	$	113	$	(34)	$	(399)
Diluted earnings (loss) per share from discontinued operations	$	—	$	0.08	$	(0.03)	$	(0.30)

On April 3, 2020, we completed the separation of our commercial businesses, Carrier and Otis. Effective as of such date, the historical results of the Carrier and Otis 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 $120 million and the related change in diluted earnings (loss) per share from discontinued operations of $0.08 in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily due to the absence of a prior year tax benefit associated with the Separation Transactions.

The change in net income (loss) from discontinued operations attributable to common shareowners of $365 million and the related change in diluted earnings (loss) per share from discontinued operations of $0.27 in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to higher prior year costs associated with the separation of our commercial businesses, including debt extinguishment costs of $611 million, net of tax, in connection with the early repayment of outstanding principal, partially offset by prior year Carrier and Otis operating activity, as the Separation Transactions occurred on April 3, 2020.

Net Income (Loss) Attributable to Common Shareowners


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions, except per share amounts)	2021		2020		2021		2020
Net income (loss) attributable to common shareowners	$	1,393	$	264	$	3,178	$	(3,654)
Diluted earnings (loss) per share from operations	$	0.93	$	0.17	$	2.10	$	(2.79)

The increase in net income (loss) attributable to common shareowners and diluted earnings (loss) per share from operations for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily driven by the increase in continuing operations, as discussed above in Net Income (Loss) from Continuing Operations Attributable to Common Shareowners, partially offset by the change from discontinued operations, as discussed above in Net Income (Loss) from Discontinued Operations Attributable to Common Shareholders.

The increase in net income (loss) attributable to common shareowners and diluted earnings (loss) per share from operations for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was driven by the increase in continuing operations, as discussed above in Net Income (Loss) from Continuing Operations Attributable to Common Shareowners and the change from discontinued operations, as discussed above in Net Income (Loss) from Discontinued Operations Attributable to Common Shareholders.

RESTRUCTURING COSTS


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020


Restructuring costs	$	19	$	250	$	118	$	685

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 and facility exit 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.

2021 Actions. During the quarter and nine months ended September 30, 2021, we recorded net pre-tax restructuring charges of $12 million and $113 million, respectively, primarily related to severance costs related to ongoing cost reduction efforts, and to a much lesser extent, the exit and consolidation of facilities initiated in 2021. We expect to incur additional restructuring charges of $74 million to complete these actions. We are targeting to complete the majority of the remaining workforce and facility related cost reduction actions initiated in 2021 by 2022. We expect recurring pre-tax savings related to these actions to reach approximately $130 million annually within one to two years. Approximately 60% 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, 2021, we had cash outflows of $9 million related to the 2021 actions.

2020 Actions. During the quarters ended September 30, 2021 and 2020, we recorded $1 million and $240 million, respectively, of net pre-tax restructuring charges for actions initiated in 2020. During the nine months ended September 30, 2021 and 2020, we reversed $19 million and recorded $686 million, respectively, of net pre-tax restructuring charges for actions initiated in 2020. We expect to incur additional restructuring charges of $7 million to complete these actions. We are targeting to complete in 2021 the majority of the remaining workforce and facility related cost reduction actions initiated in 2020. We expect annual recurring pre-tax savings related to these actions to reach approximately $1.2 billion annually within two years of initiating these actions. Approximately 85% 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, 2021 and 2020, we had cash outflows of $200 million and $222 million, respectively, related to the 2020 actions.

In addition, during the quarters ended September 30, 2021 and 2020, we recorded $6 million and $10 million, respectively, of net pre-tax restructuring charges for restructuring actions initiated in 2019 and prior. During the nine months ended September 30, 2021 and 2020, we recorded $24 million and reversed $1 million, respectively, of net pre-tax restructuring charges for restructuring actions initiated in 2019 and prior. For additional discussion of restructuring, see “Note 12: Restructuring Costs” within Item 1 of this Form 10-Q.

SEGMENT REVIEW

As discussed further above in Business Overview, on April 3, 2020, we completed the Separation Transactions, Distributions and the Raytheon Merger. 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 Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.

As previously announced, effective January 1, 2021, we reorganized certain product areas of our RIS and RMD businesses to more efficiently leverage our capabilities. The amounts and presentation of our business segments, including intersegment activity, set forth in this Form 10-Q reflect this reorganization. The reorganization does not impact our previously reported Collins Aerospace Systems and Pratt & Whitney segment results, or our consolidated balance sheets, statements of operations or statements of cash flows. Refer to “Note 19: Segment Financial Data” within Item 1 of this Form 10-Q for revised financial results for the fiscal quarters and year ended 2020.

As a result of the Raytheon Merger, we now present a FAS/CAS operating adjustment outside of segment results, which represents the difference between the service cost component of our pension and PRB expense under the Financial Accounting Standards (FAS) requirements of U.S. Generally Accepted Accounting Principles (GAAP) and our pension and postretirement benefit (PRB) expense under U.S. government Cost Accounting Standards (CAS) primarily related to our RIS and RMD

segments. While the ultimate liability for pension and PRB costs under FAS and CAS is similar, the pattern of cost recognition is different. We generally expect to recover the related RIS and RMD pension and PRB liabilities over time through the pricing of our products and services to the U.S. government. 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 subject to Federal Acquisition Regulation (FAR) part 12, 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.

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

Total Net Sales. Total net sales by segment were as follows:


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Collins Aerospace Systems	$	4,592	$	4,274	$	13,507	$	14,914
Pratt & Whitney	4,725		3,494		13,035		12,334
Raytheon Intelligence & Space	3,740		3,749		11,310		7,136
Raytheon Missiles & Defense	3,902		3,706		11,680		7,212
Total segment	16,959		15,223		49,532		41,596
Eliminations and other	(746)		(476)		(2,188)		(1,428)



Consolidated	$	16,213	$	14,747	$	47,344	$	40,168

Operating Profit (Loss). Operating profit (loss) by segment was as follows:


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Collins Aerospace Systems	$	478	$	526	$	1,298	$	1,455
Pratt & Whitney	187		(615)		319		(597)
Raytheon Intelligence & Space	391		350		1,194		659
Raytheon Missiles & Defense	490		449		1,518		847
Total segment	1,546		710		4,329		2,364
Eliminations and other	(27)		(49)		(98)		(101)
Corporate expenses and other unallocated items	(89)		(84)		(319)		(491)
FAS/CAS operating adjustment	499		380		1,347		736
Acquisition accounting adjustments	(586)		(523)		(1,621)		(4,539)
Consolidated	$	1,343	$	434	$	3,638	$	(2,031)

Included in segment operating profit are Estimate at Completion (EAC) adjustments, which relate to changes in operating profit and margin due to revisions to total estimated revenues and costs at completion. These changes reflect improved or deteriorated operating performance or award fee rates. For a full description of our EAC process, refer to “Note 5: Changes in Contract Estimates at Completion” within Item 1 of this Form 10-Q. Given that we have thousands of individual contracts and given the types and complexity of the assumptions and estimates we must make on an on-going basis, we have both favorable and unfavorable EAC adjustments.

We had the following aggregate EAC adjustments for the periods presented:


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Gross favorable	$	334	$	281	$	955	$	569
Gross unfavorable	(309)		(743)		(891)		(1,161)
Total net EAC adjustments	$	25	$	(462)	$	64	$	(592)

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 because only the unperformed portion of the contract at the merger date represents an obligation of the Company. This had the impact of reducing gross favorable and unfavorable EAC adjustments for these segments in the prior year. The change in net EAC adjustments of $487 million in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily due to a favorable change in net EAC adjustments of $457 million at Pratt & Whitney, due to the absence of unfavorable contract adjustments in the prior year.

The change in net EAC adjustments of $656 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a favorable change in net EAC adjustments of $545 million at Pratt & Whitney, due to the absence of unfavorable contract adjustments in the prior year, and a favorable change in net EAC adjustments of $121 million at RIS and $87 million at RMD, primarily due to the Raytheon Merger. This was partially offset by an unfavorable change in net EAC adjustments of $97 million at Collins Aerospace spread across numerous individual programs with no individual or common significant driver.

Significant EAC adjustments, when they occur, are discussed in each business segment’s discussion below.

Backlog and Defense Bookings. Total backlog was approximately $156.1 billion and $150.1 billion as of September 30, 2021 and December 31, 2020, respectively, which includes defense backlog of $65.0 billion and $67.3 billion as of September 30, 2021 and December 31, 2020, respectively. 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 bookings were approximately $9.8 billion and $8.4 billion for the quarters ended September 30, 2021 and 2020, and approximately $30.2 billion and $21.8 billion for the nine months ended September 30, 2021 and 2020, respectively.

Defense 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


	Quarter Ended September 30,								Nine Months Ended September 30,
(dollars in millions)	2021			2020			Change		2021			2020			Change
Net Sales	$	4,592		$	4,274		7	%	$	13,507		$	14,914		(9)	%
Operating Profit	478			526			(9)	%	1,298			1,455			(11)	%
Operating Profit Margins	10.4		%	12.3		%			9.6		%	9.8		%

Quarter Ended September 30, 2021 Compared with Quarter Ended September 30, 2020


	Factors Contributing to Total Change
(dollars in millions)	Organic(1)		Acquisitions / Divestitures, net		Restructuring Costs		Other		Total Change
Net Sales	$	375	$	(67)	$	—	$	10	$	318

Operating Profit	411		(18)		136		(577)		(48)

(1) We provide the organic change in net sales and operating profit for our 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 acquisitions and divestitures, net; restructuring costs; and the effect of foreign currency exchange rate translation fluctuations and other significant non-recurring and non-operational items (“Other”). A reconciliation of these measures to reported U.S. GAAP amounts is provided in the table above.

The organic sales increase of $0.4 billion in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 primarily relates to higher commercial aerospace aftermarket sales of $0.4 billion, including increases

across all aftermarket sales channels, primarily due to an increase in flight hours and aircraft fleet utilization as commercial aerospace continues to recover from the prior year’s unfavorable economic environment principally driven by the COVID-19 pandemic. Commercial aerospace OEM sales were down slightly in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, with narrow-body OEM sales increases partially offsetting wide-body volume declines principally on the 787 platform. Military sales were also down slightly in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020.

The organic profit increase of $0.4 billion in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily due to higher commercial aerospace operating profit of $0.4 billion principally driven by the higher commercial aerospace aftermarket sales discussed above and favorable commercial aerospace aftermarket and OEM product mix. Included in organic profit in the quarter ended September 30, 2020 was $32 million of foreign government wage subsidies related to COVID-19.

The decrease in net sales and operating profit due to acquisitions / divestitures, net relates to the sale of our Collins Aerospace military GPS and space-based precision optics businesses in the third quarter of 2020.

The decrease in Other operating profits of $0.6 billion in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 primarily relates to the absence of prior year gains of $608 million on the sales of the Collins Aerospace businesses discussed above.

Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020



	Factors Contributing to Total Change
(dollars in millions)	Organic(1)		Acquisitions / Divestitures, net		Restructuring Costs		Other		Total Change
Net Sales	$	(1,145)	$	(338)	$	—	$	76	$	(1,407)

Operating Profit	275		(94)		263		(601)		(157)

The organic sales decrease of $1.1 billion in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily relates to lower commercial aerospace OEM sales of $0.9 billion and lower commercial aerospace aftermarket sales of $0.3 billion, including declines across all aftermarket sales channels. These decreases were primarily due to the change in the economic environment principally driven by the COVID-19 pandemic. Military sales were up slightly in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The organic profit increase of $0.3 billion in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 is primarily due to lower Selling, general and administrative expenses of $0.2 billion primarily driven by the absence of a $123 million charge related to increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses in the nine months ended September 30, 2020, and lower Research and development expenses of $0.1 billion, which includes the impact of cost reduction initiatives. Commercial aerospace operating profit decreased slightly and includes the impact of the lower commercial aerospace aftermarket sales discussed above, partially offset by the absence of $157 million of prior year significant unfavorable adjustments, the benefit of cost reduction initiatives, and a $33 million favorable impact from a contract related matter in the nine months ended September 30, 2021. The significant unfavorable adjustments in the nine months ended September 30, 2020 were primarily driven by the expected acceleration of fleet retirements of a certain aircraft. Included in organic profit in the nine months ended September 30, 2020 was $56 million of foreign government wage subsidies related to COVID-19.

The decrease in Other operating profits of $0.6 billion in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily relates to the absence of prior year gains of $608 million on the sales of the Collins Aerospace businesses discussed above.

Pratt & Whitney


	Quarter Ended September 30,								Nine Months Ended September 30,
(dollars in millions)	2021			2020			Change		2021			2020			Change
Net Sales	$	4,725		$	3,494		35	%	$	13,035		$	12,334		6	%
Operating Profit	187			(615)			NM		319			(597)			NM
Operating Profit Margins	4.0		%	(17.6)		%			2.4		%	(4.8)		%

NM = Not Meaningful

Quarter Ended September 30, 2021 Compared with Quarter Ended September 30, 2020


	Factors Contributing to Total Change
(dollars in millions)	Organic(1)		Acquisitions / Divestitures, net		Restructuring Costs		Other		Total Change
Net Sales	$	1,217	$	—	$	—	$	14	$	1,231

Operating Profit	645		—		61		96		802

The organic sales increase of $1.2 billion in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 reflects higher commercial aftermarket sales of $1.0 billion, primarily due to an increase in shop visits and related spare part sales, and higher commercial OEM sales of $0.2 billion, primarily due to an increase in commercial engine deliveries, all driven by the recovery from the prior year’s unfavorable economic environment largely due to the COVID-19 pandemic. Prior year commercial aftermarket sales include unfavorable EAC adjustments of $0.3 billion, discussed further below. Military sales were up slightly in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020.

The organic profit increase of $0.6 billion in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily driven by higher commercial aerospace operating profit of $0.8 billion principally due to the aftermarket sales volume increase discussed above, favorable year-over-year EAC adjustments of $459 million, and favorable mix. The favorable year-over-year EAC adjustments were principally driven by the absence of prior year unfavorable EAC adjustments of $334 million related to a change in the estimated maintenance coverage period on a commercial engine aftermarket contract and $129 million due to the restructuring of a customer contract. Included in organic profit in the quarter ended September 30, 2020 was other income of $58 million related to foreign government wage subsidies related to COVID-19.

The increase in Other operating profit of $0.1 billion in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily driven by the absence of an $89 million impairment of commercial aircraft program assets recorded in the prior year.

In the quarter ended September 30, 2021, Pratt & Whitney booked $543 million for two F-135 sustainment contracts and $212 million for F100 engines for an international customer. In the quarter ended September 30, 2020, Pratt & Whitney booked $473 million for F-135 sustainment contracts.

Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020



	Factors Contributing to Total Change
(dollars in millions)	Organic(1)		Acquisitions / Divestitures, net		Restructuring Costs		Other		Total Change
Net Sales	$	609	$	—	$	—	$	92	$	701

Operating Profit	634		—		164		118		916

The organic sales increase of $0.6 billion in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 reflects higher commercial aftermarket sales of $0.7 billion, primarily due to an increase in shop visits and related spare part sales driven by the recovery from the prior year’s unfavorable economic environment largely due to the COVID-19 pandemic, partially offset by lower commercial OEM sales of $0.1 billion. Prior year commercial aftermarket sales include unfavorable EAC adjustments of $0.3 billion, discussed further below. Military sales were up slightly in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The organic profit increase of $0.6 billion in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily driven by higher commercial aerospace operating profit of $0.5 billion principally due to the favorable year-over-year EAC adjustments of $533 million, and lower Selling, general and administrative expenses of $0.2 billion. The higher commercial aerospace operating profit also includes the impact of the aftermarket sales volume increase discussed above, which was largely offset by lower commercial OEM operating profit due to unfavorable mix and lower sales volume. The year-over-year favorable commercial aerospace EAC adjustments were principally driven by prior year unfavorable EAC adjustments of $334 million related to a change in the estimated maintenance coverage period on a commercial engine aftermarket contract, $129 million due to the restructuring of a customer contract, and $62 million net unfavorable EAC adjustments based on a portfolio review of our commercial aftermarket programs. The lower Selling, general and administrative expenses were primarily driven by the absence of a $229 million charge in the prior year related to increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses. Also included in the organic change in operating profit was other income related to foreign government wage subsidies related to COVID-19 of $52 million and $117 million for the nine months ended September 30, 2021 and 2020, respectively, and an unfavorable EAC adjustment on a military program of $44 million in the second quarter of 2020 primarily driven by a shift in estimated overhead costs due to lower commercial engine activity.

The increase in Other operating profit of $0.1 billion in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily driven by the absence of an $89 million impairment of commercial aircraft program assets recorded in the prior year.

In addition to the bookings discussed above, in the nine months ended September 30, 2021, Pratt & Whitney had two notable defense bookings for $593 million in total for F-135 sustainment contracts. In addition to the bookings discussed above, in the nine months ended September 30, 2020, Pratt & Whitney booked $1.2 billion for the F-135 program and $168 million for the Tanker program.

Raytheon Intelligence & Space


	Quarter Ended September 30,								Nine Months Ended September 30,
(dollars in millions)	2021			2020			Change		2021			2020			Change
Net Sales	$	3,740		$	3,749		—	%	$	11,310		$	7,136		58	%
Operating Profit	391			350			12	%	1,194			659			81	%
Operating Profit Margins	10.5		%	9.3		%			10.6		%	9.2		%
Bookings	$	2,894		$	2,955		(2)	%	$	10,572		$	6,667		59	%

Quarter Ended September 30, 2021 Compared with Quarter Ended September 30, 2020


	Factors Contributing to Total Change in Net Sales
(dollars in millions)	Organic(1)		Acquisitions / Divestitures, net		Other		Total Change
Net Sales	$	(45)	$	28	$	8	$	(9)

(1) We provide the organic change in net sales for our segments. 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 acquisitions and divestitures, net, and the effect of foreign currency exchange rate translation fluctuations and other significant non-recurring and non-operational items (“Other”). A reconciliation of this measure to the reported U.S. GAAP amount is provided in the table above.


	Factors Contributing to Change in Operating Profit
(dollars in millions)	Volume		Net change in EAC adjustments		Acquisitions / Divestitures, net		Mix and other performance		Total Change

Operating Profit	$	(9)	$	45	$	(4)	$	9	$	41

Organic sales in the quarter ended September 30, 2021 were relatively consistent with the quarter ended September 30, 2020.

The increase in operating profit of $41 million and the related increase in operating profit margins in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, was primarily due to the net favorable change in EAC adjustments of $45 million, which was spread across numerous programs and primarily a result of the Raytheon Merger and the associated reset to zero percent complete for contracts accounted for on a percentage of completion basis.

Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020


	Factors Contributing to Total Change in Net Sales
(dollars in millions)	Organic(1)		Acquisitions / Divestitures, net		Other		Total Change
Net Sales	$	120	$	4,023	$	31	$	4,174


	Factors Contributing to Change in Operating Profit
(dollars in millions)	Volume		Net change in EAC adjustments		Acquisitions / Divestitures, net		Mix and other performance		Total Change

Operating Profit	$	2	$	98	$	404	$	31	$	535

Organic sales in the nine months ended September 30, 2021 were relatively consistent with the nine months ended September 30, 2020. Included in the increase in organic sales was higher net sales of $142 million on certain Airborne Intelligence, Surveillance and Reconnaissance (ISR) programs within sensing and effects primarily due to increased production driven by customer demand, higher volume of $91 million on certain classified cyber programs within cyber, training and services primarily due to increases in customer-determined activity levels, and lower net sales of $71 million due to lower volume on certain Space ISR programs within sensing and effects.

The increase in operating profit of $535 million and the related increase in operating profit margins in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was primarily due to the change in acquisitions / divestitures, net of $404 million, and the net favorable change in EAC adjustments of $98 million, which was spread across numerous programs and primarily a result of the Raytheon Merger and the associated reset to zero percent complete for contracts accounted for on a percentage of completion basis.

The increase in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the Raytheon Merger on April 3, 2020.

Backlog and Bookings– Backlog was $18.7 billion at September 30, 2021 and $19.2 billion at December 31, 2020. In the quarter ended September 30, 2021, RIS booked $962 million on a number of classified contracts. In addition to these bookings, in the nine months ended September 30, 2021, RIS booked $2,539 million on a number of classified contracts, $365 million on the Standard Terminal Automation Replacement System (STARS) program for the Federal Aviation Administration (FAA), $227 million on a missile warning and defense contract, $211 million to provide additional upgrades to the Global Positioning System Next Generation Operational Control System (GPS OCX) program for the U.S. Air Force, $199 million on an international tactical airborne radar sustainment contract, $185 million on an international training contract with the U.K. Royal

Navy, and $172 million on the Next Generation Jammer (NGJ) Mid-Band Low Rate Initial Production (LRIP) contract with the U.S. Navy.

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 these bookings, 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)	2021			2020			Change		2021			2020			Change
Net Sales	$	3,902		$	3,706		5	%	$	11,680		$	7,212		62	%
Operating Profit	490			449			9	%	1,518			847			79	%
Operating Profit Margins	12.6		%	12.1		%			13.0		%	11.7		%
Bookings	$	3,901		$	2,489		57	%	$	12,487		$	6,598		89	%

Quarter Ended September 30, 2021 Compared with Quarter Ended September 30, 2020


	Factors Contributing to Total Change in Net Sales
(dollars in millions)	Organic(1)		Acquisitions / Divestitures, net		Other		Total Change
Net Sales	$	193	$	—	$	3	$	196


	Factors Contributing to Change in Operating Profit
(dollars in millions)	Volume		Net change in EAC adjustments		Acquisitions / Divestitures, net		Mix and other performance		Total Change

Operating Profit	$	21	$	8	$	—	$	12	$	41

The organic sales increase of $193 million in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was primarily due to higher net sales of $143 million to an international customer driven by planned increases in production on NASAMS and higher net sales of $87 million on the AMRAAM program including the recognition of previously deferred precontract costs resulting from a contract award in the third quarter of 2021, partially offset by lower net sales of $65 million related to sales on our direct commercial sales contracts for precision guided munitions with a Middle East customer that had been recognized in the quarter ended September 30, 2020, but subsequently reversed in the fourth quarter of 2020. We have not yet obtained regulatory approval on these contracts, and we subsequently reversed these sales because we determined, due to then-current events, that it was no longer probable that we will be able to obtain regulatory approvals for these contracts.

The increase in operating profit of $41 million in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, was primarily due to an increase in volume of $21 million principally driven by the activity on the programs described above in organic sales. The increase in operating profit margins was primarily due to the change in mix and other performance.

Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020


	Factors Contributing to Total Change in Net Sales
(dollars in millions)	Organic(1)		Acquisitions / Divestitures, net		Other		Total Change
Net Sales	$	452	$	3,999	$	17	$	4,468


	Factors Contributing to Change in Operating Profit
(dollars in millions)	Volume		Net change in EAC adjustments		Acquisitions / Divestitures, net		Mix and other performance		Total Change

Operating Profit	$	42	$	51	$	521	$	57	$	671

The organic sales increase of $452 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to higher net sales of $118 million on an international Patriot program driven by a contract modification in the second quarter of 2021, which included the recognition of previously deferred precontract costs, higher net sales of $92 million to an international customer driven by planned increases in production on NASAMS, higher net sales of $84 million on the AMRAAM program including the recognition of previously deferred precontract costs resulting from a contract award in the third quarter of 2021 and higher net sales of $78 million on the StormBreaker program primarily due to the recognition of previously deferred precontract costs based on a contract award in the second quarter of 2021, partially offset by lower net sales of $119 million related to sales on our direct commercial sales contracts for precision guided munitions with a Middle East customer as discussed above.

The increase in operating profit of $671 million and the related increase in operating profit margins in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a change in acquisitions / divestitures, net of $521 million.

The increase in net sales and operating profit due to acquisitions / divestitures, net relates to the Raytheon Merger on April 3, 2020.

Backlog and Bookings– Backlog was $29.6 billion at September 30, 2021 and $29.1 billion at December 31, 2020. In the quarter ended September 30, 2021, RMD booked $570 million for AMRAAM for the U.S. Air Force and Navy and international customers, $432 million to provide Guidance Enhanced Missiles (GEM-T) for an international customer, $358 million for Evolved Sea Sparrow Missile (ESSM) for the U.S. Navy and international customers, $291 million for Stinger missiles for international customers and $175 million to provide Patriot technical assistance for an international customer. RMD also booked $400 million on a number of classified contracts. In addition to these bookings, in the nine months ended September 30, 2021, RMD booked approximately $2 billion for the Long Range Standoff (LRSO) Weapon System Engineering and Manufacturing Development (EMD) contract for the U.S. Air Force, $1,315 million for the Next Generation Interceptor (NGI) for the Missile Defense Agency (MDA), $518 million for AMRAAM for the U.S. Air Force and Navy and international customers, $327 million for AIM-9X Sidewinder short-range air-to-air missiles for the U.S. Navy and Air Force and international customers, $247 million to provide Patriot engineering services support for the U.S. Army and international customers, $242 million on the Army Navy/Transportable Radar Surveillance-Model 2 (AN/TPY-2) radar program for the MDA, and $213 million for StormBreaker for the U.S. Air Force and Navy.

In the quarter ended September 30, 2020, RMD booked $186 million on the AN/TPY-2 radar program for the Kingdom of Saudi Arabia (KSA). In addition to these bookings, in the nine months ended September 30, 2020, RMD booked $2,253 million on the AN/TPY-2 radar program for KSA and $321 million for Standard Missile-3 (SM-3) for the 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, which was acquired as part of the Raytheon Merger and subsequently disposed of on January 8, 2021, as further discussed in “Note 2: Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 1 of this Form 10-Q.


	Net Sales				Operating Profit
	Quarter Ended September 30,				Quarter Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Inter segment eliminations	$	(745)	$	(655)	$	(16)	$	(37)
Other non-reportable segments	(1)		179		(11)		(12)
Eliminations and other	$	(746)	$	(476)	$	(27)	$	(49)

The decrease in other non-reportable segment sales for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, was primarily related to the sale of our Forcepoint business in the first quarter of 2021.

Other non-reportable segment operating profit for the quarter ended September 30, 2021 was relatively consistent with the quarter ended September 30, 2020.


	Net Sales				Operating Profit
	Nine Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Inter segment eliminations	$	(2,203)	$	(1,756)	$	(72)	$	(73)
Other non-reportable segments	15		328		(26)		(28)
Eliminations and other	$	(2,188)	$	(1,428)	$	(98)	$	(101)

The decrease in other non-reportable segment sales for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was primarily related to the sale of our Forcepoint business in the first quarter of 2021.

Other non-reportable segments operating profit for the nine months ended September 30, 2021 was relatively consistent with the nine months ended September 30, 2020.

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.


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Corporate expenses and other unallocated items	$	(89)	$	(84)	$	(319)	$	(491)

Corporate expenses and other unallocated items in the quarter ended September 30, 2021 were relatively consistent with the quarter ended September 30, 2020.

The decrease in Corporate expenses and other unallocated items of $172 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily driven by a decrease in merger-related costs related to the Raytheon Merger of $128 million and lower restructuring costs of $112 million, partially offset by an increase in net expenses related to the LTAMDS project.

FAS/CAS operating adjustment

The segment results of RIS and RMD 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 generally include FAS service cost.

The components of the FAS/CAS operating adjustment were as follows:


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
FAS service cost (expense)	$	(102)	$	(118)	$	(304)	$	(227)
CAS expense	601		498		1,651		963
FAS/CAS operating adjustment	$	499	$	380	$	1,347	$	736

The change in our FAS/CAS operating adjustment of $119 million in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 was driven by a $103 million increase in CAS expense, as well as a $16 million decrease in FAS service cost. The increase in CAS expense was primarily due to the third quarter 2021 update to our actuarial estimates.

The change in our FAS/CAS operating adjustment of $611 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was driven by a $688 million increase in CAS expense, partially offset by a $77 million increase in FAS service cost. The increase in our CAS expense was primarily due to the inclusion of the Raytheon Company plans as a result of the Raytheon Merger. The increase in our FAS service cost was primarily due to the inclusion of the Raytheon Company plans as a result of the Raytheon Merger, partially offset by the Raytheon domestic defined pension plan amendment, as described below.

In December 2020, we approved a change to the Raytheon Company domestic defined benefit pension plans for non-union participants to cease future benefit accruals based on an employee’s years of service and compensation effective December 31, 2022. The plan change does not impact participants’ historical benefit accruals. Benefits for service after December 31, 2022 will be based on a cash balance formula.

In response to the economic environment resulting from the COVID-19 pandemic, Congress passed the American Rescue Plan Act of 2021 (ARPA) in March 2021, which included pension funding relief provisions. These provisions extend and expand upon existing pension funding relief, most notably by increasing the liability interest rates used to determine the required cash contributions for our U.S. qualified pension plans. As a result, we do not currently expect cash contributions to be required for our U.S. qualified pension plans in 2021 or 2022.

The ARPA pension funding relief provisions are also expected to result in decreases to CAS expense, and the related recovery under our contracts, for our U.S. qualified pension plans beginning in 2022 as the interest rates used to determine pension funding requirements for these plans are also used in determining CAS expense.

Acquisition accounting adjustments

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

The components of Acquisition accounting adjustments were as follows:


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Goodwill impairment charge	$	—	$	—	$	—	$	(3,183)
Amortization of acquired intangibles	(610)		(596)		(1,789)		(1,547)
Amortization of property, plant and equipment fair value adjustment	(21)		(19)		(84)		(46)
Amortization of customer contractual obligations related to acquired loss-making and below-market contracts	45		92		252		237
Acquisition accounting adjustments	$	(586)	$	(523)	$	(1,621)	$	(4,539)

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


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Collins Aerospace Systems	$	(196)	$	(157)	$	(466)	$	(3,736)
Pratt & Whitney	(47)		(7)		(98)		(91)
Raytheon Intelligence & Space	(132)		(130)		(433)		(258)
Raytheon Missiles & Defense	(211)		(204)		(624)		(404)
Total segment	(586)		(498)		(1,621)		(4,489)
Eliminations and other	—		(25)		—		(50)
Acquisition accounting adjustments	$	(586)	$	(523)	$	(1,621)	$	(4,539)

The change in the Acquisition accounting adjustments of $63 million for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, was primarily driven by an increase at Pratt & Whitney primarily due to an increase in collaboration intangibles amortization driven by an increase in V2500 program activity and Collins Aerospace primarily due to the impact of foreign currency exchange rates.

The change in the Acquisition accounting adjustments of $2,918 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, is primarily driven by the $3.2 billion goodwill impairment loss in the second quarter of 2020 related to two Collins Aerospace reporting units, partially offset by an increase of $361 million for acquisition accounting adjustments related to the Raytheon Merger, primarily due to the timing of the merger in the prior year. Included in Acquisition accounting adjustments in the nine months ended September 30, 2021 was $116 million of amortization of customer contractual obligations due to the accelerated liquidation of below-market contract reserves at Collins Aerospace driven by the termination of two customer contracts. Refer to “Note 2: Acquisitions, Dispositions, Goodwill and 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, 2021			December 31, 2020
Cash and cash equivalents	$	7,476		$	8,802
Total debt	31,248			31,823
Total equity	72,937			73,852
Total capitalization (total debt plus total equity)	104,185			105,675
Total debt to total capitalization	30		%	30		%

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 cash flows from operating activities. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in and divestitures of businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, redemptions of debt, and the ability to attract long-term capital at satisfactory terms. We had $6.84 billion available under our various credit facilities at September 30, 2021.

Although our business has been and will continue to be impacted by COVID-19, as discussed above in Business Overview, we currently believe we have sufficient liquidity to withstand the potential impacts.

At September 30, 2021, we had cash and cash equivalents of $7.5 billion, of which approximately 35% was held by RTC’s foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The Company does not intend to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. Taxes associated with the future remittance of these earnings have been recorded. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, RTC will continue to permanently reinvest these earnings. We have repatriated approximately $1.8 billion of cash in the nine months ended September 30, 2021.

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

As of September 30, 2021, 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, 2021. The daily average amount of short-term commercial paper borrowings outstanding during the nine months ended

September 30, 2021 was $191 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 May 2021, we renewed our $2.0 billion revolving credit agreement, which now expires in May 2022. As of September 30, 2021, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $7.0 billion consisting of a $5.0 billion revolving credit agreement that became available upon completion of the Raytheon Merger on April 3, 2020, and the $2.0 billion revolving credit agreement, and there were no borrowings outstanding under these agreements.

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

The Company has offered a voluntary supply chain finance (SCF) program with a global financial institution 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. The SCF program does not impact our overall liquidity.

We believe our cash on hand and future operating cash flows will be sufficient to meet our future operating cash needs. Further, we continue to have access to the commercial paper markets and our existing credit facilities, and our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.

Cash Flow - Operating Activities


	Nine Months Ended September 30,
(dollars in millions)	2021		2020
Net cash flows provided by operating activities from continuing operations	$	3,981	$	2,964
Net cash used in operating activities from discontinued operations	(27)		(693)

Operating Activities - Continuing Operations. Cash generated by operating activities from continuing operations in the nine months ended September 30, 2021 was $1,017 million higher than the same period in 2020. This increase was primarily due to higher net income after adjustments for depreciation and amortization, deferred income tax provision, stock compensation costs, net periodic pension and other postretirement benefit and the goodwill impairment charge, totaling $3.0 billion, partially offset by an unfavorable change in working capital, primarily due to an unfavorable change in working capital at the RIS and RMD segments in the first quarter of 2021 with no comparable activity in the first quarter of 2020 as a result of the Raytheon Merger. This unfavorable change in working capital at RIS and RMD includes a cash outflow for accounts payable and accrued liabilities due to the timing of incentive compensation payments. Also included in the unfavorable change in working capital was an increase in current year contract assets principally driven by the timing of billings at Pratt & Whitney and contractual billing terms on U.S. government and foreign military sales contracts at RMD, partially offset by the absence of a reduction of accounts payable and accounts receivable in the prior year at Collins Aerospace and Pratt & Whitney due to a decline in volume principally driven by the economic environment primarily due to COVID-19.

The Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Factoring activity had minimal impact on cash flows provided by operating activities during the nine months ended September 30, 2021, compared to a decrease in cash flows provided by operating activities of $0.8 billion during the nine months ended September 30, 2020. The year over year increase in factoring activity was primarily due to the higher sales volume in 2021 as compared to 2020, and includes amounts factored on certain aerospace receivables at the customers’ request for which we are compensated by the customer for the extended collection cycle.

We made pension and PRB contributions of $38 million and $64 million in the nine months ended September 30, 2021 and 2020, respectively.

In response to the economic environment resulting from the COVID-19 pandemic, Congress passed the ARPA in March 2021, which included pension funding relief provisions. These provisions extend and expand upon existing pension funding relief, most notably by increasing the liability interest rates used to determine the required cash contributions for our U.S. qualified pension plans. As a result, we do not currently expect cash contributions to be required for our U.S. qualified pension plans in 2021 or 2022.

We made net tax payments of $906 million and $488 million in the nine months ended September 30, 2021 and 2020, respectively.

Operating Activities - Discontinued Operations. The $666 million change in cash used in operating activities from discontinued operations in the nine months ended September 30, 2021 compared to September 30, 2020 was primarily driven by the absence of separation costs in 2021 as the Separation Transactions occurred on April 3, 2020.

Cash Flow - Investing Activities


	Nine Months Ended September 30,
(dollars in millions)	2021		2020
Net cash flows (used in) provided by investing activities from continuing operations	$	(139)	$	4,152
Net cash used in investing activities from discontinued operations	—		(241)

Our investing activities primarily include capital expenditures, cash investments in customer financing assets, investments/dispositions of businesses, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, and settlements of derivative contracts not designated as hedging instruments.

Investing Activities - Continuing Operations. The $4,291 million change in cash flows (used in) provided by investing activities from continuing operations in the nine months ended September 30, 2021 compared to September 30, 2020 primarily relates to the absence of cash acquired in the Raytheon Merger in the prior year of $3.2 billion and the prior year sale of our Collins Aerospace military GPS and space-based precision optics businesses, partially offset by the current year sale of our Forcepoint business described below.

Capital expenditures in the nine months ended September 30, 2021 were relatively consistent with the nine months ended September 30, 2020.

Dispositions of businesses in the nine months ended September 30, 2021 was $1.1 billion, net of cash transferred and related to the sale of our Forcepoint business. Dispositions of businesses in the nine months ended September 30, 2020 were $2,575 million primarily related to the sale of our Collins Aerospace military GPS and space-based precision optics businesses for $2.3 billion in gross cash proceeds. For additional detail, see “Note 2: Acquisitions, Dispositions, Goodwill and Intangible Assets” within Item 1 of this Form 10-Q.

Customer financing assets (payments) receipts, net included payments of $175 million and $251 million in nine months ended September 30, 2021 and 2020, respectively, and receipts of $199 million and $113 million in the nine months ended September 30, 2021 and 2020, respectively. The decrease in payments was due to fewer engines added in the nine months ended 2021 compared to 2020. The increase in receipts was driven by a sale and leaseback transaction for the sale of equipment in the nine months ended September 30, 2021.

During the nine months ended September 30, 2021, we increased our collaboration intangible assets by $138 million, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce’s collaboration interests in International Aero Engines AG (IAE) based on hours flown on the V2500-powered aircrafts in service as of the agreement date.

As discussed in “Note 13: Financial Instruments” within Item 1 of this Form 10-Q, we enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency, interest rate and commodity price exposures. During the nine months ended September 30, 2021 and 2020, we had net cash receipts of $42 million and payments of $115 million, respectively, from the settlement of these derivative instruments not designated as hedging instruments.

During the quarter ended September 30, 2021, we entered into definitive agreements related to two pending acquisitions. On August 30, 2021, we entered into a definitive agreement to acquire FlightAware, a digital aviation company that operates flight tracking and data platforms, within our Collins Aerospace segment. On September 12, 2021, we entered into a definitive agreement to acquire SEAKR Engineering, Inc., a supplier of advanced space electronics, within our Raytheon Intelligence &

Space segment. We expect cash outflows related to these acquisitions to be approximately $1.0 billion. The closings of these transactions are subject to customary closing conditions, including receipt of regulatory approvals.

On September 8, 2021, we entered into a definitive agreement to divest our global training and logistics business within our Raytheon Intelligence & Space segment. The closing of the transaction is subject to customary closing conditions, including the receipt of required regulatory approvals.

Investing Activities - Discontinued Operations. The $241 million decrease in cash used in investing activities from discontinued operations in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 is primarily driven by outflows from short-term investment activity of $160 million and capital expenditures of $87 million in 2020 which did not recur in 2021, as the Separation Transactions occurred on April 3, 2020.

Cash Flow - Financing Activities


	Nine Months Ended September 30,
(dollars in millions)	2021		2020
Net cash flows used in financing activities from continuing operations	$	(5,182)	$	(2,056)
Net cash provided by (used in) financing activities from discontinued operations	27		(1,449)

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

Financing Activities - Continuing Operations. Financing activities were a cash outflow of $5.2 billion in the nine months ended September 30, 2021 compared to a cash outflow of $2.1 billion in the nine months ended September 30, 2020. This change was driven by the net changes in issuances and repayments of long-term debt not related to the Separation Transactions of $2.6 billion, and an increase in share repurchases of $2.0 billion, partially offset by the change in net cash transfers to discontinued operations of $2.0 billion.

Refer to “Note 9: Borrowings and Lines of Credit” within Item 1 of this Form 10-Q for additional information on debt issuances and repayments.

At September 30, 2021, management had remaining authority to repurchase approximately $3.0 billion of our common stock under the December 7, 2020 share repurchase program. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs, and under plans complying with Rules 10b5-1 and 10b-18 under the Exchange Act. We may also reacquire shares outside of the program from time to time in connection with the surrender of shares to cover taxes on vesting of restricted stock and as required under our employee savings plan. Our ability to repurchase shares is subject to applicable law.

Our share repurchases were as follows:


	Nine Months Ended September 30,
(dollars in millions; shares in thousands)	2021			2020
	$		Shares	$		Shares
Shares of Common Stock repurchased	$	2,000	24,152	$	47	330

Our Board of Directors authorized the following cash dividends:


	Nine Months Ended September 30,
(dollars in millions, except per share amounts)	2021		2020
Dividends paid per share of Common Stock	$	1.495	$	1.685
Total dividends paid	$	2,212	$	2,026

On June 21, 2021 the Board of Directors declared a dividend of $0.51 per share payable September 9, 2021 to shareowners of record at the close of business on August 20, 2021. Also, on October 13, 2021, the Board of Directors declared a dividend of $0.51 per share payable December 16, 2021 to shareowners of record at the close of business on November 19, 2021.

Financing Activities - Discontinued Operations. The $1,476 million increase in cash provided by financing activities from discontinued operations in the nine months ended September 30, 2021 compared to September 30, 2020 is driven by a $2.0 billion change in net transfer activity, partially offset by the absence of $703 million of debt extinguishment costs related to the early repayment of debt in the nine months ended September 30, 2020.

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