NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING PRINCIPLES
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.
Separation Transactions, Distributions and Raytheon Merger. On April 3, 2020, United Technologies Corporation (UTC) (since renamed Raytheon Technologies Corporation) 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 Distributions). Immediately following the Separation Transactions and the 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.” 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. Unless otherwise indicated, amounts and activity throughout these Consolidated Financial Statements are presented on a continuing operations basis. Refer to “Note 3: Discontinued Operations” below for further details.
Unless the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” “Raytheon Technologies,” and “RTC” mean United Technologies Corporation and its subsidiaries when referring to periods prior to the Raytheon Merger and to the combined company, Raytheon Technologies Corporation, when referring to periods after the Raytheon Merger. Unless the context otherwise requires, the terms “Raytheon Company,” or “Raytheon” mean Raytheon Company and its subsidiaries prior to the Raytheon Merger. UTC was determined to be the accounting acquirer in the Raytheon Merger and, as a result, the financial statements of Raytheon Technologies as of and for the year ended December 31, 2020 include Raytheon Company’s financial position and results of operations for the period subsequent to the completion of the Raytheon Merger on April 3, 2020.
Coronavirus Disease 2019 (COVID-19) Pandemic. The COVID-19 pandemic continues to negatively affect the global economy, our business and operations, supply chains, and the industries in which we operate. As a result of COVID-19, commercial air travel demand experienced an unprecedented downturn as governments, businesses and individuals reacted to the pandemic in ways such as lockdowns, quarantines, border closings and other travel restrictions and requirements, the adoption of remote working and decreased leisure travel. The unprecedented decrease in air travel adversely affected our airline and airframer customers and their demand for our products and services of our Collins Aerospace Systems (Collins Aerospace) and Pratt & Whitney businesses. In addition, the border closings, lockdowns and labor shortages resulting from COVID-19 negatively impacted global supply and distribution capabilities. Decreases in the availability, cost and delivery of supplies have caused shortages and delays for the procurement of raw materials, components and other supplies required for our performance. As a result of all of these factors, 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 Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD) businesses, although experiencing some negative impacts, primarily from supply chain pressures and labor shortages, have not experienced significant business disruptions as a result of the COVID-19 pandemic.
In 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 related to two of our Collins Aerospace reporting units. Refer to “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets” for additional information;
•increased estimated credit losses on both our receivables and contract assets of $387 million;
•an unfavorable EAC adjustment on a Pratt & Whitney commercial engine aftermarket contract due to lower estimated revenues driven by a change in the estimated maintenance coverage period of $334 million;
•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 certain commercial aircraft type of $146 million;
•an unfavorable EAC adjustment of $129 million related to lower estimated revenues due to the restructuring of a customer contract at Pratt & Whitney;
•an $89 million impairment of commercial aircraft program assets at Pratt & Whitney;
•the impairment of a Collins Aerospace trade name of $57 million;
•net unfavorable EAC adjustments on commercial aftermarket contracts at Pratt & Whitney based on a change in estimated future customer activity of $75 million;
•an unfavorable EAC adjustment at Pratt & Whitney related to a shift in overhead costs to military contracts of $44 million; and
•reserves related to a commercial financing arrangement at Pratt & Whitney of $43 million.
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 recovering 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. Further, the commercial air travel recovery is tied to general economic conditions and may be impacted by inflation or government budget deficits, among other factors. However, we continue to estimate that a full recovery may occur in 2023 or 2024. As our commercial aerospace business recovers, we have seen increases in certain employee-related and discretionary costs, which had decreased in the aftermath of COVID-19 due to one-time cost reduction actions in 2020. 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 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 except in limited circumstances. The implementation of this mandate may result in attrition, including attrition of critically skilled labor and difficulty in securing future labor needs, for our workforce, as well as the workforces of our subcontractors, suppliers and customers. The mandate is currently subject to various legal proceedings. As a result, the impact of mandate on our operations and performance, as well as on our subcontractors, suppliers and customers, is uncertain. However, if ultimately required, the mandate could affect our performance on contracts, particularly due to disruptions in subcontractor or supplier performance or deliveries, and have a material adverse effect on our results of operations.
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. 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 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.
Summary of Accounting Principles. The following represents the significant accounting principles of Raytheon Technologies Corporation.
Consolidation and Classification. The Consolidated Financial Statements include the accounts of Raytheon Technologies Corporation, and all wholly owned, majority-owned and otherwise controlled domestic and foreign subsidiaries. All intercompany transactions have been eliminated. For our consolidated non-wholly owned subsidiaries, a noncontrolling interest is recognized to reflect the portion of equity that is not attributable to us. For classification of certain current assets and liabilities, the duration of our contracts or programs is utilized to define our operating cycle, which is generally longer than one year. Included within our Current assets and liabilities are Contract assets and liabilities related to our aftermarket and development arrangements, which can generally span up to fifteen years.
We reclassified certain prior period amounts to conform to our current period presentation. These reclassifications include the reclassification of assets and liabilities related to discontinued operations to Other assets, current and Other accrued liabilities, respectively, and the reclassification of debt extinguishment costs, which were previously included in Interest expense, net.
Use of Estimates. Our Consolidated Financial statements are based on the application of U.S. Generally Accepted Accounting Principles (GAAP), which require us to make estimates and assumptions about future events that affect the amounts reported in our Consolidated Financial statements and the accompanying notes. As discussed above, the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, financial condition, and liquidity, including sales, expenses, reserves and allowances, asset recoverability and EAC adjustments, will depend on future developments that are highly uncertain, including new information that may emerge concerning COVID-19 and related containment and treatment actions, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Other future events, including COVID-19, and their effects cannot be determined with certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our Consolidated Financial statements.
Cash and Cash Equivalents. Cash and cash equivalents includes cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less. The estimated fair value of Cash and cash equivalents approximates the carrying value due to their short maturities.
Accounts Receivable. Accounts receivable are stated at the net amount expected to be collected. We are exposed to credit losses primarily on our accounts receivable and contract assets related to our sales of products and services to commercial customers. The allowance for expected credit losses is established to provide for the expected lifetime credit losses by evaluating factors such as customer creditworthiness, historical payment and loss experiences, current economic conditions, including geographic and political risk, and the age and status of outstanding receivables. In certain circumstances, we may be able to develop reasonable and supportable forecasts over the contractual term of the financial asset. For periods beyond which we are able to make or obtain reasonable and supportable forecasts, we revert to historical loss experience and information.
We determine credit ratings for each customer in our portfolio based upon public information and information obtained directly from our customers. We conduct a review of customer credit ratings, published historical credit default rates for different rating categories, and multiple third-party aircraft value publications as a basis to validate the reasonableness of the allowance for expected credit losses on a quarterly basis, or when events and circumstances warrant. A credit limit is established for each customer based on the outcome of this review and consideration of the other factors discussed above. In certain cases, we may require collateral or prepayment to mitigate credit risk.
Expected credit losses are written off in the period in which the financial asset is no longer collectible.
Unbilled receivables represent revenues that are not currently billable to the customer under the terms of the contract and include unbilled amounts under commercial contracts where payment is solely subject to the passage of time. These items are expected to be billed and collected in the normal course of business. Accounts receivable as of December 31, 2021 and 2020 includes unbilled receivables of $342 million and $228 million, respectively, which primarily includes unbilled receivables with commercial aerospace customers. Other unbilled receivables where payment is subject to factors beyond just the passage of time are included in Contract assets in the Consolidated Balance Sheet, and are generally classified as current.
Contract Assets and Liabilities. Contract assets and liabilities represent the difference in the timing of revenue recognition from receipt of cash from our customers. Contract assets reflect revenue recognized and performance obligations satisfied or partially satisfied in advance of customer billing.
Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts.
Contract assets and Contract liabilities are generally classified as current as our operating cycle is generally longer than one year. See “Note 6: Contract Assets and Liabilities” for further discussion of Contract assets and liabilities.
As described in more detail above in “Accounts Receivable,” we are exposed to credit losses on our contract assets related to our sales of products and services to commercial customers and regularly assess our allowance for expected credit losses as it relates to our Contract assets.
Inventory. Inventory is stated at the lower of cost or estimated realizable value and is primarily based on first-in, first-out (FIFO) or average cost methods.
Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory where the resale value or replacement value is less than inventoriable cost. Other factors that management considers in determining the adequacy of these reserves include whether individual inventory parts meet current specifications and can be substituted for a part currently being sold or used as a service part, overall market conditions, and other inventory management initiatives. Manufacturing costs are allocated to current production contracts. In our commercial aerospace businesses, excess costs beyond standard manufacturing costs are expensed when they meet certain thresholds.
Equity Method Investments. Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in Other assets on the Consolidated Balance Sheet. Under this method of accounting, our share of the net earnings or losses of the investee is included in Other income, net on the Consolidated Statement of Operations since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. Our sales to and
purchases from unconsolidated entities accounted for under the equity method, which are considered related parties, are not material.
Customer Financing Assets. Customer financing assets (CFA) relate to our commercial aerospace businesses in which we provide financing to airline customers. Our financing predominately relates to products under lease, and to a lesser extent, notes and lease receivables. In certain limited circumstances, we pay deposits on behalf of our airline customers to secure production slots with the airframers, and such pre-delivery payments are included in our notes receivables. Any unfunded pre-delivery payments are included within our commercial aerospace financing commitments as further discussed in “Note 19: Commitments and Contingencies.” Interest income from notes and financing leases and rental income from operating lease assets is generally included in Other income, net in the Consolidated Statement of Operations, while gains or losses on sales of operating lease assets are included in products sales and cost of sales. The current portion of these financing arrangements are aggregated in Accounts receivable, net and the non-current portion of these financing arrangements are aggregated in CFA in the Consolidated Balance Sheet. The increases and decreases in CFA from funding, receipts and certain other activity, are generally reflected as Investing Activities in the Consolidated Statement of Cash Flows. Leased assets are valued at cost and reviewed for impairment when circumstances indicate that the related carrying amounts may not be recoverable. Notes and lease receivables are valued at the net amount expected to be collected. For notes and lease receivables, we determine a specific reserve for exposure based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral in connection with the evaluation of credit risk and collectability. As of December 31, 2021 and 2020, the reserves related to CFA were not material. At December 31, 2021 and 2020, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be impaired.
Business Combinations. Once a business is acquired, the fair value of the identifiable assets acquired and liabilities assumed is determined with the excess cost recorded to goodwill. As required, a preliminary fair value is determined once a business is acquired, with the final determination of the fair value being completed no later than one year from the date of acquisition.
In connection with the acquisitions of Rockwell Collins in 2018 and Goodrich in 2012, and to a lesser extent the acquisition of Raytheon Company in 2020, we recorded assumed liabilities related to customer contractual obligations on certain contracts with economic returns that were lower than what could be realized in market transactions as of the acquisition date. We measured these assumed liabilities based on the estimated cash flows of the programs plus a reasonable contracting profit margin required to transfer the contracts to market participants. These liabilities are being amortized in accordance with the underlying pattern of obligations, as reflected by the expenses incurred on the contracts. The balance of the contractual obligations was $929 million and $1,243 million at December 31, 2021 and 2020, respectively. Total consumption of the contractual obligations for the years ended December 31, 2021, 2020 and 2019 was $314 million, $295 million and $345 million, respectively, with future consumption expected to be as follows: $113 million in 2022, $95 million in 2023, $83 million in 2024, $78 million in 2025, $71 million in 2026 and $489 million thereafter.
Goodwill and Intangible Assets. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment testing annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. The goodwill impairment test compares carrying values of the reporting units to their estimated fair values. If the carrying value exceeds the fair value then the carrying value is reduced to fair value. In developing our estimates for the fair value of our reporting units and indefinite-lived intangible assets, significant judgment is required in the determination of the appropriateness of using a qualitative assessment or quantitative assessment. For the quantitative assessments that are performed, fair value is primarily based on income approaches using a discounted cash flow method or relief from royalty method, which have significant assumptions including sales growth rates, projected operating profit, terminal growth rates, discount rates and royalty rates. Such assumptions are subject to variability from year to year and are directly impacted by, among other things, global market conditions. Finite-lived intangible assets are tested for impairment when events occur that indicate that the net book value will not be recovered over future cash flows.
Intangible assets consist of patents, trademarks/tradenames, customer relationships, exclusivity assets, developed technology and other intangible assets including collaboration assets. Acquired intangible assets are recognized at fair value in purchase accounting. Finite-lived intangible assets are amortized to Cost of sales and Selling, general and administrative expenses over the applicable useful lives. Exclusivity assets are commercial aerospace payments made to secure certain contractual rights to provide product on new aircraft platforms. We classify amortization of such payments as a reduction of sales. Such payments are capitalized when there are distinct rights obtained and there are sufficient incremental cash flows to support the recoverability of the assets established. Otherwise, the applicable portion of the payments are expensed. In addition, in connection with our 2012 agreement to acquire Rolls-Royce’s ownership and collaboration interests in International Aero Engines AG (IAE), additional payments are due to Rolls-Royce contingent upon each hour flown through June 2027 by the V2500-powered aircraft in service as of the acquisition date. These flight hour payments are being capitalized as collaboration assets and amortized to cost of sales.
Useful lives of finite-lived intangible assets are estimated based upon the nature of the intangible asset and the industry in which the intangible asset is used. These intangible assets are amortized based on the pattern in which the economic benefits of the intangible assets are consumed, as represented by the underlying cash flows, which may result in an amortization method other than straight-line. For both our commercial aerospace collaboration assets and exclusivity arrangements, the pattern of economic benefit generally results in no amortization during the development period with amortization beginning as programs enter full rate production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined or if straight-line amortization approximates the pattern of economic benefit, a straight-line amortization method may be used. The range of estimated useful lives is as follows:
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Years
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Collaboration assets
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30
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Customer relationships and related programs
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2 to 32
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Developed technology
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3 to 25
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Patents and trademarks
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3 to 30
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Exclusivity assets
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5 to 25
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Leases. As a lessee, we record a right-of-use asset and a lease liability on the Consolidated Balance Sheet for leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statement of Operations.
We enter into lease agreements for the use of real estate space, vehicles, information technology equipment, and certain other equipment under both operating and finance leases. We determine if an arrangement contains a lease at inception. Operating leases are included in Operating lease right-of-use assets and Operating lease liabilities on our Consolidated Balance Sheet. The current portion of our operating lease liabilities is included in Accrued liabilities on our Consolidated Balance Sheet. Finance leases are not considered significant to our Consolidated Balance Sheet or Consolidated Statement of Operations.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, and use the implicit rate when readily determinable. We determine our incremental borrowing rate through market sources including relevant industry rates. Our lease right-of-use assets also include any initial direct costs and lease pre-payments made at or before the commencement date and are reduced for any lease incentives received at or before the commencement date. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. We exclude variable payments from lease right-of-use assets and lease liabilities, to the extent such payments are not considered fixed, and instead, expense variable payments as incurred. Variable lease expense and lease expense for short duration contracts are not a material component of lease expense. Some of our leases include the option to extend or terminate the lease. We include these options in the recognition of our right-of-use assets and lease liabilities when it is reasonably certain that we will exercise the option. Lease expense is generally recognized on a straight-line basis over the lease term.
In limited instances we act as a lessor, primarily for commercial aerospace engines, the majority of which are classified as operating leases. These leases are not significant to our Consolidated Balance Sheet or Consolidated Statement of Operations.
Other Long-Lived Assets. We evaluate the potential impairment of other long-lived assets whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. If the carrying value of other long-lived assets held and used exceeds the sum of the undiscounted expected future cash flows, the carrying value is written down to fair value. In order for long-lived assets to be considered held for disposal, we must have committed to a plan to dispose of the assets. Once deemed held for disposal, the assets are stated at the lower of the carrying amount or fair value.
Income Taxes. Future income taxes represent the tax effects of transactions which are reported in different periods for tax and financial reporting purposes. These amounts consist of the tax effects of temporary differences between the tax and financial reporting balance sheets and tax carryforwards. Future income tax benefits and payables within the same tax paying component of a particular jurisdiction are offset for presentation in the Consolidated Balance Sheet. In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not
that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest expense has also been recognized. We recognize accrued interest related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense. State income tax amounts are generally included in income tax expense; however state income tax payments related to our Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD) segments are generally recoverable through the pricing of products and services to the U.S. government. Accordingly, these state income taxes are generally allocated to contracts and then classified as Selling, general and administrative expenses when paid (recovered) or otherwise agreed as allocable with the U.S. government.
We have elected to account for tax on Global Intangible Low-Taxed Income (GILTI) as a period cost, as incurred.
Revenue Recognition. The vast majority of our revenues are from long-term contracts associated with the design, development, manufacture or modification of complex aerospace or defense equipment or related services. Collins Aerospace and Pratt & Whitney primarily serve commercial and government customers in both the OEM and aftermarket parts and services markets of the aerospace industry, while RIS and RMD primarily provide products and services to government customers in the defense industry.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily contracts that are directly with a foreign government, we are required to obtain certain regulatory approvals. In these cases, we recognize revenue based on the likelihood of obtaining regulatory approvals based upon all known facts and circumstances. A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Some of our contracts with customers contain a single performance obligation, while others contain multiple performance obligations most commonly when a contract contains multiple distinct units (such as engines or certain aerospace components) or spans multiple phases of the product life-cycle such as production, maintenance and support. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its standalone selling price when available. If standalone selling price is not available, we estimate the standalone selling price of each performance obligation, which is generally based on an expected cost plus a margin approach.
We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price, including contractual discounts, contract incentive payments, estimates of award fees, flight hours, aircraft landings or other customer usage activities on long term maintenance contracts, and other sources of variable consideration, when determining the transaction price of each contract. When reasonably able to estimate, we include variable consideration in the transaction price at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. These estimates are based on historical experience, anticipated performance and our best judgment at the time. We also consider whether our contracts contain a significant financing component, which they generally do not.
Timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms.
Performance obligations are satisfied as of a point in time for certain aerospace components, engines, and spare parts. Revenue is recognized when control of the product transfers to the customer, generally upon product shipment. Since billing also typically occurs upon product shipment, we generally do not have Contract assets or Contract liabilities balances related to point in time sales.
Performance obligations are satisfied over-time if the customer receives the benefits as we perform work, if the customer controls the asset as it is being produced (continuous transfer of control), or if the product being produced for the customer has no alternative use and we have a contractual right to payment for performance to date. We recognize revenue on an over-time basis for substantially all defense contracts and certain long-term aerospace OEM and aftermarket contracts.
Substantially all of our defense business revenue, which primarily relates to our RIS and RMD segments, and to a lesser extent Pratt & Whitney and Collins Aerospace, is recognized over time because of the continuous transfer of control to our customers. For performance obligations satisfied over time, revenue is recognized on a percentage of completion basis generally using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs can include labor, materials, subcontractors’ costs, or other direct costs and indirect costs. Our contracts with the U.S. government are typically subject to the Federal Acquisition Regulation (FAR) and are priced based on estimated or actual costs of producing goods or
providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer. Under the typical payment terms of our U.S. government fixed-price contracts, the customer pays us either performance-based payments (PBPs) or progress payments. PBPs are interim payments equal to a negotiated percentage of the contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments up to 80-90% of costs incurred as the work progresses. Because the customer retains a portion of the contract price until completion of the contract, our U.S. government fixed-price contracts generally result in revenue recognized in excess of billings which we present as Contract assets on the Consolidated Balance Sheet. For our U.S. government cost-type contracts, the customer generally pays us for our costs incurred within a short period of time. For non-U.S. government contracts, we typically receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment. Such advances are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. We recognize a liability for advance payments in excess of revenue recognized and present it as Contract liabilities on the Consolidated Balance Sheet.
For certain of our long-term aftermarket contracts, revenue is recognized over the contract period. We generally account for such contracts as a series of daily performance obligations to stand ready to provide spare parts, product maintenance and aftermarket services. These arrangements include the sale of spare parts with integral services to our customers, and are generally classified as Services sales, with the corresponding costs classified in Cost of sales - services, within the Consolidated Statement of Operations. Revenue is primarily recognized on a percentage of completion basis using costs incurred to date relative to total estimated costs at completion to measure progress, as sufficient historical evidence indicates that the cost of performing services under the contract is incurred on an other-than-straight-line basis. For some of our long-term aftermarket contracts, we receive payment prior to delivery of products and services, resulting in a contract liability balance, while for others, we deliver products or services in advance of payment, resulting in a contract asset balance.
Contracts are often modified to account for changes in contract specifications or requirements. We consider contract modifications to exist when the modification either creates new or changes existing enforceable rights and obligations. Contract modifications for goods or services that are not distinct are accounted for as part of the existing contract either on a cumulative catch-up basis or prospective basis depending on the nature of the modification.
Loss provisions on contracts are recognized to the extent that estimated contract costs exceed the estimated consideration from the products or services contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at contract signing except for certain contracts under which losses are recorded upon receipt of the purchase order that obligates us to perform. For existing commitments, anticipated losses on contractual arrangements are recognized in the period in which losses become evident. In estimating losses, products contemplated under contractual arrangements include firm quantities of product sold under contract and, in the commercial engine and wheels and brakes businesses, future highly probable sales of replacement parts required by regulation that are expected to be sold subsequently for incorporation into the original equipment. In our commercial engine and wheels and brakes businesses, when the OEM product is sold for a loss, but the combined OEM and aftermarket arrangement for each individual sales campaign is profitable, we record OEM product losses at the time of product delivery.
We review our Estimate at Completion (EACs) on significant contracts on a periodic basis and for others, no less than annually or when a change in circumstances warrant a modification to a previous estimate. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment by management on a contract by contract basis. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities relate to management’s judgment about the ability and cost to achieve the schedule, consideration of customer-directed delays or reductions in scheduled deliveries, technical requirements, customer activity levels, such as flight hours or aircraft landings, and related variable consideration. Management’s judgment related to these considerations has become increasingly more significant given the economic environment primarily caused by the COVID-19 pandemic. Management must make assumptions and estimates regarding contract revenue and costs, including estimates of labor productivity and availability, the complexity and scope of the work to be performed, the availability and cost of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer, overhead cost rates, and current and past maintenance cost and frequency driven by estimated aircraft and engine utilization and estimated useful lives of components, among others. Cost estimates may also include the estimated cost of satisfying our industrial cooperation agreements, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements, required under certain contracts primarily within our RIS and RMD
segments. These obligations may or may not be distinct depending on their nature. If cash is paid to a customer to satisfy our offset obligations it is recorded as a reduction in the transaction price.
Changes in estimates of net sales, cost of sales and the related impact to operating profit on contracts recognized over time are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation’s percentage of completion in the current period. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. Our EAC adjustments also include the establishment of loss provisions for our contracts accounted for on a percentage of completion basis.
Net EAC adjustments had the following impact on our operating results:
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(dollars in millions, except per share amounts)
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2021
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2020
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2019
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Total Net Sales
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$
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296
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$
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(407)
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$
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(106)
|
|
Operating profit (loss)
|
|
110
|
|
|
(643)
|
|
|
(69)
|
|
Income (loss) from continuing operations attributable to common shareowners (1)
|
|
87
|
|
|
(508)
|
|
|
(55)
|
|
Diluted earnings (loss) per share from continuing operations attributable to common shareowners (1)
|
|
$
|
0.06
|
|
|
$
|
(0.37)
|
|
|
$
|
(0.06)
|
|
(1) Amounts reflect a U.S. statutory tax rate of 21%, which approximates our tax rate on our EAC adjustments.
For additional discussion on significant unfavorable EAC adjustments in 2020, see the COVID-19 Pandemic discussion above.
As a result of the Raytheon Merger, Raytheon Company’s contracts accounted for on a percentage of completion basis were reset to zero percent complete as of the date of completion of the Raytheon Merger, because only the unperformed portion of the contract at such date represents an obligation of the Company. This had the impact of reducing EAC adjustments for these segments in the short term, most notably in 2020. For additional information related to the Raytheon Merger, see “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets.”
In our Collins Aerospace and Pratt & Whitney businesses, we may offer customers incentives to purchase our products, which may result in payments made to those customers, which are treated as a reduction in sales.
In our Collins Aerospace and Pratt & Whitney businesses, we incur contract fulfillment costs for engineering and development of aerospace OEM products directly related to existing or anticipated contracts with customers. Such costs generate or enhance our ability to satisfy our performance obligations under these contracts. We capitalize these costs as contract fulfillment costs to the extent the costs are recoverable from the associated contract margin and customer funding, and subsequently amortize the costs as the related performance obligations are satisfied. In instances where intellectual property does not transfer to the customer, we generally defer the customer funding of product engineering and development and recognize revenue when the related performance obligations are satisfied. Capitalized contract fulfillment costs were $1,974 million and $1,981 million as of December 31, 2021 and 2020, respectively, and are classified in Other assets in our Consolidated Balance Sheet and are included in Other operating activities, net in our Consolidated Statement of Cash Flows. We regularly assess capitalized contract fulfillment costs for impairment and recognized $111 million of impairment for contract fulfillment costs in 2020. Costs to obtain contracts are not material.
In view of the risks and costs associated with developing new engines and the large up-front investments required that often require returns generated over the full estimated life of the engine, Pratt & Whitney has entered into certain collaboration arrangements in which sales, costs and risks are shared. Sales generated from engine programs, spare parts sales, and aftermarket business under these collaboration arrangements are recorded consistent with our revenue recognition policies in our Consolidated Financial Statements. Amounts attributable to our collaborators for their share of sales are recorded as cost of sales in our Consolidated Financial Statements based upon the terms and nature of the arrangement. Costs associated with engine programs under collaborative arrangements are expensed as incurred. Under these arrangements, collaborators contribute their program share of engine parts, incur their own production costs and make certain payments for shared or joint program costs. The reimbursement from collaborators of their share of program costs is recorded as a reduction of the related expense item at that time. As of December 31, 2021, the collaborators’ interests in all commercial engine programs ranged from 13% to 49%, inclusive of a portion of Pratt & Whitney’s interests held by other participants. Pratt & Whitney is the principal participant in all existing collaborative arrangements, with the exception of the Engine Alliance (EA), a joint venture with GE Aviation, which markets and manufactures the GP7000 engine for the Airbus A380 aircraft. There are no individually significant collaborative arrangements, and none of the collaborators individually have more than a 25% share in an individual
program. The following table illustrates the Consolidated Statement of Operations classification and amounts attributable to transactions arising from the collaborative arrangements between participants for each period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Collaborator share of sales:
|
|
|
|
|
|
Cost of sales - products
|
$
|
1,534
|
|
|
$
|
1,183
|
|
|
$
|
2,097
|
|
Cost of sales - services
|
1,428
|
|
|
1,374
|
|
|
1,674
|
|
Collaborator share of program costs (reimbursement of expenses incurred):
|
|
|
|
|
|
Cost of sales - products
|
(160)
|
|
|
(147)
|
|
|
(190)
|
|
Research and development
|
(135)
|
|
|
(177)
|
|
|
(219)
|
|
Selling, general and administrative
|
(85)
|
|
|
(99)
|
|
|
(101)
|
|
Remaining Performance Obligations (RPO). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. Total RPO was $156 billion as of December 31, 2021. Of the total RPO as of December 31, 2021, we expect approximately 30% will be recognized as sales over the next 12 months. This percentage of RPO to be recognized as sales over the next 12 months depends on our current estimates of future developments, which are highly uncertain, and cannot be predicted, including new information which may emerge concerning the scope, severity and duration of the COVID-19 pandemic, actions to contain its spread or treat its impact, and governmental, business and individuals’ actions taken in response to the pandemic, which may result in customer delays or order cancellations. Approximately 40% of our RPO relates to long-term commercial aerospace maintenance contracts at Pratt & Whitney, which are generally expected to be realized over a span of up to 15 years.
Research and Development. Company-sponsored research and development costs, including those costs related to the Company’s portion in connection with cost-sharing arrangements, are charged to expense as incurred and recovery on these cost-sharing arrangements is recorded as a reduction to research and development expense as earned. Customer-sponsored research and development projects performed under contracts with customers are accounted for as contract costs and reported as cost of sales on the related revenue generating contracts.
Foreign Exchange. We conduct business in many different currencies and, accordingly, are subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of many of our foreign subsidiaries are often measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. Dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred as a separate component of accumulated other comprehensive loss (AOCL) in shareowners’ equity. Foreign exchange transaction gains and losses are recorded in Other income, net on our Consolidated Statement of Operations.
Derivatives and Hedging Activity. We use derivative instruments, including swaps, forward contracts and options, to help manage certain foreign currency, and from time to time to help manage interest rate and commodity price exposures. Derivative instruments are viewed as risk management tools by us and are not used for trading or speculative purposes. By their nature, all financial instruments involve market and credit risks. We enter into derivative and other financial instruments with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. We limit counterparty exposure and concentration of risk by diversifying counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties. We enter into transactions that are subject to enforceable master netting arrangements or similar agreements with various counterparties. However, we have not elected to offset multiple contracts with a single counterparty and, as a result, the fair value of the derivative instruments in a loss position is not offset against the fair value of derivative instruments in a gain position.
Derivatives used for hedging purposes may be designated and effective as a hedge of the identified risk exposure at the inception of the contract. All derivative instruments are recorded on the balance sheet at fair value. Derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases may be accounted for as cash flow hedges, as deemed appropriate. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income and reclassified to earnings as a component of products sales or expenses, as applicable, when the hedged transaction occurs. Cash payments or receipts on derivatives designated as cash flow hedges are recorded in Other operating activities, net within the Consolidated Statement of Cash Flows. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs.
To the extent the hedge accounting criteria are not met, the foreign currency forward contracts are utilized as economic hedges and changes in the fair value of these contracts are recorded currently in earnings in the period in which they occur. Cash receipts or payments related to the settlement of derivatives not designated as hedging instruments are recorded as investing cash flows within the Consolidated Statement of Cash Flows. Additional information pertaining to foreign currency forward contracts and net investment hedging is included in “Note 15: Financial Instruments.”
Environmental. Environmental investigatory, remediation, operating and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and regulations and prior remediation experience. Where no amount within a range of estimates is more likely, the minimum is accrued. For sites with multiple responsible parties, we consider our likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. Liabilities with fixed or reliably determinable future cash payments are discounted. A portion of these costs is eligible for future recovery through the pricing of our products and services to the U.S. government. We regularly assess the probability of recovery of these costs, which requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract activity with the U.S. government. We consider such recovery probable based on government contracting regulations and our history of receiving reimbursement for such costs, and accordingly have recorded the future recovery of these costs from the U.S. government within Other assets in the Consolidated Balance Sheet. Accrued environmental liabilities are not reduced by potential insurance reimbursements or potential recoveries from pursuing other parties. We also lease certain government-owned properties and generally are not liable for remediation of preexisting environmental contamination at these sites. As a result, we generally do not provide for these costs in our Consolidated Financial Statements. See “Note 19: Commitments and Contingencies” for additional details on the environmental remediation activities.
Pension and Postretirement Obligations. U.S. GAAP requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit (PRB) plans. Funded status is measured at least annually in the fourth quarter and represents the difference between the plans’ projected benefit obligation (PBO) and the fair market value of the plans’ assets.
Changes to our pension and PRB plans’ funded status can result from company actions, such as contributions or changes in plan provisions, or by gains and losses. Gains and losses are primarily a result of changes in assumptions and actual experience that differs from these assumptions. Major assumptions include the discount rate and expected return on plan assets (EROA). These gains or losses are recorded in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit (income) expense.
A calculated “market-related value” of our plan assets is used to develop the amount of deferred asset gains or losses to be amortized. The market-related value of assets is equal to the fair value of assets adjusted to reflect the recognition, and subsequent amortization, of the difference between actual and expected asset returns over a five-year period. The market-related value of assets is used to calculate the expected return on assets included in the net periodic benefit (income) expense.
The Company has elected to use the “corridor” approach in the amortization of gains and losses, which limits the expense recognition to the net outstanding gains and losses in excess of the greater of 10% of the PBO or 10% of the market-related value of assets. Gains and losses exceeding the corridor are amortized in net periodic benefit (income) expense over either the projected average remaining employee service period or the projected average remaining lifetime of inactive participants depending on the plan.
Net periodic benefit (income) expense is classified between operating and non-operating, whereby only the service cost component is included in operating profit and the remaining components are included in Non-service pension (income) expense.
Product Performance Obligations. We extend performance and operating cost guarantees beyond our normal service and warranty policies for extended periods on some of our products, particularly commercial aircraft engines. Liability under such guarantees is based upon future product performance and durability. We accrue for such costs that are probable and can be reasonably estimated. In addition, we incur discretionary costs to service our products in connection with product performance issues. The costs associated with these product performance and operating cost guarantees require estimates over the full terms of the agreements, and require management to consider factors such as the extent of future maintenance requirements, interval between flight and repair time and the future cost of material and labor to perform the services. These cost estimates are largely based upon historical experience. See “Note 18: Guarantees” for further discussion.
Accounting Pronouncements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU and its related amendments (collectively, the Credit Loss Standard) modifies the impairment model to utilize an expected loss methodology in place of the incurred loss
methodology for financial instruments, including trade receivables, contract assets and off-balance sheet credit exposures. The Credit Loss Standard requires consideration of a broader range of information to estimate expected credit losses, including historical information, current economic conditions and a reasonable forecast period. This ASU requires that the statement of operations reflect estimates of expected credit losses for newly recognized financial assets as well as changes in the estimate of expected credit losses that have taken place during the period, which may result in earlier recognition of certain losses. We adopted this standard effective January 1, 2020 utilizing a modified retrospective approach. A cumulative-effect non-cash adjustment to retained earnings as of January 1, 2020 was recorded in the amount of $59 million. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update remove certain exceptions of Topic 740 including: the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. We adopted the new standard effective January 1, 2021. The adoption of this standard did not have an impact on our Consolidated Financial Statements.
Other new pronouncements issued but not effective until after December 31, 2021 did not and are not expected to have a material impact on our results of operations, financial condition or liquidity.
NOTE 2: BUSINESS ACQUISITIONS, DISPOSITIONS, GOODWILL AND INTANGIBLE ASSETS
Business Acquisitions. Our investments in businesses, net of cash acquired, in 2021, 2020 and 2019 totaled $1.1 billion, $35.1 billion and $9 million, respectively. Our investments in business in 2021 primarily consisted of the acquisitions discussed below. Our investments in businesses in 2020 primarily consisted of the acquisition of Raytheon Company.
In November 2021, we completed the acquisitions of FlightAware and SEAKR Engineering Inc., for a total of approximately $1.1 billion, net of cash received. FlightAware is a leading digital aviation company providing global flight tracking solutions, predictive technology, analytics and decision-making tools, and is reported in the Collins Aerospace segment. SEAKR Engineering Inc. is a leading supplier of advanced space electronics and is reported in the RIS segment. In connection with these acquisitions, we have preliminarily recorded $0.8 billion of goodwill and $0.3 billion of intangibles assets. The purchase price allocation processes for these acquisitions are expected to be complete in 2022 after the conclusion of our final reviews.
In December 2020, we completed the acquisition of Blue Canyon Technologies, a leading provider of small satellites and spacecraft systems components for $425 million, net of cash received. Blue Canyon Technologies is reported in the RIS segment. In connection with this acquisition, we recorded $281 million of goodwill, primarily related to expected synergies from combining operations and the value of the existing workforce, which is deductible for tax purposes, and $149 million of intangible assets, primarily related to customer relationships.
Pro forma financial information and revenue from the date of acquisition have not been provided for these acquisitions as they are not material either individually or in the aggregate.
Raytheon Merger. As discussed in “Note 1: Basis of Presentation and Summary of Accounting Principles”, on April 3, 2020, UTC and Raytheon Company completed an all-stock merger of equals, following the completion by UTC of the Separation Transactions and Distributions. Raytheon Company (previously New York Stock Exchange (NYSE): RTN) shares ceased trading prior to the market open on April 3, 2020, and each share of Raytheon common stock was converted in the merger into the right to receive 2.3348 shares of UTC common stock, previously traded on the NYSE under the ticker symbol “UTX.” Upon closing of the Raytheon Merger, UTC’s name was changed to “Raytheon Technologies Corporation,” and its shares of common stock began trading as of April 3, 2020 on the NYSE under the ticker symbol “RTX.”
Total consideration is calculated as follows:
|
|
|
|
|
|
(dollars in millions)
|
Amount
|
Fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards
|
$
|
33,067
|
|
Fair value attributable to pre-merger service for replacement equity awards
|
99
|
|
Total merger consideration
|
$
|
33,166
|
|
The fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards is calculated as follows:
|
|
|
|
|
|
(dollars and shares in millions, except per share amounts and exchange ratio)
|
Amount
|
Number of Raytheon Company common shares outstanding as of April 3, 2020
|
277.3
|
Number of Raytheon Company stock awards vested as a result of the Raytheon Merger (1)
|
0.4
|
Total outstanding shares of Raytheon Company common stock and equity awards entitled to merger consideration
|
277.7
|
Exchange ratio (2)
|
2.3348
|
Shares of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards
|
648.4
|
Price per share of RTC common stock (3)
|
$
|
51.00
|
|
Fair value of RTC common stock issued for Raytheon Company outstanding common stock and vested equity awards
|
$
|
33,067
|
|
(1) Represents Raytheon Company stock awards that vested as a result of the Raytheon Merger, which is considered a “change in control” for purposes of the Raytheon 2010 Stock Plan. Certain Raytheon Company restricted stock awards and Raytheon Company restricted stock unit (RSU) awards, issued under the Raytheon 2010 Stock Plan vested on an accelerated basis as a result of the Raytheon Merger. Such vested awards were converted into the right to receive RTC common stock determined as the product of (1) the number of vested awards, and (2) the exchange ratio.
(2) The exchange ratio is equal to 2.3348 shares of UTC common stock for each share of Raytheon Company common stock in accordance with the Raytheon Merger Agreement.
(3) The price per share of RTC common stock is based on the RTC opening stock price as of April 3, 2020.
Allocation of Consideration Transferred to Net Assets Acquired. We accounted for the Raytheon Merger under the acquisition method and are required to measure identifiable assets acquired and liabilities assumed of the acquiree (Raytheon Company) at the fair values on the closing date. During the first quarter of 2021, based on the finalization of our valuation and internal reviews, we completed the purchase price allocation which resulted in a net increase to goodwill of $61 million.
The final purchase price allocation, net of cash acquired, for the acquisition was as follows:
|
|
|
|
|
|
(dollars in millions)
|
|
Cash and cash equivalents
|
$
|
3,208
|
|
Accounts receivable
|
1,997
|
|
Contract assets
|
6,023
|
|
Inventory
|
705
|
|
Other assets, current
|
940
|
|
Fixed assets
|
4,745
|
|
Operating lease right-of-use assets
|
950
|
|
Intangible assets
|
19,130
|
|
Other assets
|
1,218
|
|
Total identifiable assets acquired
|
38,916
|
|
Accounts payable
|
1,477
|
|
Accrued employee compensation
|
1,492
|
|
Other accrued liabilities
|
1,921
|
|
Contract liabilities
|
3,002
|
|
Long-term debt, including current portion
|
4,700
|
|
Operating lease liabilities, non-current portion
|
738
|
|
Future pension and postretirement benefit obligation
|
11,607
|
|
Other long-term liabilities
|
2,368
|
|
Total liabilities acquired
|
27,305
|
|
Total identifiable net assets
|
11,611
|
|
Goodwill
|
21,589
|
|
Redeemable noncontrolling interest
|
(34)
|
|
Total consideration transferred
|
$
|
33,166
|
|
Fair value adjustments to Raytheon Company’s identified assets and liabilities included an increase in fixed assets of
$1.1 billion and an increase to future pension and postretirement benefit obligations of $3.6 billion, primarily related to remeasurement of the liability based on market conditions on the Raytheon Merger closing date. For further information, see “Note 11: Employee Benefit Plans.” In determining the fair value of identifiable assets acquired and liabilities assumed, a review was conducted for any significant contingent assets or liabilities existing as of the closing date. The assessment did not note any material contingencies related to existing legal or government action.
The fair values of the customer relationship intangible assets were determined by using a discounted cash flow valuation method, which is a form of the income approach. Under this approach, the estimated future cash flows attributable to the asset are adjusted to exclude the future cash flows that can be attributed to supporting assets, such as tradenames or fixed assets. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant future cash flows, which required significant management judgment, included forecasted revenue growth rates, remaining developmental effort, operational performance including company specific synergies, program life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows were probability-adjusted to reflect the uncertainties associated with the underlying assumptions, including cancellation rates related to backlog, government demand for sole-source and recompete contracts and win rates for recompete contracts, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future cash flows were then discounted to present value, using an appropriate discount rate that required significant judgment by management. The customer relationship intangible assets are being amortized based on the pattern of economic benefits we expect to realize over the estimated economic life of the underlying programs. The fair value of the tradename intangible assets were determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the tradename and discounted to present value, using forecasted revenue growth rate projections and a discount rate, respectively, that required significant judgment by management. The tradename intangible assets were determined to have an indefinite life. The developed technology intangible assets are being amortized based on the pattern of economic benefits.
The intangible assets included above consist of the following:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Fair Value
|
Useful Life
|
Acquired customer relationships
|
$
|
12,900
|
|
25 years
|
Acquired tradenames
|
5,430
|
|
Indefinite
|
Acquired developed technology
|
800
|
|
5 to 7 years
|
Total identifiable intangible assets
|
$
|
19,130
|
|
|
We also identified customer contractual obligations on loss making programs and recorded liabilities of $222 million related to these programs based on the difference between the actual expected operating loss and a normalized operating profit. These liabilities are being liquidated based on the expected pattern of expenses incurred on these contracts.
We recorded $21.6 billion of goodwill as a result of the Raytheon Merger which primarily relates to expected synergies from combining operations and the value of the existing workforce. The goodwill generated as a result of the Raytheon Merger is nondeductible for tax purposes.
Merger-Related Costs. Merger-related costs have been expensed as incurred. In 2021 and 2020, we recorded $17 million and $142 million, respectively, of Raytheon Merger transaction and integration costs. These costs were recorded in Selling, general and administrative expenses within the Consolidated Statement of Operations.
Supplemental Pro-Forma Data. Raytheon Company’s results of operations have been included in RTC’s financial statements for the period subsequent to the completion of the Raytheon Merger on April 3, 2020. The following unaudited supplemental pro-forma data presents consolidated information as if the Raytheon Merger had been completed on January 1, 2019. The pro-forma results were calculated by combining the results of Raytheon Technologies with the stand-alone results of Raytheon Company for the pre-acquisition periods, which were adjusted to account for certain costs that would have been incurred during this pre-acquisition period. The results below reflect Raytheon Technologies on a continuing operations basis, in order to more
accurately represent the structure of Raytheon Technologies after completion of the Separation Transactions, the Distributions and the Raytheon Merger.
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
2020
|
|
2019
|
Net sales
|
$
|
64,087
|
|
|
$
|
74,238
|
|
Income (loss) from continuing operations attributable to common shareowners
|
(2,167)
|
|
|
6,544
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share of common stock from continuing operations
|
$
|
(1.43)
|
|
|
$
|
4.34
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share of common stock from continuing operations
|
(1.43)
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
The unaudited supplemental pro-forma data above includes the following significant adjustments made to account for certain costs which would have been incurred if the acquisition had been completed on January 1, 2019, as adjusted for the applicable tax impact. As the merger was completed on April 3, 2020, the pro-forma adjustments in the table below only include the required adjustments through April 3, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2020
|
|
2019
|
Amortization of acquired Raytheon Company intangible assets, net (1)
|
$
|
(270)
|
|
|
$
|
(1,048)
|
|
Amortization of fixed asset fair value adjustment (2)
|
(9)
|
|
|
(38)
|
|
Utilization of contractual customer obligation (3)
|
8
|
|
|
57
|
|
Deferred revenue fair value adjustment (4)
|
(4)
|
|
|
(33)
|
|
Adjustment to non-service pension (income) expense (5)
|
239
|
|
|
832
|
|
RTC/Raytheon fees for advisory, legal, accounting services (6)
|
134
|
|
|
(134)
|
|
Adjustment to interest expense related to the Raytheon Merger, net (7)
|
9
|
|
|
36
|
|
Elimination of deferred commission amortization (8)
|
5
|
|
|
20
|
|
|
$
|
112
|
|
|
$
|
(308)
|
|
(1) Reflects the additional amortization of the acquired Raytheon Company’s intangible assets recognized at fair value in purchase accounting and eliminates the historical Raytheon Company intangible asset amortization expense.
(2) Reflects the amortization of the fixed asset fair value adjustment as of the acquisition date.
(3) Reflects the additional amortization of liabilities recognized for certain acquired loss making contracts as of the acquisition date.
(4) Reflects the difference between prepayments related to extended arrangements and the fair value of the assumed performance obligations as they are satisfied.
(5) Represents the elimination of unamortized prior service costs and actuarial losses, as a result of fair value purchase accounting.
(6) Reflects the elimination of transaction-related fees incurred by RTC and Raytheon Company in connection with the Raytheon Merger and assumes all of the fees were incurred during the first quarter of 2019.
(7) Reflects the amortization of the fair market value adjustment related to Raytheon Company.
(8) Reflects the elimination of amortization recognized on deferred commissions that are eliminated in purchase accounting.
The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings related to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition had been consummated on January 1, 2019, nor are they indicative of future results.
Dispositions. In 2021, 2020 and 2019 cash inflows related to dispositions were $1,879 million, $2,556 million and $134 million, respectively. Our dispositions of businesses in 2021, 2020 and 2019 consisted of the dispositions discussed below and other immaterial dispositions in our aerospace businesses.
In September 2021, we entered into a definitive agreement to divest our global training and services business within our RIS segment, which we completed in December 2021, for approximately $0.9 billion in cash and other consideration, resulting in an aggregate pre-tax gain, net of transaction costs, of $251 million ($135 million after tax), which includes a $12 million pre-tax gain recognized in Non-service pension income.
In October 2020, we entered into a definitive agreement to sell our Forcepoint business, which we completed on January 8, 2021, for proceeds of $1.1 billion, net of cash transferred. At December 31, 2020, the related assets of approximately $1.9 billion and liabilities of approximately $855 million were accounted for as held for sale at fair value less cost to sell; however, Forcepoint did not qualify for presentation as discontinued operations. These held for sale assets and liabilities are presented in Other assets, current and Other accrued liabilities, respectively, on our December 31, 2020 Consolidated Balance Sheet. Assets held for sale included $1.4 billion of goodwill and intangible assets. We did not recognize a pre-tax gain or loss within the Consolidated Statement of Operations related to the sale of Forcepoint. The results of Forcepoint were included in Eliminations and other in our segment results.
In the third quarter of 2020, in accordance with conditions imposed for regulatory approval of the Raytheon Merger, we completed the sale of our Collins Aerospace military Global Positioning System (GPS) and space-based precision optics businesses for $2.3 billion in cash, resulting in an aggregate pre-tax gain, net of transaction costs, of $580 million ($253 million after tax), of which $608 million was included in Other income (expense), net partially offset by $20 million of aggregate transaction costs included in Selling, general and administrative costs and an $8 million expense included in Non-service pension income within our Consolidated Statement of Operations.
In May 2020, in order to meet the requirements for regulatory approval of the Raytheon Merger, we completed the sale of our airborne tactical radios business within our RIS segment for $231 million in cash, net of transaction-related costs. As the transaction occurred subsequent to the Raytheon Merger, the gain of $199 million was not recorded in the Consolidated Statement of Operations, but rather was recorded as an adjustment to the fair value of net assets acquired in the allocation of consideration transferred to net assets acquired in the Raytheon Merger.
Goodwill. Changes in our goodwill balances for the year ended in 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Balance as of January 1, 2021(1)
|
|
Acquisitions and Divestitures
|
|
Foreign currency
translation and other
|
|
Balance as of
December 31, 2021
|
|
|
Collins Aerospace Systems
|
$
|
31,571
|
|
|
$
|
228
|
|
|
$
|
(415)
|
|
|
$
|
31,384
|
|
|
|
Pratt & Whitney
|
1,563
|
|
|
—
|
|
|
—
|
|
|
1,563
|
|
|
|
Raytheon Intelligence & Space(1)
|
9,522
|
|
|
286
|
|
|
5
|
|
|
9,813
|
|
|
|
Raytheon Missiles & Defense(1)
|
11,608
|
|
|
52
|
|
|
(1)
|
|
|
11,659
|
|
|
|
Total Segment
|
54,264
|
|
|
566
|
|
|
(411)
|
|
|
54,419
|
|
|
|
Eliminations and other
|
21
|
|
|
—
|
|
|
(4)
|
|
|
17
|
|
|
|
Total
|
$
|
54,285
|
|
|
$
|
566
|
|
|
$
|
(415)
|
|
|
$
|
54,436
|
|
|
|
(1) In connection with the previously announced January 1, 2021 reorganization of RIS and RMD, goodwill of $282 million was allocated from RMD to RIS on a relative fair value basis and is reflected in the revised balances at January 1, 2021.
The Company reviews goodwill for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired.
We completed our annual goodwill impairment testing as of October 1, 2021, where we compared the fair value of all of our reporting units to their respective carrying values (step 1) and determined that no adjustments to the carrying value of goodwill were necessary. We estimated the fair value of our reporting units using a discounted cash flow (DCF) model based on our most recent long-range plan in place at the time of our impairment testing. The key assumptions used in the DCF analysis include our business projections, including revenue growth rates and operating profit margins, the long-term growth rate used to calculate the terminal value of the reporting unit, and the discount rate. We consider both internal and external factors and refresh key assumptions annually or as considered necessary. As part of our 2021 analysis, we used a slightly higher long-term growth rate assumption as compared to our 2020 analysis, based on our review of historical growth rates for our business and industry, long-term inflation estimates, and industry reports on projected future long-term growth for the industry. Material changes in these estimates could occur and result in impairments in future periods.
Based on our annual impairment analysis as of October 1, 2021, the reporting unit that was closest to impairment was a Collins Aerospace reporting unit with a fair value in excess of book value, including goodwill, of 15%. All other factors being equal, a 10% decrease in expected future cash flows, either due to a delay in the return to pre-pandemic revenue levels or other factors, would result in an excess of fair value over net book value of approximately 3%. Alternatively, all other factors being equal, a 50 basis points decrease in the assumed long-term growth rate would result in an excess of fair value over net book value of approximately 7%. The discount rate that we used in our 2021 analysis was consistent with the discount rate used in our 2020 analysis. All other factors being equal, a 50 basis points increase in the discount rate would result in an excess of fair value over net book value of approximately 4%.
All other reporting units had a fair value substantially in excess of book value.
We considered the deterioration in general economic and market conditions primarily due to the COVID-19 pandemic to be a triggering event in the first and second quarters of 2020, requiring an impairment evaluation of goodwill, intangible assets, net and other assets in our commercial aerospace businesses, Collins Aerospace and Pratt & Whitney. Beginning in the second quarter of 2020, we observed several airline customer bankruptcies, delays and cancellations of aircraft purchases by airlines, fleet retirements and repositioning of OEM production schedules and we experienced significant unfavorable EAC adjustments at our Collins Aerospace and Pratt & Whitney businesses due to a decline in flight hours, aircraft fleet utilization, shop visits and commercial OEM deliveries. These factors contributed to a deterioration of our expectations regarding the timing of a return to pre-COVID-19 commercial flight activity, which further reduced our future sales and cash flows expectations. In the
second quarter of 2020, we evaluated the Collins Aerospace and Pratt & Whitney reporting units for goodwill impairment and determined that the carrying values of two of the six Collins Aerospace reporting units exceeded the sum of discounted future cash flows, resulting in goodwill impairments of $3.2 billion. Goodwill impairment was not indicated for any of the other reporting units evaluated for impairment in any of these scenarios.
The Company continuously monitors and evaluates relevant events and circumstances that could unfavorably impact the key assumptions in determining the fair value of our reporting units, including long-term revenue growth projections, profitability and expectations for net cash flows, discount rates including changes to U.S. treasury rates and equity risk premiums, tax rates, recent market valuations from transactions by comparable companies, volatility in the Company’s market capitalization, and general industry, market and macro-economic conditions. It is possible that future changes in such circumstances, including significant future negative developments in the COVID-19 pandemic, or future changes in the inputs and assumptions used in estimating the fair value of our reporting units, including the expected long-term recovery of airline travel to pre-COVID-19 levels, would require the Company to record a non-cash impairment charge.
Intangible Assets. Identifiable intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
(dollars in millions)
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
Amortized:
|
|
|
|
|
|
|
|
Patents and trademarks
|
$
|
96
|
|
|
$
|
(37)
|
|
|
$
|
48
|
|
|
$
|
(35)
|
|
Collaboration assets
|
5,319
|
|
|
(1,173)
|
|
|
5,021
|
|
|
(1,024)
|
|
Exclusivity assets
|
2,673
|
|
|
(318)
|
|
|
2,541
|
|
|
(295)
|
|
Developed technology and other
|
1,118
|
|
|
(429)
|
|
|
906
|
|
|
(316)
|
|
Customer relationships
|
29,982
|
|
|
(7,411)
|
|
|
30,241
|
|
|
(5,262)
|
|
|
39,188
|
|
|
(9,368)
|
|
|
38,757
|
|
|
(6,932)
|
|
Indefinite-lived:
|
|
|
|
|
|
|
|
Trademarks and other
|
8,696
|
|
|
—
|
|
|
8,714
|
|
|
—
|
|
Total
|
$
|
47,884
|
|
|
$
|
(9,368)
|
|
|
$
|
47,471
|
|
|
$
|
(6,932)
|
|
We completed our annual indefinite-lived intangible assets impairment testing as of October 1, 2021. Based on this analysis, all of our indefinite-lived intangible assets had a fair value substantially in excess of book value. In 2020, given the deterioration in general economic and market conditions primarily due to the COVID-19 pandemic, we performed an assessment of our indefinite-lived intangible assets and recorded charges of $57 million related to the impairment of an indefinite-lived tradename intangible assets at Collins Aerospace. We will continue to evaluate the impact of the COVID-19 pandemic on our customers and our business in future periods which may result in a different conclusion.
Amortization of intangible assets was $2,439 million, $2,125 million and $1,244 million in 2021, 2020 and 2019, respectively. The following is the expected amortization of total intangible assets for 2022 through 2026, which reflects the pattern of expected economic benefit on certain aerospace intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026
|
Amortization expense
|
$1,997
|
|
$2,096
|
|
$2,174
|
|
$2,061
|
|
$1,977
|
NOTE 3: DISCONTINUED OPERATIONS
As discussed above, on April 3, 2020 UTC separated into three independent, publicly traded companies – UTC, Carrier and Otis and distributed all of the outstanding common stock of Carrier and Otis to UTC shareowners who held shares of UTC common stock as of the close of business on March 19, 2020.
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. Income (loss) from discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
2019
|
Otis
|
|
$
|
—
|
|
|
$
|
187
|
|
|
$
|
1,033
|
|
Carrier
|
|
—
|
|
|
196
|
|
|
1,698
|
|
Separation related and other discontinued operations transactions
|
|
(33)
|
|
|
(793)
|
|
|
(704)
|
|
Income (loss) from discontinued operations attributable to common shareowners
|
|
$
|
(33)
|
|
|
$
|
(410)
|
|
|
$
|
2,027
|
|
The following summarized financial information related to discontinued operations has been reclassified from Income from continuing operations and included in Income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
2019
|
Otis
|
|
|
|
|
|
|
Products sales
|
|
$
|
—
|
|
|
$
|
1,123
|
|
|
$
|
5,669
|
|
Services sales
|
|
—
|
|
|
1,843
|
|
|
7,444
|
|
Cost of sales - products
|
|
—
|
|
|
913
|
|
|
4,656
|
|
Cost of sales - services
|
|
—
|
|
|
1,157
|
|
|
4,635
|
|
Research and development
|
|
—
|
|
|
38
|
|
|
163
|
|
Selling, general and administrative expense
|
|
—
|
|
|
450
|
|
|
1,906
|
|
Other income (expense), net
|
|
—
|
|
|
(65)
|
|
|
(40)
|
|
Non-operating expense (income), net
|
|
—
|
|
|
3
|
|
|
4
|
|
Income from discontinued operations, before income taxes
|
|
—
|
|
|
340
|
|
|
1,709
|
|
Income tax expense
|
|
—
|
|
|
116
|
|
|
525
|
|
Income from discontinued operations
|
|
—
|
|
|
224
|
|
|
1,184
|
|
Less: Noncontrolling interest in subsidiaries earnings from discontinued operations
|
|
—
|
|
|
37
|
|
|
151
|
|
Income from discontinued operations attributable to common shareowners
|
|
$
|
—
|
|
|
$
|
187
|
|
|
$
|
1,033
|
|
Carrier
|
|
|
|
|
|
|
Products sales
|
|
$
|
—
|
|
|
$
|
3,143
|
|
|
$
|
15,337
|
|
Services sales
|
|
—
|
|
|
741
|
|
|
3,247
|
|
Cost of sales - products
|
|
—
|
|
|
2,239
|
|
|
10,878
|
|
Cost of sales - services
|
|
—
|
|
|
527
|
|
|
2,298
|
|
Research and development
|
|
—
|
|
|
98
|
|
|
400
|
|
Selling, general and administrative expense
|
|
—
|
|
|
669
|
|
|
2,888
|
|
Other income (expense), net
|
|
—
|
|
|
(30)
|
|
|
246
|
|
Non-operating expense (income), net
|
|
—
|
|
|
17
|
|
|
(43)
|
|
Income from discontinued operations, before income taxes
|
|
—
|
|
|
304
|
|
|
2,409
|
|
Income tax expense
|
|
—
|
|
|
102
|
|
|
672
|
|
Income from discontinued operations
|
|
—
|
|
|
202
|
|
|
1,737
|
|
Less: Noncontrolling interest in subsidiaries earnings from discontinued operations
|
|
—
|
|
|
6
|
|
|
39
|
|
Income from discontinued operations attributable to common shareowners
|
|
$
|
—
|
|
|
$
|
196
|
|
|
$
|
1,698
|
|
Separation related and other discontinued operations transactions(1)
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
$
|
10
|
|
|
$
|
151
|
|
|
$
|
16
|
|
Other income (expense), net
|
|
—
|
|
|
(709)
|
|
|
(11)
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, before income taxes
|
|
(10)
|
|
|
(860)
|
|
|
(27)
|
|
Income tax (benefit) expense
|
|
23
|
|
|
(67)
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
(33)
|
|
|
(793)
|
|
|
(704)
|
|
Total income (loss) from discontinued operations attributable to common shareowners
|
|
$
|
(33)
|
|
|
$
|
(410)
|
|
|
$
|
2,027
|
|
(1) Reflects unallocable transaction costs incurred by the Company primarily related to professional services costs pertaining to the Separation Transactions and the establishment of Carrier and Otis as stand-alone public companies, facility relocation costs, costs to separate information systems, costs of retention bonuses and tax charges and benefits related to separation activities. In addition, 2020 includes debt extinguishment costs related to the Company’s paydown of debt to not exceed the maximum applicable net indebtedness under the Raytheon Merger Agreement.
Selected financial information related to cash flows from discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
$
|
(71)
|
|
|
$
|
(728)
|
|
|
$
|
3,062
|
|
Net cash used in investing activities
|
—
|
|
|
(241)
|
|
|
(416)
|
|
Net cash provided by (used in) financing activities
|
71
|
|
|
(1,414)
|
|
|
(2,651)
|
|
Net cash (used in) provided by operating activities includes the net operating cash flows of Carrier and Otis prior to the Separation Transactions, as well as costs incurred by the Company primarily related to professional services costs pertaining to the Separation Transactions and the establishment of Carrier and Otis as stand-alone public companies, facility relocation costs, costs to separate information systems, costs of retention bonuses and tax charges related to separation activities. Net cash used in financing activities primarily consists of net cash transfers from Carrier and Otis to the Company, as well as debt extinguishment costs related to the early repayment of debt in 2020.
The Separation of Carrier was treated as a return on capital and recorded as a reduction to retained earnings, as it was in a net asset position, while the Separation of Otis was treated as a return of capital and recorded as an adjustment to Common stock, as it was in a net liability position.
NOTE 4: EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts; shares in millions)
|
2021
|
|
2020
|
|
2019
|
Net income (loss) attributable to common shareowners:
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
3,897
|
|
|
$
|
(3,109)
|
|
|
$
|
3,510
|
|
Income (loss) from discontinued operations
|
(33)
|
|
|
(410)
|
|
|
2,027
|
|
Net income (loss) attributable to common shareowners
|
$
|
3,864
|
|
|
$
|
(3,519)
|
|
|
$
|
5,537
|
|
Basic weighted average number of shares outstanding
|
1,501.6
|
|
|
1,357.8
|
|
|
854.8
|
|
Stock awards and equity units (share equivalent)
|
6.9
|
|
|
—
|
|
|
9.1
|
|
Diluted weighted average number of shares outstanding
|
1,508.5
|
|
|
1,357.8
|
|
|
863.9
|
|
Earnings (Loss) per share attributable to common shareowners - basic
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
2.60
|
|
|
$
|
(2.29)
|
|
|
$
|
4.11
|
|
Income (loss) from discontinued operations
|
(0.03)
|
|
|
(0.30)
|
|
|
2.37
|
|
Net income (loss) attributable to common shareowners
|
$
|
2.57
|
|
|
$
|
(2.59)
|
|
|
$
|
6.48
|
|
Earnings (Loss) per share attributable to common shareowners - diluted
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
2.58
|
|
|
$
|
(2.29)
|
|
|
$
|
4.06
|
|
Income (loss) from discontinued operations
|
(0.02)
|
|
|
(0.30)
|
|
|
2.35
|
|
Net income (loss) attributable to common shareowners
|
$
|
2.56
|
|
|
$
|
(2.59)
|
|
|
$
|
6.41
|
|
The computation of diluted EPS excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period because the effect would be anti-dilutive. In addition, the computation of diluted EPS excludes the effect of the potential exercise of stock awards when the awards’ assumed proceeds exceed the average market price of the common shares during the period. For 2021 and 2019, there were 13.4 million and 8.3 million stock awards excluded from the computation, respectively. For 2020, all stock awards were excluded from the computation of diluted EPS because their effect was antidilutive due to the loss from continuing operations, and amounted 32.5 million stock awards.
NOTE 5: ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
U.S. government contracts (including foreign military sales)
|
$
|
1,204
|
|
|
$
|
1,039
|
|
Other customers
|
8,932
|
|
|
8,761
|
|
Allowance for expected credit losses
|
(475)
|
|
|
(546)
|
|
Total accounts receivable, net
|
$
|
9,661
|
|
|
$
|
9,254
|
|
The changes in the allowance for expected credit losses related to Accounts receivable were as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
2020
|
Balance as of January 1
|
$
|
546
|
|
$
|
254
|
|
Current period provision for expected credit losses, net of recoveries(1)
|
(47)
|
|
277
|
|
Write-offs charged against the allowance for expected credit losses
|
(18)
|
|
(5)
|
|
Other, net(2)
|
(6)
|
|
20
|
|
Balance as of December 31
|
$
|
475
|
|
$
|
546
|
|
(1) The current provision for expected credit losses for 2020 includes $248 million of reserves driven by customer bankruptcies and additional reserves for credit losses primarily due to the economic environment primarily caused by the COVID-19 pandemic.
(2) Other, net for 2020 includes a $34 million impact related to the January 1, 2020 adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The activity in the allowance for doubtful accounts was not material in 2019.
NOTE 6: CONTRACT ASSETS AND LIABILITIES
Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. Total contract assets and contract liabilities as of December 31, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Contract assets
|
$
|
11,361
|
|
|
$
|
9,931
|
|
Contract liabilities
|
(13,720)
|
|
|
(12,889)
|
|
Net contract liabilities
|
$
|
(2,359)
|
|
|
$
|
(2,958)
|
|
Contract assets increased $1,430 million during 2021 primarily due to sales in excess of billings at Pratt & Whitney and contractual billing terms on U.S. government and foreign military sales contracts at RMD. Contract liabilities increased $831 million during 2021 primarily due to billings in excess of sales at Pratt & Whitney and timing of milestone payments on certain international contracts at RMD, partially offset by $381 million of contract liability reduction related to a contract termination at Collins Aerospace.
In 2021, 2020 and 2019, we recognized revenue of $4,301 million, $2,763 million and $2,850 million related to our Contract liabilities at January 1, 2021, January 1, 2020 and January 1, 2019, respectively.
As of December 31, 2021, our Contract liabilities include approximately $430 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.
Contract assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Unbilled
|
$
|
23,652
|
|
|
$
|
20,336
|
|
Progress payments
|
(12,291)
|
|
|
(10,405)
|
|
Total contract assets
|
$
|
11,361
|
|
|
$
|
9,931
|
|
The U.S. government has title to the assets related to unbilled amounts on U.S. government contracts that provide progress payments.
Contract assets are net of an allowance for expected credit losses of $251 million and $177 million as of December 31, 2021 and 2020, respectively.
The allowance for expected credit losses activity was not material in 2021. In 2020, we recognized incremental credit loss reserves of $132 million related to a number of airline customers that have filed for bankruptcy and additional reserves due to the economic environment primarily caused by the COVID-19 pandemic.
In addition, in 2020, we recognized an impairment of $111 million of contract assets at Collins Aerospace due to the impact of lower estimated future customer activity principally driven by the expected acceleration of fleet retirements of a certain commercial aircraft type, and we recognized an impairment of $129 million of contract assets as a result of an unfavorable EAC adjustment related to lower estimated revenues due to the restructuring of a customer contract at Pratt & Whitney.
NOTE 7: INVENTORY, NET
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Raw materials
|
$
|
3,024
|
|
|
$
|
3,015
|
|
Work-in-process
|
3,085
|
|
|
2,924
|
|
Finished goods
|
3,069
|
|
|
3,472
|
|
Total inventory, net
|
$
|
9,178
|
|
|
$
|
9,411
|
|
Raw materials, work-in-process and finished goods are net of total valuation reserves of $2.0 billion and $1.8 billion as of December 31, 2021 and 2020, respectively.
NOTE 8: COMMERCIAL AEROSPACE INDUSTRY ASSETS AND COMMITMENTS
The ongoing COVID-19 pandemic has negatively affected our business, supply chains, operations and the industries in which we operate. As a result of COVID-19, governments, businesses and individuals have taken actions such as instituting lockdowns, quarantines, border closings and other travel restrictions and requirements, adopting remote working and reducing business and leisure travel, which collectively led to an unprecedented decline in demand for commercial air travel. The unprecedented decrease in air travel adversely affected our airline and airframer customers and their demand for our products and services of our Collins Aerospace and Pratt & Whitney businesses. Refer to “Note 1: Basis of Presentation and Summary of Accounting Principles” for further details. While we have seen indications that commercial air travel is recovering, we continue to closely monitor our commercial aerospace assets for recoverability and our off-balance sheet exposures. The following summarizes certain significant assets and off-balance sheet exposures specifically related to our commercial aerospace customers:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Assets related to commercial aerospace industry customers:
|
|
|
|
Accounts receivable, net (Note 5)
|
$
|
7,235
|
|
|
$
|
7,239
|
|
Contract assets (Note 6)
|
3,264
|
|
|
2,559
|
|
Customer financing assets (1) (Note 1)
|
2,945
|
|
|
3,160
|
|
Contract fulfillment costs (Note 1)
|
1,711
|
|
|
1,773
|
|
|
|
|
|
|
|
|
|
Guarantees and Commitments related to commercial aerospace industry customers:
|
|
|
|
Commercial aerospace guarantees (net of reserves and collaboration partners’ share) (Note 18)
|
165
|
|
|
174
|
|
Commercial aerospace commitments (net of collaboration partners’ share) (Note 19)
|
9,659
|
|
|
8,515
|
|
(1) Customer financing assets is inclusive of both the current and long term balances.
We also have goodwill and intangible assets, including exclusivity assets and collaboration assets, associated with our commercial aerospace business. Refer to “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets” for further discussion.
NOTE 9: FIXED ASSETS, NET
Fixed assets, net, are stated at cost less accumulated depreciation. Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements are expensed. For sales or asset retirements, the assets and related accumulated depreciation and amortization are eliminated from the accounts. Gains and losses on sales of our Fixed assets, net, are generally recorded in operating income; however, for our RIS and RMD segments, gains and losses that are allocable to our contracts are
included in overhead, as we are required to allocate gains or losses and generally can recover these costs through the pricing of products and services to the U.S. government.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Estimated
Useful Lives
|
|
2021
|
|
2020
|
Land
|
|
|
$
|
765
|
|
|
$
|
773
|
|
Buildings and improvements
|
10-45 years
|
|
7,271
|
|
|
7,067
|
|
Machinery, tools and equipment
|
3-20 years
|
|
16,729
|
|
|
15,994
|
|
Other, including assets under construction
|
|
|
2,872
|
|
|
2,512
|
|
Fixed assets, gross
|
|
|
27,637
|
|
|
26,346
|
|
Accumulated depreciation
|
|
|
(12,665)
|
|
|
(11,384)
|
|
Fixed assets, net
|
|
|
$
|
14,972
|
|
|
$
|
14,962
|
|
Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated useful life of the improvement.
Depreciation expense related to Fixed assets, net is recorded predominantly utilizing the straight-line method and was $1,828 million in 2021, $1,767 million in 2020 and $1,191 million in 2019.
NOTE 10: BORROWINGS AND LINES OF CREDIT
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
|
|
|
Commercial paper
|
$
|
—
|
|
|
$
|
160
|
|
Other borrowings
|
134
|
|
|
87
|
|
Total short-term borrowings
|
$
|
134
|
|
|
$
|
247
|
|
As of December 31, 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 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 have original maturities of not more than 90 days from the date of issuance. Interest rates on our commercial paper borrowings are considered variable due to their short-term duration and high-frequency of turnover.
As of December 31, 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, which matures in April 2025, and a $2.0 billion revolving credit agreement, which we renewed in May 2021 and expires in May 2022. As of December 31, 2021, there were no borrowings outstanding under these agreements. In addition, at December 31, 2021, approximately $0.9 billion was available under short-term lines of credit with local banks at our various domestic and international subsidiaries.
On November 17, 2021, we completed a cash tender offer for the notes included in the repayments table below (the Tender Offer Notes), resulting in a partial repayment of approximately $1.5 billion of aggregate principal on these notes. In connection with this transaction, we recorded debt extinguishment costs of $617 million, primarily related to premiums.
We had the following issuances of long-term debt during 2021:
|
|
|
|
|
|
|
|
|
Issuance Date
|
Description of Notes
|
Aggregate Principal Balance (in millions)
|
November 16, 2021
|
2.375% notes due 2032 (1)
|
$
|
1,000
|
|
|
3.030% notes due 2052 (1)
|
1,100
|
|
August 10, 2021
|
1.900% notes due 2031 (2)
|
1,000
|
|
|
2.820% notes due 2051 (2)
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The net proceeds received from these debt issuances were used to fund the purchase of the Tender Offer Notes.
(2) The net proceeds received from these debt issuances, along with cash on hand, were used to fund the repayment of our 2.800% and 2.500% notes due 2022.
We made the following repayments of long-term debt during 2021:
|
|
|
|
|
|
|
|
|
Repayment Date
|
Description of Notes
|
Aggregate Principal Balance (in millions)
|
November 17, 2021
|
5.700% notes due 2040 (1)
|
$
|
447
|
|
|
6.125% notes due 2038 (1)
|
425
|
|
|
6.050% notes due 2036 (1)
|
190
|
|
|
5.400% notes due 2035 (1)
|
154
|
|
|
7.500% notes due 2029 (1)
|
136
|
|
|
6.700% notes due 2028 (1)
|
115
|
|
|
6.800% notes due 2036 (1)
|
17
|
|
|
7.000% notes due 2038 (1)
|
11
|
|
|
7.100% notes due 2027 (1)
|
6
|
|
November 15, 2021
|
3.100% notes due 2021
|
250
|
|
August 26, 2021
|
2.800% notes due 2022 (1)
|
1,100
|
|
|
2.500% notes due 2022 (1)
|
1,100
|
|
March 1, 2021
|
8.750% notes due 2021
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In connection with the early repayment of outstanding principal, we recorded debt extinguishment costs of $649 million in 2021.
Long-term debt consisted of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
8.750% notes due 2021
|
$
|
—
|
|
|
$
|
250
|
|
3.100% notes due 2021
|
—
|
|
|
250
|
|
2.800% notes due 2022
|
—
|
|
|
1,100
|
|
2.500% notes due 2022
|
—
|
|
|
1,100
|
|
3.650% notes due 2023 (1)
|
171
|
|
|
171
|
|
3.700% notes due 2023 (1)
|
400
|
|
|
400
|
|
3.200% notes due 2024 (1)
|
950
|
|
|
950
|
|
3.150% notes due 2024 (1)
|
300
|
|
|
300
|
|
3.950% notes due 2025 (1)
|
1,500
|
|
|
1,500
|
|
2.650% notes due 2026 (1)
|
719
|
|
|
719
|
|
3.125% notes due 2027 (1)
|
1,100
|
|
|
1,100
|
|
3.500% notes due 2027 (1)
|
1,300
|
|
|
1,300
|
|
7.200% notes due 2027 (1)
|
382
|
|
|
382
|
|
7.100% notes due 2027
|
135
|
|
|
141
|
|
6.700% notes due 2028
|
285
|
|
|
400
|
|
7.000% notes due 2028 (1)
|
185
|
|
|
185
|
|
4.125% notes due 2028 (1)
|
3,000
|
|
|
3,000
|
|
7.500% notes due 2029 (1)
|
414
|
|
|
550
|
|
2.150% notes due 2030 (€500 million principal value) (1)
|
565
|
|
|
612
|
|
2.250% notes due 2030 (1)
|
1,000
|
|
|
1,000
|
|
1.900% notes due 2031 (1)
|
1,000
|
|
|
—
|
|
2.375% notes due 2032 (1)
|
1,000
|
|
|
—
|
|
5.400% notes due 2035 (1)
|
446
|
|
|
600
|
|
6.050% notes due 2036 (1)
|
410
|
|
|
600
|
|
6.800% notes due 2036 (1)
|
117
|
|
|
134
|
|
7.000% notes due 2038
|
148
|
|
|
159
|
|
6.125% notes due 2038 (1)
|
575
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.450% notes due 2038 (1)
|
750
|
|
|
750
|
|
5.700% notes due 2040 (1)
|
553
|
|
|
1,000
|
|
4.875% notes due 2040 (1)
|
600
|
|
|
600
|
|
4.700% notes due 2041 (1)
|
425
|
|
|
425
|
|
4.500% notes due 2042 (1)
|
3,500
|
|
|
3,500
|
|
4.800% notes due 2043 (1)
|
400
|
|
|
400
|
|
4.200% notes due 2044 (1)
|
300
|
|
|
300
|
|
4.150% notes due 2045 (1)
|
850
|
|
|
850
|
|
3.750% notes due 2046 (1)
|
1,100
|
|
|
1,100
|
|
4.050% notes due 2047 (1)
|
600
|
|
|
600
|
|
4.350% notes due 2047 (1)
|
1,000
|
|
|
1,000
|
|
4.625% notes due 2048 (1)
|
1,750
|
|
|
1,750
|
|
3.125% notes due 2050 (1)
|
1,000
|
|
|
1,000
|
|
2.820% notes due 2051 (1)
|
1,000
|
|
|
—
|
|
3.030% notes due 2052 (1)
|
1,100
|
|
|
—
|
|
Other (including finance leases)
|
270
|
|
|
292
|
|
Total principal long-term debt
|
31,300
|
|
|
31,470
|
|
Other (fair market value adjustments, (discounts)/premiums and debt issuance costs)
|
51
|
|
|
106
|
|
Total long-term debt
|
31,351
|
|
|
31,576
|
|
Less: current portion
|
24
|
|
|
550
|
|
Long-term debt, net of current portion
|
$
|
31,327
|
|
|
$
|
31,026
|
|
(1) We may redeem these notes at our option pursuant to their terms.
The weighted-average interest rate related to total debt as of December 31, 2021 and 2020 was 4.0% and 4.2%, respectively.
The average maturity of our long-term debt at December 31, 2021 is approximately 15 years. The schedule of principal payments required on long-term debt for the next five years and thereafter is:
|
|
|
|
|
|
(in millions)
|
|
2022
|
$
|
13
|
|
2023
|
588
|
|
2024
|
1,270
|
|
2025
|
1,590
|
|
2026
|
751
|
|
Thereafter
|
27,088
|
|
Total
|
$
|
31,300
|
|
NOTE 11: EMPLOYEE BENEFIT PLANS
We sponsor various domestic and foreign employee benefit plans, which are discussed below.
Employee Savings Plans. We sponsor various employee savings plans. Our contributions to employer sponsored defined contribution plans were $962 million, $875 million and $485 million for 2021, 2020 and 2019, respectively.
Our non-union domestic employee savings plan for legacy UTC employees uses an Employee Stock Ownership Plan (ESOP) for employer matching contributions. External borrowings were used by the ESOP to fund a portion of its purchase of ESOP stock from us. The external borrowings have been extinguished and only re-amortized loans remain between RTC and the ESOP Trust. As ESOP debt service payments are made, common stock is released from an unreleased shares account. ESOP debt may be prepaid or re-amortized to either increase or decrease the number of shares released so that the value of released shares equals the value of plan benefit. We may also, at our option, contribute additional common stock or cash to the ESOP.
Shares of common stock are allocated to employees’ ESOP accounts at fair value on the date earned. Cash dividends on common stock held by the ESOP are used for debt service payments. Participants may choose to have their ESOP dividends reinvested or distributed in cash. Common stock allocated to ESOP participants is included in the average number of common
shares outstanding for both basic and diluted EPS. At December 31, 2021, 25.4 million common shares had been allocated to employees, leaving 7.2 million unallocated common shares in the ESOP Trust, with a fair value of $619 million.
Pension and Postretirement Plans. We sponsor both funded and unfunded domestic and foreign defined benefit pension plans that cover a large number of our employees. Our largest plans are generally closed to new participants. We also sponsor both funded and unfunded PRB plans that provide health care and life insurance benefits to eligible retirees. Our plans use a December 31 measurement date consistent with our fiscal year.
On April 3, 2020, UTC completed the Separation Transactions, which included the transfer of certain defined benefit plans from UTC to Carrier and Otis. The plans transferred were primarily international plans with the majority of the UTC defined benefit liability remaining with Raytheon Technologies. Upon separation, the pension participants within Carrier and Otis were effectively terminated from Raytheon Technologies. The terminations triggered a mid-year remeasurement of the UTC domestic plans. The remeasurement, which was calculated using discount rates and asset values as of April 3, 2020 (using March 31, 2020 as a practical expedient), resulted in a $2.4 billion increase to our pension liability, primarily due to a decrease in the fair market value of the plans’ assets since December 31, 2019. All service cost previously associated with Carrier and Otis was reclassified to discontinued operations. For non-service pension (income) expense and pension liabilities, generally only the portions related to the defined benefit plans transferred to Carrier and Otis as part of the Separation Transactions were reclassified to discontinued operations.
Raytheon Company has both funded and unfunded domestic and foreign defined benefit pension and PRB plans. As of the merger date, the Raytheon Company plans were remeasured at fair value using accounting policies consistent with the UTC plans. Refer to “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets” for additional information. The deferred pension and PRB plan losses included in Raytheon Company’s accumulated other comprehensive income (loss) as of the merger date were eliminated and are no longer subject to amortization in net periodic benefit (income) expense. Amounts prior to the merger date of April 3, 2020 do not include the Raytheon Company pension plan results.
In December 2020, we approved a change to the Raytheon Company domestic 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. We utilized a practical expedient and measured the plan assets and pension benefit obligations for the effected pension plans as of the nearest month end, December 31, 2020, resulting in a prior service credit of $2.1 billion.
In September 2019, we amended the UTC domestic defined benefit pension plans to cease accrual of additional benefits for future service and compensation for non-union participants effective December 31, 2019. Beginning January 1, 2020, these participants began receiving additional contributions under the UTC domestic defined contribution plan. The plan change did not impact participants’ historical benefit accruals. We utilized the practical expedient and remeasured plan assets and pension benefit obligations for the affected pension plans as of the nearest month-end, August 31, 2019, resulting in a net actuarial loss of $425 million. We recorded a curtailment gain of $98 million in the Consolidated Statement of Operations during the third quarter of 2019 due to the recognition of previously unrecognized prior service credits for the affected pension plans.
For non-union employees in the UTC domestic pension plans, benefits for service up to December 31, 2014 are generally based on the employee’s years of service and compensation. Benefits for service after December 31, 2014 and through December 31, 2019 are based on the existing cash balance formula that was adopted in 2003 for newly hired non-union employees and for non-union employees who made a one-time voluntary election to have future benefit accruals determined under this formula. Benefits for union employees in the UTC domestic pension plans are generally based on a stated amount for each year of service.
We made the following contributions to our pension and PRB plans’ trusts during the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
U.S. qualified defined benefit plans
|
$
|
—
|
|
|
$
|
885
|
|
|
$
|
25
|
|
International defined benefit plans
|
42
|
|
|
125
|
|
|
30
|
|
PRB plans
|
17
|
|
|
15
|
|
|
—
|
|
The contributions to our U.S. qualified defined benefit plans in 2020 include a $750 million discretionary contribution to the Raytheon Company U.S. qualified pension plans’ trust. The contributions to our International defined benefit plans in 2020 include discretionary contributions of $51 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
PRB
|
(dollars in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
71,257
|
|
|
$
|
38,027
|
|
|
$
|
1,535
|
|
|
$
|
765
|
|
Service cost attributable to continuing operations
|
523
|
|
|
483
|
|
|
7
|
|
|
6
|
|
Service cost attributable to discontinued operations
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Interest cost
|
1,249
|
|
|
1,650
|
|
|
24
|
|
|
37
|
|
Actuarial loss (gain)
|
(1,643)
|
|
|
7,029
|
|
|
(73)
|
|
|
114
|
|
Total benefits paid(1)
|
(4,098)
|
|
|
(3,623)
|
|
|
(165)
|
|
|
(144)
|
|
Net settlement, curtailment and special termination benefits
|
(89)
|
|
|
(4)
|
|
|
(11)
|
|
|
(8)
|
|
Plan amendments
|
59
|
|
|
(2,088)
|
|
|
—
|
|
|
(7)
|
|
Business combinations and divestitures(2)
|
48
|
|
|
29,385
|
|
|
—
|
|
|
724
|
|
Other (3)
|
(92)
|
|
|
397
|
|
|
53
|
|
|
48
|
|
Ending balance
|
$
|
67,214
|
|
|
$
|
71,257
|
|
|
$
|
1,370
|
|
|
$
|
1,535
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
62,318
|
|
|
$
|
36,225
|
|
|
$
|
381
|
|
|
$
|
20
|
|
Actual return on plan assets
|
4,983
|
|
|
9,885
|
|
|
36
|
|
|
80
|
|
Employer contributions(1)
|
289
|
|
|
1,201
|
|
|
95
|
|
|
102
|
|
Total benefits paid(1)
|
(4,098)
|
|
|
(3,623)
|
|
|
(165)
|
|
|
(144)
|
|
Settlements
|
(85)
|
|
|
(32)
|
|
|
(11)
|
|
|
(8)
|
|
Business combinations and divestitures(2)
|
—
|
|
|
18,310
|
|
|
—
|
|
|
286
|
|
Other (3)
|
(84)
|
|
|
352
|
|
|
53
|
|
|
45
|
|
Ending balance
|
$
|
63,323
|
|
|
$
|
62,318
|
|
|
$
|
389
|
|
|
$
|
381
|
|
Funded Status:
|
|
|
|
|
|
|
|
Fair value of plan assets
|
$
|
63,323
|
|
|
$
|
62,318
|
|
|
$
|
389
|
|
|
$
|
381
|
|
Benefit obligations
|
(67,214)
|
|
|
(71,257)
|
|
|
(1,370)
|
|
|
(1,535)
|
|
Funded status of plan
|
$
|
(3,891)
|
|
|
$
|
(8,939)
|
|
|
$
|
(981)
|
|
|
$
|
(1,154)
|
|
Amounts Recognized in the Consolidated Balance Sheet Consist of:
|
|
|
|
|
|
|
Noncurrent assets
|
$
|
3,214
|
|
|
$
|
424
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liability
|
(232)
|
|
|
(232)
|
|
|
(78)
|
|
|
(82)
|
|
Noncurrent liability
|
(6,873)
|
|
|
(9,131)
|
|
|
(903)
|
|
|
(1,072)
|
|
Net amount recognized
|
$
|
(3,891)
|
|
|
$
|
(8,939)
|
|
|
$
|
(981)
|
|
|
$
|
(1,154)
|
|
Amounts Recognized in Accumulated Other Comprehensive Loss Consist of:
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
4,402
|
|
|
$
|
8,023
|
|
|
$
|
(199)
|
|
|
$
|
(117)
|
|
Prior service credit
|
(1,715)
|
|
|
(1,947)
|
|
|
(6)
|
|
|
(9)
|
|
Net amount recognized
|
$
|
2,687
|
|
|
$
|
6,076
|
|
|
$
|
(205)
|
|
|
$
|
(126)
|
|
(1) Includes benefit payments paid directly by the company.
(2) Consists primarily of liabilities and assets acquired as a part of the Raytheon Merger in 2020.
(3) The amount included in Other primarily reflects the impact of foreign exchange translation, primarily for plans in the U.K. and Canada, and participant contributions.
The majority of our pension obligations relate to our U.S. Internal Revenue Service (IRS) qualified pension plans, which comprise 86% and 85% of our pension PBO as of December 31, 2021 and 2020, respectively. 3% of our pension PBO as of both December 31, 2021 and 2020 is attributable to our nonqualified domestic pension plans, which provide supplementary retirement benefits to certain employees in excess of the IRS qualified plan limits. International plans comprise 11% and 12% of the pension PBO as of December 31, 2021 and 2020, respectively, and are considered defined benefit pension plans for accounting purposes.
In addition to the pension and PRB noncurrent liabilities shown above, Future pension and postretirement benefit obligations on the Consolidated Balance Sheet includes $79 million and $139 million of other pension and PRB related liabilities as of December 31, 2021 and 2020, respectively.
Information for pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Projected benefit obligation
|
$
|
28,960
|
|
|
$
|
37,215
|
|
Accumulated benefit obligation
|
28,494
|
|
|
36,150
|
|
Fair value of plan assets
|
22,002
|
|
|
27,854
|
|
The accumulated benefit obligation for all defined benefit pension plans was $66.5 billion and $70.2 billion at December 31, 2021 and 2020, respectively.
Information for pension plans with projected benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Projected benefit obligation
|
$
|
31,471
|
|
|
$
|
37,217
|
|
Accumulated benefit obligation
|
30,745
|
|
|
36,151
|
|
Fair value of plan assets
|
24,366
|
|
|
27,855
|
|
The components of the net periodic pension (income) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Operating expense
|
|
|
|
|
|
Service cost
|
$
|
523
|
|
|
$
|
483
|
|
|
$
|
261
|
|
Non-operating expense
|
|
|
|
|
|
Interest cost
|
1,249
|
|
|
1,650
|
|
|
1,245
|
|
Expected return on plan assets
|
(3,476)
|
|
|
(2,995)
|
|
|
(2,252)
|
|
Amortization of prior service cost (credit)
|
(168)
|
|
|
51
|
|
|
16
|
|
|
|
|
|
|
|
Recognized actuarial net loss
|
435
|
|
|
337
|
|
|
245
|
|
Net settlement, curtailment and special termination benefits (gain) loss
|
22
|
|
|
45
|
|
|
(59)
|
|
Non-service pension income
|
(1,938)
|
|
|
(912)
|
|
|
(805)
|
|
Total net periodic pension benefit (income) expense
|
$
|
(1,415)
|
|
|
$
|
(429)
|
|
|
$
|
(544)
|
|
The components of the net periodic PRB (income) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Operating expense
|
|
|
|
|
|
Service cost
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
2
|
|
Non-operating expense
|
|
|
|
|
|
Interest cost
|
24
|
|
|
37
|
|
|
31
|
|
Expected return on plan assets
|
(21)
|
|
|
(13)
|
|
|
(1)
|
|
Amortization of prior service credit
|
(3)
|
|
|
(3)
|
|
|
(42)
|
|
Recognized actuarial net gain
|
(6)
|
|
|
(12)
|
|
|
(12)
|
|
Net settlement, curtailment and special termination benefits loss
|
—
|
|
|
1
|
|
|
—
|
|
Non-service pension (income) expense
|
(6)
|
|
|
10
|
|
|
(24)
|
|
Total net periodic PRB benefit (income) expense
|
$
|
1
|
|
|
$
|
16
|
|
|
$
|
(22)
|
|
Other changes in pension plan assets and benefit obligations recognized in other comprehensive loss in 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
2021
|
|
2020
|
Actuarial (gain) loss arising during the period
|
|
|
|
|
$
|
(3,158)
|
|
|
$
|
155
|
|
Amortization of actuarial loss
|
|
|
|
|
(435)
|
|
|
(337)
|
|
Current year prior service cost (credit)
|
|
|
|
|
59
|
|
|
(2,088)
|
|
Amortization of prior service cost
|
|
|
|
|
168
|
|
|
(51)
|
|
Net settlement and curtailment
|
|
|
|
|
(17)
|
|
|
(34)
|
|
Separation of Carrier and Otis
|
|
|
|
|
—
|
|
|
(763)
|
|
Other (1)
|
|
|
|
|
(6)
|
|
|
81
|
|
Total recognized in other comprehensive (income) loss
|
|
|
|
|
(3,389)
|
|
|
(3,037)
|
|
Net recognized in net periodic benefit (income) cost and other comprehensive (income) loss
|
|
|
|
|
$
|
(4,804)
|
|
|
$
|
(3,466)
|
|
(1) The amount included in Other primarily reflects the impact of foreign exchange translation, primarily for plans in the U.K. and Canada.
The Actuarial gain arising in 2021 was primarily due to an increase in discount rates during 2021 and asset returns exceeding our expected return on assets, partially offset by demographic losses.
The Actuarial loss arising in 2020 was primarily due to a decrease in discount rates during 2020, partially offset by asset returns exceeding our expected return on assets. Current year prior service credit in 2020 was primarily due to the Raytheon Company plan change for non-union participants as discussed above.
Other changes in PRB assets and benefit obligations recognized in other comprehensive loss in 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Actuarial (gain) loss arising during the period
|
$
|
(88)
|
|
|
$
|
47
|
|
Amortization of actuarial gain
|
6
|
|
|
12
|
|
Current year prior service cost (credit)
|
—
|
|
|
(7)
|
|
Amortization of prior service credit
|
3
|
|
|
3
|
|
Net settlement and curtailment
|
—
|
|
|
(1)
|
|
Other
|
—
|
|
|
5
|
|
Total recognized in other comprehensive (income) loss
|
(79)
|
|
|
59
|
|
Net recognized in net periodic benefit (income) cost and other comprehensive loss
|
$
|
(78)
|
|
|
$
|
75
|
|
The Actuarial gain arising in 2021 was primarily due to an increase in discount rates during 2021 and asset returns exceeding our expected return on assets on our funded plans.
The Actuarial loss arising in 2020 was primarily due to a decrease in discount rates during 2020, partially offset by asset returns exceeding our expected return on assets on our funded plans.
The table below reflects the total benefit payments expected to be paid from the plans or from corporate assets.
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Pension
|
|
PRB
|
2022
|
$
|
4,473
|
|
|
$
|
116
|
|
2023
|
3,842
|
|
|
109
|
|
2024
|
3,821
|
|
|
104
|
|
2025
|
3,796
|
|
|
98
|
|
2026
|
3,748
|
|
|
92
|
|
2027-2031
|
18,142
|
|
|
388
|
|
Major assumptions used in determining the pension benefit obligation and net periodic pension benefit (income) expense are presented in the following table as weighted-averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation
|
|
Net Periodic Benefit (Income) Expense
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2019
|
Discount rate
|
|
|
|
|
|
|
|
|
|
|
PBO
|
|
2.8
|
%
|
|
2.5
|
%
|
|
2.5
|
%
|
|
3.2
|
%
|
|
4.0
|
%
|
Interest cost (1)
|
|
N/A
|
|
N/A
|
|
1.8
|
%
|
|
2.8
|
%
|
|
3.7
|
%
|
Service cost (1)
|
|
N/A
|
|
N/A
|
|
2.8
|
%
|
|
3.5
|
%
|
|
3.7
|
%
|
Salary scale
|
|
4.4
|
%
|
|
4.3
|
%
|
|
4.4
|
%
|
|
4.3
|
%
|
|
4.3
|
%
|
Expected return on plan assets
|
|
N/A
|
|
N/A
|
|
6.5
|
%
|
|
6.5
|
%
|
|
6.8
|
%
|
Interest crediting rate
|
|
4.0
|
%
|
|
3.8
|
%
|
|
3.8
|
%
|
|
3.8
|
%
|
|
3.8
|
%
|
(1) The discount rates used to measure the service cost and interest cost applies to our significant plans. The PBO discount rate is used for the service cost and interest cost measurements for non-significant plans.
Major assumptions used in determining the PRB benefit obligation and net periodic PRB (income) expense are presented in the following table as weighted-averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation
|
|
Net Periodic Benefit (Income) Expense
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2019
|
Discount rate
|
2.8
|
%
|
|
2.4
|
%
|
|
2.4
|
%
|
|
3.1
|
%
|
|
4.0
|
%
|
Expected return on assets
|
N/A
|
|
N/A
|
|
5.7
|
%
|
|
5.7
|
%
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Assumed health care cost trend rates used in determining the PRB benefit obligation and net periodic PRB (income) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Health care cost trend rate assumed for next year
|
4.7
|
%
|
|
5.0
|
%
|
Ultimate health care cost trend rate
|
4.2
|
%
|
|
4.3
|
%
|
Year that the rate reaches the ultimate health care cost trend rate
|
2026
|
|
2026
|
The weighted-average discount rates used to measure pension and PRB liabilities are based on yield curves developed using high-quality corporate bonds as well as plan specific expected cash flows. For our significant plans, we utilize a full yield curve approach in the estimation of the service cost and interest cost components of net periodic benefit expense by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant discounted projected cash flows.
In determining the EROA assumption, we consider the target asset allocation of plan assets, as well as economic and other indicators of future performance. We may consult with and consider the opinions of financial and other professionals in determining the appropriate capital market assumptions. Return projections are validated using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns. As a result of this analysis at year end 2021, our weighted average pension EROA assumption for 2022 is 6.5%.
Plan Assets. The plans’ investment management objectives include providing the liquidity and asset levels needed to meet current and future benefit payments, while maintaining a prudent degree of portfolio diversification considering interest rate risk and market volatility. Globally, investment strategies generally target a mix of 50% to 55% of growth seeking assets and 45% to 50% of income generating and hedging assets using a wide set of diversified asset types, fund strategies and investment managers. The growth seeking allocation consists of global public equities in developed and emerging countries, private equity, real estate and multi-asset class strategies. Growth assets include an enhanced alpha strategy that invests in publicly traded equity and fixed income securities, derivatives and foreign currency. Investments in private equity are primarily via limited partnership interests in buy-out strategies with smaller allocations to distressed debt funds. The real estate strategy is principally concentrated in directly held U.S. core investments with some smaller investments in international, value-added and opportunistic strategies. Within the income generating assets, the fixed income portfolio consists of mainly government and broadly diversified high quality corporate bonds.
The plans have continued their pension risk management techniques designed to reduce their interest rate risk. Specifically, the plans have incorporated liability hedging programs that include the adoption of a risk reduction objective as part of the long-term investment strategy. Under this objective the interest rate hedge is intended to increase as funded status improves. The
hedging programs incorporate a range of assets and investment tools, each with varying interest rate sensitivities. The investment portfolios are currently hedging approximately 30% to 70% of the interest rate sensitivity of the pension plan liabilities, depending on the funded status of the plan.
The fair values of pension plan assets at December 31, 2021 and 2020 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Quoted Prices in
Active Markets
For Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Not Subject to Leveling(8)
|
|
Total
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
Public Equities
|
|
|
|
|
|
|
|
|
|
Global Equities
|
$
|
9,411
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,417
|
|
Global Equity Commingled Funds (1)
|
3
|
|
|
929
|
|
|
—
|
|
|
—
|
|
|
932
|
|
Enhanced Global Equities (2)
|
46
|
|
|
163
|
|
|
—
|
|
|
—
|
|
|
209
|
|
Other Public Equities
|
—
|
|
|
—
|
|
|
—
|
|
|
8,495
|
|
|
8,495
|
|
Private Equities (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
4,490
|
|
|
4,490
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
|
Governments
|
1,933
|
|
|
1,172
|
|
|
—
|
|
|
—
|
|
|
3,105
|
|
Corporate Bonds
|
1
|
|
|
18,681
|
|
|
—
|
|
|
—
|
|
|
18,682
|
|
Structured Products
|
—
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
Other Fixed Income
|
—
|
|
|
—
|
|
|
—
|
|
|
7,367
|
|
|
7,367
|
|
Real Estate (4)
|
—
|
|
|
—
|
|
|
1,885
|
|
|
1,743
|
|
|
3,628
|
|
Other (5)
|
—
|
|
|
91
|
|
|
—
|
|
|
5,351
|
|
|
5,442
|
|
Cash & Cash Equivalents (6)
|
—
|
|
|
111
|
|
|
—
|
|
|
220
|
|
|
331
|
|
Subtotal
|
$
|
11,394
|
|
|
$
|
21,178
|
|
|
$
|
1,885
|
|
|
$
|
27,666
|
|
|
$
|
62,123
|
|
Other Assets & Liabilities (7)
|
|
|
|
|
|
|
|
|
1,200
|
|
Total at December 31, 2021
|
|
|
|
|
|
|
|
|
$
|
63,323
|
|
Public Equities
|
|
|
|
|
|
|
|
|
|
Global Equities
|
$
|
8,437
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,442
|
|
Global Equity Commingled Funds (1)
|
1
|
|
|
2,686
|
|
|
—
|
|
|
—
|
|
|
2,687
|
|
Enhanced Global Equities (2)
|
56
|
|
|
185
|
|
|
—
|
|
|
—
|
|
|
241
|
|
Other Public Equities
|
—
|
|
|
—
|
|
|
—
|
|
|
9,008
|
|
|
9,008
|
|
Private Equities (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
3,646
|
|
|
3,646
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
|
Governments
|
1,740
|
|
|
1,480
|
|
|
—
|
|
|
—
|
|
|
3,220
|
|
Corporate Bonds
|
3
|
|
|
18,489
|
|
|
2
|
|
|
305
|
|
|
18,799
|
|
Structured Products
|
—
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Other Fixed Income
|
—
|
|
|
—
|
|
|
—
|
|
|
6,631
|
|
|
6,631
|
|
Real Estate (4)
|
—
|
|
|
—
|
|
|
1,647
|
|
|
1,737
|
|
|
3,384
|
|
Other (5)
|
—
|
|
|
99
|
|
|
—
|
|
|
5,088
|
|
|
5,187
|
|
Cash & Cash Equivalents (6)
|
9
|
|
|
97
|
|
|
—
|
|
|
154
|
|
|
260
|
|
Subtotal
|
$
|
10,246
|
|
|
$
|
23,065
|
|
|
$
|
1,649
|
|
|
$
|
26,569
|
|
|
$
|
61,529
|
|
Other Assets & Liabilities (7)
|
|
|
|
|
|
|
|
|
789
|
|
Total at December 31, 2020
|
|
|
|
|
|
|
|
|
$
|
62,318
|
|
(1) Represents commingled funds that invest primarily in common stocks.
(2) Represents enhanced equity separate account and commingled fund portfolios. A portion of the portfolio may include long-short market neutral and relative value strategies that invest in publicly traded, equity and fixed income securities, as well as derivatives of equity and fixed income securities and foreign currency.
(3) Represents limited partnership investments with general partners that primarily invest in equity and debt.
(4) Represents investments in real estate including commingled funds and directly held properties.
(5) Represents global balanced risk commingled funds that invest in multiple asset classes including equity, fixed income and some commodities. “Other” also includes insurance contracts.
(6) Represents short-term commercial paper, bonds and other cash or cash-like instruments.
(7) Represents receivables, payables and certain individually immaterial international plan assets that are not leveled.
(8) In accordance with ASU 2015-07, Fair Value Measurement (Topic 820), certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total pension benefits plan assets.
Derivatives in the plan are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. Derivative instruments mainly consist of equity futures, interest rate futures, interest rate swaps and currency forward contracts. The fair market value of the plans’ derivatives through direct or separate account investments was approximately $98 million and $176 million as of December 31, 2021 and 2020, respectively.
We review our assets at least quarterly to ensure we are within the targeted asset allocation ranges and, if necessary, asset balances are adjusted back within target allocations. We employ a broadly diversified investment manager structure that includes diversification by active and passive management, style, capitalization, country, sector, industry and number of investment managers. No individual investment represented more than 5% of the plan assets as of December 31, 2021.
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Private Equities
|
|
Corporate Bonds
|
|
Real Estate
|
|
Total
|
Balance, December 31, 2019
|
|
|
$
|
202
|
|
|
$
|
5
|
|
|
$
|
1,464
|
|
|
$
|
1,671
|
|
Realized gains
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
7
|
|
Unrealized gains (losses) relating to instruments still held in the reporting period
|
|
|
16
|
|
|
—
|
|
|
(129)
|
|
|
(113)
|
|
Purchases, sales, and settlements, net
|
|
|
10
|
|
|
(3)
|
|
|
77
|
|
|
84
|
|
Transfers in/out, net
|
|
|
(228)
|
|
|
—
|
|
|
228
|
|
|
—
|
|
Balance, December 31, 2020
|
|
|
—
|
|
|
2
|
|
|
1,647
|
|
|
1,649
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains
|
|
|
—
|
|
|
—
|
|
|
212
|
|
|
212
|
|
Unrealized gains relating to instruments still held in the reporting period
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
50
|
|
Purchases, sales, and settlements, net
|
|
|
—
|
|
|
—
|
|
|
(24)
|
|
|
(24)
|
|
Transfers in/out, net
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(2)
|
|
Balance, December 31, 2021
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,885
|
|
|
$
|
1,885
|
|
Quoted market prices are used to value investments when available. Investments in securities traded on exchanges, including listed futures and options, are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Fixed income securities are primarily measured using a market approach pricing methodology, where observable prices are obtained by market transactions involving identical or comparable securities of issuers with similar credit ratings. Mortgages have been valued on the basis of their future principal and interest payments discounted at prevailing interest rates for similar investments. Investment contracts are valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations. Real estate investments are valued on a quarterly basis using discounted cash flow models which consider long-term lease estimates, future rental receipts and estimated residual values. Valuation estimates are supplemented by third-party appraisals on an annual basis.
Private equity limited partnerships are valued quarterly using discounted cash flows, earnings multiples and market multiples. Valuation adjustments reflect changes in operating results, financial condition, or prospects of the applicable portfolio company. Over-the-counter securities and government obligations are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes. Temporary cash investments are stated at cost, which approximates fair value.
The fair market value of assets related to our PRB benefits was $389 million and $381 million as of December 31, 2021 and 2020, respectively. These assets include $147 million and $149 million of which are invested in our domestic qualified pension plan trust at December 31, 2021 and 2020, respectively. The remaining PRB investments are held within Voluntary Employees’ Beneficiary Association (VEBA) trusts. The VEBA assets are generally invested in mutual funds and are valued primarily using quoted prices in active markets (Level 1). There were no Level 3 investments in the VEBA trusts as of December 31, 2021 or 2020.
We have set aside assets in separate trusts, which we expect to be used to pay for certain nonqualified defined benefit and defined contribution plan obligations in excess of qualified plan limits. These assets are included in Other assets in our Consolidated Balance Sheet. The fair value of marketable securities held in trusts as of December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Marketable securities held in trusts
|
$
|
965
|
|
|
$
|
881
|
|
NOTE 12: LEASES
Operating lease expense was $525 million, $497 million, and $323 million for 2021, 2020, and 2019 respectively. Finance leases and leases where we are the lessor are not considered significant to our Consolidated Balance Sheet or Consolidated Statement of Operations.
In both 2021 and 2020, we entered into sale and leaseback transactions for the sale of equipment and related maintenance. We subsequently leased back the equipment sold for a limited timeframe, which is accounted for as an operating lease. The proceeds received as a result of the equipment sales are classified in Receipts from customer financing assets within the Investing Activities in our Consolidated Statement of Cash Flows, and the portion related to future maintenance services are classified within Operating Activities. The net gains as a result of these transactions were not material.
Supplemental cash flow information related to operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Operating cash flows used in the measurement of operating lease liabilities
|
$
|
490
|
|
|
$
|
420
|
|
|
$
|
411
|
|
Operating lease right-of-use assets obtained in exchange for operating lease obligations
|
535
|
|
|
299
|
|
|
123
|
|
Future lease payments related to our operating lease liabilities as of December 31, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
2022
|
$
|
421
|
|
|
|
|
|
2023
|
359
|
|
|
|
|
|
2024
|
295
|
|
|
|
|
|
2025
|
248
|
|
|
|
|
|
2026
|
198
|
|
|
|
|
|
Thereafter
|
839
|
|
|
|
|
|
Total undiscounted lease payments
|
2,360
|
|
|
|
|
|
Less imputed interest
|
(292)
|
|
|
|
|
|
Total discounted lease payments
|
$
|
2,068
|
|
|
|
|
|
Our lease liabilities recognized in our Consolidated Balance Sheet were as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Operating lease liabilities, current (included in Other accrued liabilities)
|
$
|
411
|
|
|
$
|
482
|
|
Operating lease liabilities, noncurrent
|
1,657
|
|
|
1,516
|
|
Total operating lease liabilities
|
$
|
2,068
|
|
|
$
|
1,998
|
|
The weighted-average remaining lease term related to our operating leases was 9 years and 8 years as of December 31, 2021 and 2020, respectively. The weighted-average discount rate related to our operating leases was 2.8% and 3.1% as of December 31, 2021 and 2020, respectively.
NOTE 13: INCOME TAXES
Income Before Income Taxes. The sources of income (loss) from continuing operations before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
United States
|
$
|
3,498
|
|
|
$
|
(2,762)
|
|
|
$
|
1,594
|
|
Foreign
|
1,433
|
|
|
409
|
|
|
2,558
|
|
Income (loss) from continuing operations before income taxes
|
$
|
4,931
|
|
|
$
|
(2,353)
|
|
|
$
|
4,152
|
|
The Company no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. As such, we recorded the taxes associated with the future remittance of these earnings. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, the Company will continue to permanently reinvest these earnings. As of December 31, 2021, such undistributed earnings were approximately $15 billion, excluding other comprehensive income amounts. It is not practicable to estimate the amount of tax that might be payable on the remaining amounts.
Provision for Income Taxes. The income tax expense (benefit) for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Current:
|
|
|
|
|
|
United States:
|
|
|
|
|
|
Federal
|
$
|
387
|
|
|
$
|
324
|
|
|
$
|
(100)
|
|
State
|
60
|
|
|
45
|
|
|
(58)
|
|
Foreign
|
427
|
|
|
305
|
|
|
541
|
|
|
874
|
|
|
674
|
|
|
383
|
|
Future:
|
|
|
|
|
|
United States:
|
|
|
|
|
|
Federal
|
(26)
|
|
|
(264)
|
|
|
121
|
|
State
|
41
|
|
|
258
|
|
|
56
|
|
Foreign
|
(103)
|
|
|
(93)
|
|
|
(139)
|
|
|
(88)
|
|
|
(99)
|
|
|
38
|
|
Income tax expense
|
$
|
786
|
|
|
$
|
575
|
|
|
$
|
421
|
|
|
|
|
|
|
|
Reconciliation of Effective Income Tax Rate. Differences between effective income tax rates and the statutory U.S. federal income tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
(dollars in millions)
|
Amount
|
Rate
|
|
Amount
|
Rate
|
|
Amount
|
Rate
|
Statutory U.S. federal income tax rate
|
$
|
1,036
|
|
21.0
|
%
|
|
$
|
(494)
|
|
21.0
|
%
|
|
$
|
872
|
|
21.0
|
%
|
Tax on international activities
|
(204)
|
|
(4.1)
|
|
|
27
|
|
(1.1)
|
|
|
32
|
|
0.7
|
|
Tax audit settlements
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
(290)
|
|
(7.0)
|
|
Tax charges related to Separation Transactions and Raytheon Merger
|
(39)
|
|
(0.8)
|
|
|
416
|
|
(17.7)
|
|
|
—
|
|
—
|
|
Disposals of businesses
|
108
|
|
2.2
|
|
|
177
|
|
(7.5)
|
|
|
—
|
|
—
|
|
U.S. research and development credit
|
(172)
|
|
(3.5)
|
|
|
(142)
|
|
6.1
|
|
|
(101)
|
|
(2.4)
|
|
Goodwill impairment
|
—
|
|
—
|
|
|
668
|
|
(28.4)
|
|
|
—
|
|
—
|
|
State income tax, net
|
33
|
|
0.7
|
|
|
(56)
|
|
2.4
|
|
|
16
|
|
0.4
|
|
Foreign Derived Intangible Income (FDII)
|
(121)
|
|
(2.5)
|
|
|
(83)
|
|
3.5
|
|
|
(138)
|
|
(3.3)
|
|
U.K. corporate tax rate enactment
|
73
|
|
1.5
|
|
|
8
|
|
(0.4)
|
|
|
—
|
|
—
|
|
Other
|
72
|
|
1.4
|
|
|
54
|
|
(2.3)
|
|
|
30
|
|
0.7
|
|
Effective income tax rate
|
$
|
786
|
|
15.9
|
%
|
|
$
|
575
|
|
(24.4)
|
%
|
|
$
|
421
|
|
10.1
|
%
|
The 2021 effective tax rate includes tax benefits of $244 million included in international activities associated with legal entity and operational reorganizations implemented in the third quarter of 2021, $172 million associated with U.S. research and development credits and $121 million associated with Foreign Derived Intangible Income (FDII), 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% enacted in 2021 and effective in 2023. In the first quarter of 2021, we recorded $148 million of tax charges associated with the sale of the Forcepoint business, and subsequently recognized a $104 million tax benefit due to the revaluation of that tax benefit as a result of completing the divestiture of RIS’s global training and services business for a gain in the fourth quarter of 2021.
The 2020 negative effective tax rate is a result of having tax expense of $575 million on a loss from continuing operations before income taxes of $2.4 billion. The loss from continuing operations before income taxes in 2020 includes the $3.2 billion goodwill impairment as described in “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets,” most of which was non-deductible for tax purposes. Tax expense includes net deferred tax charges of $416 million resulting from the Separation Transactions and the Raytheon Merger primarily related to the impairment of deferred tax assets and the revaluation of certain international tax incentives, and incremental tax expense of $177 million related to the disposal of businesses, including the sales of businesses at Collins Aerospace, the airborne tactical radios business at RIS and the entry into a definitive agreement to sell Forcepoint, as described in “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets.” Also included in the 2020 effective tax rate are tax benefits of $142 million associated with U.S. research and development credits and $83 million associated with FDII.
The 2019 effective tax rate includes tax benefits of $290 million primarily associated with the conclusion of the audit by the Examination Division of the Internal Revenue Service (IRS) for the Company’s 2014, 2015 and 2016 tax years and the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority. The 2019 effective tax rate also includes tax benefits of $101 million related to U.S. research and development credits and $138 million associated with FDII.
Deferred Tax Assets and Liabilities. The tax effects of temporary differences and tax carryforwards which gave rise to future income tax benefits and payables at December 31, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Future income tax benefits:
|
|
|
|
Insurance and employee benefits
|
$
|
1,831
|
|
|
$
|
3,004
|
|
Inventory and contract balances
|
756
|
|
|
822
|
|
|
|
|
|
Warranty provisions
|
248
|
|
|
220
|
|
Other basis differences
|
878
|
|
|
637
|
|
Tax loss carryforwards
|
251
|
|
|
196
|
|
Tax credit carryforwards
|
1,088
|
|
|
959
|
|
Valuation allowances
|
(825)
|
|
|
(757)
|
|
Total future income tax benefits
|
$
|
4,227
|
|
|
$
|
5,081
|
|
Future income taxes payable:
|
|
|
|
Goodwill and Intangible assets
|
$
|
7,168
|
|
|
$
|
7,786
|
|
Fixed assets
|
1,746
|
|
|
1,637
|
|
Other basis differences
|
323
|
|
|
151
|
|
Total future income tax payable
|
$
|
9,237
|
|
|
$
|
9,574
|
|
Valuation allowances have been established primarily for tax credit carryforwards, tax loss carryforwards, and certain temporary differences to reduce the future income tax benefits to expected realizable amounts.
Tax Credit and Loss Carryforwards. At December 31, 2021, tax credit carryforwards, principally state and foreign, and tax loss carryforwards, principally state and foreign, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Tax Credit
Carryforwards
|
|
Tax Loss
Carryforwards
|
Expiration period:
|
|
|
|
2022-2026
|
$
|
65
|
|
|
$
|
364
|
|
2027-2031
|
115
|
|
|
141
|
|
2032-2041
|
391
|
|
|
257
|
|
Indefinite
|
517
|
|
|
1,058
|
|
Total
|
$
|
1,088
|
|
|
$
|
1,820
|
|
Unrecognized Tax Benefits. At December 31, 2021, we had gross tax-effected unrecognized tax benefits of $1,458 million, of which $1,313 million, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits and interest expense related to unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Balance at January 1
|
$
|
1,225
|
|
|
$
|
1,347
|
|
|
$
|
1,619
|
|
Additions for tax positions related to the current year
|
110
|
|
|
125
|
|
|
131
|
|
Additions for tax positions of prior years
|
282
|
|
|
323
|
|
|
73
|
|
Reductions for tax positions of prior years
|
(49)
|
|
|
(83)
|
|
|
(101)
|
|
Settlements
|
(110)
|
|
|
(48)
|
|
|
(375)
|
|
Separation of Carrier and Otis
|
—
|
|
|
(439)
|
|
|
—
|
|
Balance at December 31
|
$
|
1,458
|
|
|
$
|
1,225
|
|
|
$
|
1,347
|
|
Gross interest expense related to unrecognized tax benefits
|
$
|
39
|
|
|
$
|
50
|
|
|
$
|
57
|
|
Total accrued interest balance at December 31
|
165
|
|
|
141
|
|
|
249
|
|
The unrecognized tax benefit table includes discontinued operations activity in 2020 and 2019.
As a result of the Separation Transactions and the Distributions in April 2020, we transferred unrecognized tax benefits to Carrier and Otis of $439 million and associated interest of approximately $165 million. Pursuant to the terms of the separation agreements, certain other unrecognized tax benefits retained by the Company are subject to indemnification. Total unrecognized tax benefits at December 31, 2019 included $437 million of benefits related to discontinued operations, and associated interest of approximately $155 million.
The 2020 additions for tax positions of prior years in the table above include amounts related to the Raytheon Merger.
Management has determined that the distributions of Carrier and Otis on April 3, 2020, and certain related internal business separation transactions, qualified as tax-free under applicable law. In making these determinations, we applied the tax law in the relevant jurisdictions to our facts and circumstances and obtained tax rulings from the relevant taxing authorities, tax opinions, and/or other external tax advice related to the concluded tax treatment. If the completed distributions of Carrier or Otis, in each case, or certain internal business separation transactions, were to fail to qualify for tax-free treatment, the Company could be subject to significant liabilities, and there could be material adverse impacts on the Company’s business, results of operations, financial condition or liquidity in future reporting periods.
We conduct business globally and, as a result, Raytheon Technologies or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, China, France, Germany, India, Poland, Saudi Arabia, Singapore, Switzerland, the United Kingdom and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2012.
During the fourth quarter of 2020, the Company recognized a non-cash gain of approximately $25 million, primarily tax, as a result of the statute of limitations expiration of the 2016 tax year of a subsidiary acquired as part of the RTC’s acquisition of Rockwell Collins.
During 2019, the Company recognized a non-cash net gain of approximately $307 million, including pre-tax interest of approximately $56 million as a result of the conclusion of the IRS audit of the Company’s 2014, 2015 and 2016 tax years.
The Examination Division of the IRS is currently auditing Raytheon Technologies tax years 2017 and 2018 and pre-merger Raytheon Company tax periods 2017, 2018 and 2019 as well as certain refund claims of Raytheon Company for tax years 2014, 2015 and 2016 filed prior to the Raytheon Merger.
The Examination Division of the IRS is also auditing pre-acquisition Rockwell Collins fiscal tax years 2016 and 2017, which is projected to close within the next six to twelve months. As a result of the projected closure of the audit of Rockwell Collins fiscal tax years 2016 and 2017, it is reasonably possible that the Company may recognize non-cash gains in the range of $20 million to $100 million, within the next six to twelve months.
It is reasonably possible that a net reduction within the range of $100 million to $500 million of unrecognized tax benefits may occur over the next 12 months as a result of the revaluation of uncertain tax positions arising from the issuance of legislation, regulatory or other guidance or developments in examinations, in appeals, or in the courts, or the closure of tax statutes.
NOTE 14: RESTRUCTURING COSTS
Restructuring costs are generally expensed as incurred. All U.S. government unallowable restructuring costs related to the Raytheon Merger are recorded within Corporate expenses and other unallocated items, as these costs are not included in management’s evaluation of the segments’ performance, and as a result, there are no unallowable restructuring costs at the RIS and RMD segments. During 2021, we recorded net pre-tax restructuring costs totaling $143 million for new and ongoing restructuring actions. We recorded charges in the segments as follows:
|
|
|
|
|
|
(dollars in millions)
|
|
Pratt & Whitney
|
$
|
7
|
|
Collins Aerospace Systems
|
40
|
|
Corporate expenses and other unallocated items
|
96
|
|
|
|
|
|
Total
|
$
|
143
|
|
Restructuring charges incurred in 2021 primarily relate to actions initiated during 2021 and were recorded as follows:
|
|
|
|
|
|
(dollars in millions)
|
|
Cost of sales
|
$
|
34
|
|
Selling, general & administrative
|
109
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
143
|
|
2021 Actions. During 2021, we recorded net pre-tax restructuring costs totaling $137 million for restructuring actions initiated in 2021, consisting of $97 million in Selling, general and administrative and $40 million in Cost of sales. The 2021 actions primarily consist of severance costs related to ongoing cost reduction efforts, and to a much lesser extent, the exit and consolidation of facilities.
We are targeting to complete in 2022 the majority of the remaining cost reduction actions initiated in 2021. No specific plans for other significant actions have been finalized at this time. The following table summarizes our accrual balances for the 2021 restructuring actions, which is included in Other accrued liabilities on our Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
Net pre-tax restructuring costs
|
|
|
|
|
|
|
$
|
137
|
|
Utilization, foreign exchange and other costs
|
|
|
|
|
|
|
(50)
|
|
Balance at December 31, 2021
|
|
|
|
|
|
|
$
|
87
|
|
The following table summarizes expected, incurred and remaining costs for the 2021 restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected Costs
|
|
Cost Incurred During 2021
|
|
Remaining Costs at December 31, 2021
|
Pratt & Whitney
|
$
|
60
|
|
|
$
|
(24)
|
|
|
$
|
36
|
|
Collins Aerospace Systems
|
62
|
|
|
(36)
|
|
|
26
|
|
Corporate expenses and other unallocated items
|
77
|
|
|
(77)
|
|
|
—
|
|
|
|
|
|
|
|
Total
|
$
|
199
|
|
|
$
|
(137)
|
|
|
$
|
62
|
|
2020 Actions. During 2021, we reversed net pre-tax restructuring costs totaling $23 million for restructuring actions initiated in 2020, consisting of a reversal of $14 million in Cost of sales and $9 million in Selling, general and administrative expenses. The 2020 actions primarily consist of severance costs principally related to restructuring actions at Pratt & Whitney and Collins Aerospace in response to the impact on our operating results from the economic environment primarily caused by the COVID-19 pandemic, actions at Corporate related to the Raytheon Merger, and ongoing cost reduction efforts including workforce reductions, and to a lesser extent, consolidation of field operations. The following table summarizes the accrual balance for the 2020 restructuring actions for the year ended 2021, which is included in Other accrued liabilities on our Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
Restructuring accruals at January 1, 2021
|
|
|
|
|
|
|
$
|
340
|
|
Net pre-tax restructuring costs
|
|
|
|
|
|
|
(23)
|
|
Utilization, foreign exchange and other costs
|
|
|
|
|
|
|
(267)
|
|
Balance at December 31, 2021
|
|
|
|
|
|
|
$
|
50
|
|
The following table summarizes expected, incurred and remaining costs for the 2020 programs by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected Costs
|
|
Costs Incurred During 2020
|
|
Costs (Incurred) Reversed During 2021
|
|
Remaining
Costs at
December 31,
2021
|
Pratt & Whitney
|
$
|
188
|
|
|
$
|
(205)
|
|
|
$
|
17
|
|
|
$
|
—
|
|
Collins Aerospace Systems
|
312
|
|
|
(333)
|
|
|
25
|
|
|
4
|
|
Corporate expenses and other unallocated items
|
251
|
|
|
(232)
|
|
|
(19)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
751
|
|
|
$
|
(770)
|
|
|
$
|
23
|
|
|
$
|
4
|
|
2019 and Prior Actions. During 2021, we recorded net pre-tax restructuring costs totaling $29 million for restructuring actions initiated in 2019 and prior. As of December 31, 2021, we had $25 million of accrual balances remaining related to 2019 and prior actions.
NOTE 15: FINANCIAL INSTRUMENTS
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.
The aggregate notional amount of our outstanding foreign currency hedges was $8.5 billion and $11.6 billion at December 31, 2021 and 2020, respectively. Additional information pertaining to foreign exchange and hedging activities is included in “Note 1: Basis of Presentation and Summary of Accounting Principles.”
The following table summarizes the fair value and presentation in the Consolidated Balance Sheet for derivative instruments as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Balance Sheet Location
|
2021
|
|
2020
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Foreign exchange contracts
|
Other assets, current
|
$
|
59
|
|
|
$
|
197
|
|
|
Other accrued liabilities
|
202
|
|
|
66
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Foreign exchange contracts
|
Other assets, current
|
$
|
11
|
|
|
$
|
44
|
|
|
Other accrued liabilities
|
11
|
|
|
32
|
|
The effect of cash flow hedging relationships on Accumulated other comprehensive income (loss) and on the Consolidated Statement of Operations in 2021 and 2020 are presented in the table below. The amounts of gain or (loss) are attributable to foreign exchange contract activity and are primarily recorded as a component of Products sales when reclassified from Accumulated other comprehensive loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Gain (loss) recorded in Accumulated other comprehensive loss
|
$
|
(226)
|
|
|
$
|
181
|
|
|
$
|
(33)
|
|
(Gain) loss reclassified from Accumulated other comprehensive loss
|
(28)
|
|
|
82
|
|
|
51
|
|
The Company utilizes the critical terms match method in assessing derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective.
As of December 31, 2021, we have €500 million of euro-denominated long-term debt outstanding, which qualifies as a net investment hedge against our investments in European businesses, which is deemed to be effective.
Assuming current market conditions continue, a $28 million pre-tax loss is expected to be reclassified from Accumulated other comprehensive loss into Products sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At December 31, 2021, all derivative contracts accounted for as cash flow hedges will mature by January 2028.
The effect of derivatives not designated as hedging instruments within Other income, net, on the Consolidated Statement of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Gain (loss) on non-designated foreign exchange contracts
|
$
|
(24)
|
|
|
$
|
(76)
|
|
|
$
|
91
|
|
NOTE 16: FAIR VALUE MEASUREMENTS
The following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring basis in our Consolidated Balance Sheet as of December 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Marketable securities held in trusts
|
$
|
965
|
|
|
$
|
890
|
|
|
$
|
75
|
|
|
$
|
—
|
|
Derivative assets
|
70
|
|
|
—
|
|
|
70
|
|
|
—
|
|
Derivative liabilities
|
(213)
|
|
|
—
|
|
|
(213)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Marketable securities held in trusts
|
$
|
881
|
|
|
$
|
773
|
|
|
$
|
108
|
|
|
$
|
—
|
|
Derivative assets
|
241
|
|
|
—
|
|
|
241
|
|
|
—
|
|
Derivative liabilities
|
(98)
|
|
|
—
|
|
|
(98)
|
|
|
—
|
|
Valuation Techniques. Our derivative assets and liabilities include foreign exchange contracts that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks.
As of December 31, 2021, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.
The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Consolidated Balance Sheet at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
(dollars in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Customer financing notes receivables
|
$
|
195
|
|
|
$
|
192
|
|
|
$
|
271
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding finance leases)
|
(31,250)
|
|
|
(35,828)
|
|
|
(31,512)
|
|
|
(38,615)
|
|
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Consolidated Balance Sheet as of December 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Customer financing notes receivables
|
$
|
192
|
|
|
$
|
—
|
|
|
$
|
192
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding finance leases)
|
(35,828)
|
|
|
—
|
|
|
(35,778)
|
|
|
(50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Customer financing notes receivables
|
$
|
264
|
|
|
$
|
—
|
|
|
$
|
264
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding finance leases)
|
(38,615)
|
|
|
—
|
|
|
(38,540)
|
|
|
(75)
|
|
The fair value of our Short-term borrowings approximates the carrying value due to their short-term nature, with commercial paper classified as level 2 and other short-term borrowings classified as level 3 within the fair value hierarchy.
NOTE 17: VARIABLE INTEREST ENTITIES
Pratt & Whitney holds a 61% program share interest in the International Aero Engines AG (IAE) collaboration with MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC) and a 49.5% ownership interest in IAE. IAE’s business purpose is to coordinate the design, development, manufacturing and product support of the V2500 engine program through involvement with the collaborators. Additionally, Pratt & Whitney, JAEC and MTU are participants in International Aero Engines, LLC (IAE LLC), whose business purpose is to coordinate the design, development, manufacturing and product support for the PW1100G-JM engine for the Airbus A320neo aircraft and the PW1400G-JM engine for the Irkut MC-21 aircraft. Pratt & Whitney holds a 59% program share interest and a 59% ownership interest in IAE LLC. IAE and IAE LLC retain limited equity with the primary economics of the programs passed to the participants. As such, we have determined that IAE and IAE LLC are variable interest entities with Pratt & Whitney as the primary beneficiary. IAE and IAE LLC have, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for variable interest entities in our Consolidated Balance Sheet as of December 31, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Current assets
|
$
|
7,081
|
|
|
$
|
6,652
|
|
Noncurrent assets
|
825
|
|
|
868
|
|
Total assets
|
$
|
7,906
|
|
|
$
|
7,520
|
|
Current liabilities
|
$
|
7,965
|
|
|
$
|
7,365
|
|
Noncurrent liabilities
|
54
|
|
|
89
|
|
Total liabilities
|
$
|
8,019
|
|
|
$
|
7,454
|
|
NOTE 18: GUARANTEES
We extend a variety of financial, market value and product performance guarantees to third parties. These instruments expire on various dates through 2028. Additional guarantees of project performance for which there is no stated value also remain outstanding. As of December 31, 2021 and 2020, the following financial guarantees were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021
|
|
December 31, 2020
|
(dollars in millions)
|
Maximum
Potential
Payment
|
|
Carrying
Amount of
Liability
|
|
Maximum
Potential
Payment
|
|
Carrying
Amount of
Liability
|
Commercial aerospace financing guarantees
|
$
|
309
|
|
|
$
|
3
|
|
|
$
|
322
|
|
|
$
|
6
|
|
Third party guarantees
|
511
|
|
|
5
|
|
|
386
|
|
|
3
|
|
We have made residual value and other guarantees related to various commercial aerospace customer financing arrangements. The estimated fair market values of the guaranteed assets equal or exceed the value of the related guarantees, net of existing reserves. Collaboration partners’ share of these financing guarantees is $141 million and $142 million at December 31, 2021 and 2020, respectively.
We also have obligations arising from sales of certain businesses and assets, including those from representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. The maximum potential payment related to these obligations is not a specified amount as a number of the obligations do not contain financial caps. The carrying amount of liabilities related to these obligations was $120 million at both December 31, 2021 and 2020. For additional information regarding the environmental indemnifications, see “Note 19: Commitments and Contingencies.”
We accrue for costs associated with guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts, and where no amount within a range of estimates is more likely, the minimum is accrued.
We also provide service and warranty policies on our products and extend performance and operating cost guarantees beyond our normal service and warranty policies on some of our products, particularly commercial aircraft engines. In addition, we incur discretionary costs to service our products in connection with specific product performance issues. Liabilities for performance and operating cost guarantees are based upon future product performance and durability, and are largely estimated based upon historical experience. Adjustments are made to accruals as claims data and historical experience warrant. The changes in the carrying amount of service and product warranties and product performance guarantees for the years ended December 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
Balance as of January 1
|
$
|
1,057
|
|
|
$
|
1,033
|
|
Warranties and performance guarantees issued
|
380
|
|
|
311
|
|
Settlements
|
(272)
|
|
|
(292)
|
|
Other
|
(8)
|
|
|
5
|
|
Balance as of December 31
|
$
|
1,157
|
|
|
$
|
1,057
|
|
NOTE 19: COMMITMENTS AND CONTINGENCIES
Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, financial condition or liquidity.
Environmental. Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. We have accrued for the costs of environmental remediation activities, including but not limited to investigatory, remediation, operating and maintenance costs and performance guarantees, and periodically reassess these amounts. We do not expect any additional liability to have a material adverse effect on our results of operations, financial condition or liquidity. As of December 31, 2021 and 2020, we had $834 million and $835 million, respectively, reserved for environmental remediation. Additional information pertaining to environmental matters is included in “Note 1: Basis of Presentation and Summary of Accounting Principles.”
Commercial Aerospace Financing and Other Commitments. We had commercial aerospace financing commitments and other contractual commitments of approximately $15.6 billion and $13.4 billion as of December 31, 2021 and 2020, respectively, on a gross basis before reduction for our collaboration partners’ share. Aircraft financing commitments, in the
form of debt or lease financing, are provided to certain commercial aerospace customers. The extent to which the financing commitments will be utilized is not currently known, since customers may be able to obtain more favorable terms from other financing sources. We may also arrange for third-party investors to assume a portion of these commitments. The majority of financing commitments are collateralized arrangements. We may also lease aircraft and subsequently sublease the aircraft to customers under long-term non-cancelable operating leases, or pay deposits on behalf of our customers to secure production slots with the airframers (pre-delivery payments). Our financing commitments with customers are contingent upon maintenance of certain levels of financial condition by the customers.
Associated risks on these commitments are mitigated due to the fact that interest rates are variable during the commitment term and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financing commitments is expected to equal the amounts funded.
We also have other contractual commitments, including commitments to make payments to secure certain contractual rights to provide product on new aircraft platforms. The estimated amount and timing of these payments, which are generally based on future sales or engine flight hours, are reflected in “Other commercial aerospace commitments” in the table below. Payments made on these contractual commitments are included within intangible assets as exclusivity assets and are amortized over the term of underlying economic benefit. We have entered into certain collaboration arrangements, which may include participation by our collaboration partners in these commitments. In addition, in connection with our 2012 agreement to acquire Rolls-Royce’s ownership and collaboration interests in IAE, additional payments are due to Rolls-Royce contingent upon each hour flown through June 2027 by the V2500-powered aircraft in service as of the acquisition date. These flight hour payments, which are considered in “Other commercial aerospace commitments” below, will be capitalized as collaboration intangible assets as payments are made.
The following is the expected maturity of our commercial aerospace industry commitments as of December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Committed
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026
|
|
Thereafter
|
Commercial aerospace financing commitments
|
$
|
4,552
|
|
|
$
|
1,222
|
|
|
$
|
1,051
|
|
|
$
|
1,380
|
|
|
$
|
344
|
|
|
$
|
443
|
|
|
$
|
112
|
|
Other commercial aerospace commitments
|
11,014
|
|
|
735
|
|
|
1,053
|
|
|
765
|
|
|
739
|
|
|
597
|
|
|
7,125
|
|
Collaboration partners’ share
|
(5,907)
|
|
|
(665)
|
|
|
(659)
|
|
|
(814)
|
|
|
(423)
|
|
|
(444)
|
|
|
(2,902)
|
|
Total commercial aerospace commitments
|
$
|
9,659
|
|
|
$
|
1,292
|
|
|
$
|
1,445
|
|
|
$
|
1,331
|
|
|
$
|
660
|
|
|
$
|
596
|
|
|
$
|
4,335
|
|
Other Financing Arrangements. We have entered into standby letters of credit and surety bonds with financial institutions to meet various bid, performance, warranty, retention and advance payment obligations for us or our affiliates. We enter into these agreements to assist certain affiliates in obtaining financing on more favorable terms, making bids on contracts and performing their contractual obligations. The stated values of these letters of credit agreements and surety bonds totaled $3.9 billion as of December 31, 2021.
Offset Obligations. We have entered into industrial cooperation agreements, sometimes in the form of either offset agreements or ICIP agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. At December 31, 2021, the aggregate amount of our offset agreements, both agreed to and anticipated to be agreed to, had an outstanding notional value of approximately $10.3 billion. These agreements are designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. Offset agreements may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects, and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for activities such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. Such activities may also vary by country depending upon requirements as dictated by their governments. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customers and typically require cash outlays that represent only a fraction of the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for penalties in the event we fail to perform in accordance with offset requirements. Historically, we have not been required to pay any penalties of significance.
Government Oversight. In the ordinary course of business, the Company and its subsidiaries and our properties are subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations and threatened legal actions and proceedings. For example, we are now, and believe that, in light of the current U.S. government contracting environment,
we will continue to be the subject of one or more U.S. government investigations. Our contracts with the U.S. government are also subject to audits. Agencies that oversee contract performance include: the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA), the Inspectors General of the U.S. Department of Defense (DoD) and other departments and agencies, the Government Accountability Office (GAO), the Department of Justice (DOJ), and Congressional Committees. Other areas of our business operations may also be subject to audit and investigation by these and other agencies. From time to time, agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. Such investigations and audits may be initiated due to a number of reasons, including as a result of a whistleblower complaint. Such investigations and audits could result in administrative, civil or criminal liabilities, including repayments, fines, treble or other damages, forfeitures, restitution, or penalties being imposed upon us, the suspension of government export licenses or the suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete. The U.S. government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. The U.S. government could void any contracts found to be tainted by fraud. Like many defense contractors, we have received audit reports recommending the reduction of certain contract prices because, for example, cost or pricing data or cost accounting practices used to price and negotiate those contracts may not have conformed to government regulations. Some of these audit reports recommend that certain payments be repaid, delayed, or withheld, and may involve substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and, in some cases, continue to negotiate and/or litigate. The Company may be, and in some cases has been, required to make payments into escrow of disputed liabilities while the related litigation is pending. If the litigation is resolved in the Company’s favor, any such payments will be returned to the Company with interest. Our final allowable incurred costs for each year are also subject to audit and have, from time to time, resulted in disputes between us and the U.S. government, with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their related courts of appeals. In addition, the DOJ has, from time to time, convened grand juries to investigate possible irregularities by us. We also provide products and services to customers outside of the U.S., and those sales are subject to local government laws, regulations and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and International Traffic in Arms Regulations (ITAR)) may also be investigated or audited. In addition, we accrue for liabilities associated with those matters that are probable and can be reasonably estimated. The most likely liability amount to be incurred is accrued based upon a range of estimates. Where no amount within a range of estimates is more likely, then we accrue the minimum amount. Other than as specifically disclosed in this Form 10-K, we do not expect these audits, investigations or disputes to have a material effect on our results of operations, financial condition or liquidity, either individually or in the aggregate.
Legal Proceedings. The Company and its subsidiaries are subject to various contract pricing disputes, government investigations and litigation matters across jurisdictions, updates to certain of which are set forth below.
Cost Accounting Standards Claims
As previously disclosed, in April 2019, a Divisional Administrative Contracting Officer (DACO) of the United States DCMA asserted a claim against Pratt & Whitney to recover alleged overpayments of approximately $1.73 billion plus interest ($730 million at December 31, 2021). The claim is based on Pratt & Whitney’s alleged noncompliance with Cost Accounting Standards (CAS) from January 1, 2007 to March 31, 2019, due to its method of allocating independent research and development costs to government contracts. Pratt & Whitney believes that the claim is without merit and filed an appeal to the ASBCA on June 7, 2019.
As previously disclosed, in December 2013, a DCMA DACO asserted a claim against Pratt & Whitney to recover alleged overpayments of approximately $177 million plus interest ($118 million at December 31, 2021). The claim is based on Pratt & Whitney’s alleged noncompliance with CAS from January 1, 2005 to December 31, 2012, due to its method of determining the cost of collaborator parts used in the calculation of material overhead costs for government contracts. In 2014, Pratt & Whitney filed an appeal to the ASBCA. An evidentiary hearing was held and completed in June 2019. On November 22, 2021, the ASBCA issued its written decision sustaining in part and denying in part Pratt & Whitney’s appeal. The ASBCA rejected the DCMA’s asserted measure of the cost of collaborator parts, and ruled substantially in Pratt & Whitney’s favor on other liability issues. The ASBCA remanded the appeal to the parties for resolution of damages issues, which could require further proceedings at the ASBCA. On December 23, 2021, the DCMA filed a motion with the ASBCA seeking partial reconsideration of the November 22, 2021 decision. Although the ASBCA decision may also be subject to further appellate review, we believe that the ASBCA’s rejection of the DCMA’s asserted measure of the cost of collaborator parts is well supported in fact and law and likely will be sustained. In December 2018, a DCMA DACO issued a second claim against Pratt & Whitney that similarly alleges that its method of determining the cost of collaborator parts does not comply with the CAS for calendar years 2013 through 2017. This second claim, which asserts the same measure of the cost of collaborator parts rejected by the ASBCA’s recent decision, demands payment of $269 million plus interest ($80 million at December 31, 2021). Pratt & Whitney appealed
this second claim to the ASBCA in January 2019. Although subject to further litigation at the ASBCA and potentially further appellate proceedings, we believe that the November 22, 2021 decision in the first claim will apply with equal legal effect to the second claim. Accordingly, we believe that the amounts demanded by the DCMA as set forth in the two claims are without legal basis and that any damages owed to the U.S. government for the two claims will not have a material adverse effect on our results of operations, financial condition or liquidity.
Thales-Raytheon Systems Matter
As previously disclosed, in 2019, Raytheon Company received a subpoena from the Securities and Exchange Commission (SEC) seeking information in connection with an investigation into whether there were improper payments made by Thales-Raytheon Systems (TRS) or anyone acting on their behalf in connection with TRS or Raytheon Company contracts in certain Middle East countries since 2014. In the first quarter of 2020, the DOJ advised Raytheon Company it had opened a parallel criminal investigation. In the third quarter of 2020, Raytheon Company received an additional subpoena from the SEC, seeking information and documents as part of its ongoing investigation. The Company maintains a rigorous anti-corruption compliance program, is cooperating fully with the SEC’s and DOJ’s inquiry, and is examining whether there has been any conduct that is in violation of Raytheon Company policy. At this time, the Company is unable to predict the outcome of the SEC’s or DOJ’s inquiry. Based on the information available to date, however, we do not believe the results of this inquiry will have a material adverse effect on our results of operations, financial condition or liquidity.
DOJ Investigation, Contract Pricing Disputes and Related Civil Litigation
As previously disclosed, on October 8, 2020, the Company received a criminal subpoena from the DOJ seeking information and documents in connection with an investigation relating to financial accounting, internal controls over financial reporting, and cost reporting regarding Raytheon Company’s Missiles & Defense (RMD) business since 2009. The investigation involves multi-year contracts subject to governmental regulation, including potential civil defective pricing claims for three RMD contracts entered into between 2011 and 2013. As part of the same investigation, on March 24, 2021, the Company received a second criminal subpoena from the DOJ seeking documents relating to a different RMD contract entered into in 2017. We are cooperating fully with, and will continue to review the issues raised by, the DOJ’s ongoing investigation. We have made substantial progress in our internal review of the issues raised by the DOJ investigation. Although we continue to believe we have defenses to the potential claims, the Company has determined that there is a probable risk of liability for damages, interest and potential penalties and has accrued approximately $290 million for this matter. We are currently unable to estimate an incremental loss, if any, which may result following the completion of our internal review and resolution of the DOJ investigation. Based on the information available to date, we do not believe the results of the investigation or of any potential civil litigation will have a material adverse effect on our results of operations, financial condition or liquidity.
Four shareholder lawsuits were filed against the Company after the DOJ investigation was first disclosed. A putative securities class action lawsuit was filed in the United States District Court for the District of Arizona against the Company and certain of its executives alleging that the defendants violated federal securities laws by making material misstatements in regulatory filings regarding internal controls over financial reporting in RMD. Three shareholder derivative lawsuits were filed in the United States District Court for the District of Delaware against the former Raytheon Company Board of Directors, the Company and certain of its executives, each alleging that defendants violated federal securities laws and breached their fiduciary duties by engaging in improper accounting practices, failing to implement sufficient internal financial and compliance controls, and making a series of false and misleading statements in regulatory filings. We believe that each of these lawsuits lacks merit.
Darnis, et al.
As previously disclosed, on August 12, 2020, several former employees of UTC or its subsidiaries filed a putative class action complaint in the United States District Court for the District of Connecticut against the Company, Otis, Carrier, the former members of the UTC Board of Directors, and the members of the Carrier and Otis Boards of Directors (Geraud Darnis, et al. v. Raytheon Technologies Corporation, et al.). The complaint challenged the method by which UTC equity awards were converted to Company, Otis, and Carrier equity awards following the separation of UTC into three independent, publicly-traded companies on April 3, 2020. The complaint also claimed that the defendants are liable for breach of certain equity compensation plans and also asserted claims under certain provisions of the Employee Retirement Income Security Act of 1974 (ERISA). On September 13, 2021, Plaintiffs filed an amended complaint which supersedes the initial complaint and continues to assert claims for breach of the equity compensation plans against the Company, Otis and Carrier, but no longer asserts ERISA claims. Further, no claim is made in the amended complaint against any current or former director of any of the three companies. Plaintiffs seek money damages, attorneys’ fees and other relief. We continue to believe that the Company has meritorious defenses to these claims. At this time, the Company is unable to predict the outcome; however, based on the
information available to date, we do not believe that this matter will have a material adverse effect on our results of operations, financial condition or liquidity.
DOJ Grand Jury Investigation and Related Civil Litigation
The Company received a grand jury subpoena in late 2019, as part of a DOJ criminal investigation into purported agreements not to solicit or hire employees in violation of the federal antitrust laws. While the investigation has focused on alleged hiring restrictions between and among Pratt & Whitney and certain of its suppliers of outsourced engineering services, the subpoena also included requests regarding Collins Aerospace. Since receipt of the subpoena, the Company has been cooperating with the DOJ investigation. On December 15, 2021, a criminal indictment was filed in the United States District Court for the District of Connecticut, against a former Pratt & Whitney employee and other employees of certain outsourced engineering suppliers charging each of them with one count of violating the federal antitrust laws. No current or former Collins Aerospace employees were named in the indictment. We were recently advised that the Company is a target of the DOJ investigation, and we continue to cooperate with the investigation. No criminal charge has been filed against the Company or its affiliates.
After the criminal charges against the individuals were filed, numerous civil class action antitrust lawsuits have been filed against Pratt & Whitney and other corporate and individual defendants in the United States District Court for the District of Connecticut. The allegations in each of the civil lawsuits track the factual assertions in the criminal indictment and generally allege that Pratt & Whitney and the other defendants agreed to restrict the hiring and recruiting of certain engineers and skilled laborers in a manner that violated federal antitrust laws. Plaintiffs in each of the civil lawsuits seek to represent different purported classes of engineers and skilled laborers employed by Pratt & Whitney and other supplier-defendants since 2011. Collins Aerospace was also named as a defendant in some of the lawsuits. Plaintiffs in each of the lawsuits seek treble damages in an undetermined amount, plus attorneys’ fees and costs of suit. We expect that all the lawsuits ultimately will be consolidated into a single joint complaint. We believe that each of these lawsuits lacks merit. Based on the information available to date, we do not believe that this matter will have a material adverse effect on our results of operations, financial condition or liquidity.
Where appropriate, we have recorded loss contingency accruals for the above-referenced matters, and the amounts individually, or in the aggregate, are not material.
Other. As described in “Note 18: Guarantees,” we extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated.
We also have other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then we accrue the minimum amount.
In the ordinary course of business, the Company and its subsidiaries are also routinely defendants in, parties to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some instances, claims for substantial monetary damages are asserted against the Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. We do not believe that these matters will have a material adverse effect upon our results of operations, financial condition or liquidity.
NOTE 20: ACCUMULATED OTHER COMPREHENSIVE INCOME
A summary of the changes in each component of Accumulated other comprehensive (loss) income, net of tax is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Foreign
Currency
Translation
|
|
Defined Benefit
Pension and
Postretirement
Plans
|
|
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
Balance at December 31, 2018
|
|
$
|
(3,442)
|
|
|
$
|
(5,718)
|
|
|
|
|
$
|
(173)
|
|
|
$
|
(9,333)
|
|
Other comprehensive income (loss) before reclassifications, net
|
|
280
|
|
|
(584)
|
|
|
|
|
(33)
|
|
|
(337)
|
|
Amounts reclassified, pre-tax
|
|
2
|
|
|
170
|
|
|
|
|
51
|
|
|
223
|
|
Tax benefit (expense)
|
|
(43)
|
|
|
97
|
|
|
|
|
(11)
|
|
|
43
|
|
ASU 2018-02 adoption impact
|
|
(8)
|
|
|
(737)
|
|
|
|
|
—
|
|
|
(745)
|
|
Balance at December 31, 2019
|
|
$
|
(3,211)
|
|
|
$
|
(6,772)
|
|
|
|
|
$
|
(166)
|
|
|
$
|
(10,149)
|
|
Other comprehensive income before reclassifications, net
|
|
609
|
|
|
1,842
|
|
|
|
|
181
|
|
|
2,632
|
|
Amounts reclassified, pre-tax
|
|
—
|
|
|
373
|
|
|
|
|
82
|
|
|
455
|
|
Tax benefit (expense)
|
|
25
|
|
|
(510)
|
|
|
|
|
(62)
|
|
|
(547)
|
|
Separation of Carrier and Otis, net of tax
|
|
3,287
|
|
|
584
|
|
|
|
|
4
|
|
|
3,875
|
|
Balance at December 31, 2020
|
|
$
|
710
|
|
|
$
|
(4,483)
|
|
|
|
|
$
|
39
|
|
|
$
|
(3,734)
|
|
Other comprehensive income (loss) before reclassifications, net
|
|
(647)
|
|
|
3,210
|
|
|
|
|
(226)
|
|
|
2,337
|
|
Amounts reclassified, pre-tax
|
|
—
|
|
|
258
|
|
|
|
|
(28)
|
|
|
230
|
|
Tax benefit (expense)
|
|
(14)
|
|
|
(813)
|
|
|
|
|
79
|
|
|
(748)
|
|
Balance at December 31, 2021
|
|
$
|
49
|
|
|
$
|
(1,828)
|
|
|
|
|
$
|
(136)
|
|
|
$
|
(1,915)
|
|
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). The standard allows companies to reclassify to retained earnings the stranded tax effects in Accumulated other comprehensive income (AOCI) from the Tax Cuts and Jobs Act of 2017 (TCJA). We elected to reclassify the income tax effects of TCJA from AOCI of $745 million to retained earnings, effective January 1, 2019.
Amounts reclassified that relate to our defined benefit pension and postretirement plans include the amortization of prior service costs and actuarial net gains or losses recognized during each period presented. These costs are recorded as components of net periodic pension income for each period presented. See “Note 11: Employee Benefit Plans” for additional details.
All noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests) are reported in the mezzanine section of the Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value.
NOTE 21: STOCK-BASED COMPENSATION
RTC’s long-term incentive plans authorize various types of market and performance based incentive awards that may be granted to officers and key employees. Certain historic awards remain outstanding under predecessor plans. The Raytheon Technologies Corporation 2018 Long-Term Incentive Plan, as amended and restated (2018 LTIP) was approved by shareowners on April 26, 2021. A total of 134.8 million shares have been authorized for issuance pursuant to awards under the 2018 LTIP including shares assumed from predecessor plans. There is also an additional 21.5 million shares for future issuance due to adjustments related to the Separation Transactions. As of December 31, 2021, approximately 99.2 million shares remain available for awards under the 2018 LTIP. The 2018 LTIP does not contain aggregate annual award limits, however, it sets an annual award limit per participant. The 2018 LTIP will expire after all authorized shares have been awarded or April 26, 2031, whichever is sooner.
Under the 2018 LTIP, the exercise price of awards is set on the grant date and may not be less than the fair market value per share on that date. Generally, stock appreciation rights and stock options have a term of ten years and a three-year vesting period, subject to limited exceptions. In the event of retirement, annual stock appreciation rights, stock options, and RSUs held for more than one year may become vested and exercisable, subject to certain terms and conditions. LTIP awards with performance-based vesting generally have a minimum three-year vesting period and vest based on actual performance against pre-established metrics. In the event of retirement, performance-based awards held for more than one year, remain eligible to vest based on actual performance relative to performance goals. We have historically repurchased shares of our common stock
in an amount at least equal to the number of shares issued under our equity compensation arrangements and will continue to evaluate this policy in conjunction with our overall share repurchase program.
We measure the cost of all share-based payments, including stock options and stock appreciation rights, at fair value on the grant date and recognize this cost in the Consolidated Statement of Operations, net of expected forfeitures, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2021
|
|
2020
|
|
2019
|
Total compensation cost recognized
|
$
|
442
|
|
|
$
|
330
|
|
|
$
|
268
|
|
The associated future income tax benefit recognized was $83 million, $63 million and $47 million for the years ended December 31, 2021, 2020 and 2019, respectively.
For the years ended December 31, 2021, 2020 and 2019, the amount of cash received from the exercise of stock options was $7 million, $15 million and $27 million, respectively, with an associated tax benefit realized of $42 million, $48 million and $75 million, respectively. In addition, for the years ended December 31, 2021, 2020 and 2019, the associated tax benefit realized from the vesting of performance share units (PSUs), restricted stock awards and RSUs was $44 million, $58 million and $36 million, respectively.
At December 31, 2021, there was $328 million of total unrecognized compensation cost related to non-vested equity awards granted under long-term incentive plans. This cost is expected to be recognized ratably over a weighted-average period of 2.4 years.
A summary of the transactions under our long-term incentive plans for the year ended December 31, 2021 follows.
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|
|
Stock Options
|
|
Stock Appreciation Rights
|
|
Performance Share Units
|
|
Restricted Stock and RSUs
|
(shares and units in thousands)
|
Shares
|
|
Average
Price (1)
|
|
Shares
|
|
Average
Price (1)
|
|
Units
|
|
Average
Price (1)
|
|
Units
|
|
Average
Price (1)
|
Outstanding at:
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|
December 31, 2020
|
1,944
|
|
|
$
|
77.88
|
|
|
33,550
|
|
|
$
|
77.93
|
|
|
—
|
|
|
$
|
—
|
|
|
11,034
|
|
|
$
|
62.92
|
|
Granted
|
64
|
|
|
72.49
|
|
|
2,371
|
|
|
73.07
|
|
|
1,339
|
|
|
73.75
|
|
|
4,426
|
|
|
73.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised / earned
|
(109)
|
|
|
61.85
|
|
|
(2,291)
|
|
|
61.90
|
|
|
—
|
|
|
—
|
|
|
(3,431)
|
|
|
64.77
|
|
Cancelled
|
(50)
|
|
|
88.01
|
|
|
(569)
|
|
|
81.90
|
|
|
(74)
|
|
|
73.65
|
|
|
(586)
|
|
|
65.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021
|
1,849
|
|
|
$
|
78.36
|
|
|
33,061
|
|
|
$
|
78.62
|
|
|
1,265
|
|
|
$
|
73.75
|
|
|
11,443
|
|
|
$
|
66.18
|
|
(1) Weighted-average grant / exercise price.
The weighted-average grant date fair value of stock options and stock appreciation rights granted during 2021, 2020 and 2019 was $15.60, $23.37 and $20.81, respectively. The weighted-average grant date fair value of performance share units, which vest upon achieving certain performance metrics, granted during 2021 and 2019 was $73.75 and $117.87, respectively. There were no performance share units granted in 2020, and all PSUs granted in 2019 were converted to RSUs in connection with the Separation Transactions and Distributions. The total fair value of awards vested during the years ended December 31, 2021, 2020 and 2019 was $287 million, $284 million and $211 million, respectively. The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of stock options and stock appreciation rights exercised during the years ended December 31, 2021, 2020 and 2019 was $54 million, $206 million and $383 million, respectively. The total intrinsic value (which is the stock price at vesting multiplied by the number of underlying shares) of performance share units and other restricted awards vested was $256 million, $295 million and $188 million during the years ended December 31, 2021, 2020 and 2019, respectively.
The following table summarizes information about equity awards outstanding that are vested and expected to vest as well as equity awards outstanding that are exercisable at December 31, 2021:
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|
|
Equity Awards Vested and Expected to Vest
|
|
Equity Awards That Are Exercisable
|
(shares in thousands; aggregate intrinsic value in millions)
|
|
Awards
|
|
Average
Price (1)
|
|
Aggregate
Intrinsic
Value
|
|
Remaining Term (2)
|
|
Awards
|
|
Average
Price (1)
|
|
Aggregate
Intrinsic
Value
|
|
Remaining Term (2)
|
Stock Options
|
|
1,841
|
|
|
$
|
78.33
|
|
|
$
|
8
|
|
|
7.71
|
|
1,029
|
|
|
$
|
76.04
|
|
|
$
|
11
|
|
|
4.30
|
Stock Appreciation Rights
|
|
32,860
|
|
|
78.60
|
|
|
155
|
|
|
7.82
|
|
19,276
|
|
|
77.34
|
|
|
176
|
|
|
4.46
|
Performance Share Units
|
|
1,127
|
|
|
73.76
|
|
|
97
|
|
|
2.11
|
|
|
|
|
|
|
|
|
Restricted Stock and RSUs
|
|
10,660
|
|
|
66.29
|
|
|
1,174
|
|
|
1.61
|
|
|
|
|
|
|
|
|
(1) Weighted-average exercise price per share.
(2) Weighted-average contractual remaining term in years.
The fair value of each option award is estimated on the date of grant using a binomial lattice model. The following table indicates the assumptions used in estimating fair value for awards granted during 2021, 2020 and 2019. Lattice-based option models incorporate ranges of assumptions for inputs; those ranges are as follows:
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|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
Expected volatility
|
|
29.9%
|
|
18.8%
|
|
18.8% - 19.7%
|
Weighted-average volatility
|
|
30
|
%
|
|
19
|
%
|
|
20
|
%
|
Expected term (in years)
|
|
6.5
|
|
6.5
|
|
6.5 - 6.6
|
Expected dividend yield
|
|
2.6
|
%
|
|
1.9
|
%
|
|
2.4
|
%
|
Risk-free rate
|
|
0.04% - 1.2%
|
|
1.4% - 1.6%
|
|
2.3% - 2.7%
|
Expected volatilities are based on the returns of our stock, including implied volatilities from traded options on our stock for the binomial lattice model. We use historical data to estimate equity award exercise and employee termination behavior within the valuation model. The expected term represents an estimate of the period of time equity awards are expected to remain outstanding. The risk-free rate is based on the term structure of interest rates at the time of equity award grant.
NOTE 22: SEGMENT FINANCIAL DATA
Our operations for the periods presented herein are classified into four principal segments: Collins Aerospace, Pratt & Whitney, RIS and RMD. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. The results of RIS and RMD reflect the period subsequent to the completion of the Raytheon Merger on April 3, 2020.
Collins Aerospace Systems is a leading global provider of technologically advanced aerospace and defense products and aftermarket service solutions for aircraft manufacturers, airlines, and regional, business and general aviation, as well as for defense and commercial space operations. Collins Aerospace’s product lines include integrated avionics systems, aviation systems, communications systems, navigation systems, electric power generation, management and distribution systems, environmental control systems, flight control systems, air data and aircraft sensing systems, engine control systems, engine components, engine nacelle systems, including thrust reversers and mounting pylons, interior and exterior aircraft lighting, aircraft seating and cargo systems, evacuation systems, landing systems, including landing gear, wheels and braking systems, hoists and winches, fire and ice detection and protection systems, actuation systems, and propeller systems. Collins Aerospace also designs, manufactures, and supports cabin interior, oxygen systems, food and beverage preparation, storage and galley systems, lavatory and wastewater management systems. Collins Aerospace solutions support human space exploration with environmental control and power systems and extravehicular activity suits and support government and defense customer missions by providing airborne intelligence, surveillance and reconnaissance systems, test and training range systems, crew escape systems, and simulation and training solutions. Collins Aerospace also provides connected aviation solutions and services through worldwide voice and data communication networks and solutions. Aftermarket services include spare parts, overhaul and repair, engineering and technical support, training and fleet management solutions, asset management services and information management services.
Pratt & Whitney is among the world’s leading suppliers of aircraft engines for commercial, military, business jet and general aviation customers. Pratt & Whitney’s Commercial Engines and Military Engines businesses design, develop, produce and maintain families of large engines for wide- and narrow-body and large regional aircraft for commercial customers and for fighter, bomber, tanker and transport aircraft for military customers. Pratt & Whitney’s small engine business, Pratt & Whitney Canada (P&WC), is among the world’s leading suppliers of engines powering regional airlines, general and business aviation, as well as helicopters. Pratt & Whitney also produces, sells and services military and commercial auxiliary power units. Pratt & Whitney provides fleet management services and aftermarket maintenance, repair and overhaul services in all of these segments.
Raytheon Intelligence & Space is a global leading developer and provider of integrated space, communication and sensor systems for advanced missions in all domains, and cyber and software solutions to intelligence, defense, federal and commercial customers. These systems and solutions include end-to-end space solutions, data processing systems, multi-domain intelligence solutions, electronic warfare solutions, including high-energy laser weapons systems, secure sensor solutions, command and control systems, modernization services, and advanced cyber analytics, systems defense and services.
Raytheon Missiles & Defense is a leading designer, developer, integrator producer and sustainer of integrated air and missile defense systems; defensive and combat solutions; large land- and sea-based radars; ballistic and hypersonic missile defense systems; and naval and undersea sensor solutions for the U.S. and foreign government customers. RMD’s integrated air and missile defense systems include the proven Patriot air and missile defense system and its Lower Tier Air and Missile Defense
Sensor (LTAMDS), the first in a family of radars known as GhostEye™, as well as next-generation radar systems to defeat advanced threats. Its defensive solutions include counter-unmanned aircraft systems and ship defense systems. Its combat solutions include precision munitions, missiles, hypersonics, high power microwave and other weapons. RMD’s naval and undersea solutions include combat and ship electronic and sensing systems, as well as undersea sensing and effects solutions. Ballistic and hypersonic missile defense systems include portable radar systems and a portfolio of effectors. Its sustainment solutions include maintenance, depot support, training and predictive analytics services.
Segment Information. Total sales and operating profit by segment include inter-segment sales which are generally recorded at cost-plus a specified fee or at a negotiated fixed price. These pricing arrangements may result in margins different than what the purchasing segment realizes on the ultimate third-party sales.
We 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. GAAP and our pension and 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. 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 the U.S. government. Collins Aerospace and Pratt & Whitney segments generally record pension and PRB expense on a FAS basis.
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.
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-K 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.
Segment information for the years ended December 31 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Profit (Loss)
|
|
Operating Profit (Loss) Margins
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
2019
|
|
2021
|
|
2020
|
|
2019
|
|
2021
|
|
2020
|
|
2019
|
Collins Aerospace Systems
|
|
$
|
18,449
|
|
|
$
|
19,288
|
|
|
$
|
26,028
|
|
|
$
|
1,759
|
|
|
$
|
1,466
|
|
|
$
|
4,508
|
|
|
9.5
|
%
|
|
7.6
|
%
|
|
17.3
|
%
|
Pratt & Whitney
|
|
18,150
|
|
|
16,799
|
|
|
20,902
|
|
|
454
|
|
|
(564)
|
|
|
1,801
|
|
|
2.5
|
%
|
|
(3.4)
|
%
|
|
8.6
|
%
|
Raytheon Intelligence & Space
|
|
15,180
|
|
|
11,069
|
|
|
—
|
|
|
1,833
|
|
|
1,020
|
|
|
—
|
|
|
12.1
|
%
|
|
9.2
|
%
|
|
—
|
%
|
Raytheon Missiles & Defense
|
|
15,539
|
|
|
11,396
|
|
|
—
|
|
|
2,004
|
|
|
880
|
|
|
—
|
|
|
12.9
|
%
|
|
7.7
|
%
|
|
—
|
%
|
Total segment
|
|
67,318
|
|
|
58,552
|
|
|
46,930
|
|
|
6,050
|
|
|
2,802
|
|
|
6,309
|
|
|
9.0
|
%
|
|
4.8
|
%
|
|
13.4
|
%
|
Eliminations and other (1)
|
|
(2,930)
|
|
|
(1,965)
|
|
|
(1,581)
|
|
|
(133)
|
|
|
(107)
|
|
|
(140)
|
|
|
|
|
|
|
|
Corporate expenses and other unallocated items (2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(552)
|
|
|
(590)
|
|
|
(367)
|
|
|
|
|
|
|
|
FAS/CAS operating adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,796
|
|
|
1,106
|
|
|
—
|
|
|
|
|
|
|
|
Acquisition accounting adjustments(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,203)
|
|
|
(5,100)
|
|
|
(888)
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
64,388
|
|
|
$
|
56,587
|
|
|
$
|
45,349
|
|
|
$
|
4,958
|
|
|
$
|
(1,889)
|
|
|
$
|
4,914
|
|
|
7.7
|
%
|
|
(3.3)
|
%
|
|
10.8
|
%
|
(1) Includes the operating results of certain smaller non-reportable business segments. 2020 amounts include Forcepoint, LLC, which was acquired as part of the Raytheon Merger, and subsequently disposed of on January 8, 2021.
(2) Corporate expenses and other unallocated items in 2021 and 2020 include the net expenses related to the U.S. Army’s Lower Tier Air and Missile Defense Sensor (LTAMDS) project. No amounts were recorded in 2019.
(3) Operating profit (loss) in 2020 includes the $3.2 billion goodwill impairment charge in the second quarter of 2020 related to two Collins Aerospace reporting units. Refer to “Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets” for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
Capital Expenditures
|
|
Depreciation & Amortization
|
(dollars in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2019
|
|
2021
|
|
2020
|
|
2019
|
Collins Aerospace Systems (1)
|
$
|
67,564
|
|
|
$
|
68,701
|
|
|
$
|
665
|
|
|
$
|
638
|
|
|
$
|
959
|
|
|
$
|
728
|
|
|
$
|
736
|
|
|
$
|
695
|
|
Pratt & Whitney (1)
|
33,414
|
|
|
32,780
|
|
|
700
|
|
|
565
|
|
|
822
|
|
|
642
|
|
|
729
|
|
|
614
|
|
Raytheon Intelligence & Space (1)
|
21,545
|
|
|
21,573
|
|
|
305
|
|
|
218
|
|
|
—
|
|
|
187
|
|
|
154
|
|
|
—
|
|
Raytheon Missiles & Defense (1)
|
28,766
|
|
|
29,337
|
|
|
287
|
|
|
280
|
|
|
—
|
|
|
333
|
|
|
228
|
|
|
—
|
|
Total segment
|
151,289
|
|
|
152,391
|
|
|
1,957
|
|
|
1,701
|
|
|
1,781
|
|
|
1,890
|
|
|
1,847
|
|
|
1,309
|
|
Corporate, eliminations and other
|
10,115
|
|
|
9,762
|
|
|
177
|
|
|
94
|
|
|
87
|
|
|
152
|
|
|
155
|
|
|
165
|
|
Acquisition accounting adjustments
|
|
|
|
|
|
|
|
|
|
|
2,515
|
|
|
2,154
|
|
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
161,404
|
|
|
$
|
162,153
|
|
|
$
|
2,134
|
|
|
$
|
1,795
|
|
|
$
|
1,868
|
|
|
$
|
4,557
|
|
|
$
|
4,156
|
|
|
$
|
2,708
|
|
(1) Total assets include acquired intangible assets and the property, plant and equipment fair value adjustment. Related amortization expense is included in Acquisition accounting adjustments.
Geographic External Sales by Origin and Long-Lived Assets. Geographic external sales are attributed to the geographic regions based on their location of origin. U.S. external sales include export sales to commercial customers outside the U.S. and sales to the U.S. government, commercial and affiliated customers, which are known to be for resale to customers outside the U.S. Long-lived assets are Fixed assets, net attributed to the specific geographic regions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Net Sales
|
|
Long-Lived Assets
|
(dollars in millions)
|
|
2021
|
|
2020
|
|
2019
|
|
2021
|
|
2020
|
United States
|
|
$
|
55,837
|
|
|
$
|
48,560
|
|
|
$
|
35,125
|
|
|
$
|
11,731
|
|
|
$
|
11,560
|
|
International
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
3,630
|
|
|
3,696
|
|
|
4,419
|
|
|
1,255
|
|
|
1,371
|
|
Asia Pacific
|
|
1,748
|
|
|
1,574
|
|
|
1,989
|
|
|
854
|
|
|
893
|
|
Middle East and North Africa
|
|
136
|
|
|
103
|
|
|
203
|
|
|
129
|
|
|
137
|
|
Other
|
|
3,037
|
|
|
2,654
|
|
|
3,613
|
|
|
1,003
|
|
|
1,001
|
|
Consolidated
|
|
$
|
64,388
|
|
|
$
|
56,587
|
|
|
$
|
45,349
|
|
|
$
|
14,972
|
|
|
$
|
14,962
|
|
Disaggregation of Revenue. We also disaggregate our contracts from customers by geographic location based on customer location, by customer and by sales type. Our geographic location based on customer location uses end user customer location where known or practical to determine, or in instances where the end user customer is not known or not practical to determine, we utilize “ship to” location as the customer location. In addition, for our RIS and RMD segments, we disaggregate our contracts from customers by contract type. We believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Segment sales disaggregated by geographic region for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
United States
|
$
|
9,341
|
|
$
|
9,034
|
|
$
|
12,126
|
|
$
|
9,495
|
|
$
|
15
|
|
$
|
40,011
|
|
Europe
|
4,421
|
|
3,488
|
|
434
|
|
1,255
|
|
—
|
|
9,598
|
|
Asia Pacific
|
1,851
|
|
3,885
|
|
771
|
|
1,462
|
|
—
|
|
7,969
|
|
Middle East and North Africa
|
462
|
|
441
|
|
469
|
|
3,007
|
|
—
|
|
4,379
|
|
Canada and All Other
|
915
|
|
1,302
|
|
144
|
|
70
|
|
—
|
|
2,431
|
|
Consolidated net sales
|
16,990
|
|
18,150
|
|
13,944
|
|
15,289
|
|
15
|
|
64,388
|
|
Inter-segment sales
|
1,459
|
|
—
|
|
1,236
|
|
250
|
|
(2,945)
|
|
—
|
|
Business segment sales
|
$
|
18,449
|
|
$
|
18,150
|
|
$
|
15,180
|
|
$
|
15,539
|
|
$
|
(2,930)
|
|
$
|
64,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
United States
|
$
|
10,132
|
|
$
|
8,534
|
|
$
|
8,704
|
|
$
|
6,906
|
|
$
|
284
|
|
$
|
34,560
|
|
Europe
|
4,643
|
|
2,726
|
|
307
|
|
1,031
|
|
149
|
|
8,856
|
|
Asia Pacific
|
1,810
|
|
4,024
|
|
637
|
|
1,132
|
|
41
|
|
7,644
|
|
Middle East and North Africa
|
421
|
|
505
|
|
410
|
|
2,077
|
|
30
|
|
3,443
|
|
|
|
|
|
|
|
|
Canada and All Other
|
904
|
|
1,001
|
|
83
|
|
73
|
|
23
|
|
2,084
|
|
Consolidated net sales
|
17,910
|
|
16,790
|
|
10,141
|
|
11,219
|
|
527
|
|
56,587
|
|
Inter-segment sales
|
1,378
|
|
9
|
|
928
|
|
177
|
|
(2,492)
|
|
—
|
|
Business segment sales
|
$
|
19,288
|
|
$
|
16,799
|
|
$
|
11,069
|
|
$
|
11,396
|
|
$
|
(1,965)
|
|
$
|
56,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
United States
|
$
|
12,762
|
|
$
|
8,622
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13
|
|
$
|
21,397
|
|
Europe
|
7,051
|
|
4,327
|
|
—
|
|
—
|
|
—
|
|
11,378
|
|
Asia Pacific
|
2,473
|
|
5,462
|
|
—
|
|
—
|
|
—
|
|
7,935
|
|
Middle East and North Africa
|
693
|
|
837
|
|
—
|
|
—
|
|
—
|
|
1,530
|
|
|
|
|
|
|
|
|
Canada and All Other
|
1,452
|
|
1,657
|
|
—
|
|
—
|
|
—
|
|
3,109
|
|
Consolidated net sales
|
24,431
|
|
20,905
|
|
—
|
|
—
|
|
13
|
|
45,349
|
|
Inter-segment sales
|
1,597
|
|
(3)
|
|
—
|
|
—
|
|
(1,594)
|
|
—
|
|
Business segment sales
|
$
|
26,028
|
|
$
|
20,902
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1,581)
|
|
$
|
45,349
|
|
Segment sales disaggregated by customer for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
U.S. government (1)
|
$
|
4,685
|
|
$
|
5,140
|
|
$
|
11,844
|
|
$
|
9,493
|
|
$
|
15
|
|
$
|
31,177
|
|
Foreign military sales through the U.S. government
|
168
|
|
1,273
|
|
825
|
|
3,280
|
|
—
|
|
5,546
|
|
Foreign government direct commercial sales
|
1,095
|
|
541
|
|
844
|
|
2,513
|
|
—
|
|
4,993
|
|
Commercial aerospace and other commercial
|
11,042
|
|
11,196
|
|
431
|
|
3
|
|
—
|
|
22,672
|
|
Consolidated net sales
|
16,990
|
|
18,150
|
|
13,944
|
|
15,289
|
|
15
|
|
64,388
|
|
Inter-segment sales
|
1,459
|
|
—
|
|
1,236
|
|
250
|
|
(2,945)
|
|
—
|
|
Business segment sales
|
$
|
18,449
|
|
$
|
18,150
|
|
$
|
15,180
|
|
$
|
15,539
|
|
$
|
(2,930)
|
|
$
|
64,388
|
|
(1) Excludes foreign military sales through the U.S. government.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
U.S. government (1)
|
$
|
5,159
|
|
$
|
5,193
|
|
$
|
8,512
|
|
$
|
6,896
|
|
$
|
202
|
|
$
|
25,962
|
|
Foreign military sales through the U.S. government
|
218
|
|
1,229
|
|
640
|
|
2,498
|
|
—
|
|
4,585
|
|
Foreign government direct commercial sales
|
923
|
|
583
|
|
740
|
|
1,725
|
|
3
|
|
3,974
|
|
Commercial aerospace and other commercial
|
11,610
|
|
9,785
|
|
249
|
|
100
|
|
322
|
|
22,066
|
|
Consolidated net sales
|
17,910
|
|
16,790
|
|
10,141
|
|
11,219
|
|
527
|
|
56,587
|
|
Inter-segment sales
|
1,378
|
|
9
|
|
928
|
|
177
|
|
(2,492)
|
|
—
|
|
Business segment sales
|
$
|
19,288
|
|
$
|
16,799
|
|
$
|
11,069
|
|
$
|
11,396
|
|
$
|
(1,965)
|
|
$
|
56,587
|
|
(1) Excludes foreign military sales through the U.S. government.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
U.S. government (1)
|
$
|
4,781
|
|
$
|
4,313
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
9,094
|
|
Foreign military sales through the U.S. government
|
255
|
|
1,316
|
|
—
|
|
—
|
|
—
|
|
1,571
|
|
Foreign government direct commercial sales
|
937
|
|
561
|
|
—
|
|
—
|
|
—
|
|
1,498
|
|
Commercial aerospace and other commercial
|
18,458
|
|
14,715
|
|
—
|
|
—
|
|
13
|
|
33,186
|
|
Consolidated net sales
|
24,431
|
|
20,905
|
|
—
|
|
—
|
|
13
|
|
45,349
|
|
Inter-segment sales
|
1,597
|
|
(3)
|
|
—
|
|
—
|
|
(1,594)
|
|
—
|
|
Business segment sales
|
$
|
26,028
|
|
$
|
20,902
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1,581)
|
|
$
|
45,349
|
|
(1) Excludes foreign military sales through the U.S. government.
Sales to Airbus primarily relate to Pratt & Whitney and Collins Aerospace products, and prior to discounts and incentives were approximately 12%, 13% and 22% of total net sales in 2021, 2020 and 2019, respectively.
Segment sales disaggregated by sales type for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
Products
|
$
|
13,404
|
|
$
|
11,189
|
|
$
|
10,735
|
|
$
|
13,927
|
|
$
|
15
|
|
$
|
49,270
|
|
Services
|
3,586
|
|
6,961
|
|
3,209
|
|
1,362
|
|
—
|
|
15,118
|
|
Consolidated net sales
|
16,990
|
|
18,150
|
|
13,944
|
|
15,289
|
|
15
|
|
64,388
|
|
Inter-segment sales
|
1,459
|
|
—
|
|
1,236
|
|
250
|
|
(2,945)
|
|
—
|
|
Business segment sales
|
$
|
18,449
|
|
$
|
18,150
|
|
$
|
15,180
|
|
$
|
15,539
|
|
$
|
(2,930)
|
|
$
|
64,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
Products
|
$
|
14,664
|
|
$
|
10,186
|
|
$
|
7,775
|
|
$
|
10,232
|
|
$
|
462
|
|
$
|
43,319
|
|
Services
|
3,246
|
|
6,604
|
|
2,366
|
|
987
|
|
65
|
|
13,268
|
|
Consolidated net sales
|
17,910
|
|
16,790
|
|
10,141
|
|
11,219
|
|
527
|
|
56,587
|
|
Inter-segment sales
|
1,378
|
|
9
|
|
928
|
|
177
|
|
(2,492)
|
|
—
|
|
Business segment sales
|
$
|
19,288
|
|
$
|
16,799
|
|
$
|
11,069
|
|
$
|
11,396
|
|
$
|
(1,965)
|
|
$
|
56,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
(dollars in millions)
|
Collins Aerospace Systems
|
Pratt & Whitney
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Other
|
Total
|
Products
|
$
|
19,991
|
|
$
|
12,994
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13
|
|
$
|
32,998
|
|
Services
|
4,440
|
|
7,911
|
|
—
|
|
—
|
|
—
|
|
12,351
|
|
Consolidated net sales
|
24,431
|
|
20,905
|
|
—
|
|
—
|
|
13
|
|
45,349
|
|
Inter-segment sales
|
1,597
|
|
(3)
|
|
—
|
|
—
|
|
(1,594)
|
|
—
|
|
Business segment sales
|
$
|
26,028
|
|
$
|
20,902
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1,581)
|
|
$
|
45,349
|
|
RIS and RMD segment sales disaggregated by contract type for the year ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
(dollars in millions)
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
|
Raytheon Intelligence & Space
|
Raytheon Missiles & Defense
|
Fixed-price
|
$
|
6,338
|
|
$
|
9,406
|
|
|
$
|
4,526
|
|
$
|
7,080
|
|
Cost-type
|
7,606
|
|
5,883
|
|
|
5,615
|
|
4,139
|
|
Consolidated net sales
|
13,944
|
|
15,289
|
|
|
10,141
|
|
11,219
|
|
Inter-segment sales
|
1,236
|
|
250
|
|
|
928
|
|
177
|
|
Business segment sales
|
$
|
15,180
|
|
$
|
15,539
|
|
|
$
|
11,069
|
|
$
|
11,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|