RTX CORPORATION BUSINESS OVERVIEW
We are a global premier systems provider of high technology products and services to the aerospace and defense industries.
We operate in four principal business segments: Collins Aerospace Systems (Collins),Pratt & Whitney ,Raytheon Intelligence & Space (RIS) andRaytheon Missiles & Defense (RMD). Unless the context otherwise requires, the terms "we," "our," "us," "the Company," "Raytheon Technologies ," and "RTC" meanRaytheon Technologies Corporation and its subsidiaries. RIS and RMD follow a 4-4-5 fiscal calendar while Collins andPratt & Whitney use a quarter calendar end. Throughout this Quarterly Report on Form 10-Q, when we refer to the quarters endedSeptember 30, 2022 andSeptember 30, 2021 with respect to RIS or RMD, we are referring to theirOctober 2, 2022 andOctober 3, 2021 fiscal quarter ends, respectively. The current status of significant factors affecting our business environment in 2022 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 2021 Annual Report on Form 10-K.
Industry Considerations
Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. Our operations include original equipment manufacturer (OEM) and extensive related aftermarket parts and services related to our aerospace operations. Our defense business serves both domestic and international customers primarily as a prime contractor or subcontractor on a broad portfolio of defense and related programs for government customers. Our business mix also reflects the combination of shorter cycles in our commercial aerospace spares contracts and certain service contracts in our defense business 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 andPratt & 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 andPratt & Whitney , which are inclusive of both spare parts and services. RIS, RMD, and the defense operations of Collins andPratt & Whitney are affected byU.S. Department of Defense (DoD ) budget and spending levels, changes in demand, changes in policy positions or priorities and the global political environment. In addition, our defense businesses engage in both direct commercial sales, which generally requireU.S. government licenses and approvals, as well as foreign military sales, which are government-to-government transactions initiated by, and carried out at the direction of, theU.S. government. Changes in these budget and spending levels, policies, or priorities, which are subject to geopolitical risks and threats, may impact our defense businesses, including the timing of and delays inU.S. government licenses and approvals for sales, the risk of sanctions or other restrictions.
Impact of the COVID-19 Pandemic
The coronavirus disease 2019 (COVID-19) pandemic continues to negatively affect the global economy, our business and operations, supply chains, and the industries in which we operate. However, we continue to see signs of ongoing recovery in commercial air travel. 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 when commercial air traffic capacity will fully return to and/or exceed pre-COVID-19 levels. Our expectations regarding the COVID-19 pandemic and ongoing recovery and their potential financial impact are based on available information and assumptions that we believe are reasonable at this time; however, the actual financial impact is highly uncertain and subject to a wide range of factors and future developments. Other Matters
Global economic and political conditions, changes in raw material and commodity prices and supply, labor availability and costs, inflation, interest rates, foreign currency exchange rates, energy costs, levels of air travel, the financial condition of
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commercial airlines, and the impact from natural disasters and weather conditions create uncertainties that could impact our businesses.
DuringAugust 2022 , the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Sciences Act and the Inflation Reduction Act were signed into law, each effective as ofJanuary 1, 2023 . This new legislation includes the implementation of a new corporate alternative minimum tax, an excise tax on stock buybacks, and tax incentives for energy and climate initiatives, among other provisions. We do not currently expect the legislation will have a material effect on our results of operations, financial condition or liquidity. In response to the Russian military's invasion ofUkraine onFebruary 24, 2022 , theU.S. government and the governments of various jurisdictions in which we operate, includingCanada , theUnited Kingdom , theEuropean Union , and others, have imposed broad economic sanctions and export controls targeting specific industries, entities and individuals inRussia . The Russian government has implemented similar counter-sanctions and export controls targeting specific industries, entities and individuals in theU.S. and other jurisdictions in which we operate. These government measures, among other limitations, restrict transactions involving various Russian banks and financial institutions and impose enhanced export controls limiting transfers of various goods, software and technologies to and fromRussia , including broadened export controls specifically targeting the aerospace sector. These measures have adversely affected and could continue to adversely affect the Company and/or our supply chain, business partners or customers; however, based on information available to date, we do not currently expect these issues will have a material adverse effect on our financial results. In the quarter endedMarch 31, 2022 , we reversed$1.3 billion of backlog, which would have been recognized over a span of approximately 10 years, and recorded certain impairment charges and increases to reserves related to operations at ourPratt & Whitney and Collins businesses, as discussed further in "Note 1: Basis of Presentation" within Item 1 of this Form 10-Q. We will continue to monitor future developments, including additional sanctions and other measures, that could adversely affect the Company and/or our supply chain, business partners or customers. In addition,the People's Republic of China (China ) previously announced that it may take measures against RTC in connection with certain foreign military sales toTaiwan . In addition,China has indicated that it decided to sanction our Chairman and Chief Executive OfficerGregory Hayes , in connection with another potential foreign military sale toTaiwan involving RTC products and services. RTC is not aware of any specific sanctions againstMr. Hayes or RTC, or the nature or timing of any future potential sanctions or countermeasures. IfChina 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 byChina cannot be determined at this time. Also, inJuly 2019 , theU.S. government suspendedTurkey's participation in the F-35 Joint Strike Fighter program becauseTurkey accepted delivery of the Russian-built S-400 air and missile defense system. TheU.S. has imposed, and may impose additional, sanctions onTurkey , as well as contractual restrictions on the use of Turkish sources on certain military programs, 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 ofU.S. sanctions or contractual prohibitions onTurkey 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. We have direct commercial sales contracts for products and services to certain foreign customers, for whichU.S. government review and approval have been pending. TheU.S. government's approval of these sales is subject to a range of factors, including its foreign policies related to these customers, which are subject to continuing review and potential changes. Likewise, regulatory approvals previously granted for prior sales can be paused or revoked if the products and services have not yet been delivered to the customer. 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 ofSeptember 30, 2022 , our Contract liabilities include approximately$355 million of advance payments received from aMiddle 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.
See Part I, Item 1A, "Risk Factors" in our 2021 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 2021 Annual Report on Form 10-K, which
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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 endedSeptember 30, 2022 . RESULTS OF OPERATIONS As described in our "Cautionary Note Concerning Factors That May Affect Future Results" 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. We provide the organic change in Net sales and Cost of sales for our consolidated results of operations as well as the organic change in Net sales and Operating profit for our segments. We believe that these non-Generally Accepted Accounting Principles (non-GAAP) measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability. The organic change in Net sales, Cost of sales and Operating profit excludes acquisitions and divestitures, net, and the effect of foreign currency exchange rate translation fluctuations and other significant non-recurring and non-operational items ("Other"). Additionally, the organic change in Cost of sales and Operating profit excludes restructuring costs, the FAS/CAS operating adjustment and costs related to certain acquisition accounting adjustments. Restructuring costs generally arise from severance related to workforce reductions and facility exit costs. 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. Net Sales Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2022 2021 2022 2021 Net sales$ 16,951 $ 16,213 $ 48,981$ 47,344
The factors contributing to the change year-over-year in total net sales for the
quarter and nine months ended
Quarter Ended Nine Months Ended
(dollars in millions) September 30, 2022 September 30, 2022
Organic(1) $ 1,021 $ 2,382
Acquisitions and divestitures, net (185) (539)
Other (98) (206)
Total change $ 738 $ 1,637
(1) See "Results of Operations" for definition of organic. A reconciliation of
this measure to the reported
Net sales increased$1,021 million organically in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 primarily due to higher organic sales of$0.7 billion atPratt & Whitney and$0.6 billion at Collins, partially offset by lower organic sales of$0.2 billion at RMD. The$185 million decrease in net sales related to Acquisitions and divestitures, net for the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 , was primarily driven by the sale of our global training and services business within our RIS segment in the fourth quarter of 2021.
The decrease in other net sales of
Net sales increased$2,382 million organically in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 primarily due to higher organic sales of$1.9 billion atPratt & Whitney and$1.6 billion at Collins, partially offset by lower organic sales of$0.9 billion at RMD. The$539 million decrease in net sales related to Acquisitions and divestitures, net for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , was primarily driven by the sale of our global training and services business within our RIS segment in the fourth quarter of 2021.
The decrease in other net sales of
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See "Segment Review" below for further information by segment.
Quarter Ended September 30, % of Total Net Sales
(dollars in millions) 2022 2021 2022 2021
Net Sales
Products $ 12,756 $ 12,331 75.3 % 76.1 %
Services 4,195 3,882 24.7 % 23.9 %
Total net sales $ 16,951 $ 16,213 100 % 100 %
Refer to "Note 17: Segment Financial Data" within Item 1 of this Form 10-Q for the composition of external net sales by products and services by segment.
Net products sales increased
Net services sales increased$313 million in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 primarily due to increases in external services sales of$0.3 billion atPratt & Whitney and$0.1 billion at Collins, partially offset by a decrease in external services sales of$0.2 billion at RIS primarily driven by the sale of the global training and services business in the fourth quarter of 2021. Nine Months Ended September 30, % of Total Net Sales (dollars in millions) 2022 2021 2022 2021Net Sales Products $ 36,876$ 36,174 75.3 % 76.4 % Services 12,105 11,170 24.7 % 23.6 % Total net sales $ 48,981$ 47,344 100 % 100 % Net products sales increased$702 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 due to increases in external products sales of$0.9 billion atPratt & Whitney and$0.9 billion at Collins, partially offset by decreases in external products sales of$0.9 billion at RMD and$0.2 billion at RIS. Net services sales increased$935 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 primarily due to increases in external services sales of$0.9 billion atPratt & Whitney and$0.4 billion at Collins, partially offset by a decrease in external services sales of$0.4 billion at RIS primarily driven by the sale of the global training and services business in the fourth quarter of 2021.
Our sales to major customers were as follows:
Quarter Ended September 30, % of Total Net Sales
(dollars in millions) 2022 2021 2022 2021
Sales to the U.S. government(1) $ 7,555 $ 7,737 44.6 % 47.7 %
Foreign military sales through the U.S.
government 1,275 1,364 7.5 % 8.4 %
Foreign government direct commercial
sales 1,064 1,242 6.3 % 7.7 %
Commercial aerospace and other commercial
sales 7,057 5,870 41.6 % 36.2 %
Total net sales $ 16,951 $ 16,213 100 % 100 %
(1) Excludes foreign military sales through the U.S. government.
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Nine Months Ended September 30, % of Total Net Sales
(dollars in millions) 2022 2021 2022 2021
Sales to the U.S. government(1) $ 22,452 $ 23,155 45.8 % 48.9 %
Foreign military sales through the U.S.
government 3,632 4,156 7.4 % 8.8 %
Foreign government direct commercial
sales 3,118 3,735 6.4 % 7.9 %
Commercial aerospace and other commercial
sales 19,779 16,298 40.4 % 34.4 %
Total net sales $ 48,981 $ 47,344 100 % 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) 2022 2021 2022 2021
Total cost of sales $ 13,464 $ 13,089 $ 38,880 $ 38,281
Percentage of net sales 79.4 % 80.7 % 79.4 % 80.9 %
The factors contributing to the change year-over-year in total cost of sales for
the quarter and nine months ended
Quarter Ended Nine Months Ended
(dollars in millions) September 30, 2022 September 30, 2022
Organic(1) $ 650 $ 1,156
Acquisitions and divestitures, net (155) (448)
Restructuring 13 (5)
FAS/CAS operating adjustment 105 181
Acquisition accounting adjustments (113) (235)
Other (125) (50)
Total change $ 375 $ 599
(1) See "Results of Operations" for definition of organic. A reconciliation of
this measure to the reported
The organic increase in total cost of sales of$650 million for the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 was primarily driven by the organic sales increases atPratt & Whitney and Collins, partially offset by the organic sales decrease at RMD noted above. The$155 million decrease in cost of sales related to Acquisitions and divestitures, net for the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 , was primarily driven by the sale of our global training and services business within our RIS segment in the fourth quarter of 2021.
The decrease in other cost of sales of
The organic increase in total cost of sales of$1,156 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , was primarily driven by the organic sales increases atPratt & Whitney and Collins, partially offset by the organic sales decrease at RMD noted above. The$448 million decrease in cost of sales related to Acquisitions and divestitures, net for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , was primarily driven by the sale of our global training and services business within our RIS segment in the fourth quarter of 2021. The decrease in other cost of sales of$50 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , was primarily driven by the impact of foreign exchange, partially offset by charges recorded during the first quarter of 2022 atPratt & Whitney and Collins related to impairment of customer financing assets for products under lease, inventory reserves, purchase order obligations, and the impairment of contract fulfillment costs that are no longer recoverable, all due to global sanctions on and export controls with respect toRussia . See "Note 1: Basis of Presentation" within Item 1 of this Form 10-Q for additional information. 35
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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) 2022 2021 2022 2021
Cost of sales
Products $ 10,493 $ 10,296 61.9 % 63.5 %
Services 2,971 2,793 17.5 % 17.2 %
Total cost of sales $ 13,464 $ 13,089 79.4 % 80.7 %
Net products cost of sales increased $197 million in the quarter ended
September 30, 2022 compared to the quarter ended September 30, 2021 primarily
due to increases at Collins and Pratt & Whitney , partially offset by decreases
at RMD and a decrease in Acquisition accounting adjustments. The changes at
Collins, Pratt & Whitney , and RMD were related to the changes in products sales
noted above.
Net services cost of sales increased $178 million in the quarter ended
September 30, 2022 compared to the quarter ended September 30, 2021 primarily
due to an increase in external services cost of sales at Pratt & Whitney ,
partially offset by a decrease in external services sales at RIS, both driven by
the services sales changes noted above.
Nine Months Ended September 30, % of Total Net Sales
(dollars in millions) 2022 2021 2022 2021
Cost of sales
Products $ 30,353 $ 30,267 62.0 % 63.9 %
Services 8,527 8,014 17.4 % 16.9 %
Total cost of sales $ 38,880 $ 38,281 79.4 % 80.9 %
Net products cost of sales increased $86 million in the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021
primarily due to increases at Collins and Pratt & Whitney , partially offset by
decreases at RMD and RIS and in Acquisition Accounting Adjustments. The changes
at RMD, RIS, Collins, and Pratt & Whitney were related to the changes in
products sales noted above.
Net services cost of sales increased $513 million in the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021
primarily due to increases in external services cost of sales at Pratt & Whitney
and Collins, partially offset by a decrease in external services sales at RIS,
all driven by the services sales changes noted above.
Research and Development
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Company-funded $ 662 $ 676 $ 1,995 $ 1,922
Percentage of net sales 3.9 % 4.2 % 4.1 % 4.1 %
Customer-funded (1) $ 1,125 $ 1,125 $ 3,300 $ 3,414
Percentage of net sales 6.6 % 6.9 % 6.7 % 7.2 %
(1) Included in cost of sales in our Condensed Consolidated Statement of Operations.
Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected.
Company-funded and customer-funded research and development in the quarter ended
Company-funded research and development as a percentage of net sales for the nine months endedSeptember 30, 2022 was relatively consistent with the nine months endedSeptember 30, 2021 . The company-funded research and development increase was principally driven by increased spending atPratt & Whitney on various commercial programs. The decrease in customer-funded research and development of$114 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily driven by lower expenses on various military programs 36
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at Collins and lower expenses spread across various programs at RMD, partially offset by an increase in expenses on the Next Generation Interceptor (NGI) program awarded in the second quarter of 2021 at RMD.
Selling, General and Administrative
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Selling, general and administrative expenses $ 1,391 $ 1,229 $ 4,284 $ 3,817
Percentage of net sales 8.2 % 7.6 % 8.7 % 8.1 %
Selling, general and administrative expenses increased $162 million in the
quarter ended September 30, 2022 compared to the quarter ended September 30,
2021 primarily driven by higher combined expenses of $0.1 billion at Collins and
Pratt & Whitney principally driven by higher employee-related costs and by
higher information technology (IT)-related costs at Corporate.
Selling, general and administrative expenses increased $467 million in the nine
months ended September 30, 2022 compared to the nine months ended September 30,
2021 primarily driven by higher combined expenses of $0.4 billion at Collins and
Pratt & Whitney principally driven by higher employee-related costs and by $71
million of charges related to increased estimates for credit losses due to
global sanctions on and export controls with respect to Russia . See "Note 1:
Basis of Presentation" within Item 1 of this Form 10-Q for additional
information on Russia sanctions.
We are continuously evaluating our cost structure and have implemented restructuring actions in an effort to keep our cost structure competitive. As appropriate, the amounts reflected above include the beneficial impact of previous restructuring actions on Selling, general and administrative expenses.
Other Income, Net
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Other income, net $ 46 $ 124 $ 91 $ 314
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
The decrease in Other income, net of$223 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily due to$69 million of charges associated with the disposition of two non-core businesses at Collins in the second quarter of 2022, the absence of prior year foreign government wage subsidies related to COVID-19 atPratt & Whitney of$52 million and a$23 million loss resulting from the exit of our investment in aRussia -based joint venture at Collins in the first quarter of 2022. The above items were partially offset by a net favorable year-over-year impact of foreign exchange gains and losses of$38 million with the remaining change spread across multiple items with no common or significant driver. Operating Profit Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2022 2021 2022 2021 Operating profit $ 1,480$ 1,343 $ 3,913$ 3,638 Operating profit margin 8.7 % 8.3 % 8.0 % 7.7 %
The increase in Operating profit of
The increase in Operating profit of
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Non-service Pension Income
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Non-service pension income $ (468) $
(491) $ (1,422)
The change in Non-service pension income of$23 million for the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 included the impact of an increase in the discount rate, partially offset by prior years' pension asset returns exceeding our expected return on assets (EROA) assumption. The change in Non-service pension income of$50 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 included the impact of an increase in the discount rate, partially offset by prior years' pension asset returns exceeding our EROA assumption. Interest Expense, Net Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2022 2021 2022 2021 Interest expense $ 326 $ 336 $ 968$ 1,008 Interest income (10) (9) (54) (24) Other non-operating expense (income)(1) (5) 31 44 62 Interest expense, net $ 311 $ 358 $ 958$ 1,046 Average interest expense rate 4.0 % 4.2 % 4.0 % 4.1 % (1) Primarily consists of the gains or losses on assets associated with certain of our nonqualified deferred compensation and employee benefit plans, as well as the gains or losses on liabilities associated with certain of our nonqualified deferred compensation plans.
The decrease in interest expense, net of
The decrease in interest expense, net of$88 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily due to a$40 million decrease in Interest expense, a$30 million increase in Interest income, and an$18 million decrease in Other non-operating expenses. The decrease in Interest expense was primarily due to repayments of higher interest rate long-term debt during 2021, partially offset by debt issuances with lower interest rates during 2021. The increase in Interest income was primarily due to adjustments of certain tax-related interest reserves in the first quarter of 2022. The decrease in Other non-operating expense (income) was primarily due to the absence of$32 million of net debt extinguishment costs in the prior year. Income Taxes Quarter Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Effective income tax rate 14.8 % 0.2 % 11.8 % 17.0 % The effective tax rate in the quarter endedSeptember 30, 2022 includes a benefit of approximately 4 percentage points primarily related to an incremental Foreign Derived Intangible Income (FDII) benefit and other effects created by the capitalization of research or experimental expenditures for tax-purposes, which was enacted as part of the Tax Cuts and Jobs Act of 2017 and became effective onJanuary 1, 2022 . Tax expense in the quarter endedSeptember 30, 2021 includes deferred tax benefits of$244 million associated with legal entity and operational reorganizations implemented in the third quarter of 2021. The effective tax rate in the nine months endedSeptember 30, 2022 includes a benefit of approximately 5 percentage points primarily related to an incremental FDII benefit and other effects created by the capitalization of research or experimental expenditures for tax-purposes, which was enacted as part of the Tax Cuts and Jobs Act of 2017 and became effective onJanuary 1, 2022 . Tax expense in the nine months endedSeptember 30, 2021 includes deferred tax benefits of$244 million associated with legal entity and operational reorganizations implemented in the third quarter of 2021, tax charges incremental to theU.S. statutory rate of$148 million associated with the sale of the Forcepoint business, as described in "Note 2: Acquisitions, Dispositions,Goodwill and Intangible Assets" within Item 1 of this Form 10-Q, and$73 million associated with the revaluation of deferred taxes resulting from the increase in theUnited Kingdom (U.K. ) corporate tax rate to 25% enacted in 2021. Subsequently, in the fourth quarter of 2021, we recognized an incremental$104 million tax benefit due to the revaluation of the Forcepoint tax benefit as a result of completing the divestiture of RIS's global training and services business. 38
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Net Income from Continuing Operations Attributable to Common Shareowners
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions, except per share
amounts) 2022 2021 2022 2021
Net income from continuing operations
attributable to common shareowners
3,794 $ 3,212
Diluted earnings per share from continuing
operations $ 0.94 $ 0.93 $ 2.55 $ 2.13
Net income from continuing operations attributable to common shareowners for the
quarter ended September 30, 2022 includes the following:
•acquisition accounting adjustments of $379 million , net of tax, which had an
unfavorable impact on diluted earnings per share (EPS) from continuing
operations of $0.26 ; and
•income of $65 million related to the capitalization of research or experimental
expenditures for tax purposes, which had a net favorable impact on diluted EPS
from continuing operations of $0.04 .
Net income from continuing operations attributable to common shareowners for the
quarter ended September 30, 2021 includes the following:
•acquisition accounting adjustments of $456 million , net of tax, which had an
unfavorable impact on diluted 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 from continuing operations attributable to common shareowners for the
nine months ended September 30, 2022 includes the following:
•acquisition accounting adjustments of $1,107 million , net of tax, which had an
unfavorable impact on diluted EPS from continuing operations of $0.74 ;
•impairment charges and reserve adjustments related to the global sanctions on
and export controls with respect to Russia of $210 million , net of tax, which
had an unfavorable impact on diluted EPS from continuing operations of $0.14 ;
and
•income of $159 million related to the capitalization of research or
experimental expenditures for tax purposes, which had a net favorable impact on
diluted EPS from continuing operations of $0.11 .
Net income from continuing operations attributable to common shareowners for the
nine months ended September 30, 2021 includes the following:
•acquisition accounting adjustments 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 ; and
•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 .
Net Income Attributable to Common Shareowners
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions, except per share
amounts) 2022 2021 2022 2021
Net income attributable to common
shareowners $ 1,387 $ 1,393 $ 3,775 $ 3,178 Diluted earnings per share from operations $ 0.94
2.54 $ 2.10
The decrease in net income attributable to common shareowners and diluted
earnings per share from operations for the quarter ended September 30, 2022
compared to the quarter ended September 30, 2021 and for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 was
primarily driven by the decreases in continuing operations, as discussed above
in Net Income from Continuing Operations Attributable to Common Shareowners.
SEGMENT REVIEW
Our operations, for the periods presented herein, are classified into four
principal segments: Collins, Pratt & Whitney , RIS and RMD. 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
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eliminated within Eliminations and other, which also includes certain smaller non-reportable segments. Segment results exclude certain acquisition accounting adjustments, the FAS/CAS operating adjustment and certain corporate expenses, as further discussed below. Given the nature of our business, we believe that total net sales and operating profit (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. We provide the organic change in Net sales and Operating profit for our segments as discussed above in "Results of Operations." We believe that these non-GAAP measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability. ForPratt & Whitney only, Other also includes the transactional impact of foreign exchange hedging atPratt & Whitney Canada due to its significance toPratt & Whitney's overall operating results.
Total
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Collins Aerospace Systems $ 5,100 $
4,592 $ 14,935
5,380 4,725 14,878 13,035
Raytheon Intelligence & Space 3,626 3,740 10,768 11,310
Raytheon Missiles & Defense 3,678 3,902 10,763 11,680
Total segment 17,784 16,959 51,344 49,532
Eliminations and other (833) (746) (2,363) (2,188)
Consolidated $ 16,951 $ 16,213 $ 48,981 $ 47,344 Operating Profit. Operating profit by segment was as follows:
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Collins Aerospace Systems $ 616 $ 478 $ 1,602 $ 1,298
Pratt & Whitney 316 187 769 319
Raytheon Intelligence & Space 371 391 1,064 1,194
Raytheon Missiles & Defense 408 490 1,143 1,518
Total segment 1,711 1,546 4,578 4,329
Eliminations and other (50) (27) (131) (98)
Corporate expenses and other
unallocated items (77) (89) (255) (319)
FAS/CAS operating adjustment 378 499 1,135 1,347
Acquisition accounting adjustments (482) (586) (1,414) (1,621)
Consolidated $ 1,480 $ 1,343 $ 3,913 $ 3,638
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 may
reflect improved or deteriorated operating performance, as well as changes in
facts and assumptions related to contract options, contract modifications,
incentive and award fees associated with program performance, customer activity
levels, and other customer-directed changes. For a full description of our EAC
process, refer to "Note 4: Changes in Contract Estimates at Completion" within
Item 1 of this Form 10-Q. Given that we have thousands of individual contracts
and given the types and complexity of the assumptions and estimates we must make
on an on-going basis and the nature of the work required to perform under our
contracts, we have both favorable and unfavorable EAC adjustments in the
ordinary course.
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We had the following aggregate EAC adjustments for the periods presented:
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Gross favorable $ 339 $ 334 $ 1,002 $ 955
Gross unfavorable (332) (309) (1,000) (891)
Total net EAC adjustments $ 7 $ 25 $ 2 $ 64
The change in net EAC adjustments of $18 million in the quarter ended
September 30, 2022 compared to the quarter ended September 30, 2021 was
primarily due to unfavorable changes in net EAC adjustments of $21 million at
RMD spread across numerous individual programs with no individual or common
significant driver and includes the impact of continued supply chain and labor
market constraints.
The change in net EAC adjustments of $62 million in the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 was
primarily due to unfavorable changes in net EAC adjustments of $143 million at
RMD and $59 million at RIS, including the impact of acquisitions and
dispositions, both spread across numerous individual programs with no individual
or common significant driver. These unfavorable changes were partially offset by
a favorable change in net EAC adjustments of $105 million at Collins, spread
across numerous individual programs with no individual or common significant
driver, and a favorable change in net EAC adjustments of $35 million at Pratt &
Whitney primarily due to a $50 million favorable contract adjustment resulting
from a contract modification on a commercial aftermarket program in the second
quarter of 2022.
Significant EAC adjustments, when they occur, are discussed in each business segment's discussion below.
Backlog and Defense Bookings. Total backlog was approximately$168 billion and$156 billion as ofSeptember 30, 2022 andDecember 31, 2021 , respectively, which includes defense backlog of$67 billion and$63 billion as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. In the quarter endedMarch 31, 2022 , we reversed$1.3 billion of backlog at ourPratt & Whitney and Collins businesses, as discussed further in "Note 1: Basis of Presentation" within Item 1 of this Form 10-Q. Our defense operations consist primarily of our RIS and RMD businesses and operations in the defense businesses within our Collins andPratt & Whitney segments. Defense bookings were approximately$12 billion and$10 billion for the quarters endedSeptember 30, 2022 and 2021, respectively, and approximately$34 billion and$30 billion for the nine months endedSeptember 30, 2022 and 2021, respectively. Defense bookings are impacted by the timing and amounts of awards in a given period, which are subject to numerous factors, including: the desired capability by the customer and urgency of customer needs, customer budgets and other fiscal constraints, political and economic and other environmental factors, the timing of customer negotiations, and the timing of governmental approvals and notifications. In addition, due to these factors, quarterly bookings tend to fluctuate from period to period, particularly on a segment basis. Collins Aerospace Systems Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2022 2021 Change 2022 2021 Change Net sales $ 5,100$ 4,592 11 % $ 14,935$ 13,507 11 % Operating profit 616 478 29 % 1,602 1,298 23 % Operating profit margins 12.1 % 10.4 % 10.7 % 9.6 % Quarter EndedSeptember 30, 2022 Compared with Quarter EndedSeptember 30, 2021 Factors Contributing to Total Change Acquisitions / Restructuring (dollars in millions) Organic(1) Divestitures, net Costs Other Total Change Net sales $ 587 $ (21) $ -$ (58) $ 508 Operating profit 158 (3) (12) (5) 138
(1) See "Segment Review" above for definition of organic. A reconciliation of
these measures to reported
The organic sales increase of$0.6 billion in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 primarily relates to higher commercial aerospace aftermarket sales of$0.4 billion , including increases across all aftermarket sales channels, and higher commercial aerospace OEM sales of$0.2 billion . These increases were principally driven by the recovery of commercial air traffic which has resulted in an increase in flight hours, aircraft fleet 41
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utilization and narrow-body commercial OEM volume growth. This was partially offset by lower military sales of$0.1 billion in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 primarily due to lower material receipts and decreased volume. The organic profit increase of$0.2 billion in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 was primarily due to higher commercial aerospace operating profit of$0.3 billion , principally driven by the higher commercial aerospace aftermarket sales discussed above. This increase in commercial aerospace operating profit was partially offset by lower military operating profit of$0.1 billion principally driven by lower military sales volume, and higher combined selling, general and administrative expenses and research and development costs of$0.1 billion . Nine Months EndedSeptember 30, 2022 Compared with Nine Months EndedSeptember 30, 2021 Factors
Contributing to Total Change
Acquisitions / Restructuring
(dollars in millions) Organic(1) Divestitures, net Costs Other Total Change
Net sales $ 1,576 $ (21) $ - $ (127) $ 1,428
Operating profit 498 (10) 13 (197) 304
(1) See "Segment Review" above for definition of organic. A reconciliation of
these measures to reported
The organic sales increase of$1.6 billion in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 primarily relates to higher commercial aerospace aftermarket sales of$1.3 billion , including increases across all aftermarket sales channels, and higher commercial aerospace OEM sales of$0.6 billion , both principally driven by the recovery of commercial air traffic which has resulted in an increase in flight hours, aircraft fleet utilization and narrow-body commercial OEM volume growth. These increases were partially offset by lower military sales of$0.4 billion in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to lower material receipts and expected declines in F-35 volume. The organic profit increase of$0.5 billion in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 is primarily due to higher commercial aerospace operating profit of$1.0 billion principally driven by the higher commercial aerospace aftermarket sales discussed above, partially offset by the absence of a$33 million favorable impact from a contract related matter in the nine months endedSeptember 30, 2021 . This increase in commercial aerospace operating profit was partially offset by lower military operating profit of$0.2 billion principally driven by the lower military sales discussed above, and higher selling, general and administrative expenses of$0.2 billion . The decrease in Other operating profits of$197 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily due to$141 million of pretax charges related to increased estimates for credit losses, inventory reserves, recognition of purchase order obligations and a loss resulting from the exit of our investment in aRussia -based joint venture, all due to global sanctions on and export controls with respect toRussia in the first quarter of 2022. In addition, we recognized$69 million of charges associated with the disposition of two non-core businesses in the second quarter of 2022. See "Note 1: Basis of Presentation" within Item 1 of this Form 10-Q for additional information onRussia sanctions.Pratt & Whitney Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2022 2021 Change 2022 2021 Change Net sales $ 5,380$ 4,725 14 % $ 14,878$ 13,035 14 % Operating profit 316 187 69 % 769 319 141 % Operating profit margins 5.9 % 4.0 % 5.2 % 2.4 % Quarter EndedSeptember 30, 2022 Compared with Quarter EndedSeptember 30, 2021 Factors Contributing to Total Change Acquisitions / Restructuring (dollars in millions) Organic(1) Divestitures, net Costs Other Total Change Net sales$ 686 $ - $ -$ (31) $ 655 Operating profit 137 - - (8) 129
(1) See "Segment Review" above for definition of organic. A reconciliation of
these measures to reported
The organic sales increase of$0.7 billion in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 reflects higher commercial aftermarket sales of$0.5 billion primarily due to an increase in shop visits and 42
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related spare part sales as the commercial aerospace environment continues to recover. The increase also includes higher commercial OEM sales of$0.2 billion primarily driven by favorable mix and higher volume on commercial engine shipments. These increases were partially offset by a slight decline in military sales reflecting expected lower F135 production volume, partially offset by higher F135 sustainment volume. The organic profit increase of$0.1 billion in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 was primarily driven by higher commercial aerospace operating profit of$0.2 billion principally due to the aftermarket sales increase discussed above and favorable commercial OEM mix. The increase also includes slightly higher military operating profit primarily driven by favorable mix. These increases were partially offset by a combined increase in selling, general and administrative expenses and research and development costs of$0.1 billion . Nine Months EndedSeptember 30, 2022 Compared with Nine Months EndedSeptember 30, 2021
Factors Contributing to Total Change
Acquisitions / Restructuring
(dollars in millions) Organic(1) Divestitures, net Costs Other Total Change
Net sales $ 1,913 $ - $ - $ (70) $ 1,843
Operating profit 624 - 1 (175) 450
(1) See "Segment Review" above for definition of organic. A reconciliation of
these measures to reported
The organic sales increase of$1.9 billion in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 reflects higher commercial aftermarket sales of$1.5 billion primarily due to an increase in shop visits and related spare part sales as the commercial aerospace environment continues to recover. The increase also includes higher commercial OEM sales of$0.5 billion driven by favorable mix and higher volume on commercial engine shipments. These increases were partially offset by lower military sales of$0.1 billion primarily due to lower sales on F135 production volume, partially offset by higher F135 sustainment volume. The organic profit increase of$0.6 billion in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily driven by higher commercial aerospace operating profit of$1.0 billion principally due to the aftermarket sales volume increase discussed above and favorable OEM mix. The organic profit increase also includes slightly higher military operating profit primarily driven by favorable mix. These increases were partially offset by a combined increase in selling, general and administrative expenses and research and development costs of$0.2 billion . In the nine months endedSeptember 30, 2022 , our organic profit included a$50 million favorable contract adjustment resulting from a contract modification on a commercial aftermarket program in the second quarter of 2022, which impacted our commercial aerospace operating profit. In the nine months endedSeptember 30, 2021 our organic profit included$52 million related to foreign government wage subsidies due to COVID-19. The decrease in Other operating profit of$175 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily due to$155 million of pretax charges related to impairment of customer financing assets for products under lease, increased estimates for credit losses, inventory reserves and recognition of purchase order obligations, all due to global sanctions on and export controls with respect toRussia in the first quarter of 2022. See "Note 1: Basis of Presentation" within Item 1 of this Form 10-Q for additional information. Defense Bookings - In addition to a number of smaller bookings, in the quarter endedSeptember 30, 2022 ,Pratt & Whitney booked$524 million for F135 sustainment and$278 million for expanded scope on F135 production Lots 15 and 16. In addition to these bookings, in the nine months endedSeptember 30, 2022 Pratt & Whitney booked$4.0 billion for F135 production Lots 15 and 16,$408 million for F135 sustainment, and$251 million for tanker production Lots 7 and 8.
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 Change 2022 2021 Change
Net sales $ 3,626 $ 3,740 (3) % $ 10,768 $ 11,310 (5) %
Operating profit 371 391 (5) % 1,064 1,194 (11) %
Operating profit margins 10.2 % 10.5 % 9.9 % 10.6 %
Bookings $ 3,897 $ 2,894 35 % $ 9,469 $ 10,572 (10) %
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Quarter EndedSeptember 30, 2022 Compared with Quarter EndedSeptember 30, 2021 Factors Contributing to Total Change in Net Sales Acquisitions / (dollars in millions) Organic(1) Divestitures, net Other Total Change Net sales $ 68 $ (164)$ (18) $ (114) (1) See "Segment Review" above for definition of organic. A reconciliation of this measure to the reportedU.S. GAAP amount is provided in the table above. Factors Contributing to Change in Operating Profit Net change in EAC Acquisitions / Mix and other (dollars in millions) Volume adjustments Divestitures, net performance Total Change Operating profit $ 5 $ 9 $ (28) $ (6) $ (20) Organic sales in the quarter endedSeptember 30, 2022 were relatively consistent with the quarter endedSeptember 30, 2021 . Included in the organic change in sales were higher Sensing and Effects sales of$0.2 billion due to certain development programs transitioning into production and an increase in sales on classified programs, partially offset by lower Command,Control and Communications sales of$0.1 billion primarily driven by an anticipated decrease in production volumes on certain tactical communications systems programs. The decrease in operating profit of$20 million , and the related decrease in operating profit margins, in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 , were primarily due to acquisitions / divestitures, net described below, partially offset by the net favorable change in EAC adjustments of$9 million , which was spread across numerous programs.
The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the sale of the global training and services business in the fourth quarter of 2021.
Nine Months Ended
September 30, 2021
Factors Contributing to Total Change in Net Sales
Acquisitions /
(dollars in millions) Organic(1) Divestitures, net Other Total Change
Net sales $ 15 $ (518) $ (39) $ (542)
(1) See "Segment Review" above for definition of organic. A reconciliation of
this measure to the reported U.S. GAAP amount is provided in the table above.
Factors Contributing to Change in Operating Profit
Net change in EAC Acquisitions / Mix and other
(dollars in millions) Volume adjustments Divestitures, net performance Total Change
Operating profit $ 4 $ (29) $ (92) $ (13) $ (130)
Organic sales in the nine months ended September 30, 2022 were relatively
consistent with the nine months ended September 30, 2021 . Included in the
organic change in sales were higher Sensing and Effects sales of $0.1 billion ,
and higher Cyber, Training and Services sales of $0.1 billion on certain
classified cyber programs, offset by lower Command, Control and Communications
sales of $0.2 billion . The higher Sensing and Effects sales includes an increase
due to certain development programs transitioning into production, an increase
in sales on classified programs, and a decrease in surveillance and targeting
systems due to lower production volume. The lower Command, Control and
Communications sales were primarily driven by an anticipated decrease in
production volumes on certain tactical communications systems programs.
The decrease in operating profit of $130 million , and the related decrease in
operating profit margins, in the nine months ended September 30, 2022 compared
to the nine months ended September 30, 2021 , were primarily due to acquisition /
divestitures, net described below and the net unfavorable change in EAC
adjustments of $29 million , which was spread across numerous programs.
The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the sale of the global training and services business in the fourth quarter of 2021.
Backlog and Bookings- Backlog was$17 billion atSeptember 30, 2022 and$18 billion atDecember 31, 2021 . In addition to a number of smaller bookings, in the quarter endedSeptember 30, 2022 , RIS booked$1.6 billion on a number of classified contracts. In addition to these bookings, in the nine months endedSeptember 30, 2022 , RIS booked$2.3 billion on a number of classified contracts,$311 million on the Next-Generation Overhead Persistent Infrared (Next-Gen OPIR) GEO missile warning 44
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and defense contract for the
Raytheon Missiles & Defense Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2022 2021 Change 2022 2021 Change Net sales$ 3,678 $ 3,902 (6) %$ 10,763 $ 11,680 (8) % Operating profit 408 490 (17) % 1,143 1,518 (25) % Operating profit margins 11.1 % 12.6 % 10.6 % 13.0 % Bookings$ 5,415 $ 3,901 39 %$ 14,052 $ 12,487 13 % Quarter EndedSeptember 30, 2022 Compared with Quarter EndedSeptember 30, 2021 Factors Contributing to Total Change in Net Sales Acquisitions / (dollars in millions) Organic(1) Divestitures, net Other Total Change Net sales $ (209) $ -$ (15) $ (224)
(1) See "Segment Review" above for definition of organic. A reconciliation of
this measure to the reported
Factors Contributing to Change in Operating Profit
Net change in EAC Acquisitions / Mix and other
(dollars in millions) Volume adjustments Divestitures, net performance Total Change
Operating profit $ (19) $ (21) $ - $ (42) $ (82)
The organic sales decrease of $209 million in the quarter ended
September 30, 2022 compared to the quarter ended September 30, 2021 was
primarily due to lower net sales of $0.2 billion from our Land Warfare and Air
Defense programs, including certain international air and missile defense
programs, primarily driven by lower material receipts as a result of supply
chain constraints and anticipated decreases in production, and lower net sales
of $0.1 billion from our Naval Power programs due to lower volumes across
multiple programs, partially offset by higher net sales on SPY-6 programs. These
declines were partially offset by higher net sales of $0.2 billion from our
Strategic Missile Defense programs, which included higher net sales on the NGI
program.
The decrease in operating profit of $82 million in the quarter ended
September 30, 2022 compared to the quarter ended September 30, 2021 , was due to
a change in mix and other performance of $42 million , a net unfavorable change
in EAC adjustments of $21 million , and lower volume of $19 million . The changes
in mix and other performance and volume were principally driven by the lower net
sales on the Land Warfare and Air Defense programs discussed above. The net
unfavorable change in EAC adjustments was spread across numerous programs and
includes the impact of continued supply chain and labor market constraints. The
decrease in operating profit margins in the quarter ended September 30, 2022
compared to the quarter ended September 30, 2021 , was primarily due to the
change in mix and other performance and the net change in EAC adjustments.
Nine Months Ended September 30, 2022 Compared with Nine Months Ended
September 30, 2021
Factors Contributing to Total Change in Net Sales
Acquisitions /
(dollars in millions) Organic(1) Divestitures, net Other Total Change
Net sales $ (883) $ - $ (34) $ (917) (1) See "Segment Review" above for definition of organic. A reconciliation of
this measure to the reported
Factors Contributing to Change in Operating Profit
Net change in EAC Acquisitions / Mix and other
(dollars in millions) Volume adjustments Divestitures, net performance Total Change
Operating profit $ (77) $ (143) $ - $ (155) $ (375)
The organic sales decrease of $883 million in the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 was
primarily due to lower net sales of $0.7 billion from our Land Warfare and Air
Defense programs, including certain international air and missile defense
programs, primarily driven by lower material receipts as a result of supply
chain constraints and anticipated decreases in production; lower net sales of
$0.3 billion from our Air Power programs,
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including lower net sales on the Paveway program and theAdvanced Medium Range Air -to-Air Missile (AMRAAM) program; and lower net sales of$0.3 billion on ourNaval Power programs due to lower volumes across multiple programs, partially offset by higher net sales from SPY-6 programs. These decreases were partially offset by higher net sales of$0.3 billion from our Strategic Missile Defense programs which included higher net sales from the NGI program. The decrease in operating profit of$375 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 was primarily due to a change in mix and other performance of$155 million , a net unfavorable change in EAC adjustments of$143 million , and lower volume of$77 million . The changes in mix and other performance and volume were principally driven by the lower net sales on the Land Warfare and Air Defense programs discussed above. The net unfavorable change in EAC adjustments was spread across numerous programs and includes the impact of continued supply chain and labor market constraints. The decrease in operating profit margins in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , was primarily due to the change in mix and other performance and the net change in EAC adjustments. Backlog and Bookings- Backlog was$32 billion atSeptember 30, 2022 and$29 billion atDecember 31, 2021 . In addition to a number of smaller bookings, in the quarter endedSeptember 30, 2022 , RMD booked$1 billion for the first Hypersonic Attack Cruise Missile (HACM) for theU.S. Air Force ,$972 million for AMRAAM for theU.S. Air Force andNavy and international customers,$353 million for theLower Tier Air and Missile Defense Sensor (LTAMDS) Pre-planned Product Improvement program for theU.S. Army ,$226 million for systems improvement program hardware for the Air Intercept Missile (AIM-9X) Sidewinder short-range air- to-air missiles for theU.S. Navy , and$207 million for integrated effectors and sensors for Counter-Unmanned Aircraft Systems (C-UAS) defense system for theU.S. Army . In addition to these bookings, in the nine months endedSeptember 30, 2022 , RMD booked$1.6 billion on a number of classified contracts, including a strategic competitive award. RMD also booked$662 million on Stinger for theU.S. Army ,$651 million for the SPY-6 Hardware Production and Sustainment contract for theU.S. Navy ,$648 million for Standard Missile-3 (SM-3) for theMissile Defense Agency (MDA),$423 million on the SPY-6 Hardware Production and Sustainment contract for theU.S. Navy ,$384 million for Excalibur Rapid Demonstration Phase 2 for theU.S. Army ,$219 million for AIM-9X Sidewinder short-range air-to-air missiles for theU.S. Navy andAir Force and international customers,$218 million to provide Patriot engineering support services for theU.S. Army and international customers, and$217 million on Tomahawk for theU.S. Navy .
Corporate and Eliminations and other
Eliminations and other reflects the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller non-reportable business segments. 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 costs related to theRaytheon merger, net costs associated with corporate research and development, including the LTAMDS program and certain reserves. Net Sales Operating Profit Quarter Ended September 30, Quarter Ended September 30, (dollars in millions) 2022 2021 2022 2021 Eliminations and other $ (833)$ (746) $ (50)$ (27) Corporate expenses and other unallocated items - - (77) (89) The increase in eliminations and other sales of$87 million in the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 was primarily due to an increase in intersegment eliminations, principally driven by Collins.
Eliminations and other operating profit in the quarter ended
Corporate expenses and other unallocated items in the quarter ended
Net Sales Operating Profit
Nine months ended September 30, Nine months ended September 30,
(dollars in millions) 2022 2021 2022 2021
Eliminations and other $ (2,363) $ (2,188) $ (131) $ (98)
Corporate expenses and other unallocated items - - (255) (319)
The increase in eliminations and other sales of $175 million in the nine months
ended September 30, 2022 compared to the nine months ended September 30, 2021
was primarily due to an increase in intersegment eliminations, principally
driven by Collins.
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Eliminations and other operating profit in the nine months ended
The decrease in Corporate expenses and other unallocated items of$64 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , was primarily due to a decrease in expenses related to the LTAMDS project and lower restructuring costs, partially offset by an increase in IT-related costs. FAS/CAS operating adjustment We present a FAS/CAS operating adjustment outside of segment results, which represents the difference between the service cost component of our pension and postretirement benefit (PRB) expense under the Financial Accounting Standards (FAS) requirements ofU.S. Generally Accepted Accounting Principles (GAAP) and our pension and PRB expense underU.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. Over time, we generally expect to recover the related RIS and RMD pension and PRB liabilities through the pricing of our products and services to theU.S. government. Collins andPratt & Whitney generally record pension and PRB expense on a FAS basis.
The components of the FAS/CAS operating adjustment were as follows:
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
FAS service cost (expense) $ (91) $ (102) $ (274) $ (304)
CAS expense 469 601 1,409 1,651
FAS/CAS operating adjustment $ 378 $ 499 $ 1,135 $ 1,347
The change in our FAS/CAS operating adjustment of $121 million in the quarter
ended September 30, 2022 compared to the quarter ended September 30, 2021 was
driven by a $132 million decrease in CAS expense, partially offset by an $11
million decrease in FAS service cost. The decrease in CAS expense was primarily
due to our 2021 actuarial estimate update in the third quarter of 2021 and an
increase in applicable discount rates as a result of U.S. qualified pension plan
funding relief included in the American Rescue Plan Act of 2021 (ARPA).
The change in our FAS/CAS operating adjustment of $212 million in the nine
months ended September 30, 2022 compared to the nine months ended September 30,
2021 was driven by a $242 million decrease in CAS expense, partially offset by a
$30 million decrease in FAS service cost. The decrease in CAS expense was
primarily due to an increase in applicable discount rates as a result of U.S.
qualified pension plan funding relief included in ARPA.
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:
Nine Months Ended
Quarter Ended September 30, September 30,
(dollars in millions) 2022 2021 2022 2021
Amortization of acquired intangibles $ (486) $
(610)
(20) (21) (73) (84)
Amortization of customer contractual obligations
related to acquired loss-making and below-market
contracts 24 45 80 252
Acquisition accounting adjustments $ (482) $ (586) $ (1,414) $ (1,621)
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Acquisition accounting adjustments related to acquisitions in each segment were
as follows:
Nine Months Ended
Quarter Ended September 30, September 30,
(dollars in millions) 2022 2021 2022 2021
Collins Aerospace Systems $ (201) $ (196) $ (604) $ (466)
Pratt & Whitney (72) (47) (168) (98)
Raytheon Intelligence & Space (73) (132) (231) (433)
Raytheon Missiles & Defense (136) (211) (411) (624)
Total segment (482) (586) (1,414) (1,621)
Eliminations and other - - - -
Acquisition accounting adjustments $ (482) The change in the Acquisition accounting adjustments of$104 million for the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 , was primarily driven by a decrease in RIS and RMD intangibles amortization related to theRaytheon merger in 2020. The change in the Acquisition accounting adjustments of$207 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , is primarily driven by a decrease in RIS and RMD intangibles amortization related to theRaytheon merger in 2020, partially offset by the absence of$116 million of amortization of customer contractual obligations due to the accelerated liquidation of a below-market contract reserve at Collins driven by the termination of two customer contracts recognized in the nine months endedSeptember 30, 2021 . LIQUIDITY AND FINANCIAL CONDITION
(dollars in millions) September 30, 2022 December 31, 2021 Cash and cash equivalents $ 5,381 $ 7,832 Total debt 33,447 31,485 Total equity 71,735 74,664 Total capitalization (total debt plus total equity) 105,182 106,149 Total debt to total capitalization 32 % 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. AtSeptember 30, 2022 , we had cash and cash equivalents of$5.4 billion , of which approximately 38% 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 theU.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.
Historically, our strong credit ratings and financial position have enabled us to issue long-term debt at favorable interest rates.
As ofSeptember 30, 2022 , 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, which expires inApril 2025 , and a$2.0 billion revolving credit agreement, which was renewed inSeptember 2022 and expires inSeptember 2023 . As ofSeptember 30, 2022 , there were no borrowings outstanding under these agreements. From time to time, we use commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The commercial paper notes have original maturities of not more than 364 days from the date of issuance. As ofSeptember 30, 2022 , 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$2.1 billion of commercial paper outstanding atSeptember 30, 2022 . The proceeds from these borrowings have primarily been used to fund payments related to the impact of a provision enacted in the Tax Cuts and Jobs Act of 2017 requiring the capitalization of research and experimental expenditures for tax purposes. The daily average 48
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amount of short-term commercial paper borrowings outstanding during the nine
months ended
Proceeds from issuance of commercial paper with maturities greater than 90 days were$1.4 billion during the nine months endedSeptember 30, 2022 . There were no repayments of commercial paper with maturities greater than 90 days during the nine months endedSeptember 30, 2022 . During the nine months endedSeptember 30, 2021 , commercial paper borrowings had original maturities of not more than 90 days from the date of issuance. We have an existing universal shelf registration statement, which we filed with theSecurities and Exchange Commission (SEC) onSeptember 22, 2022 , for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement. The Company offers 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, 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.
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