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

BUSINESS OVERVIEW
We are a global premier systems provider of high technology products and
services to the aerospace and defense industries. On April 3, 2020, United
Technologies Corporation (UTC) completed the Separation Transactions as defined
below, and on April 3, 2020, completed the Raytheon Merger as defined below, to
form the new company, Raytheon Technologies Corporation. As a result of these
transactions, we now operate in four principal business segments: Collins
Aerospace Systems (Collins Aerospace), Pratt & Whitney, Raytheon Intelligence &
Space (RIS) and Raytheon Missiles & Defense (RMD).
Separation Transactions and Distributions. On April 3, 2020, United Technologies
Corporation (UTC) (since renamed Raytheon Technologies Corporation) completed
the previously announced separation of its business into three independent,
publicly traded companies - UTC, Carrier Global Corporation (Carrier) and Otis
Worldwide Corporation (Otis) (such separations, the "Separation Transactions").
UTC distributed all of the outstanding shares of Carrier common stock and all of
the outstanding shares of Otis common stock to UTC shareowners who held shares
of UTC common stock as of the close of business on March 19, 2020, the record
date for the distributions (the Distributions). UTC distributed 866,158,910 and
433,079,455 shares of common stock of Carrier and Otis, respectively in the
Distributions, each of which was effective at 12:01 a.m., Eastern Time, on April
3, 2020. The historical results of Otis and Carrier are presented as
discontinued operations and, as such, have been excluded from both continuing
operations and segment results for all periods presented. Throughout this
Quarterly Report on Form 10-Q, unless otherwise indicated, amounts and activity
are presented on a continuing operations basis.
Raytheon Merger. On April 3, 2020, following the completion of the Separation
Transactions and the Distributions, pursuant to an Agreement and Plan of Merger
dated June 9, 2019, as amended, UTC and Raytheon Company (Raytheon) completed
their previously announced all-stock merger of equals transaction (the Raytheon
Merger). Upon closing of the Raytheon Merger, Raytheon Company became a
wholly-owned subsidiary of UTC, which changed its name to "Raytheon Technologies
Corporation."
Unless the context otherwise requires, the terms "we," "our," "us," "the
Company," "Raytheon Technologies," and "RTC" mean United Technologies
Corporation and its subsidiaries when referring to periods prior to the Raytheon
Merger and to the combined company, Raytheon Technologies Corporation, when
referring to periods after the Raytheon Merger. Unless the context otherwise
requires, the terms "Raytheon Company," or "Raytheon" mean Raytheon Company and
its subsidiaries prior to the Raytheon Merger.
UTC was determined to be the accounting acquirer in the merger, and as a result
the financial statements of Raytheon Technologies for the period ended and as of
June 30, 2020 include Raytheon Company's financial position and results of
operations for the period subsequent to the completion of the Raytheon Merger on
April 3, 2020. Raytheon Intelligence & Space (RIS) and Raytheon Missiles &
Defense (RMD) follow a 4-4-5 fiscal calendar with results recorded from the
April 3, 2020 merger close date through June 28, 2020 while Collins Aerospace
Systems (Collins Aerospace) and Pratt & Whitney continue to use a quarter
calendar end of June 30, 2020. The historical results of Otis and Carrier are
presented as discontinued operations and, as such, have been excluded from both
continuing operations and segment results for all periods presented. See "Note
3: Discontinued Operations" within Item 1 of this Form 10-Q for additional
information.
The current status of significant factors affecting our business environment in
2020 is discussed below. For additional discussion, refer to the "Business
Overview" section in Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) in our 2019 Annual Report, which is
incorporated by reference in our 2019 Form 10-K, and the "Risk Factors" in Part
II, Item IA of our Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2020.
Industry Considerations
Our worldwide operations can be affected by industrial, economic and political
factors on both a regional and global level. Our operations include original
equipment manufacturer (OEM) and extensive related aftermarket parts and
services related to our aerospace operations. Our defense business serves both
domestic and international customers primarily as a prime contractor or
subcontractor on a broad portfolio of defense and related programs for
government customers. Our business mix also reflects the combination of shorter
cycles in our commercial aerospace spares contracts and certain service
contracts in our defense business primarily at RIS, and longer cycles in our
aerospace OEM and aftermarket maintenance contracts and on our defense contracts
to design, develop, manufacture or modify complex equipment. Our customers are
in the public and private sectors, and our businesses reflect an extensive
geographic diversification that has evolved with continued globalization.
Government legislation, policies and regulations can have a negative impact on
our worldwide operations. Government and market-driven safety and performance
regulations, restrictions on aircraft engine noise and emissions, government
imposed travel restrictions, and government procurement practices can impact our
businesses.
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Collins Aerospace and Pratt & Whitney serve both commercial and government
aerospace customers. Revenue passenger miles (RPMs), available seat miles and
the general economic health of airline carriers are key barometers for our
commercial aerospace operations. Performance in the general aviation sector is
closely tied to the overall health of the economy and is positively correlated
to corporate profits. Our commercial aftermarket operations continue to evolve
as a significant portion of our aerospace operations' customers are covered
under long-term aftermarket service agreements at both Collins Aerospace and
Pratt & Whitney. These agreements are comprehensive long-term spare part and
service agreements with our customers.
RIS, RMD, and the defense operations of Collins Aerospace and Pratt & Whitney
are affected by U.S. Department of Defense (DoD) budget and spending levels,
changes in market demand and the global political environment. Total sales to
the U.S. government were $7.3 billion and $2.4 billion for the quarters ended
June 30, 2020 and 2019, or 52% and 21% of total sales for those periods,
respectively. Total sales to the U.S. government were $9.9 billion and $4.5
billion for the six months ended June 30, 2020 and 2019, or 39% and 20% of total
sales for those periods, respectively. Our participation in long-term
production, development and sustainment programs for the U.S. government has and
is expected to contribute positively to our results in 2020.
Impact of the COVID-19 pandemic on results and forward looking impacts
In March 2020, the coronavirus disease 2019 (COVID-19) was declared a pandemic
by the World Health Organization and a national emergency by the U.S.
government. The pandemic has negatively affected the U.S. and global economy,
disrupted global supply chains and financial markets, and resulted in
significant travel restrictions, mandated facility closures and shelter-in-place
and social distancing orders in numerous jurisdictions around the world.
Raytheon Technologies is taking all prudent measures to protect the health and
safety of our employees, such as practicing social distancing, performing deep
cleaning in all of our facilities, and enabling our employees to work from home
where possible. We have also taken appropriate actions to help support our
communities in addressing the challenges posed by the pandemic, including the
production and donation of personal protective equipment.
Our business and operations and the industries in which we operate have been
significantly impacted by public and private sector policies and initiatives in
the U.S. and worldwide to address the transmission of COVID-19, such as the
imposition of travel restrictions and the adoption of remote working.
Additionally, public sentiments regarding air travel have also had a significant
impact. We began to experience issues related to COVID-19 in the first quarter,
primarily related to a limited number of facility closures, less than full
staffing, and disruptions in supplier deliveries, most significantly in our
Collins Aerospace and Pratt & Whitney businesses. However, our customers
continued to receive our products and services during the first quarter and the
outbreak did not have a significant impact on our operating results for the
quarter ended March 31, 2020.
In the second quarter of 2020 and subsequent to quarter end, the continued
disruption to air travel and commercial activities and the significant
restrictions and limitations on businesses, particularly within the aerospace
and commercial airline industries, have negatively impacted global supply,
demand and distribution capabilities. In particular, the significant decrease in
air travel resulting from the COVID-19 pandemic is adversely affecting our
airline and airframer customers, and their demand for the products and services
of our Collins Aerospace and Pratt & Whitney businesses. Based on recent public
data and estimates, revenue passenger miles (RPMs) for the year ended December
31, 2020 could decline by approximately 60% in comparison to the prior year due
to the pandemic. As a result, our airline customers have reported significant
reductions in fleet utilization, aircraft grounding and unplanned retirements,
and have deferred and, in some cases, cancelled new aircraft deliveries.
Airlines have shifted to cash conservation behaviors such as deferring engine
maintenance due to lower flight hours and aircraft utilization, requesting
extended payment terms, deferring delivery of new aircraft and spare engines and
requesting discounts on engine maintenance. Some airline customers have filed
for bankruptcy due to their inability to meet their financial obligations.
Additionally, we are seeing purchase order declines in line with publicly
communicated aircraft production volumes as original equipment manufacturer
(OEM) customers delay and cancel orders. We continue to monitor these trends and
are working closely with our customers. We are actively mitigating costs and
adjusting production schedules to accommodate these declines in demand. We have
also been taking actions to preserve capital and protect the long-term needs of
our businesses, including cutting discretionary spending, significantly reducing
capital expenditures and research and development spend, suspending our share
buybacks, deferring merit increases and implementing temporary pay reductions,
freezing non-essential hiring, repositioning employees to defense work, and
furloughing employees when needed. In the quarter ended June 30, 2020, we
recorded total restructuring charges of $427 million primarily related to
personnel reductions. Thus far, most of these actions have been taken at our
Collins Aerospace and Pratt & Whitney businesses. The former Raytheon Company
businesses have not experienced significant facility closures or other business
disruptions.
Given the significant reduction in business and leisure passenger air travel,
the number of planes temporarily grounded, and continued travel restrictions
that have resulted from the pandemic, we expect our future operating results,
particularly those of our Collins Aerospace and Pratt & Whitney businesses to
continue to be significantly negatively impacted. Our expectations
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regarding the COVID-19 pandemic and its potential financial impact are based on
available information and assumptions that we believe are reasonable at this
time; however, the actual financial impact is highly uncertain and subject to a
wide range of factors and future developments. While we believe that the
long-term outlook for the aerospace industry remains positive due to the
fundamental drivers of air travel demand, there is significant uncertainty with
respect to when and if commercial air traffic levels will begin to recover, and
whether and at what point capacity will return to and/or exceed pre-COVID-19
levels. Our latest estimates are that this recovery may occur in 2023 or 2024.
New information may emerge concerning the scope, severity and duration of the
COVID-19 pandemic, as well as any worsening of the pandemic and whether there
will be additional outbreaks of the pandemic, actions to contain its spread or
treat its impact, and governmental, business and individuals' actions taken in
response to the pandemic (including restrictions and limitations on travel and
transportation) among others.
We considered the deterioration in general economic and market conditions
primarily due to the COVID-19 pandemic to be a triggering event requiring us to
reassess our commercial aerospace business goodwill and intangibles valuations,
as well as our significant assumptions of future cash flows from our underlying
assets and potential changes in our liabilities in both the first and second
quarters of 2020. In the second quarter of 2020, our revenue at Collins
Aerospace and Pratt & Whitney was significantly impacted by the decline in
flight hours, aircraft fleet utilization, shop visits and commercial OEM
deliveries. In order to evaluate the ongoing impact, we updated our forecast
assumptions of future business activity that are subject to a wide range of
uncertainties, including those noted above.
Based upon our analysis, we concluded that the carrying value of two of our
Collins Aerospace reporting units as of June 30, 2020 was greater than its fair
value, and accordingly, we recorded a goodwill impairment charge of $3.2 billion
in the quarter ended June 30, 2020. Refer to "Note 2: Acquisitions,
Dispositions, Goodwill and Other Intangible Assets" within Item 1 of this Form
10-Q for additional information. Additionally, in the quarter and six months
ended June 30, 2020 we recorded write-downs of assets in our Collins Aerospace
and Pratt & Whitney businesses primarily related to increased estimated credit
losses of $237 million and $309 million in the quarter and six months ended
June 30, 2020, respectively, a reduction in expected future billings or revenues
on commercial contracts, based on a change in estimated customer activity during
the current period, of $179 million and $190 million in the quarter and six
months ended June 30, 2020, respectively, the impairment of a Collins Aerospace
trade name of $17 million and $57 million in the quarter and six months ended
June 30, 2020, respectively, and a change in contract estimates related to a
shift in overhead costs to military contracts of $44 million in both the quarter
and six months ended June 30, 2020. Given the uncertainty related to the
severity and length of the pandemic, as well as any worsening of the pandemic
and whether there will be additional outbreaks of the pandemic and its impact
across the aerospace industry, we may be required to record additional charges
or impairments in future periods.
Although the impact of COVID-19 on our commercial markets is significant, we
currently believe we have sufficient liquidity to withstand the potential
impacts of COVID-19. With the completion of the Separation Transactions, the
Distributions and the Raytheon Merger, we have a balanced and diversified
portfolio of both aerospace and defense businesses which we believe will help
mitigate the impacts of the COVID-19 pandemic and future business cycles.
Other Matters
Global economic and political conditions, changes in raw material and commodity
prices, interest rates, foreign currency exchange rates, energy costs, levels of
end market demand in construction, levels of air travel, the financial condition
of commercial airlines, and the impact from natural disasters and weather
conditions create uncertainties that could impact our earnings outlook for the
remainder of 2020. With regard to political conditions, the U.S. government
suspended Turkey's participation in the F-35 Joint Strike Fighter program
because Turkey accepted delivery of the Russian-built S-400 air and missile
defense system. The U.S. has imposed, and may impose additional, sanctions on
Turkey as a result of this or other political disputes. Turkish companies supply
components, some of which are sole-sourced, to our aerospace operations for
commercial and military engines and aerospace products. Depending upon the scope
and timing of U.S. sanctions on Turkey and potential reciprocal actions, if any,
such sanctions or actions could impact our aerospace operations' sources of
supply and could have a material adverse effect on our results of operations,
cash flows or financial condition. See Part II, Item 1A, "Risk Factors" in our
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 for
further discussion.
The following activity is disclosed as required by Section 13(r)(1)(D) of the
Securities Exchange Act of 1934, as amended, as transactions or dealings with
the government of Iran that have not been specifically authorized by a U.S.
federal department or agency.
In January 2020, Raytheon Company inadvertently misdirected a vendor payment for
$105,000 to Bank Saderat Iran as the result of a data entry error. Bank Saderat
Iran is sanctioned by the U.S. Department of the Treasury's Office of Foreign
Assets Control (OFAC) as a financial institution owned or controlled by the
Government of Iran and is blocked under the Iranian Transactions and Sanctions
Regulations (31 CFR Part 560) and Global Terrorism Sanctions Regulations (31 CFR
Part 594). The misdirected payment, which occurred prior to the Raytheon Merger,
was blocked by Raytheon Company's U.S. bank in accordance with OFAC
requirements. Raytheon Company subsequently determined that a data entry error
had resulted in its
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vendor being assigned incorrect bank routing information associated with the
sanctioned Iranian bank. Neither Raytheon Company's vendor, nor the intended
recipient bank, are or were subject to U.S. government sanctions. On March 2,
2020, Raytheon Company submitted a license request to OFAC seeking release of
the blocked funds, and OFAC issued the license on July 1, 2020. Raytheon Company
did not receive any revenues or profits associated with the inadvertent payment.
                         CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Management believes the most complex and sensitive
judgments, because of their significance to the Condensed Consolidated Financial
Statements, result primarily from the need to make estimates about the effects
of matters that are inherently uncertain. The most significant areas involving
management judgments and estimates are described below and reflect updates from
our 2019 Form 10-K as a result of the Raytheon Merger and Separation
Transactions. Actual results in these areas could differ from management's
estimates.
Long-Term Contract Accounting. We recognize revenue on an over-time basis for
substantially all defense contracts and certain long-term aerospace aftermarket
contracts. We measure progress toward completion of these contracts on a
percentage of completion basis, using costs incurred to date relative to total
estimated costs at completion. Incurred costs represent work performed, which
correspond with and best depict transfer of control to the customer. Contract
costs are incurred over a period of time, which can be several years, and the
estimation of these costs requires management's judgment. We review our Estimate
at Completion (EACs) on significant contracts on a periodic basis and for
others, no less than annually or when a change in circumstances warrant a
modification to a previous estimate. Due to the nature of the work required to
be performed on many of the Company's performance obligations, the estimation of
total revenue and cost at completion is complex, subject to many variables and
requires significant judgment by management on a contract by contract basis. As
part of this process, management reviews information including, but not limited
to, any outstanding key contract matters, progress towards completion and the
related program schedule, identified risks and opportunities and the related
changes in estimates of revenues and costs. The risks and opportunities include
management's judgment about the ability and cost to achieve the schedule
including consideration of customer-directed delays or reductions in scheduled
deliveries, and technical and other specific contract requirements including
customer activity levels and variable consideration based upon that activity.
Management's judgment related to these considerations has become increasingly
more significant given the current economic environment primarily caused by the
COVID-19 pandemic. Management must make assumptions and estimates regarding
contract revenue and costs, including estimates of labor productivity and
availability, the complexity and scope of the work to be performed, the
availability and cost of materials, the length of time to complete the
performance obligation, execution by our subcontractors, the availability and
timing of funding from our customer, overhead cost rates, estimated aircraft and
engine utilization and estimated useful lives of components, among other
variables. Cost estimates may also include the estimated cost of satisfying our
industrial cooperation agreements, sometimes in the form of either offset
obligations or in-country industrial participation (ICIP) agreements, required
under certain contracts. These obligations may or may not be distinct depending
on their nature. If cash is paid to a customer to satisfy our offset obligations
it is recorded as a reduction in the transaction price. Changes in estimates of
net sales, cost of sales and the related impact to operating profit are
recognized on a cumulative catch-up basis, which recognizes the cumulative
effect of the profit changes on current and prior periods based on a performance
obligation's percentage of completion in the current period. A significant
change in one or more of these estimates could affect the profitability of one
or more of our performance obligations. Our EAC adjustments also include the
establishment of loss provisions on our contracts accounted for on a percentage
of completion basis.
Net EAC adjustments had the following impact on our operating results:
                                                                                                                       Six Months Ended
                                                              Quarter Ended June 30,                                       June 30,
(dollars in millions, except per share amounts)             2020                     2019             2020                2019
Operating profit                                       $      (151)

$ (69) $ (130) $ (81) Income (loss) from continuing operations attributable to common shareowners (1)

                        (119)                   (55)            (103)                (64)
Diluted earnings (loss) per share from
continuing operations attributable to common
shareowners (1)                                        $     (0.08)               $ (0.06)         $ (0.08)         $    (0.07)


(1)  Amounts reflect a U.S. statutory tax rate of 21%, which approximates our
effective tax rate on our EAC adjustments.
As a result of the Raytheon Merger, Raytheon Company's contracts accounted for
on a percentage of completion basis were reset to zero percent complete as of
the merger date, since only the unperformed portion of the contract at the
merger date represents the obligation of the Company. For additional information
related to the Raytheon Merger, see "Note 2: Acquisitions, Dispositions,
Goodwill and Other Intangible Assets" within Item 1 of this Form 10-Q.
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Costs incurred for engineering and development of aerospace products under
contracts with customers are capitalized as contract fulfillment costs, to the
extent recoverable from the associated contract margin, and subsequently
amortized as the OEM products are delivered to the customer. The estimation of
contract margin requires management's judgment. We regularly assess capitalized
contract fulfillment costs for impairment.
Goodwill and Intangible Assets. The assets and liabilities of acquired
businesses are recorded under the acquisition method of accounting at their
estimated fair values at the dates of acquisition. Goodwill represents costs in
excess of fair values assigned to the underlying identifiable net assets of
acquired businesses. Intangible assets consist of patents,
trademarks/tradenames, exclusivity assets, developed technology, customer
relationships, and other intangible assets including a collaboration asset
established in connection with our 2012 agreement to acquire Rolls-Royce's
ownership and collaboration interests in International Aero Engines AG (IAE).
The fair value for acquired customer relationship intangibles is determined as
of the acquisition date based on estimates and judgments regarding expectations
for the future after-tax cash flows arising from the follow-on revenue from
customer relationships that existed on the acquisition date over their estimated
lives, including the probability of expected future contract renewals and
revenue, less a contributory assets charge, all of which is discounted to
present value. The fair value of the trademark and tradename intangible assets
are determined utilizing the relief from royalty method which is a form of the
income approach. Under this method, a royalty rate based on observed market
royalties is applied to projected revenue supporting the tradename and
discounted to present value using an appropriate discount rate. See "Note 1:
Basis of Presentation and Accounting Principles Update" within Item 1 of this
Form 10-Q for further details.
We applied these approaches to the valuation of intangibles for the Raytheon
Merger, for which the most significant intangible assets identified were
customer relationships and tradenames. Specific to these intangible assets, our
estimates of market participant future cash flows included forecasted revenue
growth rates, remaining developmental effort, operational performance including
company specific synergies, program life cycles, material and labor pricing, and
other relevant customer, contractual and market factors. For the customer
relationships, where appropriate, the net cash flows were probability-adjusted
to reflect the uncertainties associated with the underlying assumptions,
including cancellation rates related to backlog, government demand for
sole-source and recompete contracts and win rates for recompete contracts, as
well as the risk profile of the net cash flows utilized in the valuation. In
addition, the net cash flows were discounted using an appropriate discount rate.
The estimated fair value of identifiable intangible assets acquired in
connection with the Raytheon Merger was approximately $19.1 billion.
Also included within other intangible assets are exclusivity assets, which are
payments made to secure certain contractual rights to provide products on new
commercial aerospace platforms. Such payments are capitalized when there are
distinct rights obtained and there are sufficient incremental cash flows to
support the recoverability of the assets established. Otherwise, the applicable
portion of the payments are expensed. Capitalized payments made on these
contractual commitments are amortized as a reduction of sales. We amortize these
intangible assets based on the pattern of economic benefit, which typically
results in an amortization method other than straight-line. In the aerospace
industry, amortization based on the pattern of economic benefit generally
results in lower amortization expense during the development period with
increasing amortization expense as programs enter full production and
aftermarket cycles. If a pattern of economic benefit cannot be reliably
determined, a straight-line amortization method is used. The gross value of
these contractual commitments at June 30, 2020 was approximately $12.3 billion,
of which approximately $3.2 billion has been paid to date. We record these
payments as intangible assets when such payments are no longer conditional. We
regularly assess the recoverability of these intangibles, which is dependent
upon the future success and profitability of the underlying aircraft platforms
including the associated aftermarket revenue streams.
Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual, or more frequent if necessary, impairment
testing using the guidance and criteria described in the Intangibles-Goodwill
and Other Topic of the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC). A goodwill impairment loss is measured at the
amount by which a reporting unit's carrying value exceeds its fair value,
without exceeding the recorded amount of goodwill. In developing our estimates
for the fair value of our reporting units, significant judgment is required in
the determination of the appropriateness of using a qualitative assessment or
quantitative assessment. For these quantitative assessments that are performed,
fair value is primarily based on income approaches using discounted cash flow
models and relief from royalty models, which have significant assumptions
including sales growth rates, projected operating profit, terminal growth rates,
discount rates and royalty rates. Such assumptions are subject to variability
from year to year and are directly impacted by global market conditions. The
Company reviews goodwill for impairment annually or more frequently if events or
changes in circumstances indicate the asset might be impaired.
The Company has been monitoring the deterioration in general economic and market
conditions primarily due to the COVID-19 pandemic. In the second quarter of
2020, we observed several airline customer bankruptcies, delays and
cancellations of aircraft purchases by airlines, fleet retirements and
repositioning of OEM production schedules. These factors contributed to a
deterioration of our expectations regarding the timing of a return to
pre-COVID-19 commercial flight activity,
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which further reduced our expectations regarding future sales and cash flows. We
considered these factors to be a triggering event requiring impairment
evaluation of goodwill, intangible assets and other assets in our commercial
aerospace businesses, Collins Aerospace and Pratt & Whitney.
Impairment evaluations at Collins Aerospace and Pratt & Whitney resulted in
several other charges as further discussed in the "Business Overview" section
above, and includes $17 million and $57 million of impairment related to a
Collins Aerospace indefinite-lived tradename intangible, in the quarter and six
months ended June 30, 2020. These charges were primarily due to declines in
expected future commercial air traffic, airline bankruptcies, or other impacts
such as accelerated fleet retirements and the shift in overhead costs to our
military production contracts in joint military/commercial production facilities
due to the decline in commercial sales volumes. We also evaluated amortizable
intangible assets and identified no impairments.
Finally, we evaluated the Collins Aerospace and Pratt & Whitney reporting units
for goodwill impairment and determined that the carrying values of two of the
six Collins Aerospace reporting units exceeded the sum of discounted future cash
flows, resulting in goodwill impairments of $3.2 billion. Collins Aerospace
discounted future cash flow estimates were developed for three scenarios: a base
case, downside case, and an upside case. These scenarios included assumptions
regarding future airline flight activity, out of warranty hours on original
equipment, expected repairs, upgrades and replacements, future OEM manufacturing
schedules and related environmental assumptions, including individuals' desire
to return to normal travel, business needs to travel, and potential cures or
vaccines to prevent or reduce the effects of COVID-19. These estimates require a
significant amount of judgment and are subject to change based upon factors
outside our control.
We recorded total goodwill impairments of $3.2 billion related to the two
Collins Aerospace reporting units by weighting the three scenarios as follows:
50% for the base case, 40% for the downside case, and 10% for the upside case.
We used these weightings, as we believe they reflect the risks and opportunities
relative to our current estimates. Goodwill impairment was not indicated for any
of the other reporting units evaluated for impairment in any of these scenarios.
For these other reporting units, the reporting unit that was closest to
impairment was a reporting unit at Collins Aerospace, with a fair value in
excess of book value, including goodwill, of $1.4 billion or 19%. Material
changes in these estimates could occur and result in additional impairments in
future periods. If the discount rate used for the impairment analysis increased
or decreased by 25 basis points, the impairments of the two Collins Aerospace
reporting units would have increased by $1.2 billion or decreased by
$1.3 billion, respectively. If the cash flows were decreased or increased by 10%
the impairments would have increased by $2.5 billion or decreased by
$2.1 billion, respectively.
The Company continuously monitors for events and circumstances that could
negatively impact the key assumptions in determining fair value, including
long-term revenue growth projections, profitability, discount rates, recent
market valuations from transactions by comparable companies, volatility in the
Company's market capitalization, and general industry, market and macro-economic
conditions. It is possible that future changes in such circumstances, including
a more prolonged and/or severe COVID-19 pandemic than anticipated, or future
changes in the variables associated with the judgments, assumptions and
estimates used in assessing the fair value of our reporting units, would require
the Company to record a non-cash impairment charge.
Employee Benefit Plans. We sponsor domestic and foreign defined benefit pension
and postretirement benefit (PRB) plans. Assumptions used to calculate our funded
status are determined based on company data and appropriate market indicators.
They are evaluated annually at December 31 and when significant events require a
mid-year remeasurement. A change in any of these assumptions or actual
experience that differs from these assumptions are subject to recognition in
pension and postretirement net periodic benefit (income) cost reported in the
Condensed Consolidated Financial Statements.
Assumptions used in the accounting for these employee benefit plans require
judgement. Major assumptions include the discount rate and expected return on
plan assets (EROA). Other assumptions include mortality rates, demographic
assumptions (such as retirement age), rate of increase in employee compensation
levels, and health care cost increase projections.
The weighted-average discount rates used to measure pension and PRB liabilities
are based on yield curves developed using high-quality corporate bonds as well
as plan specific cash flows. For our significant plans, we utilize a full yield
curve approach in the estimation of the service cost and interest cost
components of net periodic benefit costs by applying the specific spot rates
along the yield curve used in determination of the benefit obligation to the
relevant discounted projected cash flows.
As a result of the Raytheon Merger we have updated our sensitivity analysis as
of the merger date. An increase of 25 basis points in the discount rate would
have decreased our projected benefit obligation by $1,921 million as of April 3,
2020. A decrease of 25 basis points in the discount rate would have increased
our projected benefit obligation by $2,018 million as of April 3, 2020.
The discount rate sensitivities assume no change in the shape or steepness of
the company-specific yield curve used to plot the individual spot rates that
will be applied to the projected cash outflows for future benefit payments in
order to calculate interest and service cost. A flattening of the yield curve,
results in a narrowing of the spread between interest and obligation
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discount rates and would increase our net periodic benefit cost. Conversely, a
steepening of the yield curve would result in an increase in the spread between
interest and obligation discount rates and would decrease our net periodic
benefit cost.
The EROA is the average rate of earnings expected over the long term on assets
invested to fund anticipated future benefit payment obligations. In determining
the EROA assumption, we consider the target asset allocation of plan assets,
economic and other indicators of future performance, and the historical
performance of total plan assets and individual asset classes. In addition, we
may consult with and consider the opinions of financial and other professionals
in developing the appropriate capital market assumptions. Return projections are
also validated using a simulation model that incorporates yield curves, credit
spreads and risk premiums to project long-term prospective returns. Differences
between actual asset returns in a given year and the EROA do not necessarily
indicate a change in the assumption is required, as the EROA represents the
expected average returns over a long-term horizon.
We must apply both Financial Accounting Standards (FAS) requirements under U.S.
Generally Accepted Accounting Principles (GAAP) (as described above) and U.S.
government Cost Accounting Standards (CAS) requirements to calculate pension and
PRB expense. Both FAS and CAS expense use long term assumptions requiring
judgement, but the CAS expense calculation is different from the FAS
requirements and calculation methodology. While the ultimate liability for
pension costs under FAS and CAS is similar, the pattern of cost recognition is
different. Our CAS pension expense is comprised primarily of CAS service cost as
well as amortization amounts resulting from demographic or economic experience
different than expected, changes in assumptions, or changes in plan provisions.
CAS requires contractors to compare the liability using a discount rate based on
the EROA to a liability using a discount rate based on high-quality corporate
bonds, and use the greater of the two liability calculations in developing CAS
expense. Additionally, unlike FAS, CAS expense is only recognized for plans that
are not fully funded. Consequently, if plans become or cease to be fully funded
under CAS due to our asset or liability experience, our CAS expense will change
accordingly.
The segment results of RIS and RMD only include pension and PRB expense as
determined under CAS, which we generally recover through the pricing of our
products and services to the U.S. government. The difference between our CAS
expense and the FAS service cost attributable to these segments is the FAS/CAS
operating adjustment and is reported as a separate line in our segment results.
The FAS/CAS operating adjustment results in consolidated pension expense in
operating profit equal to the service cost component of FAS expense under U.S.
GAAP. The segment results of Collins Aerospace and Pratt & Whitney include FAS
service cost. The other components of FAS expense for all segments are recorded
in non-operating income under Non-service pension (benefit) on our Condensed
Consolidated Statement of Operations.
We are also subject to ERISA funding rules, which require us to fully fund our
pension plans over a rolling seven-year period as determined annually based on
the Pension Protection Act of 2006 (PPA) calculated funded status at the
beginning of each year. The funding requirements are primarily based on the
year's expected service cost and amortization of other previously unfunded
liabilities. Due to the differences in requirements and calculation
methodologies, neither our FAS expense nor our CAS expense is indicative of the
PPA funding requirements.
Income Taxes. Management believes that our earnings during the periods when the
temporary differences become deductible will be sufficient to realize the
related future income tax benefits, which may be realized over an extended
period of time. For those jurisdictions where the expiration date of tax
carryforwards or the projected operating results indicate that realization is
not likely, a valuation allowance is provided.
In assessing the need for a valuation allowance, we estimate future taxable
income, considering the feasibility of ongoing tax planning strategies and the
realizability of tax loss carryforwards. Valuation allowances related to
deferred tax assets can be affected by changes to tax laws, changes to statutory
tax rates and future taxable income levels. In the event we were to determine
that we would not be able to realize all or a portion of our deferred tax assets
in the future, we would reduce such amounts through an increase to tax expense
in the period in which that determination is made or when tax law changes are
enacted. Conversely, if we were to determine that we would be able to realize
our deferred tax assets in the future in excess of the net carrying amounts, we
would decrease the recorded valuation allowance through a decrease to tax
expense in the period in which that determination is made.
In the ordinary course of business there is inherent uncertainty in quantifying
our income tax positions. We assess our income tax positions and record tax
benefits for all years subject to examination based upon management's evaluation
of the facts, circumstances and information available at the reporting date. For
those tax positions where it is more likely than not that a tax benefit will be
sustained, we have recorded the largest amount of tax benefit with a greater
than 50% likelihood of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For those income
tax positions where it is not more likely than not that a tax benefit will be
sustained, no tax benefit has been recognized in the financial statements. In
addition, we have entered into certain internal legal entity restructuring
transactions necessary to effectuate the Separation Transactions. We have
accrued tax on these transactions based on our interpretation of the applicable
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tax laws and our determination of appropriate entity valuations. See "Note 1:
Basis of Presentation and Summary of Accounting Principles" and "Note 9: Income
Taxes" within Item 1 of this Form 10-Q for further discussion.
Management has determined that the distributions of Carrier and Otis on April 3,
2020, and certain related internal business separation transactions, qualified
as tax-free under applicable law. In making these determinations, we applied the
tax law in the relevant jurisdictions to our facts and circumstances and either
obtained tax rulings from the relevant taxing authorities, tax opinions, and/or
other external tax advice related to the concluded tax treatment. If the
completed distributions of Carrier or Otis, in each case, or certain internal
business separation transactions, were to fail to qualify for tax-free
treatment, the Company could be subject to significant liabilities, and there
could be material adverse impacts on the Company's business, financial
condition, results of operations and cash flows in future reporting periods.
Contingent Liabilities. Our operating units include businesses which sell
products and services and conduct operations throughout the world. As described
in "Note 17: Commitments and Contingencies" within Item 1 of this Form 10-Q,
contractual, regulatory and other matters in the normal course of business may
arise that subject us to claims or litigation. Of note, the design, development,
production and support of new aerospace technologies is inherently complex and
subject to risk. Since the PW1000G Geared Turbofan engine entered into service
in 2016, technical issues have been identified and experienced with the engine,
which is typical for new engines and new aerospace technologies. Pratt & Whitney
has addressed these issues through various improvements and modifications. These
issues have resulted in financial impacts, including increased warranty
provisions, customer contract settlements, and reductions in contract
performance estimates. Additional technical issues may also arise in the normal
course, which may result in financial impacts that could be material to the
Company's financial position, results of operations and cash flows.
Additionally, we have significant contracts with the U.S. government, subject to
government oversight and audit, which may require significant adjustment of
contract prices. We accrue for liabilities associated with these matters when it
is probable that a liability has been incurred and the amount can be reasonably
estimated. The most likely cost to be incurred is accrued based on an evaluation
of then currently available facts with respect to each matter. When no amount
within a range of estimates is more likely, the minimum is accrued. The inherent
uncertainty related to the outcome of these matters can result in amounts
materially different from any provisions made with respect to their resolution.
                             RESULTS OF OPERATIONS
As described in our "Cautionary Note Regarding Forward-Looking Statements" in
this Form 10-Q, our interim period results of operations and period-to-period
comparisons of such results, particularly at a segment level, may not be
indicative of our future operating results. The following discussions of
comparative results among periods, including the discussion of segment results,
should be viewed in this context. As discussed further above in Business
Overview, the results of RIS and RMD reflect the period subsequent to the
completion of the Raytheon Merger on April 3, 2020. In addition, as a result of
the Separations Transactions and the Distributions, beginning in the second
quarter of 2020, the historical results of Otis and Carrier are presented as
discontinued operations and, as such, have been excluded from both continuing
operations and segment results for all periods presented.
                                   Net Sales
                            Quarter Ended June 30,                           Six Months Ended June 30,
(dollars in millions)        2020             2019           2020           

2019

Net Sales               $    14,061        $ 11,329       $ 25,421       $                22,282

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

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


Net sales decreased $4,098 million organically in the quarter ended
June 30, 2020 compared to the quarter ended June 30, 2019. This decrease
reflects lower organic sales of $2.4 billion at Collins Aerospace, primarily
driven by lower commercial aerospace OEM sales and lower commercial aerospace
aftermarket sales, partially offset by higher military sales. The declines in
commercial aerospace OEM sales and commercial aerospace aftermarket sales were
both primarily due to the current economic environment principally driven by the
COVID-19 pandemic which has resulted in lower flight hours, aircraft fleet
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utilization and commercial OEM deliveries. The decrease in net sales also
reflects lower organic sales of $1.7 billion at Pratt & Whitney primarily driven
by lower commercial aftermarket sales and lower commercial OEM sales, both
primarily due to a significant reduction in shop visits and related spare part
sales and commercial engine deliveries, principally driven by the current
economic environment primarily due to the COVID-19 pandemic, partially offset by
higher military sales primarily driven by an increase in F135 engine sales. The
$6,905 million sales increase due to acquisitions and divestitures, net for the
quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, is
primarily driven by the Raytheon Merger on April 3, 2020.
Net sales decreased $3,560 million organically for the six months ended June 30,
2020 compared to the six months ended June 30, 2019. This decrease reflects
lower organic sales of $2.4 billion at Collins Aerospace, primarily driven by
lower commercial aerospace OEM sales and lower commercial aerospace aftermarket
sales, partially offset by higher military sales. The declines in commercial
aerospace OEM sales and commercial aerospace aftermarket sales were both
primarily due to the current economic environment principally driven by the
COVID-19 pandemic, which has resulted in lower flight hours, aircraft fleet
utilization and commercial OEM deliveries. The decrease in net sales also
reflects lower organic sales of $1.1 billion at Pratt & Whitney primarily driven
by lower commercial aftermarket sales and lower commercial OEM sales, both
primarily due to a significant reduction in shop visits and related spare part
sales and commercial engine deliveries, principally driven by the current
economic environment primarily due to the COVID-19 pandemic, partially offset by
higher military sales primarily driven by an increase in F135 engine sales. The
$6,900 million sales increase due to acquisitions and divestitures, net for the
six months ended June 30, 2020 compared to the six months ended June 30, 2019,
is primarily driven by the Raytheon Merger on April 3, 2020.
The composition of external net sales by products and services sales for the
quarter and six months ended June 30, 2020 was approximately the following:
                                         Collins Aerospace                                  Raytheon Intelligence &       Raytheon Missiles &
                                              Systems               Pratt & Whitney                  Space                      Defense
Quarter Ended June 30, 2020
Products                                               85  %                    55  %                         75  %                     90  %
Services                                               15  %                    45  %                         25  %                     10  %

Six Months Ended June 30, 2020
Products                                               80  %                    60  %                         75  %                     90  %
Services                                               20  %                    40  %                         25  %                     10  %



                                                 Quarter Ended June 30,                                   % of Total Net Sales
(dollars in millions, except percentages)       2020                 2019                2020                  2019
Net Sales
Products                                   $    10,768           $   8,389                    77  %                 74  %
Services                                         3,293               2,940                    23  %                 26  %
Total net sales                            $    14,061           $  11,329                   100  %                100  %


Net products sales grew $2,379 million in the quarter ended June 30, 2020
compared to the quarter ended June 30, 2019 primarily due to an increase in
external product sales of $5.6 billion due to the Raytheon Merger on April 3,
2020, partially offset by decreases in external product sales of $1.9 billion at
Collins Aerospace and $1.4 billion at Pratt & Whitney.
Net services sales grew $353 million in the quarter ended June 30, 2020 compared
to the quarter ended June 30, 2019 primarily due to an increase in external
services sales of $1.0 billion due to the Raytheon Merger on April 3, 2020,
partially offset by decreases in external services sales of $0.4 billion at
Collins Aerospace and $0.2 billion at Pratt & Whitney.
                                                Six Months Ended June 30,                                  % of Total Net Sales
(dollars in millions, except percentages)        2020                 2019                2020                  2019
Net Sales
Products                                   $     18,933           $  16,424                    74  %                 74  %
Services                                          6,488               5,858                    26  %                 26  %
Total net sales                            $     25,421           $  22,282                   100  %                100  %


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  Table     of Conte    n    ts
Net products sales grew $2,509 million in the six months ended June 30, 2020
compared to the six months ended June 30, 2019 primarily due to an increase in
external product sales of $5.6 billion due to the Raytheon Merger on April 3,
2020, partially offset by decreases in external product sales of $2.0 billion at
Collins Aerospace and $1.1 billion at Pratt & Whitney.
Net services sales grew $630 million in the six months ended June 30, 2020
compared to the six months ended June 30, 2019 primarily due to an increase in
external services sales of $1.0 billion due to the Raytheon Merger on April 3,
2020, partially offset by decreases in external services sales of $0.4 billion
at Collins Aerospace.
Our sales to major customers were as follows:
                                                  Quarter Ended June 30,                                   % of Total Net Sales
(dollars in millions, except percentages)        2020                 2019                2020                  2019
Sales to the U.S. government(1)             $     7,328           $   2,434                    52  %                 21  %
Foreign military sales through the U.S.
government                                        1,342                 390                    10  %                  3  %
Foreign government direct commercial sales        1,104                 382                     8  %                  3  %
Commercial aerospace and other commercial
sales                                             4,287               8,123                    30  %                 72  %
Total net sales                             $    14,061           $  11,329                   100  %                100  %

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

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

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

                      Cost of Products and Services Sold
                                                                                                           Six Months Ended
                                                   Quarter Ended June 30,                                      June 30,
(dollars in millions)                              2020                 2019              2020                2019
Total cost of products and services sold     $     12,214           $   8,554          $ 20,786          $   16,973
Percentage of net sales                              86.9   %            75.5  %           81.8  %             76.2    %


The factors contributing to the change year-over-year for the quarter and six
months ended June 30, 2020 in total cost of products and services sold are as
follows:
                                                                 Quarter Ended            Six Months Ended
(dollars in millions)                                            June 30, 2020             June 30, 2020
Organic change                                                 $      (2,368)           $       (1,846)
Foreign currency translation                                             (72)                     (168)
Acquisitions and divestitures, net                                     5,593                     5,542
Restructuring                                                            171                       133
Acquisition accounting adjustments                                       325                       322
Other                                                                     11                      (170)
Total change                                                   $       3,660            $        3,813


The organic decrease in total cost of products and services sold for the quarter
ended June 30, 2020 compared to the quarter ended June 30, 2019, of $2,368
million was primarily driven by the organic sales decreases noted above. The
increase in Acquisitions and divestitures, net of $5,593 million for the quarter
ended June 30, 2020 compared to the quarter ended June 30, 2019 is primarily
driven by the Raytheon Merger on April 3, 2020.
The organic decrease in total cost of products and services sold for the six
months ended June 30, 2020 compared to the six months ended June 30, 2019, of
$1,846 million was primarily driven by the organic sales decreases noted above.
The increase in Acquisitions and divestitures, net of $5,542 million for the six
months ended June 30, 2020 compared to the six months ended June 30, 2019 is
primarily driven by the Raytheon Merger on April 3, 2020. The decline in Other
of $170 million for the six months ended June 30, 2020 compared to the six
months ended June 30, 2019, reflects the absence of prior year
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Table of Conte n ts amortization of inventory fair value step-up associated with the Rockwell Collins acquisition of $181 million at Collins Aerospace.

                                                 Quarter Ended June 30,                                      % of Total Net Sales
(dollars in millions, except percentages)        2020                 2019                 2020                   2019
Cost of sales
Products                                   $      9,620           $   6,736                   68.4  %                59.5  %
Services                                          2,594               1,818                   18.4  %                16.0  %
Total cost of sales                        $     12,214           $   8,554                   86.9  %                75.5  %


Net products cost of sales grew $2,884 million in the quarter ended
June 30, 2020 compared to the quarter ended June 30, 2019 primarily due to an
increase in external product cost of sales due to the Raytheon Merger on April
3, 2020, partially offset by decreases in external product cost of sales at
Pratt & Whitney and Collins Aerospace.
Net services cost of sales grew $776 million in the quarter ended June 30, 2020
compared to the quarter ended June 30, 2019 primarily due to an increase in
external services cost of sales due to the Raytheon Merger on April 3, 2020,
partially offset by decreases in external services cost of sales at Collins
Aerospace and Pratt & Whitney.
                                                Six Months Ended June 30,                                    % of Total Net Sales
(dollars in millions, except percentages)        2020                 2019                 2020                   2019
Cost of sales
Products                                   $     16,249           $  13,399                   63.9  %                60.1  %
Services                                          4,537               3,574                   17.8  %                16.0  %
Total cost of sales                        $     20,786           $  16,973                   81.8  %                76.2  %


Net products cost of sales grew $2,850 million in the six months ended June 30,
2020 compared to the six months ended June 30, 2019 primarily due to an increase
in external product cost of sales due to the Raytheon Merger on April 3, 2020,
partially offset by decreases in external product cost of sales at Collins
Aerospace and Pratt & Whitney.
Net services cost of sales grew $963 million in the six months ended June 30,
2020 compared to the six months ended June 30, 2019 primarily due to an increase
in external services cost of sales due to the Raytheon Merger on April 3, 2020,
partially offset by decreases in external services cost of sales at Collins
Aerospace.
                           Research and Development
                                                    Quarter Ended June 30,                                  Six Months Ended June 30,
(dollars in millions)                              2020                 2019                2020                   2019
Company-funded                               $        695           $      605          $    1,230          $       1,192
Percentage of net sales                               4.9   %              5.3  %              4.8  %                 5.3     %
Customer-funded (1)                          $      1,198           $      574          $    1,825          $       1,125
Percentage of net sales                               8.5   %              5.1  %              7.2  %                 5.0     %


(1) Customer-funded research and development costs are included in cost of sales
in our consolidated statement of operations.
Research and development spending is subject to the variable nature of program
development schedules and, therefore, year-over-year fluctuations in spending
levels are expected. The increase in company-funded research and development of
$90 million for the quarter ended June 30, 2020 compared to the quarter ended
June 30, 2019, was primarily driven by $0.2 billion related to the Raytheon
Merger on April 3, 2020, partially offset by lower expenses of $0.1 billion
across various commercial programs at Pratt & Whitney principally driven by cost
reduction measures due to the current economic environment primarily due to
COVID-19. The increase in company-funded research and development of $38 million
for the six months ended June 30, 2020 compared to the six months ended June 30,
2019, was primarily driven by $0.2 billion related to the Raytheon Merger on
April 3, 2020, partially offset by lower expenses of $0.1 billion across various
commercial programs at Pratt & Whitney principally driven by cost reduction
measures due to the current economic environment primarily due to COVID-19.
The increase in customer-funded research and development of $624 million for the
quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, was
primarily driven by $0.6 billion related to the Raytheon Merger on April 3,
2020. The increase in customer-funded research and development of $700 million
for the six months ended June 30, 2020 compared to the six months ended June 30,
2019, was also primarily driven by $0.6 billion related to the Raytheon Merger
on April 3, 2020. The remaining increase was driven by higher military
development program expenses of $0.1 billion at Pratt & Whitney and $0.1 billion
at Collins Aerospace.
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  Table     of Conte    n    ts
                      Selling, General and Administrative
                                                                                                                Six Months Ended
                                                       Quarter Ended June 30,                                       June 30,
(dollars in millions)                                  2020                 2019              2020                 2019
Selling, general and administrative expenses     $      1,811           $     902          $  2,788          $     1,770
Percentage of net sales                                  12.9   %             8.0  %           11.0  %               7.9     %


Selling, general and administrative expenses increased $909 million in the
quarter ended June 30, 2020 compared to the quarter ended June 30, 2019,
primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020
and higher general and administrative restructuring costs of $0.2 billion. The
growth in Selling, general and administrative expenses also includes increases
of $0.1 billion at Pratt & Whitney and $0.1 billion at Collins Aerospace
principally driven by increased estimates of expected credit losses primarily
due to customer bankruptcies and additional general allowances for credit
losses.
Selling, general and administrative expenses increased $1,018 million in the six
months ended June 30, 2020 compared to the six months ended June 30, 2019,
primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020
and higher general and administrative restructuring costs of $0.2 billion. The
growth in Selling, general and administrative expenses also includes higher
expenses of $0.2 billion at Pratt & Whitney and $0.1 billion at Collins
Aerospace principally driven by increased estimates of expected credit losses
primarily due to customer bankruptcies and additional general allowances for
credit losses.
We are continuously evaluating our cost structure and have implemented
restructuring actions as a method of keeping our cost structure competitive. As
appropriate, the amounts reflected above include the beneficial impact of
previous restructuring actions on Selling, general and administrative expenses.
See "Note 11: Restructuring Costs" within Item 1 of this Form 10-Q and
Restructuring Costs, below, for further discussion.
                           Other Income (Loss), Net
                                                 Quarter Ended June 30,                               Six Months Ended June 30,
(dollars in millions)                            2020                2019              2020                  2019
Other income (loss), net                    $       82           $     118          $    101          $        181


Other income (loss), net includes equity earnings in unconsolidated entities,
royalty income, foreign exchange gains and losses, as well as other ongoing and
nonrecurring items. The decrease in other income (loss), net of $36 million for
the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was
primarily due to net unfavorable year-over-year impact of foreign exchange gains
and losses of $45 million, $19 million related to the absence of a prior year
licensing sale at Pratt & Whitney, $17 million related to the impairment of a
tradename related to Collins Aerospace resulting from the projected impact of
COVID-19 and $16 million of lower equity earnings in unconsolidated entities,
partially offset by $83 million related to foreign government wage subsidies due
to COVID-19 at Pratt & Whitney and Collins Aerospace, with the remaining change
spread across multiple items with no individual common or significant driver.
The decrease in Other income (loss), net of $80 million for the six months ended
June 30, 2020 compared to the six months ended June 30, 2019, was primarily due
to $59 million of net unfavorable year-over-year impact of foreign exchange
gains and losses, $57 million related to the impairment of a tradename related
to Collins Aerospace resulting from the projected impact of COVID-19, $19
million related to the absence of a prior year licensing sale at Pratt & Whitney
and $18 million related to the absence of a prior year gain on divestiture at
Pratt & Whitney, partially offset by $83 million related to foreign government
wage subsidies due to COVID-19 at Pratt & Whitney and Collins Aerospace.
                               Operating Profits
                                                                                                           Six Months Ended
                                                  Quarter Ended June 30,                                       June 30,
(dollars in millions)                             2020                 2019              2020                 2019
Operating profits (loss)                    $     (3,760)          $   1,386          $ (2,465)         $     2,528
Operating profit (loss) margin                     (26.7)  %            12.2  %           (9.7) %              11.3     %


The decrease in operating profits of $5,146 million for the quarter ended
June 30, 2020 compared to the quarter ended June 30, 2019 was primarily driven
by the $3,183 million goodwill impairment loss related to two Collins Aerospace
reporting units and operating performance at our segments as described below in
the individual segment results. Included in the decrease in operating profits
was an increase in restructuring costs of $406 million primarily related to the
Raytheon Merger on April 3, 2020 and restructuring actions taken at our Collins
Aerospace and Pratt & Whitney segments, and an additional increase in
acquisition accounting adjustments of $353 million related to the Raytheon
Merger.
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  Table     of Conte    n    ts
The decrease in operating profits of $4,993 million for the six months ended
June 30, 2020 compared to the six months ended June 30, 2019 was primarily
driven by the $3,183 million goodwill impairment loss related to two Collins
Aerospace reporting units. Included in the decrease in operating profits was an
increase in restructuring costs of $360 million primarily related to the
Raytheon Merger on April 3, 2020 and restructuring actions taken at our Collins
Aerospace and Pratt & Whitney segments and an increase in acquisition accounting
adjustments of $353 million related to the Raytheon Merger.
                         Non-service Pension (Benefit)
                                                                                                           Six Months Ended
                                                   Quarter Ended June 30,                                      June 30,
(dollars in millions)                              2020                2019              2020                 2019
Non-service pension (benefit)                 $     (237)          $    (200)         $   (405)         $      (392)


The change in Non-service pension (benefit) of $37 million for the quarter ended
June 30, 2020 compared to the quarter ended June 30, 2019 was primarily driven
by the inclusion of the Raytheon Company plans as a result of the Raytheon
Merger, partially offset by an increase in the amortization of net actuarial
loss in quarter ended June 30, 2020 compared to the quarter ended June 30, 2020
for the UTC plans.
The change in Non-service pension (benefit) of $13 million for the six months
ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily
driven by the inclusion of the Raytheon Company plans as a result of the
Raytheon Merger, partially offset by an increase in the amortization of net
actuarial loss in six months ended June 30, 2020 compared to the six months
ended June 30, 2019 for the UTC plans.
                             Interest Expense, Net
                                                 Quarter Ended June 30,                               Six Months Ended June 30,
(dollars in millions)                            2020                2019              2020                  2019
Interest expense                            $      346           $     420          $    685          $        851
Interest income                                    (11)                (68)              (18)                  (79)
Interest expense, net                       $      335           $     352          $    667          $        772
Average interest expense rate                      3.8   %             3.6  %            3.8  %                3.6      %


Interest expense, net decreased $17 million and $105 million for the quarter and
six months ended June 30, 2020, compared to the quarter and six months ended
June 30, 2019, respectively. The decrease in interest expense was primarily due
to the repayment of long-term debt. Included in the decrease was a $44 million
change in the mark-to-market fair value of marketable securities held in trusts
associated with certain of our nonqualified deferred compensation and employee
benefit plans, primarily related to the Raytheon Merger. The average maturity of
our long-term debt at June 30, 2020 is approximately 14 years. The decrease in
interest income for the quarter ended June 30, 2020, compared to the quarter
ended June 30, 2019 and for the six months ended June 30, 2020, compared to the
six months ended June 30, 2019, was primarily driven by interest income of $58
million related to tax settlements in the prior year.
                                  Income Taxes
                           Quarter Ended June 30,                           Six Months Ended June 30,
                              2020               2019        2020                  2019
Effective tax rate                    1.0  %     0.5  %     (22.0) %                         7.4  %



Included in the effective tax rate for the quarter ended June 30, 2020 was the
21% tax benefit from the pretax loss, offset by a 17.4% increase in the rate
associated with the non-deductible goodwill impairment, a 1.6% increase to the
rate related to the debt exchange, and a 1.2% increase in the rate associated
with a revaluation of certain international tax incentives. The remaining 0.2%
decrease to the rate is composed of various unrelated items, which individually
and collectively are not significant.
The effective tax rate for the six months ended June 30, 2020 included the 21%
tax benefit on the pretax loss, offset by a 24.6% increase in the rate
associated with the non-deductible goodwill impairment, a 14.3% increase in the
rate for the impairment of deferred tax assets as a result of the Separation
Transactions or the Raytheon Merger, a 2.2% increase to the rate related to the
debt exchange, and a 1.7% increase in the rate associated with a revaluation of
certain international tax incentives. The remaining 0.2% increase to the rate is
composed of various unrelated items, which individually and collectively are not
significant.
The effective tax rate for the quarter and six months ended June 30, 2019
included the 21% tax expense from the pretax income offset by a net decrease to
the rate of 22.5% and 12.9%, respectively, associated with audit settlements
related to the
                                       65
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Examination Division of the Internal Revenue Service for the UTC 2014-2016 tax
years and the filing by a subsidiary of the Company to participate in an amnesty
program offered by the Italian Tax Authority. The remaining 2.0% increase for
the quarter ended June 30, 2019 and 0.7% decrease for the six months ended June
30, 2019 is composed of various unrelated items, which individually and
collectively are not significant.
The full year rate is subject to change as guidance and interpretations related
to the Tax Cuts and Jobs Act of 2017 (TCJA) continue to be finalized.
Additionally, we anticipate variability in the tax rate quarter to quarter from
potential discrete items. On July 20, 2020, the U.S. Treasury Department
released final global intangible low-taxed income (GILTI) and proposed subpart F
income regulations. The GILTI regulations provide guidance with respect to
provisions enacted in the TCJA and allow for retroactive application. We are
reviewing the impact and currently estimate a tax benefit in the range of $80 to
$120 million to be recorded in third quarter of 2020.
Net Income (Loss) from Continuing Operations Attributable to Common Shareowners
                                                                                                              Six Months Ended
                                                     Quarter Ended June 30,                                       June 30,
(dollars in millions, except per share
amounts)                                             2020                 2019              2020                 2019
Net income (loss) from continuing operations
attributable to common shareowners             $     (3,844)          $   1,183          $ (3,406)         $     1,895
Diluted earnings (loss) per share from
continuing operations                          $      (2.56)          $    

1.37 $ (2.78) $ 2.20

Net loss from continuing operations attributable to common shareowners for the
quarter ended June 30, 2020 includes $3,200 million of goodwill and intangibles
impairment charges related to our Collins Aerospace segment, which had an
unfavorable impact on diluted earnings per share from continuing operations of
$2.13, acquisition accounting adjustments primarily related to the Raytheon
Merger of $424 million, net of tax, which had an unfavorable impact on diluted
earnings per share from continuing operations of $0.28, restructuring charges of
$322 million, net of tax, which had an unfavorable impact on diluted earnings
per share from continuing operations of $0.21, increased estimates of expected
credit losses driven by customer bankruptcies and additional general allowances
for credit losses of $189 million, net of tax, which had an unfavorable impact
on diluted earnings per share from continuing operations of $0.13, significant
unfavorable adjustments principally driven by the expected acceleration of fleet
retirements of certain aircrafts and the impact of EAC adjustments related to
estimated lower flight hours, a change in the estimated number of shop visits
and the related amount of estimated costs of $183 million, net of tax, which had
an unfavorable impact on diluted earnings per share from continuing operations
of $0.12, the tax related items noted in Income Taxes above, which had an
unfavorable impact on diluted earnings per share from continuing operations of
$0.06, foreign government wage subsidies income related to COVID-19 at Pratt &
Whitney and Collins Aerospace of $67 million, net of tax, which had a favorable
impact on diluted earnings per share from continuing operations of $0.04, and
transaction costs related to the Raytheon Merger of $62 million, net of tax,
which had an unfavorable impact on diluted earnings per share from continuing
operations of $0.04.
Net income from continuing operations attributable to common shareowners for the
quarter ended June 30, 2019 includes $322 million of tax settlements and related
interest income on tax settlements, which had an unfavorable impact on diluted
earnings per share from continuing operations of $0.37, acquisition accounting
adjustments of $165 million, net of tax, which had an unfavorable impact on
diluted earnings per share from continuing operations of $0.19, transaction and
integration costs related to the Raytheon Merger and Rockwell Collins
acquisition of $34 million, net of tax, which had an unfavorable impact on
diluted earnings per share from continuing operations of $0.04 and restructuring
charges, net of tax, of $16 million, which had an unfavorable impact on diluted
earnings per share from continuing operations of $0.02.
Net loss from continuing operations attributable to common shareowners for the
six months ended June 30, 2020 includes $3,240 million of goodwill and
intangibles impairment charges related to our Collins Aerospace segment, which
had an unfavorable impact on diluted earnings per share from continuing
operations of $2.63, acquisition accounting adjustments primarily related to the
Raytheon Merger of $603 million, net of tax, which had an unfavorable impact on
diluted earnings per share from continuing operations of $0.49, the tax related
items noted in Income Taxes above, which had an unfavorable impact on diluted
earnings per share from continuing operations of $0.42, restructuring charges of
$328 million, net of tax, which had an unfavorable impact on diluted earnings
per share from continuing operations of $0.27, increased estimates of expected
credit losses driven by customer bankruptcies and additional general allowances
for credit losses of $244 million, net of tax, which had an unfavorable impact
on diluted earnings per share from continuing operations of $0.16, significant
unfavorable adjustments principally driven by the expected acceleration of fleet
retirements of certain aircrafts and the impact of EAC adjustments related to
estimated lower flight hours, a change in the estimated number of shop visits
and the related amount of estimated costs of $200 million, net of tax, which had
an unfavorable impact on diluted earnings per share from continuing operations
of $0.13, transaction costs related to the Raytheon Merger of $88 million, net
of tax, which had an unfavorable impact on diluted earnings per share from
continuing operations of $0.07, and foreign government wage subsidies income
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  Table     of Conte    n    ts
related to COVID-19 at Pratt & Whitney and Collins Aerospace of $67 million, net
of tax, which had a favorable impact on diluted earnings per share from
continuing operations of $0.04.
Net income from continuing operations attributable to common shareowners for the
six months ended June 30, 2019 includes acquisition accounting adjustments of
$345 million, net of tax, which had an unfavorable impact on diluted earnings
per share from continuing operations of $0.40, tax settlements and related
interest income on tax settlements of $322 million, which had an unfavorable
impact on diluted earnings per share from continuing operations of $0.37,
amortization on the inventory fair value step-up associated with the Rockwell
Collins acquisition of $141 million, net of tax, which had an unfavorable impact
on diluted earnings per share from continuing operations of $0.16, restructuring
charges of $56 million, net of tax, which had an unfavorable impact on diluted
earnings per share from continuing operations of $0.07, transaction and
integration costs related to the Raytheon Merger and Rockwell Collins
acquisition of $42 million, net of tax, which had an unfavorable impact on
diluted earnings per share from continuing operations of $0.05 and a loss on the
sale of a business at Collins Aerospace of $19 million, net of tax, which had an
unfavorable impact on diluted earnings per share from continuing operations of
$0.02.
     Net Income (Loss) from Discontinued Operations Attributable to Common
                                  Shareowners
                                                                                                            Six Months Ended
                                                    Quarter Ended June 30,                                      June 30,
(dollars in millions, except per share
amounts)                                            2020                2019              2020                 2019
Net income (loss) from discontinued operations
attributable to common shareowners             $        9           $     717          $   (512)         $     1,351
Diluted earnings (loss) per share from
discontinued operations                        $     0.01           $    

0.83 $ (0.42) $ 1.56

On April 3, 2020, UTC completed the separation of its commercial businesses,
Otis and Carrier. Effective as of such date, the historical results of the Otis
and Carrier segments have been reclassified to discontinued operations for all
periods presented. See "Note 3: Discontinued Operations" within Item 1 of this
Form 10-Q for additional information. The decrease of net income (loss) from
discontinued operations attributable to common shareowners of $708 million and
the related decrease in diluted earnings (loss) per share from discontinued
operations of $0.82 in the quarter ended June 30, 2020 compared to the quarter
ended June 30, 2019 was primarily due to the separation of Otis and Carrier on
April 3, 2020. The decrease of net income (loss) from discontinued operations
attributable to common shareowners of $1,863 million and $1.98, respectively, in
the six months ended June 30, 2020 compared to the six months ended June 30,
2019 was primarily due to the costs associated with the separation of our
commercial businesses as discussed below.
Net income (loss) from discontinued operations for the quarter ended
June 30, 2020 included a benefit associated with the separation of our
commercial businesses of $9 million, net of tax. Net income (loss) from
discontinued operations for the six months ended June 30, 2020 included costs
associated with the separation of our commercial businesses of $895 million, net
of tax, primarily related to debt extinguishment costs in connection with the
early repayment of outstanding principal of $611 million.
Net income (loss) from discontinued operations for the quarter and the six
months ended June 30, 2019 included costs associated with the separation of our
commercial businesses of $87 million, net of tax.
             Net Income (Loss) Attributable to Common Shareowners
                                                                                                              Six Months Ended
                                                   Quarter Ended June 30,                                         June 30,
(dollars in millions, except per share
amounts)                                           2020                 2019               2020                  2019
Net income (loss) attributable to common
shareowners                                  $     (3,835)          $   1,900          $  (3,918)         $      3,246
Diluted earnings (loss) per share from
operations                                   $      (2.55)          $    

2.20 $ (3.20) $ 3.76

Net loss attributable to common shareowners and diluted earnings per share from
operations for the quarter and six months ended June 30, 2020 was driven by the
decrease in continuing operations, as discussed above in Net Income (Loss) from
Continuing Operations Attributable to Common Shareowners and the decrease from
discontinued operations, as discussed above in Net Income (Loss) from
Discontinued Operations.
Restructuring Costs
                                                          Quarter Ended June 30,                              Six Months Ended June 30,
(dollars in millions)                                     2020               2019              2020                  2019

Restructuring costs                                  $      427           $     21          $    435          $         75


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Restructuring actions are an essential component of our operating margin
improvement efforts and relate to both existing operations and recent mergers
and acquisitions. Charges generally arise from severance related to workforce
reductions, facility exit and lease termination costs associated with the
consolidation of field and manufacturing operations and costs to exit legacy
programs. We continue to closely monitor the economic environment and may
undertake further restructuring actions to keep our cost structure aligned with
the demands of the prevailing market conditions.
2020 Actions. During the quarter and six months ended June 30, 2020, we recorded
net pre-tax restructuring charges of $444 million and $446 million,
respectively, primarily related to severance and restructuring actions resulting
from the Raytheon Merger, severance and restructuring actions at Pratt & Whitney
and Collins Aerospace in response to the anticipated impact on our operating
results related to the current economic environment primarily caused by the
COVID-19 pandemic, and ongoing cost reduction efforts initiated in 2020. We
expect to incur additional restructuring charges of $38 million to complete
these actions. We are targeting to complete the majority of the actions
initiated in 2020 in 2021. We expect recurring pre-tax savings in continuing
operations related to these actions to reach approximately $780 million annually
within one to two years. Approximately 70% of the restructuring costs will
require cash payments, which we have funded and expect to continue to fund with
cash generated from operations. During the six months ended June 30, 2020, we
had cash outflows of $50 million related to the 2020 actions.
2019 Actions. During the quarters ended June 30, 2020 and 2019, we reversed
$9 million and recorded $4 million respectively, of net pre-tax restructuring
charges for actions initiated in 2019. During the six months ended June 30, 2020
and 2019, we reversed $4 million and recorded $33 million, respectively, of net
pre-tax restructuring charges for actions initiated in 2019. We expect to incur
additional restructuring charges of $77 million to complete these actions. We
are targeting to complete in 2020 the majority of the remaining workforce and
facility related cost reduction actions initiated in 2019. We expect annual
recurring pre-tax savings in continuing operations related to these actions to
reach approximately $250 million annually within two years of initiating these
actions, and we realized approximately $70 million during the six months ended
June 30, 2020. Almost all of the restructuring costs will require cash payments,
which we have funded and expect to continue to fund with cash generated from
operations. During the six months ended June 30, 2020 and 2019, we had cash
outflows of $25 million and $14 million, respectively related to the 2019
actions.
In addition, during the quarters ended June 30, 2020 and 2019, we reversed
$8 million and recorded $17 million, respectively, of net pre-tax restructuring
charges for restructuring actions initiated in 2018 and prior. During the six
months ended June 30, 2020 and 2019, we reversed $7 million and recorded
$42 million, respectively of net pre-tax restructuring charges for restructuring
actions initiated in 2018 and prior. For additional discussion of restructuring,
see "Note 11: Restructuring Costs" within Item 1 of this Form 10-Q.
Segment Review
As discussed further above in Business Overview, on April 3, 2020, United
Technologies Corporation (UTC) completed the Separation Transactions as defined
below, and on April 3, 2020, completed the Raytheon Merger as defined below, to
form the new company, Raytheon Technologies Corporation. As a result of these
transactions, we now operate in four principal business segments: Collins
Aerospace Systems (Collins Aerospace), Pratt & Whitney, Raytheon Intelligence &
Space (RIS) and Raytheon Missiles & Defense (RMD). The results of RIS and RMD
reflect the period subsequent to the completion of the Raytheon Merger on April
3, 2020. The historical results of Otis and Carrier are presented as
discontinued operations and, as such, have been excluded from both continuing
operations and segment results for all periods presented.
Collins Aerospace and Pratt & Whitney were historically the aerospace businesses
under UTC, and these segments remained unchanged as a result of the merger. The
RIS and RMD segments were created based on the reorganization of Raytheon's
historical business segments, where Raytheon's Intelligence, Information and
Services and Space and Airborne Systems segments were combined to form the RIS
segment, and Raytheon's Integrated Defense Systems and Missiles Systems segments
were combined to form the RMD segment. For a more detailed description of our
Collins Aerospace and Pratt & Whitney businesses, see "Business" within Item 1
of our 2019 Annual Report on Form 10-K.
Raytheon Intelligence & Space is a leading developer and provider of integrated
sensor and communication systems for advanced missions, including space-enabled
information and multi-domain intelligence solutions, as well as electronic
warfare solutions, advanced training and logistic services, and cyber and
software solutions to intelligence, defense, federal and commercial customers
worldwide.
Raytheon Missiles & Defense is a leading designer, developer, integrator and
producer of missile and combat systems for the armed forces of the U.S. and
allied nations and a leader in integrated air and missile defense, large land-
and sea-based radar solutions, command, control, communications, computers,
cyber and intelligence solutions, naval combat and ship electronic and sensing
systems, and undersea sensing and effects solutions.
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In conjunction with the Raytheon Merger, we revised our measurement of segment
performance to reflect how management now reviews and evaluates operating
performance. Under the new segment performance measurement, certain acquisition
accounting adjustments are now excluded from segments' results in order to
better represent the ongoing operational performance of those segments. In
addition, the majority of Corporate expenses are now allocated to the segments,
excluding certain items that remain at Corporate because they are not included
in management's review of the segments' results. Historical results, discussion
and presentation of our business segments reflect the impact of these
adjustments for all periods presented. Also as a result of the Raytheon Merger,
we now present a FAS/CAS operating adjustment outside of segment results, which
represents the difference between our service cost component of our pension and
PRB expense under the Financial Accounting Standards (FAS) requirements of U.S.
GAAP and our pension and PRB expense under U.S. government Cost Accounting
Standards (CAS) primarily related to our RIS and RMD segments. Because the
Collins Aerospace and Pratt & Whitney segments generally record pension and PRB
expense on a FAS basis, historical results were not impacted by this change in
segment reporting.
Recast segment sales and operating profit, reflecting the performance
measurement changes described above, were as follows:
Total Net Sales                                                              Quarter Ended                                                               Twelve Months Ended
                                                              December 31, September 30,                                         December 31,
(dollars in millions)                         March 31, 2020      2019         2019       June 30, 2019    March 31, 2019            2019
Collins Aerospace Systems                    $       6,438    $   6,444    $   6,495     $       6,576    $       6,513          $  26,028
Pratt & Whitney                                      5,353        5,645        5,285             5,154            4,818          $  20,902
Raytheon Intelligence & Space                            -            -            -                 -                -                  -
Raytheon Missiles & Defense                              -            -            -                 -                -                  -
Total segment                                       11,791       12,089       11,780            11,730           11,331          $  46,930
Eliminations and other                                (431)        (395)        (407)             (401)            (378)            (1,581)
Consolidated                                 $      11,360    $  11,694    $  11,373     $      11,329    $      10,953          $  45,349



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


Segments are generally based on the management structure of the businesses and
the grouping of similar operating companies, based on capabilities and
technologies, where each management organization has general operating autonomy
over diversified products and services. Segment total net sales and operating
profit include intercompany sales and profit, which are ultimately eliminated
within Eliminations and other, which also includes certain smaller
non-reportable segments. For our defense contracts, where the primary customer
is the U.S. government, our intercompany sales and profit is generally recorded
at cost-plus a specified fee, which may differ from what the selling entity
would be able to obtain on sales to external customers. Segment results exclude
certain acquisition accounting adjustments, the FAS/CAS operating adjustment and
certain corporate expenses, as further discussed below.
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We attempt to quantify material factors within our discussion of the results of
each segment whenever those factors are determinable. However, in some
instances, the factors we cite within our segment discussion are based upon
input measures or qualitative information that does not lend itself to
quantification when discussed in the context of the financial results measured
on an output basis and are not, therefore, quantified in the below discussions.
Given the nature of our business, total net sales and operating profits (and the
related operating profit margin percentage), which we disclose and discuss at
the segment level, are most relevant to an understanding of management's view of
our segment performance, as described below.

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

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

Consolidated                              $    14,061           $  11,329          $  25,421          $    22,282

Operating Profits-Operating profits by segment was as follows:

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


Included in segment operating profits are EAC adjustments, which relate to
changes in operating profits and margin due to revisions to total estimated
revenues and costs at completion. These changes reflect improved or deteriorated
operating performance or award fee rates. For a full description of our EAC
process, refer to "Note 1: Basis of Presentation and Summary of Accounting
Principles" within Item 1 of this Form 10-Q. Given that we have thousands of
individual contracts and the types and complexity of the assumptions and
estimates we must make on an on-going basis, we have both favorable and
unfavorable EAC adjustments. We had the following aggregate EAC adjustments for
the periods presented:
                                                                                                              Six Months Ended
                                                    Quarter Ended June 30,                                        June 30,
(dollars in millions)                               2020                2019               2020                  2019
Gross favorable                                $      151           $     109          $     288          $        219
Gross unfavorable                              $     (302)          $    (178)         $    (418)         $       (300)
Total net EAC adjustments                      $     (151)          $     (69)         $    (130)         $        (81)


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  Table     of Conte    n    ts
As a result of the Raytheon Merger, RIS's and RMD's long-term contracts that are
accounted for on a percentage of completion basis, were reset to zero percent
complete as of the merger date since only the unperformed portion of the
contract at the merger date represents the obligation of the Company. This will
have the impact of reducing gross favorable and unfavorable EAC adjustments for
these segments in the short-term, with the exception of EAC adjustments related
to loss reserves. The change in net EAC adjustments of $82 million in the
quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was
primarily due to $56 million of net unfavorable EAC adjustments for RIS and RMD
in the quarter ended June 30, 2020 due to the impact of purchase accounting for
the Raytheon Merger. The change in net EAC adjustments of $49 million in the six
months ended June 30, 2020 compared to the six months ended June 30, 2019 was
primarily due to $56 million of net unfavorable EAC adjustments for RIS and RMD
in the six months ended June 30, 2019 due to the impact of the Raytheon Merger
and a decrease in net EAC adjustments of $18 million at Pratt & Whitney,
partially offset by an increase in net EAC adjustments of $25 million at Collins
Aerospace. Significant EAC adjustments in the second quarters and first six
months of 2020 and 2019 are discussed in each business segment's discussion
below. Refer to the individual segment results for further information.
Defense Backlog and Defense Bookings-We believe backlog and bookings are
relevant to an understanding of management's view of our defense operations'
performance. Our defense operations consist primarily of our RIS and RMD
businesses, but also to a lesser extent, includes operations in the defense
space at our Collins Aerospace and Pratt & Whitney businesses.
Backlog, which is essentially equivalent to our remaining performance
obligations for our defense contracts, represents the dollar value of firm
orders for which work has not been performed and excludes unexercised contract
options and potential orders under ordering-type contracts (e.g.,
indefinite-delivery, indefinite-quantity (IDIQ) type contracts). Backlog is
affected by changes in foreign exchange rates.
Defense backlog as of June 30, 2020 and December 31, 2019 was as follows:
(dollars in millions)                            June 30, 2020       December 31, 2019
Collins Aerospace Systems - defense contracts   $       8,022       $       

7,502

Pratt & Whitney - defense contracts                    13,354                 14,787
Raytheon Intelligence & Space                          18,983                      -
Raytheon Missiles & Defense                            32,775                      -
Total defense backlog                           $      73,134       $         22,289


Bookings generally represent the dollar value of new external contracts awarded
to us during the reporting period and include firm orders for which funding has
not been appropriated. We believe bookings are an important measure of future
performance for our defense operations and are an indicator of potential future
changes in these operations' total net sales, because we cannot record revenues
under a new contract without first having a booking in the current or a
preceding period.
Bookings exclude unexercised contract options and potential orders under
ordering-type contracts (e.g., IDIQ type contracts), and are reduced for
contract cancellations and terminations of bookings recognized in the current
year. We reflect contract cancellations and terminations from prior year
bookings, as well as the impact of changes in foreign exchange rates, directly
as an adjustment to backlog in the period in which the cancellation or
termination occurs and the impact is determinable. Contract cancellations and
terminations include contract underruns on cost-type programs.
Bookings are impacted by the timing and amounts of awards in a given period,
which are subject to numerous factors, including: (1) the desired capability by
the customer and urgency of customer needs; (2) customer budgets and other
fiscal constraints; (3) political and economic and other environmental factors;
(4) the timing of customer negotiations; (5) the timing of governmental
approvals and notifications; and (6) the timing of option exercises or increases
in scope. In addition, due to these factors, quarterly bookings tend to
fluctuate from period to period, particularly on a segment basis. As a result,
we believe
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  Table     of Conte    n    ts
comparing bookings on a quarterly basis or for periods less than one year is
less meaningful than for longer periods and that shorter term changes in
bookings may not necessarily indicate a material trend.
Defense bookings for the quarters and six months ended June 30, 2020 and 2019
were as follows:
                                                                                                        Six Months Ended
                                             Quarter Ended June 30,                                         June 30,
(dollars in millions)                        2020                 2019               2020                  2019
Collins Aerospace Systems - defense
contracts                              $      1,600           $   2,056          $   3,703          $      3,266
Pratt & Whitney - defense contracts             739               4,402              1,828                 5,525
Raytheon Intelligence & Space                 3,516                   -              3,516                     -
Raytheon Missiles & Defense                   4,305                   -              4,305                     -
Total defense bookings                 $     10,160           $   6,458          $  13,352          $      8,791



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

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

Contributing to Total Change

                            Organic /                FX                Acquisitions /             Restructuring
                           Operational           Translation          Divestitures, net               Costs                Other            Total Change
Net Sales                $     (2,366)          $       (9)         $            1              $         -             $       -          $     (2,374)

Operating Profits              (1,456)                   8                       -                     (134)                  (11)               (1,593)


The organic sales decrease of $2.4 billion in the quarter ended June 30, 2020
compared to the quarter ended June 30, 2019 primarily relates to lower
commercial aerospace OEM sales of $1.4 billion and lower commercial aerospace
aftermarket sales of $1.1 billion, both primarily due to the current economic
environment principally driven by the COVID-19 pandemic which has resulted in
lower flight hours, aircraft fleet utilization and commercial OEM deliveries.
This decrease was partially offset by higher military sales of $0.2 billion.
Included in the organic sales decrease were lower commercial aerospace OEM and
aftermarket sales of approximately $0.3 billion related to the Boeing 737 Max
program and fewer upgrades due to certain regulatory mandates that were
primarily completed in early 2020.
The operational profit decrease of $1.5 billion in the quarter ended
June 30, 2020 compared to the quarter ended June 30, 2019 primarily reflects:
•lower commercial aerospace operating profit of $1.4 billion driven by the lower
commercial aerospace OEM and aftermarket sales volume discussed above. Included
in the lower commercial OEM operating profit were $122 million of significant
unfavorable adjustments principally driven by the expected acceleration of fleet
retirements of a certain aircraft.
•higher selling, general and administrative expenses of $0.1 billion primarily
driven by $89 million of increased estimates of expected credit losses due to
customer bankruptcies and additional general allowances for credit losses.
Included in operational profit in the quarter ended June 30, 2020 was other
income of $24 million related to foreign government wage subsidies due to
COVID-19.
Other operating profits in the quarter ended June 30, 2020 was relatively
consistent with the quarter ended June 30, 2019.
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Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019

                                                            Factors 

Contributing to Total Change

                            Organic /               FX                Acquisitions /             Restructuring
                           Operational          Translation          Divestitures, net               Costs                Other            Total Change
Net Sales                $    (2,425)          $      (20)         $            (4)            $         -             $       -          $     (2,449)

Operating Profits             (1,497)                  11                       50                    (101)                  226                (1,311)


The organic sales decrease of $2.4 billion in the six months ended June 30, 2020
compared to the six months ended June 30, 2019 primarily relates to lower
commercial aerospace OEM sales of $1.7 billion and lower commercial aerospace
aftermarket sales of $1.0 billion, both primarily due to the current economic
environment principally driven by the COVID-19 pandemic, which has resulted in
lower flight hours, aircraft fleet utilization and commercial OEM deliveries.
This decrease was partially offset by higher military sales of $0.4 billion.
Included in the organic sales decrease were lower commercial aerospace OEM and
aftermarket sales of approximately $0.5 billion related to the Boeing 737 Max
program and fewer upgrades due to certain regulatory mandates that were
primarily completed in early 2020.
The operational profit decrease of $1.5 billion in the six months ended June 30,
2020 compared to the six months ended June 30, 2019 primarily reflects:
•lower commercial aerospace operating profit of $1.5 billion driven by the lower
commercial aerospace OEM and aftermarket sales volume discussed above. Included
in the lower commercial OEM operating profit were $144 million of significant
unfavorable adjustments principally driven by the expected acceleration of fleet
retirements of a certain aircraft.
•higher selling, general and administrative expenses of $0.1 billion primarily
driven by $99 million of increased estimates of expected credit losses due to
customer bankruptcies and additional general allowances for credit losses.
Included in operational profit in the six months ended June 30, 2020 was other
income of $24 million related to foreign government wage subsidies due to
COVID-19 and other income of $12 million related to the favorable impact of a
contract related matter.
The increase in Other operating profits of $0.2 billion in the six months ended
June 30, 2020 compared to the six months ended June 30, 2019 primarily relates
to the absence of prior year amortization of inventory fair value step-up
associated with the Rockwell Collins acquisition of $181 million and the absence
of a prior year loss on the sale of a business of $25 million.
Pratt & Whitney
                                                                                                                                      Six Months Ended
                                                           Quarter Ended June 30,                                                         June 30,
(dollars in millions)                              2020                   2019       Change              2020             2019        Change
Net Sales                                     $    3,487               $ 5,154           (32) %       $ 8,840          $ 9,972             (11) %
Operating Profits                                   (457)                  449          (202) %            18              927             (98) %
Operating Profit Margins                           (13.1)  %               8.7  %                         0.2  %           9.3  %

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

Contributing to Total Change

                              Organic /                  FX                 Acquisitions /             Restructuring
                             Operational           Translation(1)          Divestitures, net               Costs                Other            Total Change
Net Sales                  $     (1,652)          $         (15)         $            -              $         -             $       -          $     (1,667)

Operating Profits                  (796)                     (1)                      -                     (104)                   (5)                 (906)


(1) For Pratt & Whitney only, the transactional impact of foreign exchange
hedging at Pratt & Whitney Canada has been netted against the translational
foreign exchange impact for presentation purposes in the table above. For all
other segments these foreign exchange transactional impacts are included within
the organic/operational caption in their respective tables. Due to its
significance to Pratt & Whitney's overall operating results, we believe it is
useful to segregate the foreign exchange transactional impact in order to
clearly identify the underlying financial performance.
The organic sales decrease of $1.7 billion in the quarter ended June 30, 2020
compared to the quarter ended June 30, 2019 primarily reflects lower commercial
aftermarket sales of $1.3 billion and lower commercial OEM sales of $0.5
billion, both primarily due to a significant reduction in shop visits and
related spare part sales and commercial engine deliveries, principally driven by
the current economic environment primarily due to the COVID-19 pandemic,
partially offset by higher military sales of $0.1 billion primarily driven by an
increase in F135 engine sales.

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

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•lower commercial aftermarket operating profits of $0.7 billion driven by the
sales volume decrease discussed above and unfavorable mix.
•higher selling, general and administrative expenses of $0.1 billion primarily
driven by $148 million of increased estimates of expected credit losses due to
customer bankruptcies and additional general allowances for credit losses.
This increase was partially offset by:
•lower research and development costs of $0.1 billion.
•other income of $59 million related to foreign government wage subsidies due to
COVID-19 in the quarter ended June 30, 2020.
Included in operational profit was an increase in net unfavorable EAC
adjustments of $16 million, which included significant net unfavorable EAC
adjustments of $71 million based on a portfolio review of our commercial
aftermarket programs in consideration of the estimated lower flight hours, a
change in the estimated number of shop visits and the related amount of
estimated costs. Also included was an unfavorable EAC adjustment of $44 million
on a military program primarily driven by a shift in estimated overhead costs
due to the lower commercial engine activity discussed above, partially offset by
unfavorable net EAC adjustments in the prior year.
Other operating profits in the quarter ended June 30, 2020 was relatively
consistent with the quarter ended June 30, 2019.

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

                                                            Factors 

Contributing to Total Change

                            Organic /                FX                Acquisitions /             Restructuring
                           Operational           Translation          Divestitures, net               Costs                Other            Total Change
Net Sales                $     (1,096)          $      (36)         $            -              $         -             $       -          $     (1,132)

Operating Profits                (770)                 (12)                      -                      (90)                  (37)                 (909)

    The organic sales decrease of $1.1 billion in the six months ended June 30,
2020 compared to the six months ended June 30, 2019 primarily reflects lower
commercial aftermarket sales of $1.2 billion and lower commercial OEM sales of
$0.2 billion, both primarily due to a significant reduction in shop visits and
related spare part sales and commercial engine deliveries, principally driven by
the current economic environment primarily due to the COVID-19 pandemic,
partially offset by higher military sales of $0.4 billion primarily driven by an
increase in F135 engine sales.
The operational profit decrease of $0.8 billion in the six months ended June 30,
2020 compared to the six months ended June 30, 2019 was primarily driven by:
•lower commercial aftermarket operating profits of $0.7 billion driven by the
sales volume decrease discussed above and unfavorable mix.
•higher selling, general and administrative expenses of $0.2 billion primarily
driven by $210 million of increased estimates of expected credit losses due to
customer bankruptcies and additional general allowances for credit losses.
This increase was partially offset by:
•lower research and development costs of $0.1 billion.
•other income of $59 million related to foreign government wage subsidies due to
COVID-19 in the six months ended June 30, 2020.
Included in operational profit was an increase in net unfavorable EAC
adjustments of $18 million, which included significant net unfavorable EAC
adjustments of $71 million based on a portfolio review of our commercial
aftermarket programs in consideration of the estimated lower flight hours, a
change in the estimated number of shop visits and the related amount of
estimated costs. Also included was an unfavorable EAC adjustment of $44 million
on a military program primarily driven by a shift in estimated overhead costs
due to the lower commercial engine activity discussed above, partially offset by
unfavorable net EAC adjustments in the prior year.
    The decrease in Other operating profits of $37 million in the six months
ended June 30, 2020 compared to the six months ended June 30, 2019 relates to
the absence of a prior year licensing sale of $19 million and the absence of a
prior year gain on divestiture of $18 million.
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Raytheon Intelligence & Space
                                                        Quarter Ended June 30,                                                      Six Months Ended June 30,
(dollars in millions)                             2020               2019       Change             2020             2019        Change
Net Sales                                    $   3,314                   -             NM       $ 3,314                 -               NM
Operating Profits                                  311                   -             NM           311                 -               NM
Operating Profit Margins                           9.4    %              -                          9.4  %              -
Bookings                                     $   3,516                   -             NM       $ 3,516                 -               NM


NM = Not meaningful
The increase in net sales of $3,314 million in both the quarter and six months
ended June 30, 2020 compared to the quarter and six months ended June 30, 2019,
respectively, was due to the Raytheon Merger on April 3, 2020.
The increase in operating profits of $311 million and the related increase in
operating profit margins in both the quarter and six months ended June 30, 2020
compared to the quarter and six months ended June 30, 2019, respectively, was
due to the Raytheon Merger.
Backlog and Bookings- Backlog was $18,983 million at June 30, 2020 compared to
zero at December 31, 2019. The increase in backlog of $18,983 million was due to
the Raytheon Merger. In the quarter ended June 30, 2020, RIS booked $1,418
million on a number of classified contracts and $166 million on the Global
Aircrew Strategic Network Terminal (Global ASNT) program for the U.S. Air Force.
Raytheon Missiles & Defense
                                                        Quarter Ended June 30,                                                      Six Months Ended June 30,
(dollars in millions)                             2020               2019       Change             2020             2019        Change
Net Sales                                    $   3,590                   -             NM       $ 3,590                 -               NM
Operating Profits                                  397                   -             NM           397                 -               NM
Operating Profit Margins                          11.1    %              -                         11.1  %              -
Bookings                                     $   4,305                   -             NM       $ 4,305                 -               NM


NM = Not meaningful
The increase in net sales of $3,590 million in both the quarter and six months
ended June 30, 2020 compared to the quarter and six months ended June 30, 2019,
respectively, was due to the Raytheon Merger on April 3, 2020.
The increase in operating profits of $397 million and the related increase in
operating profit margins in both the quarter and six months ended June 30, 2020
compared to the quarter and six months ended June 30, 2019, respectively, was
due to the Raytheon Merger.
Backlog and Bookings- Backlog was $32,775 million at June 30, 2020 compared to
zero at December 31, 2019. The increase in backlog of $32,775 million was due to
the Raytheon Merger. In the quarter ended June 30, 2020, RMD booked $2,253
million on the Army Navy/Transportable Radar Surveillance-Model 2 (AN/TPY-2)
radar program for the Kingdom of Saudi Arabia (KSA) and $299 million for
Standard Missile-3 (SM-3®) for the Missile Defense Agency (MDA) and an
international customer.
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Eliminations and other
Eliminations and other reflects the elimination of sales, other income and
operating profit transacted between segments, as well as the operating results
of certain smaller non-reportable business segments, including Forcepoint, LLC,
which was acquired as part of the Raytheon Merger.
                                                              Net Sales                                       Operating Profits
                                                        Quarter Ended June 30,                              Quarter Ended June 30,
(dollars in millions)                                   2020               2019              2020                 2019
Inter segment eliminations                         $     (682)          $   (403)         $    (24)         $       (65)
Other non-reportable segments                             150                  2                (4)                  23
Eliminations and other                             $     (532)          $   (401)         $    (28)         $       (42)


The increase in other non-reportable segments sales for the quarter ended
June 30, 2020 compared to the quarter ended June 30, 2019, was primarily due to
the Forcepoint sales related to the Raytheon Merger on April 3, 2020.
The decrease in other non-reportable segments operating profit for the quarter
ended June 30, 2020 compared to the quarter ended June 30, 2019, was primarily
due to the impact of foreign currency translation of $24 million.
                                                                Net Sales                                        Operating Profits
                                                                                                                 Six Months Ended
                                                        Six Months Ended June 30,                                    June 30,
(dollars in millions)                                    2020                 2019              2020                2019
Inter segment eliminations                         $      (1,118)          $   (785)         $    (37)         $       (115)
Other non-reportable segments                                155                  6               (16)                   46
Eliminations and other                             $        (963)          $   (779)         $    (53)         $        (69)


The increase in other non-reportable segment sales for the six months ended
June 30, 2020 compared to the six months ended June 30, 2019, was primarily due
to the Forcepoint sales related to the Raytheon Merger on April 3, 2020.
The decrease in other non-reportable segments operating profit for the six
months ended June 30, 2020 compared to the six months ended June 30, 2019, was
primarily due to the impact of foreign currency translation of $63 million.
Corporate expenses and other unallocated items
Corporate expenses and other unallocated items consists of costs and certain
other unallowable corporate costs not considered part of management's evaluation
of reportable segment operating performance including restructuring and merger
costs related to the Raytheon Merger, net costs associated with corporate
research and development, including the Lower Tier Air and Missile Defense
Sensor (LTAMDS) program which was acquired as part of the Raytheon Merger, and
certain reserves. See Restructuring Costs, above, for a more detailed discussion
of our restructuring costs.
                                                                                                      Six Months Ended
                                            Quarter Ended June 30,                                        June 30,
(dollars in millions)                      2020                 2019               2020                  2019
Corporate expenses and other
unallocated items                     $      (277)          $     (87)

$ (407) $ (133)

The change in Corporate expenses and other unallocated items of $190 million for
the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 was
primarily driven by increased restructuring costs of $168 million, and an
increase in merger-related costs for the Raytheon Merger of $44 million.
The change in Corporate expenses and other unallocated items of $274 million for
the six months ended June 30, 2020 compared to the six months ended June 30,
2019 was primarily driven by increased restructuring costs of $169 million and
an increase in merger-related costs for the Raytheon Merger of $73 million.
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FAS/CAS operating adjustment
The segment results of RIS and RMD only include pension and postretirement
benefit (PRB) expense as determined under U.S. government CAS, which we
generally recover through the pricing of our products and services to the U.S.
government. The difference between our CAS expense and the FAS service cost
attributable to these segments under U.S. GAAP is the FAS/CAS operating
adjustment. The FAS/CAS operating adjustment results in consolidated pension
expense in operating profit equal to the service cost component of FAS expense
under U.S. GAAP. The segment results of Collins Aerospace and Pratt & Whitney
include FAS service cost.
The pension and PRB components of the FAS/CAS Operating Adjustment were as
follows:
                                            Quarter Ended June 30,                                      Six Months Ended June 30,
(dollars in millions)                       2020                 2019               2020                       2019
FAS service cost (expense)            $       (109)          $       -          $    (109)         $                  -
CAS expense                                    465                   -                465                             -
FAS/CAS operating adjustment          $        356           $       -          $     356          $                  -


The change in our FAS/CAS Operating Adjustment of $356 million in the quarter
ended June 30, 2020 compared to the quarter ended June 30, 2019 and in the six
months ended June 30, 2020 compared to the six months ended June 30, 2019 was
primarily driven by the Raytheon Merger on April 3, 2020.
Acquisition accounting adjustments
Acquisition accounting adjustments include the amortization of acquired
intangible assets related to historical acquisitions, the amortization of the
property, plant and equipment fair value adjustment acquired through historical
acquisitions and the amortization of customer contractual obligations related to
loss making or below market contracts acquired. These adjustments are not
considered part of management's evaluation of segment results.
The components of Acquisition accounting adjustments were as follows:
                                                                                                             Six Months Ended
                                                Quarter Ended June 30,                                           June 30,
(dollars in millions)                        2020                      2019               2020                  2019
Goodwill impairment charge             $     (3,183)               $       -          $  (3,183)         $          -
Amortization of acquired intangibles           (611)                    (290)              (951)                 (597)
Amortization of property, plant and
equipment fair value adjustment                 (20)                     (11)               (27)                  (22)
Amortization of customer contractual
obligations related to acquired
loss-making and below-market contracts           69                       91                145                   182
Acquisition accounting adjustments     $     (3,745)               $    

(210) $ (4,016) $ (437)

Acquisition accounting adjustments related to acquisitions in each segment were
as follows:
                                                                                                                  Six Months Ended
                                                     Quarter Ended June 30,                                           June 30,
(dollars in millions)                             2020                      2019               2020                  2019
Collins Aerospace Systems                   $     (3,211)               $     (59)         $  (3,324)         $       (136)
Pratt & Whitney                                     (181)                    (151)              (339)                 (301)
Raytheon Intelligence & Space                       (128)                       -               (128)                    -
Raytheon Missiles & Defense                         (200)                       -               (200)                    -
Total segment                                     (3,720)                    (210)            (3,991)                 (437)
Eliminations and other                               (25)                       -                (25)                    -
Acquisition accounting adjustments          $     (3,745)               $   

(210) $ (4,016) $ (437)

The change the Acquisition accounting adjustments of $3,535 million and
$3,579 million for the quarter and six months ended June 30, 2020 compared to
the quarter and six months ended June 30, 2019 respectively, is primarily driven
by the $3,183 million goodwill impairment loss related to two Collins Aerospace
reporting units and $353 million related to the Raytheon Merger primarily
related to the amortization of intangibles. Refer to "Note 2: Acquisitions,
Dispositions, Goodwill and Other Intangible Assets" within Item 1 of this Form
10-Q for additional information on the goodwill impairment loss.
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                       LIQUIDITY AND FINANCIAL CONDITION
(dollars in millions)                                                 June 30, 2020         December 31, 2019
Cash and cash equivalents                                            $      6,975          $          4,937

Total debt                                                                 32,750                    43,252
Total equity                                                               68,892                    44,231
Total capitalization (total debt plus total equity)                       101,642                    87,483
Total debt to total capitalization                                             32  %                     49  %


Liquidity and Financial Condition as of June 30, 2020
We assess our liquidity in terms of our ability to generate cash to fund our
operating, investing and financing activities. Our principal source of liquidity
is operating cash flows. In addition to operating cash flows, other significant
factors that affect our overall management of liquidity include: capital
expenditures, customer financing requirements, investments in businesses,
dividends, common stock repurchases, pension funding, access to the commercial
paper markets, adequacy of available bank lines of credit, redemptions of debt,
and the ability to attract long-term capital at satisfactory terms. We had $6.84
billion available under our various credit facilities at June 30, 2020.
As discussed above in Business Overview, the COVID-19 pandemic has negatively
affected the U.S. and global economy, disrupted global supply chains and
financial markets, and resulted in significant travel restrictions, including
mandated facility closures and shelter-in-place orders in numerous jurisdictions
around the world. In response, we have begun taking actions to preserve capital
and protect the long-term needs of our business, including cutting discretionary
spending, significantly reducing capital expenditures and research and
development spend, suspending share repurchases, deferring merit increases,
freezing non-essential hiring, repositioning employees to defense work, and
furloughing employees when needed. We will monitor the environment closely and
are prepared to take further actions if necessary. Although our business will be
significantly impacted, we currently believe we have sufficient liquidity to
withstand the potential impacts.
The CARES Act, along with earlier issued IRS guidance, provides for a net
deferral of payroll tax payments. As a result, we have deferred cash outflows of
approximately $200 million during the six months ended June 30, 2020, and expect
a full year 2020 cash flows benefit of approximately $450 million. This will
have the effect of increasing cash outflows for payroll taxes during 2021 and
2022. In addition, deferrals of required estimated federal, foreign and state
income tax payments due to the CARES Act and other similar state and foreign
stimulus incentives could impact the timing of these payments within the year.
The CARES Act, among other things, also contains numerous other provisions which
may impact us. We continue to refine the effect of the CARES Act and ongoing
government guidance related to COVID-19 that may be issued.
At June 30, 2020, we had cash and cash equivalents of $7.0 billion, of which
approximately 28% was held by foreign subsidiaries. We manage our worldwide cash
requirements by reviewing available funds among the many subsidiaries through
which we conduct our business and the cost effectiveness with which those funds
can be accessed. The Company does not intend to reinvest certain undistributed
earnings of its international subsidiaries that have been previously taxed in
the U.S. For the remainder of the Company's undistributed international
earnings, unless tax effective to repatriate, we will continue to permanently
reinvest these earnings. We have repatriated approximately $1.3 billion of cash
for the six months ended June 30, 2020.
On occasion, we are required to maintain cash deposits with certain banks with
respect to contractual obligations related to acquisitions, divestitures or
other legal obligations, including certain customer payments related to factored
receivables that we collect on behalf of the financing institutions. As of
June 30, 2020 and December 31, 2019, the amount of such restricted cash was
approximately $42 million and $25 million, respectively, which is excluded from
cash and cash equivalents.
Historically, our strong credit ratings and financial position have enabled us
to issue long-term debt at favorable interest rates.
As of June 30, 2020, our maximum commercial paper borrowing limit was $5.0
billion as the commercial paper is backed by our $5.0 billion revolving credit
agreement. We had $160 million of commercial paper borrowings as of June 30,
2020. The maximum amount of short-term commercial paper borrowings outstanding
at any point in time during the six months ended June 30, 2020 was $1,904
million. We use our commercial paper borrowings for general corporate purposes,
including the funding of potential acquisitions, pension contributions, debt
refinancing, dividend payments and repurchases of our common stock. The
commercial paper notes outstanding have original maturities of not more than 90
days from the date of issuance.
In preparation for and in anticipation of the Separation Transactions, the
Distributions and the Raytheon Merger, the Company entered into and terminated a
number of credit agreements in the six months ended June 30, 2020.
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On February 11, 2020 and March 3, 2020, we terminated a $2.0 billion revolving
credit agreement and a $4.0 billion term loan credit agreement, respectively.
Upon termination, we repaid the $2.1 billion of borrowings outstanding on the
$4.0 billion term loan credit agreement. On April 3, 2020, upon the completion
of the Raytheon Merger, we terminated a $2.20 billion revolving credit agreement
and a $2.15 billion multicurrency revolving credit agreement.
On March 20, 2020 and March 23, 2020, we entered into two $500 million term loan
credit agreements and borrowed $1.0 billion under these agreements in the first
quarter of 2020. We terminated these agreements on May 5, 2020 and April 28,
2020, respectively, upon repayment.
On March 16, 2020, we entered into a revolving credit agreement with various
banks permitting aggregate borrowings of up to $5.0 billion which became
available upon completion of the Raytheon Merger on April 3, 2020. This credit
agreement matures on April 3, 2025. On May 6, 2020, we entered into a revolving
credit agreement with various banks permitting aggregate borrowings of up to
$2.0 billion. This credit agreement matures on May 5, 2021.
As of June 30, 2020 we had revolving credit agreements with various banks
permitting aggregate borrowings of up to $7.0 billion.
On February 10, 2020, Otis entered into a term loan credit agreement providing
for a $1.0 billion unsecured, unsubordinated 3-year term loan credit facility
which matures on February 10, 2023. Also on February 10, 2020, Carrier entered
into a term loan credit agreement providing for a $1.75 billion unsecured,
unsubordinated 3-year term loan credit facility which matures February 10, 2023.
On March 27, 2020, Otis and Carrier drew on the full amounts of the term loans
and distributed the full proceeds to Raytheon Technologies in connection with
the Separation Transactions. UTC utilized those amounts to extinguish Raytheon
Technologies' short-term and long-term debt in order to not exceed the maximum
applicable net indebtedness required by the Raytheon Merger Agreement.
We have an existing universal shelf registration statement, which we filed with
the SEC on September 27, 2019, for an indeterminate amount of debt and equity
securities for future issuance, subject to our internal limitation on the amount
of debt to be issued under this shelf registration statement.
We believe our future operating cash flows will be sufficient to meet our future
operating cash needs. Further, we continue to have access to the commercial
paper markets and our existing credit facilities, and our ability to obtain debt
or equity financing, as well as the availability under committed credit lines,
provides additional potential sources of liquidity should they be required or
appropriate.

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