Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We are a global premier systems provider of high technology products and services to the aerospace and defense industries. We operate in four principal business segments: Collins Aerospace Systems (Collins Aerospace), Pratt & Whitney, Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD).
On April 3, 2020, United Technologies Corporation (UTC) (since renamed Raytheon Technologies Corporation) completed the separation of its business into three independent, publicly traded companies - UTC, Carrier Global Corporation (Carrier) and Otis Worldwide Corporation (Otis) (the Separation Transactions). UTC distributed all of the outstanding shares of Carrier common stock and all of the outstanding shares of Otis common stock to UTC shareowners who held shares of UTC common stock as of the close of business on March 19, 2020 (the Distributions). Immediately following the Separation Transactions and Distributions, on April 3, 2020, UTC and Raytheon Company completed their all-stock merger of equals transaction (the Raytheon Merger), pursuant to which Raytheon Company became a wholly-owned subsidiary of UTC and UTC was renamed Raytheon Technologies Corporation (RTC). UTC was determined to be the accounting acquirer in the Raytheon Merger, and as a result the financial statements of Raytheon Technologies for year ended December 31, 2020 include Raytheon Company's financial position and results of operations for the period subsequent to the completion of the Raytheon Merger on April 3, 2020. The historical results of Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. See "Note 3: Discontinued Operations" within Item 8 of this Form 10-K for additional information.
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.
Industry Considerations
Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. Our operations include original equipment manufacturer (OEM) and extensive related aftermarket parts and services related to our aerospace operations. Our defense business serves both domestic and international customers primarily as a prime contractor or subcontractor on a broad portfolio of defense and related programs for government customers. Our business mix also reflects the combination of shorter cycles in our commercial aerospace spares contracts and certain service contracts in our defense business primarily at RIS, and longer cycles in our aerospace OEM and aftermarket maintenance contracts and on our defense contracts to design, develop, manufacture or modify complex equipment. Our customers are in the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization.
Government legislation, policies and regulations, including regulations related to global warming, carbon footprint and fuel efficiency, can have a negative impact on our worldwide operations. Government and industry-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, government imposed travel restrictions, and government procurement practices can impact our businesses.
Collins Aerospace and Pratt & Whitney serve both commercial and government aerospace customers. Revenue passenger miles (RPMs), available seat miles and the general economic health of airline carriers are key barometers for our commercial aerospace operations. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits. Many of our aerospace operations' customers are covered under long-term aftermarket service agreements at both Collins Aerospace and Pratt & Whitney, which are inclusive of both spare parts and services.
RIS, RMD, and the defense operations of Collins Aerospace and Pratt & Whitney are affected by U.S. Department of Defense (DoD) budget and spending levels, changes in demand, changes in policy positions or priorities and the global political environment.
Business Transformation and Operational Excellence
We are leveraging the Raytheon Merger to undertake various strategic initiatives to transform the Company and increase our existing focus on operational excellence. These initiatives include our new Customer Oriented Results Excellence (CORE) operating system, significant investments in digital technologies across our business to enhance our products and services, and structural cost reduction initiatives. We are also continuing to develop advanced technologies, including through specific technology-focused business acquisitions.
Coronavirus Disease 2019 (COVID-19) Pandemic
The COVID-19 pandemic continues to negatively affect the global economy, our business and operations, supply chains, and the industries in which we operate. For a discussion of the risk factors associated with the COVID-19 pandemic, refer to Item 1A. Risk Factors within Part I of this Form 10-K. As a result of all of these factors, we expect our future operating results, particularly those of our Collins Aerospace and Pratt & Whitney businesses, to continue to be negatively impacted when compared to pre-COVID-19 (2019) results. Our RIS and RMD businesses, although experiencing some negative impacts, primarily from supply chain pressures and labor shortages, have not experienced significant business disruptions as a result of the COVID-19 pandemic.
While we believe that the long-term outlook for the aerospace industry remains positive due to the fundamental drivers of air travel demand, there continues to be uncertainty with respect to the point at which commercial air traffic capacity will return to and/or exceed pre-COVID-19 levels. We have seen indications that commercial air travel is recovering in certain areas of demand; however, other areas continue to lag. In addition, while global vaccination rates have increased, infection from COVID-19 variants have continued, which may impact the pace of the commercial aerospace recovery. Further, the commercial air travel recovery is tied to general economic conditions and may be impacted by inflation or government budget deficits, among other factors. However, we continue to estimate that a full recovery may occur in 2023 or 2024. As our commercial aerospace business recovers, we have seen increases in certain employee-related and discretionary costs, which had decreased in the aftermath of COVID-19 due to one-time cost reduction actions in 2020. A recovery may also impact our judgments around credit risk related to estimated credit losses.
In addition, in March 2021, Congress passed the American Rescue Plan Act of 2021 (ARPA) which included pension funding relief provisions. For further discussion, refer to the "FAS/CAS operating adjustment" subsection under the "Segment Review" section below. We continue to monitor for any further government guidance related to COVID-19 that may be issued.
On September 24, 2021, in furtherance of an executive order, the U.S. Safer Federal Workforce Task Force issued guidance requiring federal contractors and subcontractors to comply with COVID-19 safety protocols, including requiring certain employees to be fully vaccinated against COVID-19 except in limited circumstances. The implementation of this mandate may result in attrition, including attrition of critically skilled labor and difficulty in securing future labor needs, for our workforce, as well as the workforces of our subcontractors, suppliers and customers. The mandate is currently subject to various legal proceedings. As a result, the impact of mandate on our operations and performance, as well as on our subcontractors, suppliers and customers, is uncertain. However, if ultimately required, the mandate could affect our performance on contracts, particularly due to disruptions in subcontractor or supplier performance or deliveries, and have a material adverse effect on our results of operations.
Our expectations regarding the COVID-19 pandemic and ongoing recovery and their potential financial impact are based on available information and assumptions that we believe are reasonable at this time; however, the actual financial impact is highly uncertain and subject to a wide range of factors and future developments. New information may continue to emerge concerning the scope, severity and duration of the COVID-19 pandemic, as well as any worsening of the pandemic, the effect of additional variants, the efficacy, acceptance, distribution and availability of vaccines, new or continued actions to contain the pandemic's spread or treat its impact, and governmental, business and individual actions taken in response to the pandemic (including restrictions and limitations on travel and transportation, and changes in leisure and business travel patterns and work environments) among others. Some of these actions and related impacts may be trends that continue in the future even after the pandemic no longer poses a significant public health risk.
Other Matters
Global economic and political conditions, changes in raw material and commodity prices, labor costs, interest rates, foreign currency exchange rates, energy costs, levels of air travel, the financial condition of commercial airlines, and the impact from natural disasters and weather conditions create uncertainties that could impact our businesses. With regard to political conditions, in July 2019, the U.S. government suspended Turkey's participation in the F-35 Joint Strike Fighter program because Turkey accepted delivery of the Russian-built S-400 air and missile defense system. The U.S. has imposed, and may impose additional, sanctions on Turkey, as well as contractual restrictions on the use of Turkish sources on certain military programs, as a result of this or other political disputes. Turkish companies supply us with components, some of which are sole-sourced, primarily in our aerospace operations for commercial and military engines and aerospace products. Depending upon the scope and timing of U.S. sanctions or contractual prohibitions on Turkey and potential reciprocal actions, if any, such sanctions or actions could impact our sources of supply and could have a material adverse effect on our results of operations, cash flows or financial condition. In addition, in October 2020, the People's Republic of China (China) announced that it may sanction RTC in connection with a possible Foreign Military Sale to Taiwan of six MS-110 Reconnaissance Pods and related equipment manufactured by Collins Aerospace. Foreign Military Sales are government-to-government transactions that are initiated by, and carried out at the direction of, the U.S. government. To date, the Chinese government has not imposed
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sanctions on RTC or indicated the nature or timing of any future potential sanctions or other actions. If China were to impose sanctions or take other regulatory action against RTC, our suppliers, affiliates or partners, it could potentially disrupt our business operations. The impact of potential sanctions or other actions by China cannot be determined at this time.
We have direct commercial sales contracts for products and services to certain foreign customers, for which U.S. government review and approval have been pending. The U.S. government's approval of these sales is subject to a range of factors, including its foreign policies related to these customers, which are subject to continuing review and potential changes. Likewise, regulatory approvals previously granted for prior sales can be paused or revoked if the products and services have not yet been delivered to the customer. If we ultimately do not receive all of the regulatory approvals, or those approvals are revoked, it could have a material effect on our financial results. In particular, as of December 31, 2021, our Contract liabilities include approximately $430 million of advance payments received from a Middle East customer on contracts for which we no longer believe we will be able to execute or obtain required regulatory approvals. These advance payments may become refundable to the customer if the contracts are ultimately terminated.
See Item 1A. Risk Factors within Part I of this Form 10-K for further discussion of these items.
FINANCIAL SUMMARY
We use the following key financial performance measures to manage our business on a consolidated basis and by business segment, and to monitor and assess our results of operations:
Net Sales - a growth metric that measures our revenue for the current year;
Operating Profit (Loss) - a measure of our profit (loss) for the year, before non-operating expenses, net and income taxes; and
Operating Profit (Loss) Margin - a measure of our Operating profit (loss) as a percentage of Total Net Sales.
(dollars in millions)202120202019
Total Net Sales$64,388 $56,587 $45,349
Operating profit (loss)4,958 (1,889)4,914
Operating profit (loss) margins7.7 %(3.3)%10.8 %
Operating cash flow from continuing operations$7,142 $4,334 $5,821
In order to better assess the underlying performance of our business, we also focus on the change in organic net sales on both a consolidated basis and business segment basis, and the change in organic operating profit (loss) on a business segment basis, which allows for better year-over-year comparability. See Results of Operations below for our definition of the organic change in Net sales and Operating profit (loss), which are not defined measures under U.S. Generally Accepted Accounting Principles (GAAP) and may be calculated differently by other companies.
We also focus on backlog as a key financial performance measure of our forward-looking sales growth. Total backlog was $156 billion and $150 billion as of December 31, 2021 and 2020, respectively. Backlog, which is equivalent to our remaining performance obligations (RPO) for our sales contracts, represents the aggregate dollar value of firm orders for which products have not been provided or service 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). Segment backlog does not include intercompany backlog. Backlog generally increases with bookings and/or orders and generally decreases as sales are recognized on these bookings and is affected by changes in foreign exchange rates, as well as contract cancellations and terminations, and cost underruns on cost-type contracts.
In addition, we maintain a strong focus on program execution and the prudent management of capital and investments in order to maximize operating income and cash. We focus on adjusted earnings per share (EPS) and measures to assess our cash generation and the efficiency and effectiveness of our use of capital, such as free cash flow (FCF), both of which are not defined measures under U.S. GAAP and may be calculated differently by other companies.
Considered together, we believe these metrics are strong indicators of our overall performance and our ability to create shareowner value. We feel these measures are balanced among long-term and short-term performance, efficiency and growth. We also use these and other performance metrics for executive compensation purposes.
A discussion of our results of operations and financial condition follows below in Results of Operations, Segment Review, and Liquidity and Financial Condition.
RESULTS OF OPERATIONS
As described in our "Cautionary Note Concerning Factors That May Affect Future Results" in this Form 10-K, our period-to-period comparisons of our results, particularly at a segment level, may not be indicative of our future operating results. The
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following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context. As discussed further above in "Business Overview," the results of RIS and RMD reflect the period subsequent to the completion of the Raytheon Merger on April 3, 2020. As such, the results of RIS and RMD for the second quarter of 2020 exclude results prior to the date of completion of the Raytheon Merger, the estimated impact of which is approximately $400 million of sales and approximately $45 million of operating profit. These amounts, in addition to the first quarter of 2021 results, have been excluded from the organic changes for the year ended December 31, 2021 disclosed throughout our Results of Operations discussion. In addition, as a result of the Separation Transactions and the Distributions, the historical results of Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.
We provide the organic change in Net sales and Cost of sales for our consolidated results of operations as well as the organic change in Net sales and Operating profit (loss) for our segments. We believe that these non-GAAP measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability. The organic change in Net sales, Cost of sales and Operating Profit (loss) excludes acquisitions and divestitures, net, and the effect of foreign currency exchange rate translation fluctuations and other significant non-recurring and non-operational items ("Other."). Additionally, the organic change in Cost of sales and Operating profit (loss) excludes restructuring costs, the FAS/CAS operating adjustment and costs related to certain acquisition accounting adjustments. Acquisition accounting adjustments include the amortization of acquired intangible assets related to acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through acquisitions and the amortization of customer contractual obligations related to loss making or below market contracts acquired.
Net Sales
(dollars in millions)202120202019
Total Net Sales$64,388 $56,587 $45,349
The factors contributing to the total change year-over-year in Total Net Sales are as follows:
(dollars in millions)20212020
Organic (1)
$724 $(10,438)
Acquisitions and divestitures, net6,961 21,662
Other116 14
Total change$7,801 $11,238
(1) See "Results of Operations" for definition of organic. A reconciliation of this measure to reported U.S. GAAP amounts is provided in the table above.
Net sales increased $0.7 billion organically in 2021 compared to 2020 primarily due to higher organic sales of $1.3 billion at Pratt & Whitney, partially offset by lower organic sales of $0.6 billion at Collins Aerospace. The $7.0 billion sales increase in Acquisitions and divestitures, net in 2021 compared to 2020, was primarily driven by the Raytheon Merger on April 3, 2020, partially offset by the sale of the Collins Aerospace military Global Positioning System (GPS) and space-based precision optics businesses in the third quarter of 2020 and the sale of our Forcepoint business in the first quarter of 2021.
Net sales decreased $10.4 billion organically in 2020 compared to 2019 primarily due to lower sales of $6.6 billion at Collins Aerospace and $4.1 billion at Pratt & Whitney all principally driven by the economic and operating environment primarily due to the COVID-19 pandemic. The $21.7 billion sales increase in Acquisitions and divestitures, net in 2020 compared to 2019, is primarily driven by the Raytheon Merger on April 3, 2020. Included in the change in Acquisitions and divestitures, net was the sale of the Collins Aerospace military GPS and space-based precision optics businesses sold in the third quarter of 2020, as further discussed in "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
See "Segment Review" below for further information by segment.
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% of Total Net Sales
(dollars in millions)202120202019202120202019
Net sales
Products sales$49,270 $43,319 $32,998 77 %77 %73 %
Services sales15,118 13,268 12,351 23 %23 %27 %
Total Net Sales$64,388 $56,587 $45,349 100 %100 %100 %
Refer to "Note 22: Segment Financial Data" within Item 8 of this Form 10-K for the composition of external net sales by products and services by segment.
Net products sales grew $6.0 billion in 2021 compared to 2020 primarily due to an increase in external products sales of $3.7 billion at RMD and $3.0 billion at RIS, both primarily due to the Raytheon Merger on April 3, 2020, and an increase in external products sales of $1.0 billion at Pratt & Whitney, partially offset by a decrease in external products sales of $1.3 billion at Collins Aerospace. Net services sales grew $1.9 billion in 2021 compared to 2020 primarily due to an increase in external services sales of $0.8 billion at RIS and $0.4 billion at RMD, both primarily due to the Raytheon Merger on April 3, 2020, and an increase in external services sales of $0.4 billion at Pratt & Whitney and $0.3 billion at Collins Aerospace.
Net products sales grew $10.3 billion in 2020 compared to 2019 primarily due to an increase in external products sales of $18.4 billion due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external products sales of $5.3 billion at Collins Aerospace and $2.8 billion at Pratt & Whitney. Net services sales grew $0.9 billion in 2020 compared to 2019 primarily due to an increase in external services sales of $3.4 billion due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external services sales of $1.3 billion at Pratt & Whitney and $1.2 billion at Collins Aerospace.
Our sales to major customers were as follows:
% of Total Net Sales
(dollars in millions)202120202019202120202019
Sales to the U.S. government (1)
$31,177 $25,962 $9,094 48 %46 %20 %
Foreign military sales through the U.S. government5,546 4,585 1,571 9 %8 %3 %
Foreign government direct commercial sales4,993 3,974 1,498 8 %7 %3 %
Commercial aerospace and other commercial sales22,672 22,066 33,186 35 %39 %73 %
Total Net Sales$64,388 $56,587 $45,349 100 %100 %100 %
(1) Excludes foreign military sales through the U.S. government.
Cost of Sales
(dollars in millions)202120202019
Total Cost of sales$51,897 $48,056 $34,598
Percentage of net sales81 %85 %76 %
The factors contributing to the change year-over-year in total Cost of sales are as follows:
(dollars in millions)20212020
Organic (1)
$(1,293)$(4,432)
Acquisitions and divestitures, net5,829 17,696
Restructuring(363)220
FAS/CAS operating adjustment(643)(965)
Acquisition accounting adjustments345 939
Other(34)-
Total change$3,841 $13,458
(1) See "Results of Operations" for definition of organic. A reconciliation of this measure to reported U.S. GAAP amounts is provided in the table above.
The organic decrease in total Cost of sales in 2021 compared to 2020 of $1.3 billion was primarily due to a decrease in organic Cost of sales at Collins Aerospace primarily due to the sales decrease noted above, the benefit of cost reduction initiatives, and the absence of prior year significant unfavorable adjustments, and a decrease in organic Cost of sales at RMD primarily due to the absence of an unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and
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recognition of supplier related obligations for certain international contracts as further described in "Segment Review" below. These decreases in Cost of sales were partially offset by an increase in organic Cost of sales at Pratt & Whitney due to the organic sales increases noted above. The increase in Acquisitions and divestitures, net of $5.8 billion in 2021 compared to 2020 is primarily driven by the Raytheon Merger on April 3, 2020, partially offset by the sale of the Collins Aerospace military GPS and space-based precision optics businesses in the third quarter of 2020 and the sale of our Forcepoint business in the first quarter of 2021 as further discussed in "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
The organic decrease in total Cost of sales in 2020 compared to 2019, of $4.4 billion was primarily driven by the organic sales decreases noted above. The increase in Acquisitions and divestitures, net of $17.7 billion for 2020 compared to 2019 was primarily driven by the Raytheon Merger on April 3, 2020. Included in the change in Acquisitions and divestitures, net is the sale of the Collins Aerospace military GPS and space-based precision optics businesses sold in the third quarter of 2020, and an unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and recognition of supplier related obligations for certain international contracts at RMD as further described in "Segment Review" below. Included in Other cost of sales was an $89 million impairment of commercial aircraft program assets at Pratt & Whitney in 2020 and amortization of the inventory fair value step-up associated with the Rockwell Collins acquisition of $181 million at Collins Aerospace in 2019.
For further discussion on Restructuring costs see "Restructuring Costs" section below. For further discussion on FAS/CAS operating adjustment see "FAS/CAS operating adjustment" subsection under the "Segment Review" section below. For further discussion on Acquisition accounting adjustments, see "Acquisition accounting adjustments" subsection under the "Segment Review" section below.
% of Total Net Sales
(dollars in millions)202120202019202120202019
Cost of sales
Products$41,095 $38,137 $26,910 64 %67 %59 %
Services10,802 9,919 7,688 17 %18 %17 %
Total Cost of Sales$51,897 $48,056 $34,598 81 %85 %76 %
Net products Cost of sales increased $3.0 billion in 2021 compared to 2020 primarily due to an increase in external products cost of sales at RIS and RMD principally due to the Raytheon Merger on April 3, 2020, and an increase in external product cost of sales at Pratt & Whitney, principally driven by the products sales increase noted above, partially offset by a decrease in external products Cost of sales at Collins Aerospace, principally driven by the products sales decrease noted above, the benefit of cost reduction initiatives and the absence of prior year significant unfavorable adjustments. Net services Cost of sales grew $0.9 billion in 2021 compared to 2020 primarily due to an increase in external services Cost of sales at RIS and RMD principally due to the Raytheon Merger on April 3, 2020.
Net products Cost of sales grew $11.2 billion in 2020 compared to 2019 primarily due to an increase in external products Cost of sales due to the Raytheon Merger on April 3, 2020, partially offset by decreases in external products Cost of sales at Collins Aerospace and Pratt & Whitney. Net services Cost of sales grew $2.2 billion in 2020 compared to 2019 primarily due to an increase in external services Cost of sales due to the Raytheon Merger on April 3, 2020, partially offset by a decrease in external services Cost of sales at Collins Aerospace.
Research and Development
(dollars in millions)202120202019
Company-funded$2,732 $2,582 $2,452
Percentage of net sales4.2 %4.6 %5.4 %
Customer-funded (1)
$4,485 $4,111 $2,283
Percentage of net sales7.0 %7.3 %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 $0.2 billion in 2021 compared to 2020, was primarily driven by $0.2 billion related to the Raytheon Merger on April 3, 2020. The increase in company-funded research and development of $0.1 billion in 2020 compared to 2019, was primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020, partially offset by lower expenses of $0.3 billion across various
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commercial programs at Pratt & Whitney and $0.2 billion across various commercial programs at Collins Aerospace, both principally driven by cost reduction measures in response to the economic environment primarily due to COVID-19.
The increase in customer-funded research and development of $0.4 billion in 2021 compared to 2020, was primarily driven by $0.6 billion related to the Raytheon Merger on April 3, 2020, partially offset by lower expenses of $0.2 billion on various military and commercial programs at Pratt & Whitney and lower expenses of $0.1 billion at Collins Aerospace primarily related to the sale of the military GPS and space-based precision optics businesses in the third quarter of 2020. The increase in customer-funded research and development of $1.8 billion in 2020 compared to 2019, was primarily driven by $1.7 billion related to the Raytheon Merger on April 3, 2020.
Selling, General and Administrative
(dollars in millions)202120202019
Selling, general and administrative$5,224 $5,540 $3,711
Percentage of net sales8.1 %9.8 %8.2 %
Selling, general and administrative expenses decreased $0.3 billion in 2021 compared to 2020, primarily driven by the absence of $0.4 billion of prior year charges related to increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses at our Pratt & Whitney and Collins Aerospace segments, lower costs of $0.3 billion due to the sale of our Forcepoint business in the first quarter of 2021, and lower general and administrative restructuring costs of $0.3 billion primarily related to restructuring actions taken at Collins Aerospace and Corporate in the prior year, partially offset by an increase in expenses of $0.4 billion related to the Raytheon Merger, and higher employee-related costs.
Selling, general and administrative expenses increased $1.8 billion in 2020 compared to 2019, primarily driven by $1.6 billion related to the Raytheon Merger on April 3, 2020, excluding the impact of merger-related restructuring costs. The increase in selling, general and administrative expenses also includes higher expenses of $0.4 billion related to increased estimates of expected credit losses primarily due to customer bankruptcies and additional allowances for credit losses at Pratt & Whitney and Collins Aerospace, higher general and administrative restructuring costs of $0.3 billion, and lower expenses due to cost reduction initiatives.
We are continuously evaluating our cost structure and have implemented restructuring actions in an effort to keep our cost structure competitive. As appropriate, the amounts reflected above include the beneficial impact of previous restructuring actions on selling, general and administrative expenses. See "Note 14: Restructuring Costs" within Item 8 of this Form 10-K and Restructuring Costs, below, for further discussion.
Other Income, Net
(dollars in millions)202120202019
Other income, net$423 $885 $326
Other income, 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, net of $462 million in 2021 compared to 2020 was primarily due to the absence of $595 million of gains on the sales of the Collins Aerospace businesses in the third quarter of 2020, a decrease of $178 million of foreign government wage subsidies related to COVID-19 at Pratt & Whitney and Collins Aerospace and an accrual of $147 million in the fourth quarter of 2021 related to the ongoing Department of Justice (DOJ) investigation into contract pricing matters at RMD, partially offset by a gain of $269 million on the sale of RIS's global training and services business in the fourth quarter of 2021, as further discussed in "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K. The remaining change was spread across multiple items with no common or significant driver.
The increase in Other income, net of $559 million in 2020 compared to 2019, was primarily due to $595 million of gains on the sales of the Collins Aerospace businesses, and $225 million related to foreign government wage subsidies due to COVID-19 at Pratt & Whitney and Collins Aerospace, partially offset by a net unfavorable year-over-year impact of foreign exchange gains and losses of $138 million.
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Operating Profit (Loss)
(dollars in millions)202120202019
Operating profit (loss)$4,958$(1,889)$4,914
Operating profit (loss) margin7.7 %(3.3)%10.8 %
The change in Operating profit (loss) of $6.8 billion in 2021 compared to 2020 was primarily driven by the operating performance at our operating segments, including the impact of the Raytheon Merger, the absence of the $3.2 billion goodwill impairment in the second quarter of 2020 related to two Collins Aerospace reporting units, and an increase in our FAS/CAS operating adjustment of $690 million primarily as a result of the Raytheon Merger. Included in the increase in Operating profit was a decrease in restructuring costs of $625 million primarily related to restructuring actions taken at our Collins Aerospace and Pratt & Whitney segments in the prior year and the absence of a prior year unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and recognition of supplier related obligations for certain international contracts at RMD as further described in "Segment Review" below.
The change in Operating profit (loss) of $6.8 billion in 2020 compared to 2019 was primarily driven by the operating performance at our segments as described below in "Segment Review" and the $3.2 billion goodwill impairment in the second quarter of 2020 related to two Collins Aerospace reporting units. Included in the decrease in Operating profit (loss) was an increase in acquisition accounting adjustments of $1.1 billion related to the Raytheon Merger, an increase in restructuring costs of $527 million primarily related to restructuring actions taken at our Collins Aerospace segment and restructuring actions in connection with the Raytheon Merger on April 3, 2020 and an unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and recognition of supplier related obligations for certain international contracts at RMD as further described in "Segment Review" below.
Non-service Pension Income
(dollars in millions)202120202019
Non-service pension (income)$(1,944)$(902)$(829)
The change in Non-service pension income of $1.0 billion in 2021 compared to 2020 was primarily driven by the decrease in the discount rates at December 31, 2020 compared to the prior period, the Raytheon Company domestic defined benefit pension plan amendment described below and prior year pension asset returns exceeding our expected return on plan assets (EROA) assumption.
The change in Non-service pension income of $73 million in 2020 compared to 2019 was primarily driven by the inclusion of Raytheon Company plans in 2020 as a result of the Raytheon Merger and a decrease in the interest rates at December 31, 2019 and during 2020 compared to December 31, 2018, partially offset by a decrease in the EROA assumption for the UTC plans in 2020 and a one-time curtailment gain of $98 million in 2019. The one-time curtailment gain was due to the recognition of previously unrecognized prior service credits as a result of an amendment to the UTC domestic defined benefit plans to cease accrual of additional benefits for future service and compensation for non-union participants effective December 31, 2019.
In December 2020, we approved a change to the Raytheon Company domestic defined benefit pension plans for non-union participants to cease future benefit accruals based on an employee's years of service and compensation effective December 31, 2022. The plan change does not impact participants' historical benefit accruals. Benefits for service after December 31, 2022 will be based on a cash balance formula.
Interest Expense, Net
(dollars in millions)202120202019
Interest expense$1,358 $1,408 $1,711
Interest income(36)(42)(120)
Interest expense, net$1,322 $1,366 $1,591
Total average interest expense rate - average outstanding borrowings during the year:4.1 %4.0 %3.6 %
Total average interest expense rate - outstanding borrowings as of December 31:4.0 %4.2 %3.6 %
Interest expense, net in 2021 was relatively consistent with 2020. Included in Interest expense, net was a $50 million unfavorable change in the mark-to-market fair value of marketable securities held in trusts associated with certain of our nonqualified deferred compensation and employee benefit plans, partially offset by a decrease in interest expense primarily due to the repayment of long-term debt. The average maturity of our long-term debt at December 31, 2021 was approximately 15 years.
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Interest expense, net decreased $225 million in 2020 as compared with 2019, primarily due to a decrease in interest expense principally driven by the repayment of long-term debt, partially offset by a decrease in interest income principally driven by interest income of $63 million related to tax settlements in the prior year. The average maturity of our long-term debt at December 31, 2020 was approximately 14 years.
Income Taxes
202120202019
Effective income tax rate15.9 %(24.4)%10.1 %
The 2021 effective tax rate includes tax benefits of $244 million associated with legal entity and operational reorganizations implemented in the third quarter of 2021, $172 million associated with U.S. research and development credits and $121 million associated with Foreign Derived Intangible Income (FDII), and tax charges of $73 million associated with the revaluation of deferred taxes resulting from the increase in the United Kingdom (U.K.) corporate tax rate to 25% enacted in 2021 and effective in 2023. In the first quarter of 2021, we recorded $148 million of tax charges associated with the sale of the Forcepoint business, and subsequently recognized a $104 million tax benefit due to the revaluation of that tax benefit as a result of completing the divestiture of RIS's global training and services business for a gain in the fourth quarter of 2021.
The 2020 negative effective tax rate is a result of having tax expense of $575 million on a loss from continuing operations before income taxes of $2.4 billion. The loss from continuing operations before income taxes in 2020 includes the $3.2 billion goodwill impairment, most of which was non-deductible for tax purposes. Tax expense includes net deferred tax charges of $416 million resulting from the Separation Transactions and the Raytheon Merger primarily related to the impairment of deferred tax assets and the revaluation of certain international tax incentives, and incremental tax expense of $177 million related to the disposal of businesses, including the sales of businesses at Collins Aerospace, the airborne tactical radios business at RIS and the entry into a definitive agreement to sell Forcepoint. Also included in the 2020 effective tax rate are tax benefits of $142 million associated with U.S. research and development credits and $83 million associated with FDII.
The 2019 effective tax rate includes tax benefits of $290 million primarily associated with the conclusion of the audit by the Examination Division of the Internal Revenue Service (IRS) for the Company's 2014, 2015 and 2016 tax years and the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority. The 2019 effective tax rate also includes tax benefits of $101 million related to U.S. research and development credits and $138 million associated with FDII.
Provisions enacted in the Tax Cuts and Jobs Act of 2017 (TCJA) related to the capitalization for tax purposes of research and experimental expenditures became effective on January 1, 2022. If these provisions are not deferred beyond 2022, our tax payments will increase by an estimated $2 billion in 2022; however, our effective tax rate will be favorably impacted.
For additional discussion of income taxes and the effective income tax rate, see "Income Taxes" within Critical Accounting Estimates, below, and "Note 13: Income Taxes" within Item 8 of this Form 10-K.
Net Income (Loss) from Continuing Operations Attributable to Common Shareowners
(dollars in millions, except per share amounts)202120202019
Net income (loss) from continuing operations attributable to common shareowners $3,897 $(3,109)$3,510
Diluted earnings (loss) per share from continuing operations$2.58 $(2.29)$4.06
Net income from continuing operations attributable to common shareowners for 2021 includes the following:
•acquisition accounting adjustments primarily related to the Raytheon Merger of $1.7 billion, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $1.13;
•net debt extinguishment costs of $524 million, net of tax, in connection with the early repayment of outstanding principal, which had an unfavorable impact on diluted EPS from continuing operations of $0.35;
•tax benefits of $244 million associated with legal entity and operational reorganizations implemented in the third quarter 2021, which had a favorable impact on diluted EPS from continuing operations of $0.16;
•tax expense of $148 million related to the sale of our Forcepoint business in the first quarter of 2021, which had an unfavorable impact on diluted EPS from continuing operations of $0.10, and the subsequent revaluation of that tax benefit of $104 million in the fourth quarter of 2021, due to the completion of the divestiture of RIS's global training and services business for a gain, which had an favorable impact on diluted EPS from continuing operations of $0.07;
•accrual of $147 million related to the ongoing DOJ investigation into contract pricing matters at RMD, which had an unfavorable impact on diluted EPS from continuing operations of $0.10;
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•restructuring charges of $121 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.08; and
•gain on the sale of our global training and services business within our RIS segment of $126 million, net of tax, which had a favorable impact on diluted EPS from continuing operations of $0.08.
Net loss from continuing operations attributable to common shareowners for 2020 includes the following:
•acquisition accounting adjustments primarily related to the Raytheon Merger of $1.4 billion, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $1.06;
•restructuring charges of $598 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.44;
•$3.2 billion of primarily non-deductible goodwill and intangibles impairment charges related to our Collins Aerospace segment, which had an unfavorable impact on diluted EPS from continuing operations of $2.37;
•significant unfavorable contract adjustments at Pratt & Whitney and Collins Aerospace of $667 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.49;
•$415 million of tax charges in connection with the Separation Transactions, including the impairment of deferred tax assets not expected to be utilized, which had an unfavorable impact on diluted EPS from continuing operations of $0.31;
•unfavorable profit impact at RMD of $412 million, net of tax, related to certain direct commercial sales contracts for precision guided munitions with a certain Middle East customer, which had an unfavorable impact on diluted EPS from continuing operations of $0.30;
•increased estimates of expected credit losses driven by customer bankruptcies and additional allowances for credit losses of $300 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.22; and
•gains on the sales of the Collins Aerospace businesses of $240 million, net of tax, which had a favorable impact on diluted EPS from continuing operations of $0.18.
Net income from continuing operations attributable to common shareowners for 2019 includes the following:
•acquisition accounting adjustments of $704 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.81;
•restructuring charges of $186 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.21;
•tax settlements and related interest income on tax settlements of $341 million, which had a favorable impact on diluted EPS from continuing operations of $0.39; and
•amortization on the inventory fair value step-up associated with the Rockwell Collins Acquisition of $140 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.16.
Net Income (Loss) from Discontinued Operations Attributable to Common Shareowners
(dollars in millions, except per share amounts)202120202019
Net income (loss) from discontinued operations attributable to common shareowners $(33)$(410)$2,027
Diluted earnings (loss) per share from discontinued operations$(0.02)$(0.30)$2.35
On April 3, 2020, we completed the separation of our commercial businesses, Carrier and Otis. Effective as of that date, the historical results of the Carrier and Otis segments were reclassified to discontinued operations for all periods presented. See "Note 3: Discontinued Operations" within Item 8 of this Form 10-K for additional information.
The change in Net income (loss) from discontinued operations attributable to common shareowners of $377 million and the related change in diluted earnings (loss) per share from discontinued operations of $0.28 in 2021 compared to 2020 was primarily due to higher prior year costs associated with the separation of our commercial businesses, including debt extinguishment costs of $611 million, net of tax, in connection with the early repayment of outstanding principal, partially offset by prior year Carrier and Otis operating activity, as the Separation Transactions occurred on April 3, 2020.
The change in Net income (loss) from discontinued operations attributable to common shareowners of $2.4 billion and the related change in diluted earnings (loss) per share from discontinued operations of $2.65 in 2020 compared to 2019 was primarily due to prior year Carrier and Otis operating activity, as the Separation Transactions occurred on April 3, 2020, partially offset by higher prior year costs associated with the separation of our commercial businesses. Net income (loss) from discontinued operations for 2020 and 2019 includes $888 million, net of tax, and $1.3 billion, net of tax, respectively, of costs associated with the Company's separation of its commercial businesses. Separation costs in 2020 primarily related to debt extinguishment costs of $611 million in connection with the early repayment of outstanding principal.
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Net Income (Loss) Attributable to Common Shareowners
(dollars in millions, except per share amounts)202120202019
Net income (loss) attributable to common shareowners $3,864 $(3,519)$5,537
Diluted earnings (loss) per share from operations$2.56 $(2.59)$6.41
The changes in Net income (loss) attributable to common shareowners and diluted EPS from operations for 2021 compared to 2020 and for 2020 compared to 2019 were driven by the changes in continuing operations, as discussed above in Net Income (Loss) from Continuing Operations Attributable to Common Shareowners and the changes from discontinued operations, as discussed above in Net Income (Loss) from Discontinued Operations Attributable to Common Shareowners.
RESTRUCTURING COSTS
(dollars in millions)202120202019
Restructuring costs$143 $777 $245
Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and recent mergers and acquisitions. Charges generally arise from severance related to workforce reductions and facility exit costs associated with the consolidation of field and manufacturing operations and costs to exit legacy programs. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.
2021 Actions. During 2021, we recorded net pre-tax restructuring charges of $137 million for restructuring efforts initiated in 2021, primarily related to severance costs in connection with ongoing cost reduction efforts, and to a much lesser extent, the exit and consolidation of facilities. We expect to incur additional restructuring charges of $62 million to complete these actions. We are targeting to complete the majority of actions initiated in 2021 by 2022. We expect recurring pre-tax savings in continuing operations related to these actions to reach approximately $140 million annually within one to two years. Approximately 60% of the total pre-tax charge will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During 2021, we had cash outflows of approximately $20 million related to 2021 actions.
2020 Actions. During 2021, we reversed net pre-tax restructuring costs of $23 million related to actions initiated in 2020. In 2020, we recorded net pre-tax restructuring charges of $770 million for actions initiated in 2020. These costs primarily related to severance and restructuring actions at Pratt & Whitney and Collins Aerospace in response to the impact on our operating results related to the economic environment primarily caused by the COVID-19 pandemic, the Raytheon Merger, and the ongoing cost reduction efforts. Additional restructuring charges to complete these actions are expected to be de minimis. We expect recurring pre-tax savings in continuing operations related to these actions to reach approximately $1.2 billion annually within two years of initiating these actions. Approximately 90% of the total pre-tax charge will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During 2021 and 2020, we had cash outflows of approximately $220 million and $400 million, respectively, related to the 2020 actions.
In addition, during 2021, we recorded $29 million of net pre-tax restructuring costs for restructuring actions initiated in 2019 and prior. In 2020 and 2019, we recorded $7 million and $245 million, respectively, of net pre-tax restructuring costs for restructuring actions initiated in 2019 and prior. For additional discussion of restructuring, see "Note 14: Restructuring Costs" within Item 8 of this Form 10-K.
SEGMENT REVIEW
We 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 Carrier and Otis are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented.
For a detailed description of our businesses, see "Business" within Item 1 of this Form 10-K.
As previously announced, effective January 1, 2021, we reorganized certain product areas of our RIS and RMD businesses to more efficiently leverage our capabilities. The amounts and presentation of our business segments, including intersegment activity, set forth in this Form 10-K reflect this reorganization. The reorganization does not impact our previously reported Collins Aerospace Systems and Pratt & Whitney segment results, or our consolidated balance sheets, statements of operations or statements of cash flows.
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We present a FAS/CAS operating adjustment outside of segment results, which represents the difference between the service cost component of our pension and postretirement benefit (PRB) expense under the Financial Accounting Standards (FAS) requirements of U.S. GAAP and our pension and PRB expense under U.S. government Cost Accounting Standards (CAS) primarily related to our RIS and RMD segments. While the ultimate liability for pension and PRB costs under FAS and CAS is similar, the pattern of cost recognition is different. Over time, we generally expect to recover the related RIS and RMD pension and PRB liabilities through the pricing of our products and services to the U.S. government. Collins Aerospace and Pratt & Whitney segments generally record pension and PRB expense on a FAS basis.
Segments are generally based on the management structure of the businesses and the grouping of similar operations, based on capabilities and technologies, where each management organization has general operating autonomy over diversified products and services. Segment Total Net Sales and Operating profit (loss) include intercompany sales and profit, which are ultimately eliminated within Eliminations and other, which also includes certain smaller non-reportable segments. Segment results exclude certain acquisition accounting adjustments, the FAS/CAS operating adjustment and certain corporate expenses, as further discussed below.
We provide the organic change in Net sales and Operating profit (loss) for our segments as discussed above in "Results of Operations". We believe that these non-GAAP measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability. For Pratt & Whitney only, Other also includes the transactional impact of foreign exchange hedging at Pratt & Whitney Canada due to its significance to Pratt & Whitney's overall operating results.
Given the nature of our business, we believe that Total Net Sales and Operating profit (loss) (and the related operating profit (loss) 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:
(dollars in millions)202120202019
Collins Aerospace Systems$18,449 $19,288 $26,028
Pratt & Whitney18,150 16,799 20,902
Raytheon Intelligence & Space15,180 11,069 -
Raytheon Missiles & Defense15,539 11,396 -
Total segment67,318 58,552 46,930
Eliminations and other(1)
(2,930)(1,965)(1,581)
Consolidated$64,388 $56,587 $45,349
(1) Includes the operating results of certain smaller non-reportable business segments. 2020 amounts include Forcepoint, LLC, which was acquired as part of the Raytheon Merger, and subsequently disposed of on January 8, 2021.
Operating Profit (Loss). Operating profit (loss) by segment was as follows:
(dollars in millions)202120202019
Collins Aerospace Systems$1,759 $1,466 $4,508
Pratt & Whitney454 (564)1,801
Raytheon Intelligence & Space1,833 1,020 -
Raytheon Missiles & Defense2,004 880 -
Total segment6,050 2,802 6,309
Eliminations and other(1)
(133)(107)(140)
Corporate expenses and other unallocated items(2)
(552)(590)(367)
FAS/CAS operating adjustment1,796 1,106 -
Acquisition accounting adjustments(3)
(2,203)(5,100)(888)
Consolidated$4,958 $(1,889)$4,914
(1) Includes the operating results of certain smaller non-reportable business segments. 2020 amounts include Forcepoint, LLC, which was acquired as part of the Raytheon Merger, and subsequently disposed of on January 8, 2021.
(2) Corporate expenses and other unallocated items in 2021 and 2020 include the net expenses related to the U.S. Army's Lower Tier Air and Missile Defense Sensor (LTAMDS) project. No amounts were recorded in 2019.
(3) Acquisition accounting adjustments in 2020 includes the $3.2 billion goodwill impairment loss in the second quarter of 2020 related to two Collins Aerospace reporting units. Refer to "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" in Item 8 of this Form 10-K for additional information.
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Included in segment Operating profit (loss) are Estimate at Completion (EAC) adjustments, which relate to changes in Operating profit (loss) and margin due to revisions to total estimated revenues and costs at completion. These changes may reflect improved or deteriorated operating performance, as well as changes in facts and assumptions related to contract options, contract modifications, incentive and award fees associated with program performance, customer activity levels, and other customer-directed changes. For a full description of our EAC process, refer to "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 8 of this Form 10-K. Given that we have thousands of individual contracts and given the types and complexity of the assumptions and estimates we must make on an on-going basis and the nature of the work required to be performed under our contracts, we have both favorable and unfavorable EAC adjustments in the ordinary course.
We had the following aggregate EAC adjustments for the periods presented:
(dollars in millions)202120202019
Gross favorable$1,286 $994 $419
Gross unfavorable(1,176)(1,637)(488)
Total net EAC adjustments$110 $(643)$(69)
As a result of the Raytheon Merger, RIS's and RMD's long-term contracts that are accounted for on a percentage of completion basis, were reset to zero percent complete as of the merger date because only the unperformed portion of the contract at the merger date represented an obligation of the Company. This had the impact of reducing gross favorable and unfavorable EAC adjustments for these segments in the short term, most notably in 2020. The change in net EAC adjustments of $753 million in 2021 compared 2020 was primarily due to a favorable change in net EAC adjustments of $635 million at Pratt & Whitney, due to the absence of significant unfavorable contract adjustments in the prior year, and a favorable change in net EAC adjustments of $126 million at RIS and $40 million at RMD, primarily due to the Raytheon Merger. This was partially offset by an unfavorable change in net EAC adjustments of $48 million at Collins Aerospace spread across numerous individual programs with no individual or common significant driver.
The change in net EAC adjustments of $574 million in 2020 compared 2019 was primarily due to an increase in net unfavorable EAC adjustments of $544 million at Pratt & Whitney, principally due to the economic and operating environment primarily driven by the COVID-19 pandemic.
Significant EAC adjustments, when they occur, are discussed in each business segment's discussion below.
Backlog and Defense Bookings. Total backlog was approximately $156 billion and $150 billion as of December 31, 2021 and 2020. Our backlog by segment, which does not include intercompany backlog, was as follows at December 31:
(dollars in billions)20212020
Collins Aerospace Systems$24 $23
Pratt & Whitney85 78
Raytheon Intelligence & Space18 19
Raytheon Missiles & Defense29 29
Other- 1
Total backlog$156 $150
Included in total backlog is defense backlog of $63 billion and $67 billion as of December 31, 2021 and 2020, respectively. Our defense operations consist primarily of our RIS and RMD businesses and operations in the defense businesses within our Collins Aerospace and Pratt & Whitney segments. Defense bookings were approximately $40 billion, $31 billion and $17 billion for 2021, 2020 and 2019 respectively.
Backlog, which is equivalent to our remaining performance obligations (RPO) for our sales contracts, represents the aggregate dollar value of firm orders for which products have not been provided or service has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ type contracts). Backlog generally increases with bookings and generally decreases as sales are recognized on these bookings and is affected by changes in foreign exchange rates, as well as contract cancellations and terminations as discussed further below.
We believe defense 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. Defense bookings generally represent the dollar value of new external defense contracts awarded to us during the reporting period and include firm orders for which funding has not been appropriated.
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Defense bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ type contracts), and are reduced for contract cancellations and terminations of bookings recognized in the current period. We reflect contract cancellations and terminations from prior year bookings, as well as the impact of changes in foreign exchange rates, directly as an adjustment to backlog in the period in which the cancellation or termination occurs and the impact is determinable. Contract cancellations and terminations also include contract underruns on cost-type programs.
Collins Aerospace Systems
% Change
(dollars in millions)2021202020192021 compared with 2020
2020 compared with 2019
Net sales$18,449 $19,288 $26,028 (4)%(26)%
Operating profit1,759 1,466 4,508 20 %(67)%
Operating profit margins9.5 %7.6 %17.3 %
2021 Compared with 2020
Factors Contributing to Total Change
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netRestructuringCostsOtherTotal Change
Net sales$(574)$(333)$- $68 $(839)
Operating profit653 (91)320 (589)293
2020 Compared with 2019
Factors Contributing to Total Change
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netRestructuringCostsOtherTotal Change
Net sales$(6,554)$(201)$- $15 $(6,740)
Operating profit(3,598)(12)(258)826 (3,042)
(1) See "Segment Review" above for definition of organic. A reconciliation of these measures to reported U.S. GAAP amounts is provided in the table above.
2021 Compared with 2020
The organic sales decrease of $0.6 billion in 2021 compared to 2020 primarily relates to lower commercial aerospace OEM sales of $0.8 billion, predominately due to wide body volume declines principally driven by lower 787 deliveries. This was partially offset by higher commercial aerospace aftermarket sales of $0.3 billion primarily due to an increase in flight hours and aircraft fleet utilization as commercial aerospace continues to recover from the prior year's unfavorable economic environment principally driven by the COVID-19 pandemic. Military sales were down slightly in 2021 compared to 2020.
The organic profit increase of $0.7 billion in 2021 compared to 2020 was primarily due to higher commercial aerospace operating profit of $0.5 billion and lower selling, general and administrative expenses of $0.1 billion. The higher commercial aerospace operating profit was principally driven by the higher commercial aerospace aftermarket sales discussed above, the benefit of cost reduction initiatives, the absence of $157 million of prior year significant unfavorable adjustments, and a $52 million favorable impact from a contract-related matter in 2021. The significant unfavorable adjustments in 2020 were primarily driven by the expected acceleration of fleet retirements of a certain aircraft type. The lower selling, general and administrative expenses were primarily driven by the absence of a $125 million charge for allowances for credit losses in 2020, primarily related to the impact of the COVID-19 pandemic. Included in organic profit in 2020 was $72 million of foreign government wage subsidies related to COVID-19.
The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the sale of our Collins Aerospace military GPS and space-based precision optics businesses in the third quarter of 2020, as further discussed in "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
The decrease in Other operating profit of $0.6 billion in 2021 compared to 2020 primarily relates to the absence of prior year gains of $595 million on the sales of the Collins Aerospace military GPS and space-based precision optics businesses.
2020 Compared with 2019
The organic sales decrease of $6.6 billion in 2020 compared to 2019 primarily relates to lower commercial aerospace OEM sales of $3.7 billion and lower commercial aerospace aftermarket sales of $3.4 billion, including declines across all aftermarket sales channels. These reductions were primarily due to the economic environment principally driven by the COVID-19 pandemic, which resulted in lower flight hours, aircraft fleet utilization and commercial OEM deliveries. This decrease was
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partially offset by higher military sales of $0.6 billion. Included in the organic sales decrease were lower commercial aerospace OEM and aftermarket sales of approximately $1.0 billion related to the Boeing 737 Max program and fewer upgrades due to certain regulatory mandates that were primarily completed in early 2020.
The organic profit decrease of $3.6 billion in 2020 compared to 2019 was primarily due to lower commercial aerospace operating profit of $4.0 billion principally driven by the lower commercial aerospace OEM and aftermarket sales volume discussed above. Included in the lower commercial OEM operating profit were $157 million of significant unfavorable adjustments principally driven by the expected acceleration of fleet retirements of a certain aircraft. The decrease was partially offset by lower research and development expenses of $0.2 billion, which includes the impact of cost reduction initiatives. Included in the operating profit decrease was $125 million of increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses. Included in organic profit in 2020 was other income of $72 million related to foreign government wage subsidies due to COVID-19.
The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the sale of our Collins Aerospace military GPS and space-based precision optics businesses in the third quarter of 2020.
The increase in other operating profit of $0.8 billion in 2020 compared to 2019 primarily relates to gains of $595 million on the sales of the Collins Aerospace businesses discussed above, the absence of prior year amortization of inventory fair value step-up associated with the Rockwell Acquisition of $181 million and the absence of a prior year loss on the sale of a business of $25 million.
Pratt & Whitney
% Change
(dollars in millions)2021202020192021 compared with 20202020 compared with 2019
Net sales$18,150$16,799$20,9028 %(20)%
Operating profit (loss)454(564)1,801180 %(131)%
Operating profit (loss) margins2.5 %(3.4)%8.6 %
2021 Compared with 2020
Factors Contributing to Total Change
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netRestructuringCostsOtherTotal Change
Net sales$1,255 $- $- $96 $1,351
Operating profit (loss)702 - 173 143 1,018
2020 Compared with 2019
Factors Contributing to Total Change
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netRestructuringCostsOtherTotal Change
Net sales$(4,080)$- $- $(23)$(4,103)
Operating profit (loss)(2,126)- (47)(192)(2,365)
(1) See "Segment Review" above for definition of organic. A reconciliation of these measures to reported U.S. GAAP amounts is provided in the table above.
2021 Compared with 2020
The organic sales increase of $1.3 billion in 2021 compared to 2020 primarily reflects higher commercial aftermarket sales of $1.2 billion, primarily due to an increase in shop visits and related spare part sales driven by the recovery from the prior year's unfavorable economic environment largely due to the COVID-19 pandemic, and higher commercial OEM sales of $0.1 billion. Prior year commercial aftermarket sales include unfavorable EAC adjustments of $0.4 billion, discussed further below. These increases were partially offset by lower military sales of $0.1 billion in 2021 compared to 2020.
The organic profit increase of $0.7 billion in 2021 compared to 2020 was primarily driven by higher commercial aerospace operating profit of $0.7 billion principally due to favorable change in net EAC adjustments of $0.6 billion, and lower selling, general and administrative expenses of $0.1 billion. The higher commercial aerospace operating profit also includes the impact of the aftermarket sales volume increase discussed above, which was partially offset by lower commercial OEM operating profit due to unfavorable mix on the increased sales volume. The lower year-over-year unfavorable commercial aerospace EAC adjustments were principally driven by prior year unfavorable EAC adjustments discussed below. The lower selling, general and administrative expenses were primarily driven by the absence of a $257 million charge in the prior year for allowances for
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credit losses, partially offset by higher employee-related costs. The change in organic operating profit was also impacted by $106 million of lower government wage subsidies, and the absence of prior year unfavorable EAC adjustments on certain commercial aftermarket and military programs, as discussed below.
The increase in other operating profit of $0.1 billion in 2021 compared to 2020 was primarily driven by the absence of an $89 million impairment of commercial aircraft program assets and $43 million of reserves related to a commercial financing arrangement, both recorded in the prior year.
2020 Compared with 2019
The organic sales decrease of $4.1 billion in 2020 compared to 2019 primarily reflects lower commercial aftermarket sales of $3.8 billion, due to a significant reduction in shop visits and related spare part sales, and lower commercial OEM sales of $1.1 billion, primarily due to a significant reduction in commercial engine deliveries, all principally driven by the economic and operating environment primarily due to the COVID-19 pandemic. These declines were partially offset by higher military sales of $0.8 billion primarily driven by an increase in F135 engine sales and aftermarket growth on multiple platforms. Included in the lower commercial aftermarket sales is a $0.4 billion impact to sales from the net unfavorable contract adjustments discussed further below.
The organic profit decrease of $2.1 billion in 2020 compared to 2019 was primarily driven by lower commercial aftermarket operating profit of $2.4 billion driven by the sales volume decrease discussed above, unfavorable mix, a $334 million unfavorable EAC adjustment on a commercial engine aftermarket contract due to lower estimated revenues driven by a change in the estimated maintenance coverage period, an unfavorable EAC adjustment of $129 million related to lower estimated revenues due to the restructuring of a customer contract, and $86 million related to an unfavorable EAC adjustment and increased allowances for warranty for legacy fleet related retrofits. The decrease was also driven by higher selling, general and administrative expenses of $0.2 billion primarily driven by $257 million of increased estimates of expected credit losses due to customer bankruptcies and additional allowances for credit losses, primarily related to the impact of the COVID-19 pandemic. This decrease in organic profit was partially offset by lower research and development costs of $0.3 billion, which includes the impact of cost reduction initiatives, and other income of $153 million related to foreign government wage subsidies due to COVID-19.
Included in organic profit was an increase in net unfavorable EAC adjustments of $544 million, which included the unfavorable EAC adjustments discussed above and significant net unfavorable EAC adjustments of $62 million based on a portfolio review of our commercial aftermarket programs in the second quarter of 2020 in consideration of the estimated lower flight hours, a change in the estimated number of shop visits and the related amount of estimated costs. Also included was an unfavorable EAC adjustment of $44 million in the second quarter of 2020 on a military program primarily driven by a shift in estimated overhead costs due to the lower commercial engine activity discussed above.
The decrease in other operating profit of $0.2 billion in 2020 compared to 2019 was primarily due to an $89 million impairment of commercial aircraft program assets in the current year and $43 million of reserves related to a commercial financing arrangement in the current year.
Defense Bookings - In addition to a number of smaller bookings, Pratt & Whitney booked the following significant bookings in 2021: $1.7 billion for F135 sustainment contracts, $435 million for an F119 sustainment contract, $255 million for an F135 production contract and $212 million for F100 engines for an international customer.
Raytheon Intelligence & Space
% Change
(dollars in millions)2021202020192021 compared with 20202020 compared with 2019
Net sales$15,18011,069 - 37 %NM
Operating profit1,8331,020 - 80 %NM
Operating profit margins12.1 %9.2 %-
Bookings$14,01910,568 - 33 %NM
NM = Not meaningful
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2021 Compared with 2020
Factors Contributing to Total Change in Net Sales
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netOtherTotal Change
Net sales$86 $3,991 $34 $4,111
(1) See "Segment Review" above for definition of organic. A reconciliation of these measures to reported U.S. GAAP amounts is provided in the table above.
Factors Contributing to Change in Operating Profit
(dollars in millions)VolumeNet change in EAC adjustmentsAcquisitions /Divestitures, netMix and other performanceTotal Change
Operating profit$(10)$132 $399 $292 $813
2021 Compared with 2020
Organic sales in 2021 were relatively consistent with 2020. The increase in net sales due to acquisitions / divestitures, net primarily relates to the Raytheon Merger on April 3, 2020.
The increase in operating profit of $0.8 billion and the related increase in operating profit margins in 2021 compared to 2020, were primarily due to the change in Acquisitions / divestitures, net of $399 million, primarily due to the Raytheon Merger on April 3, 2020, an increase in mix and other performance of $292 million primarily due to a $239 million gain, net of transaction costs, on the sale of RIS's global training and services business in December 2021, as further discussed in "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K, and the net favorable change in EAC adjustments of $132 million, which was primarily driven by the absence of $124 million of unfavorable EAC adjustments related to a domestic classified fixed price development program in 2020.
2020 Compared with 2019
The increase in net sales of $11.1 billion in 2020 compared to 2019 was due to the Raytheon Merger on April 3, 2020.
The increase in operating profit of $1.0 billion and the related increase in operating profit margins in 2020 compared to 2019 were due to the Raytheon Merger. Included in operating profit in 2020 were $124 million of unfavorable EAC adjustments for loss reserves related to a domestic classified fixed price development program in a net loss position, of which $87 million was recorded in the fourth quarter of 2020.
Backlog and Bookings - Backlog was $18 billion at December 31, 2021 compared to $19 billion at December 31, 2020. Included in the decrease in backlog was a $0.9 billion adjustment related to the sale of RIS's global training and services business discussed above. In 2021, RIS booked $4.8 billion on a number of classified contracts, $672 million of Electro-Optical Infrared (EO/IR) products and services contracts in the fourth quarter of 2021 including the Electro-Optical Distributed Aperture System (EODAS) for the F35 Joint Strike Fighter program, $419 million on the Next Generation Jammer (NGJ) Mid-Band Low Rate Initial Production (LRIP) contract with the U.S. Navy, $365 million on the Standard Terminal Automation Replacement System (STARS) program for the Federal Aviation Administration (FAA), $227 million on a missile warning and defense contract, $211 million to provide additional upgrades to the Global Positioning System Next Generation Operational Control System (GPS OCX) program for the U.S. Air Force, $199 million on an international tactical airborne radar sustainment contract, and $185 million on an international training contract with the U.K. Royal Navy.
Raytheon Missiles & Defense
% Change
(dollars in millions)2021202020192021 compared with 20202020 compared with 2019
Net sales$15,53911,396 - 36 %NM
Operating profit2,004880 - 128 %NM
Operating profit margins12.9 %7.7 %-
Bookings$15,6509,716 - 61 %NM
NM = Not meaningful
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2021 Compared with 2020
Factors Contributing to Total Change in Net Sales
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netOtherTotal Change
Net sales$130 $3,999 $14 $4,143
(1) See "Segment Review" above for definition of organic. A reconciliation of these measures to reported U.S. GAAP amounts is provided in the table above.
Factors Contributing to Change in Operating Profit
(dollars in millions)VolumeNet change in EAC adjustmentsAcquisitions /Divestitures, netMix and other performanceTotal Change
Operating profit$7 $(14)$521 $610 $1,124
2021 Compared with 2020
Organic sales in 2021 were relatively consistent with 2020. The increase in net sales due to acquisitions / divestitures, net relates to the Raytheon Merger on April 3, 2020.
The increase in operating profit of $1.1 billion and the related increase in operating profit margins in 2021 compared to 2020 was primarily due to a change in mix and other performance of $610 million, primarily driven by the absence of an unfavorable profit impact of $516 million in 2020 related to certain international contracts as further described below, and a change in acquisitions / divestitures, net of $521 million due to the Raytheon Merger on April 3, 2020.
2020 Compared with 2019
The increase in net sales of $11.4 billion in 2020 compared to 2019 was due to the Raytheon Merger on April 3, 2020.
The increase in operating profit of $0.9 billion and the related increase in operating profit margins in 2020 compared to 2019 was due to the Raytheon Merger. Included in operating profit in 2020 was an unfavorable net impact of $516 million related to certain international contracts as further described below, and a $25 million net favorable EAC adjustment due to a revised estimate in costs to complete an industrial cooperation agreement obligation on multiple contracts for an international customer based upon an agreement signed in the fourth quarter of 2020.
In the fourth quarter of 2020, RMD reversed $119 million of sales for work performed subsequent to the date of the Raytheon Merger through the end of the third quarter of 2020, and the related operating profit, on our direct commercial sales contracts for precision guided munitions with a certain Middle East customer, for which we have not yet obtained regulatory approval. Due to the U.S. presidential and congressional elections and the resulting uncertainty surrounding U.S. foreign policy on direct commercial sales for precision guided munitions with this customer, we determined that it was no longer probable that we will be able to obtain regulatory approvals for these contracts. RMD also recognized an unfavorable profit impact of $516 million related to these contracts, primarily related to inventory reserves, contract asset impairments and recognition of supplier related obligations related to termination liability, which we do not expect to be utilized or otherwise directed to other customers. In addition, we reversed $755 million of backlog on these contracts.
Backlog and Bookings- Backlog was $29 billion at both December 31, 2021 and 2020. In 2021, RMD booked $3.2 billion on a number of classified contracts, including approximately $2 billion for the Long Range Standoff (LRSO) Weapon System Engineering and Manufacturing Development (EMD) contract for the U.S. Air Force. RMD also booked $1,315 million for the NGI program for the Missile Defense Agency (MDA), $1,088 million for the Advanced Medium Range Air-to-Air Missile (AMRAAM) for the U.S. Air Force and Navy and international customers, $729 million for Standard Missile-2 (SM-2) for the U.S. Navy and international customers, $627 million for Evolved Seasparrow Missile (ESSM) for the U.S. Navy and international customers, $432 million to provide Guidance Enhanced Missiles (GEM-T) for an international customer, $327 million for AIM-9X Sidewinder short-range air-to-air missiles for the U.S. Navy and Air Force and international customers, $291 million for Stinger missiles for international customers, $247 million to provide Patriot engineering services support for the U.S. Army and international customers, $242 million on the Army Navy/Transportable Radar Surveillance-Model 2 (AN/TPY-2) radar program for the MDA, $213 million for StormBreaker for the U.S. Air Force and Navy, $175 million to provide Patriot technical assistance for an international customer, and $164 million for the Air and Missile Defense Radar (AMDR) program for the U.S. Navy.
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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, which was acquired as part of the Raytheon Merger and subsequently disposed of on January 8, 2021, as further discussed in "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
Net SalesOperating Profit
(dollars in millions)202120202019202120202019
Inter-segment eliminations(1)
$(2,945)$(2,492)$(1,594)$(86)$(79)$(208)
Other non-reportable segments15 527 13 (47)(28)68
Eliminations and other$(2,930)$(1,965)$(1,581)$(133)$(107)$(140)
(1) The increase in inter-segment eliminations sales in 2020 compared to 2019, was primarily due to the Raytheon Merger on April 3, 2020.
The decrease in other non-reportable segment sales and the change in other non-reportable segment operating profit in 2021 compared to 2020, was primarily due to the sale of our Forcepoint business in the first quarter of 2021.
The increase in other non-reportable segment sales in 2020 compared to 2019, was primarily related to Forcepoint sales.
The decrease in other non-reportable segments operating profit in 2020 compared to 2019, was primarily due to the impact of foreign currency translation, partially offset by operating profit related to Forcepoint.
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.
(dollars in millions)202120202019
Corporate expenses and other unallocated items$(552)$(590)$(367)
The change in Corporate expenses and other unallocated items of $38 million for 2021 compared to 2020 was primarily driven by a decrease in merger-related costs related to the Raytheon Merger of $148 million and lower restructuring costs of $112 million, partially offset by an accrual of $147 million in the fourth quarter of 2021 related to the ongoing DOJ investigation into contract pricing matters at RMD and an increase in net expenses related to the LTAMDS project.
The change in corporate expenses and other unallocated items of $223 million in 2020 compared to 2019 was primarily driven by increased restructuring costs of $201 million, $130 million of net expenses related to the LTAMDS project acquired as part of the Raytheon Merger and an increase in merger-related costs related to the Raytheon Merger of $82 million, partially offset by $40 million of merger-related costs for the Rockwell Acquisition in 2019 and other unallocated items with no individual or common significant driver.
FAS/CAS operating adjustment
The segment results of RIS and RMD include pension and PRB expense as determined under U.S. government Cost Accounting Standards (CAS), which we generally recover through the pricing of our products and services to the U.S. government. The difference between our CAS expense and the Financial Accounting Standards (FAS) service cost attributable to these segments under U.S. GAAP is the FAS/CAS operating adjustment. The FAS/CAS operating adjustment results in consolidated pension expense in operating profit equal to the service cost component of FAS expense under U.S. GAAP. The segment results of Collins Aerospace and Pratt & Whitney generally include FAS service cost.
The CAS expense calculation is different from the FAS requirements and calculation methodology. While the ultimate liability for pension costs under FAS and CAS is similar, the pattern of cost recognition is different. Our CAS pension expense is comprised primarily of CAS service cost, as well as amortization amounts resulting from demographic or economic experience different than expected, changes in assumptions, or changes in plan provisions. Unlike FAS, CAS expense is only recognized for plans that are not fully funded. Consequently, if plans become or cease to be fully funded under CAS due to our asset or liability experience, our CAS expense will change accordingly.
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The components of the FAS/CAS operating adjustment were as follows:
(dollars in millions)202120202019
FAS service cost (expense)$(405)$(354)$-
CAS expense2,201 1,460 -
FAS/CAS operating adjustment$1,796 $1,106 $-
The change in our FAS/CAS operating adjustment of $690 million in 2021 compared to 2020 was driven by a $741 million increase in CAS expense, partially offset by a $51 million increase in FAS service cost. The increase in our CAS expense was primarily due to the Raytheon Merger.
The change in our FAS/CAS operating adjustment of $1,106 million in 2020 compared to 2019 was due to the Raytheon Merger.
In December 2020, we approved a change to the Raytheon Company domestic defined benefit pension plans for non-union participants to cease future benefit accruals based on an employee's years of service and compensation effective December 31, 2022. The plan change does not impact participants' historical benefit accruals. Benefits for service after December 31, 2022 will be based on a cash balance formula.
In response to the economic environment resulting from the COVID-19 pandemic, Congress passed the American Rescue Plan Act of 2021 (ARPA) in March 2021 which included pension funding relief provisions, as further discussed in "Cash Flow - Operating Activities". These pension funding relief provisions are expected to result in decreases to CAS expense, and the related recovery under our contracts, for our U.S. qualified pension plans beginning in 2022, as the interest rates used to determine pension funding requirements for these plans are also used in determining CAS expense.
Acquisition accounting adjustments
Acquisition accounting adjustments include the amortization of acquired intangible assets related to acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through acquisitions and the amortization of customer contractual obligations related to loss making or below market contracts acquired. These adjustments are not considered part of management's evaluation of segment results.
The components of Acquisition accounting adjustments were as follows:
(dollars in millions)202120202019
Goodwill impairment charge$- $(3,183)$-
Amortization of acquired intangibles (2,404)(2,142)(1,211)
Amortization of property, plant and equipment fair value adjustment(111)(69)(23)
Amortization of customer contractual obligations related to acquired loss-making and below-market contracts312 294 346
Acquisition accounting adjustments$(2,203)$(5,100)$(888)
Acquisition accounting adjustments related to acquisitions in each segment were as follows:
(dollars in millions)202120202019
Collins Aerospace Systems$(641)$(3,926)$(605)
Pratt & Whitney(160)(117)(283)
Raytheon Intelligence & Space(563)(394)-
Raytheon Missiles & Defense(838)(607)-
Total segment(2,202)(5,044)(888)
Eliminations and other(1)(56)-
Acquisition accounting adjustments$(2,203)$(5,100)$(888)
The change in the Acquisition accounting adjustments of $2.9 billion in 2021 compared to 2020, is primarily driven by the absence of the $3.2 billion goodwill impairment loss in the second quarter of 2020 related to two Collins Aerospace reporting units, partially offset by an increase of $0.4 billion for acquisition accounting adjustments related to the Raytheon Merger, primarily due to the timing of the merger in the prior year. Included in Acquisition accounting adjustments in 2021 was $116 million of amortization of customer contractual obligations due to the accelerated liquidation of below-market contract reserves
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at Collins Aerospace driven by the termination of two customer contracts. Refer to "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K for additional information on the goodwill impairment.
The change in the Acquisition accounting adjustments of $4.2 billion in 2020 compared to 2019, is primarily driven by the $3.2 billion goodwill impairment in the second quarter of 2020 related to two Collins Aerospace reporting units and an increase of $1.1 billion related to the Raytheon Merger, primarily related to the amortization of acquired intangibles.
LIQUIDITY AND FINANCIAL CONDITION
(dollars in millions)20212020
Cash and cash equivalents$7,832 $8,802
Total debt31,485 31,823
Total equity74,664 73,852
Total capitalization (total debt plus total equity)106,149 105,675
Total debt to total capitalization30 %30 %
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is cash flows from operating activities. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in and divestitures of businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, redemptions of debt and the ability to attract long-term capital at satisfactory terms. We had $7.0 billion available under our various credit facilities at December 31, 2021.
Although our business has been and will continue to be impacted by COVID-19, we currently believe we have sufficient liquidity to withstand the potential impacts.
At December 31, 2021, we had Cash and cash equivalents of $7.8 billion, of which approximately 34% was held by RTC's foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The Company does not intend to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. Taxes associated with the future remittance of these earnings have been recorded. For the remainder of the Company's undistributed international earnings, unless tax effective to repatriate, RTC will continue to permanently reinvest these earnings.
Historically, our strong credit ratings and financial position have enabled us to issue long-term debt at favorable market rates.
As of December 31, 2021, our maximum commercial paper borrowing limit was $5.0 billion as the commercial paper is backed by our $5.0 billion revolving credit agreement. We had no commercial paper borrowings as of December 31, 2021. The daily average amount of short-term commercial paper borrowings outstanding during the year ended December 31, 2021 was $175 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 have original maturities of not more than 90 days from the date of issuance.
As of December 31, 2021, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $7.0 billion, consisting of a $5.0 billion revolving credit agreement, which matures in April 2025, and a $2.0 billion revolving credit agreement, which we renewed in May 2021 and expires in May 2022. As of December 31, 2021, there were no borrowings outstanding under these agreements.
We have an existing universal shelf registration statement, which we filed with the Securities and Exchange Commission (SEC) on September 27, 2019, for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement.
The Company offers a voluntary supply chain finance (SCF) program with a global financial institution which enables our suppliers, at their sole discretion, to sell their receivables from the Company to the financial institution at a rate that leverages our credit rating, which might be beneficial to them. Our suppliers' participation in the SCF program does not impact or change our terms and conditions with those suppliers, and therefore, we have no economic interest in a supplier's decision to participate in the program. In addition, we provide no guarantees or otherwise pay for any of the costs of the program incurred by those suppliers that choose to participate, and have no direct financial relationship with the financial institution, as it relates to the program. As such, the SCF program does not impact our overall liquidity.
We believe our cash on hand and future operating cash flows will be sufficient to meet our future operating cash needs. Further, we continue to have access to the commercial paper markets and our existing credit facilities, and our ability to obtain debt or
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equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.
Cash Flow - Operating Activities
(dollars in millions)202120202019
Net cash flows provided by operating activities from continuing operations$7,142 $4,334 $5,821
Net cash flows (used in) provided by operating activities from discontinued operations(71)(728)3,062
2021 Compared with 2020 Operating Activities - Continuing Operations
Cash generated from operating activities in 2021 was $2.8 billion higher than 2020. This increase was primarily due to higher net income of $4.1 billion after adjustments for depreciation and amortization, deferred income tax provision, stock compensation costs, net periodic pension and other postretirement benefit, the goodwill impairment charge and debt extinguishment costs, as well as lower pension and PRB contributions to trusts of $1.0 billion in 2021 compared to 2020. This was partially offset by an unfavorable change in working capital of $1.1 billion in 2021 compared to 2020, primarily due to activity at the RIS and RMD segments in the first quarter of 2021 with no comparable activity in the first quarter of 2020 as a result of the Raytheon Merger. This unfavorable change in working capital at RIS and RMD includes a cash outflow for accounts payable and accrued liabilities due to the timing of incentive compensation payments. Also included in the total unfavorable change in working capital was an increase in Contract assets principally driven by sales in excess of billings at Pratt & Whitney and contractual billing terms on U.S. government and foreign military sales contracts at RMD, and growth in accounts payable and accounts receivable at Collins Aerospace and Pratt & Whitney due to an increase in sales volume as commercial aerospace recovers.
The Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Factoring activity resulted in a decrease of approximately $0.2 billion in cash provided by operating activities during the year ended December 31, 2021, compared to a decrease in cash flows provided by operating activities of $1.3 billion during the year ended December 31, 2020. The year over year favorable impact from factoring activity was primarily due to the significant decline in sales volume in 2020 principally driven by the economic environment primarily due to COVID-19. Factoring activity includes amounts factored on certain aerospace receivables at the customers' request for which we are compensated by the customer for the extended collection cycle.
2020 Compared with 2019 Operating Activities - Continuing Operations
Cash generated from operating activities in 2020 was $1.5 billion lower than 2019. This decrease is primarily due to a decrease in net income after adjustments for depreciation and amortization, the 2020 goodwill impairment charge, the deferred income tax provision, stock compensation costs and net periodic pension and other post retirement income of $2.0 billion primarily driven by a decrease at Pratt & Whitney and Collins Aerospace as a result of the economic environment primarily driven by COVID-19, partially offset by net income from RIS and RMD following the Raytheon Merger. Included in the decrease in operating cash flows was an increase in pension contributions, as further discussed below, and an unfavorable impact from accounts payable primarily at Collins Aerospace and Pratt & Whitney due to a decline in volume principally driven by the economic environment primarily driven by COVID-19, which was partially offset by a favorable change in inventory at Collins Aerospace and Pratt & Whitney due to the decline in volume and a favorable change in Accounts receivable and Contract assets due to the timing of billings and collections in 2020 across our segments.
Factoring activity resulted in a decrease of approximately $1.3 billion in cash generated from operating activities during the year ended December 31, 2020, compared to an increase of approximately $0.3 billion in cash generated from operating activities during the year ended December 31, 2019. This decrease in factoring activity was driven by a decrease in factoring levels at Collins Aerospace and Pratt & Whitney primarily driven by lower sales volume.
We made pension and PRB contributions to trusts of $59 million, $1,025 million, and $55 million in 2021, 2020, and 2019, respectively. The contributions in 2020 include discretionary contributions of $801 million. We make both required and discretionary contributions to our pension plans. Required contributions are primarily determined by Employee Retirement Income Security Act of 1974 (ERISA) funding rules, which require us to fully fund our U.S qualified 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, which are dependent upon many factors, including returns on invested assets, the level of market interest rates and actuarial assumptions. We can contribute cash or RTC shares to our plans at our discretion, subject to applicable regulations. As of December 31, 2021, the total investment by the U.S. qualified pension plans in RTC shares was less than 1% of total plan assets.
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In response to the economic environment resulting from the COVID-19 pandemic, Congress passed the ARPA in March 2021, which included pension funding relief provisions. These provisions extend and expand upon existing pension funding relief, most notably by increasing the liability interest rates used to determine the required cash contributions for our U.S. qualified pension plans. The Infrastructure Investment and Jobs Act passed by Congress in November 2021 further extended the interest rate pension funding relief provisions included in ARPA. As a result of these pension funding relief provisions, we do not currently expect cash contributions to be required for our U.S. qualified pension plans in the foreseeable future. Global pension and PRB cash funding requirements are expected to be approximately $0.4 billion annually in 2022, 2023, 2024, and 2025, which includes benefit payments to be paid directly by the company.
Provisions enacted in the TCJA related to the capitalization for tax purposes of research and experimental expenditures became effective on January 1, 2022. If these provisions are not deferred beyond 2022, our tax payments will increase by an estimated $2 billion in 2022.
Included in cash flows from operating activities are payments related to our operating lease obligations. See "Note 12: Leases" within Item 8 of this Form 10-K for actual and expected payments on operating lease obligations.
In addition, the majority of our cash flows for purchase obligations are classified as cash flows from operating activities. We expect future payments related to our purchase obligations to be $23.3 billion, $17.2 billion of which is payable in 2022. Purchase obligations include current amounts committed for the purchase of goods and services under legally enforceable contracts or purchase orders, and do not represent our entire anticipated purchases in the future. Approximately 50% of our purchase obligations described above represent purchase orders for products to be delivered under firm contracts with the U.S. government for which we have full recourse under customary contract termination clauses.
Operating Activities - Discontinued Operations
The $657 million increase in cash flows provided by operating activities from discontinued operations in 2021 compared to 2020 was primarily driven by the absence of prior year separation costs as the Separation Transactions occurred on April 3, 2020. The $3.8 billion decrease in cash flows provided by operating activities from discontinued operations in 2020 compared to 2019 primarily relates to a decrease in net income from discontinued operations driven by the absence of operating activity for the majority of the year, as the Separation Transactions occurred on April 3, 2020.
Cash Flow - Investing Activities
(dollars in millions)202120202019
Net cash flows (used in) provided by investing activities from continuing operations$(1,364)$3,343 $(2,676)
Net cash flows used in investing activities from discontinued operations- (241)(416)
Our investing activities primarily include investments in/dispositions of businesses, capital expenditures, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, settlements of derivative contracts not designated as hedging instruments, and cash investments in Customer financing assets.
2021 Compared with 2020 Investing Activities - Continuing Operations
The $4.7 billion change in cash flows (used in) provided by investing activities in 2021 compared to 2020 primarily relates to the absence of cash acquired in the Raytheon Merger in the prior year of $3.2 billion, and investments in and dispositions of businesses, as discussed below.
2020 Compared with 2019 Investing Activities - Continuing Operations
The $6.0 billion change in cash flows (used in) provided by investing activities in 2020 compared to 2019 primarily relates to cash acquired in the Raytheon Merger of $3.2 billion, the sale of our Collins Aerospace military Global Positioning System (GPS) and space-based precision optics businesses for $2.3 billion in cash proceeds, and a net increase from customer financing assets of $747 million, as discussed below, partially offset by the Blue Canyon Technologies acquisition of $419 million.
Investments in businesses in 2021 of $1.1 billion primarily related to the acquisitions of FlightAware at Collins Aerospace and SEAKR Engineering Inc. at RIS. Investments in businesses in 2020 of $419 million primarily related to the acquisition of Blue Canyon Technologies at RIS. Investments in businesses in 2019 were not material. For additional detail, see "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
Dispositions of businesses in 2021 of $1.9 billion, net of cash transferred, primarily related to the sale of our Forcepoint business and the sale of our global training and services business within RIS. Dispositions of businesses in 2020 of $2.6 billion, net of cash transferred, primarily related to the sale of our Collins Aerospace military GPS and space-based precision optics businesses. Dispositions of business in 2019 of $134 million, net of cash transferred, primarily consisted of the business sold in
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connection with the Rockwell Acquisition. For additional detail, see "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
Capital expenditures were $2.1 billion, $1.8 billion and $1.9 billion in 2021, 2020, and 2019, respectively. Capital expenditures increased $339 million in 2021 compared to 2020, primarily due to increases at RIS and RMD principally driven by the Raytheon Merger and increases at Pratt & Whitney. Capital expenditures decreased $73 million in 2020 from 2019 as reductions at Collins Aerospace and Pratt & Whitney were largely offset by increased capital expenditures driven by the Raytheon Merger.
Customer financing assets payments were $231 million, $280 million, and $787 million in 2021, 2020 and 2019, respectively. The decrease in payments in 2021 compared to 2020 was due to fewer engines added to our leased asset pool, partially offset by increased customer financing. The decrease in payments in 2020 compared to 2019 was due to fewer engines added to our leased asset pool. Customer financing assets receipts were $389 million, $368 million and $128 million in 2021, 2020 and 2019, respectively. Receipts in 2021 were relatively consistent with 2020, as both periods included similar sale and leaseback transactions for the sale of equipment. The increase in receipts in 2020 compared to 2019 was driven by the sale and leaseback transaction in 2020. Refer to "Note 12: Leases" within Item 8 of this Form 10-K for additional discussion of these transactions.
In 2021, 2020, and 2019 we increased our collaboration intangible assets by approximately $188 million, $172 million, $351 million, respectively, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce's collaboration interests in International Aero Engines AG (IAE).
At December 31, 2021, we had commercial aerospace financing and other contractual commitments, including exclusivity and collaboration payment commitments, of approximately $15.6 billion, on a gross basis before reduction for our collaboration partners' share. Refer to "Note 19: Commitments and Contingencies" within Item 8 of this Form 10-K for further details on our commercial aerospace financing and other contractual commitments.
As discussed in "Note 15: Financial Instruments" within Item 8 of this Form 10-K, we enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments and those utilized as economic hedges. We operate internationally and in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures. During 2021, 2020, and 2019 we had net cash (payments) receipts of $(16) million, $(32) million, and $342 million, respectively, from the settlement of these derivative instruments not designated as hedging instruments.
Investing Activities - Discontinued Operations
The $241 million decrease in cash flows used in investing activities from discontinued operations in 2021 compared to 2020 was due to the fact that the Separation Transactions occurred on April 3, 2020. The $175 million decrease in cash flows used in investing activities from discontinued operations in 2020 compared to 2019 primarily relates to a reduction in capital expenditures at Carrier and Otis of approximately $300 million, partially offset by a reduction in investment cash of approximately $135 million.
Cash Flow - Financing Activities
(dollars in millions)202120202019
Net cash flows used in financing activities from continuing operations$(6,756)$(3,860)$(1,913)
Net cash flows provided by (used in) financing activities from discontinued operations71 (1,414)(2,651)
Our financing activities primarily include the issuance and repayment of short-term and long-term debt, payment of dividends and stock repurchases.
2021 Compared with 2020 Financing Activities- Continuing Operations
The $2.9 billion change in cash flows used in financing activities in 2021 compared to 2020 primarily relates to an increase in share repurchases of $2.3 billion, as discussed below. In addition, in 2021, we had debt repayments, including debt extinguishment costs, of $4.9 billion and long-term debt issuances of $4.1 billion.
2020 Compared with 2019 - Financing Activities- Continuing Operations
The $1.9 billion change in cash flows used in financing activities in 2020 compared to 2019 primarily relates to increases in long-term debt repayments of $13.4 billion, a $4.4 billion change in net cash transfers to discontinued operations, an increase in short-term borrowing repayments of $2.9 billion, and an increase in dividends paid on common stock of $0.3 billion, partially
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offset by an increase in long-term debt issuances of $19.2 billion. The 2020 debt issuances reflect debt incurred by Carrier and Otis of approximately $6 billion and $11 billion, respectively. The net proceeds of these issuances and draws were primarily utilized by UTC 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.
Included in cash flows from financing activities are payments related to our long term debt, including both interest and principal payments. A summary of our long-term debt commitments as of December 31, 2021 was as follows:
Payments Due by Period
(dollars in millions)202220232024Thereafter
Long-term debt-principal$13 $588 $1,270 $29,429
Long-term debt-future interest1,250 1,257 1,221 15,745
Our share repurchases were as follows for the years ended December 31:
(dollars in millions; shares in thousands)202120202019
$Shares$Shares$Shares
Shares of Common Stock repurchased$2,327 28,003 $47 330 $151 1,133
At December 31, 2021, management had remaining authority to repurchase approximately $6.0 billion of our common stock under the December 7, 2021 share repurchase program. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs, and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. We may also reacquire shares outside of the program from time to time in connection with the surrender of shares to cover taxes on vesting of restricted stock and as required under our employee savings plan. Our ability to repurchase shares is subject to applicable law.
Our Board of Directors authorized the following cash dividends for the years ended December 31:
(dollars in millions, except per share amounts)202120202019
Dividends paid per share of Common Stock$2.005 $2.160 $2.940
Total dividends paid$2,957 $2,732 $2,442
On February 11, 2022, the Board of Directors declared a dividend of $0.51 per share payable March 24, 2022 to shareowners of record at the close of business on February 25, 2022.
Financing Activities - Discontinued Operations
Cash flows provided by financing activities from discontinued operations in 2021 were not significant as the Separation Transactions occurred on April 3, 2020. The $1.2 billion decrease in cash flows used in financing activities from discontinued operations in 2020 compared to 2019 primarily relates to $703 million of debt extinguishment costs related to the early repayment of debt in 2020 and cash distributions made to Carrier and Otis of $2.8 billion, which were more than offset by a change in net transfer activity of $4.5 billion.
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 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. 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, generally using costs incurred to date relative to total estimated costs at completion. 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
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revenues and costs. The risks and opportunities relate to management's judgment about the ability and cost to achieve the schedule, consideration of customer-directed delays or reductions in scheduled deliveries, technical requirements, customer activity levels, such as flight hours or aircraft landings, and related variable consideration. Management's judgment related to these considerations has become increasingly more significant given the economic environment primarily caused by the COVID-19 pandemic. Management must make assumptions and estimates regarding contract revenue and costs, including estimates of labor productivity and availability, the complexity and scope of the work to be performed, the availability and cost of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer, overhead cost rates, and current and past maintenance cost and frequency driven by estimated aircraft and engine utilization and estimated useful lives of components, among others. In particular, fixed-price development programs involve significant management judgment, as development contracts by nature have elements that have not been done before and thus, are highly subject to future unexpected cost growth. Cost estimates may also include the estimated cost of satisfying our industrial cooperation agreements, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements, required under certain contracts primarily within our RIS and RMD segments. These obligations may or may not be distinct depending on their nature. 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:
(dollars in millions, except per share amounts)202120202019
Operating profit (loss)$110 $(643)$(69)
Income (loss) from continuing operations attributable to common shareowners (1)
87 (508)(55)
Diluted earnings (loss) per share from continuing operations attributable to common shareowners (1)
$0.06 $(0.37)$(0.06)
(1) Amounts reflect a U.S. statutory tax rate of 21%, which approximates our tax rate on our EAC adjustments.
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, because only the unperformed portion of the contract at the merger date represented the obligation of the Company. For additional information related to the Raytheon Merger, see "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
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 customer funding, and subsequently amortized as the OEM products are delivered to the customer. The estimation of contract costs, and margin, considered as part of this recoverability assessment requires significant judgment. See "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 8 of this Form 10-K for further discussion. We regularly assess capitalized contract fulfillment costs for impairment. In 2020, we recognized impairment of $111 million related to contract fulfillment costs.
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 consider available positive and negative evidence including past operating results, projections of future taxable income, the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Our projections of future taxable income include estimates and assumptions regarding our volume, pricing, and costs, as well as the timing and amount of reversals of taxable temporary differences. 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. Significant judgment is required when assessing our income tax positions and in determining our tax expense and benefits. Each quarter, management
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assesses our tax positions based on an evaluation of the facts, circumstances, applicable tax laws, including regulations, case law, and other interpretive guidance, as well as any other relevant information. Adjustments to our tax positions are made as new information becomes available or when our assessments change. In addition, we have entered into certain internal legal entity restructuring transactions necessary to effectuate the Separation Transactions. We have accrued tax on these transactions based on our interpretation of the applicable tax laws and our determination of appropriate entity valuations. See "Note 1: Basis of Presentation and Summary of Accounting Principles" and "Note 13: Income Taxes" within Item 8 of this Form 10-K for further discussion.
Management has determined that the distributions of Carrier and Otis on April 3, 2020, and certain related internal business separation transactions, qualified as tax-free under applicable law. In making these determinations, we applied the tax law in the relevant jurisdictions to our facts and circumstances and obtained tax rulings from the relevant taxing authorities, tax opinions, and/or other external tax advice related to the concluded tax treatment. If the completed distributions of Carrier or Otis, in each case, or certain internal business separation transactions, were to fail to qualify for tax-free treatment, the Company could be subject to significant liabilities, and there could be material adverse impacts on the Company's business, results of operations, financial condition and liquidity in future reporting periods.
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 acquired in business combinations consist of patents, trademarks/tradenames, developed technology, customer relationships, and other intangible assets. 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 Summary of Accounting Principles" within Item 8 of this Form 10-K for further details.
Also included within intangible assets are exclusivity assets, which are payments made to secure certain contractual rights to provide products on new commercial aerospace platforms. At December 31, 2021, our exclusivity assets, net of accumulated amortization, was approximately $2.4 billion, and our remaining estimated commitments, net of collaborator share, were approximately $8.9 billion. We regularly assess the recoverability of these intangibles, which is dependent upon our assumptions around the future success and profitability of the underlying aircraft platforms including the associated aftermarket revenue streams, and the related future cash flows.
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment testing annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. The impairment test compares carrying values of the reporting units and indefinite-lived intangible assets to their estimated fair values. If the carrying value exceeds the fair value then the carrying value is reduced to fair value. In developing our estimates for the fair value of our reporting units and indefinite-lived intangible assets, significant judgment is required in the determination of the appropriateness of using a qualitative assessment or quantitative assessment. For the quantitative assessments that are performed for goodwill and indefinite-lived intangible assets, fair value is primarily based on income approaches using a discounted cash flow method and relief from royalty method, respectively, which have significant assumptions including sales growth rates, projected operating profit, terminal growth rates, discount rates and royalty rates. Such assumptions are subject to variability from year to year and are directly impacted by, among other things, global market conditions.
We completed our annual goodwill impairment testing as of October 1, 2021, where we compared the fair value of all of our reporting units to their respective carrying values (step 1) and determined that no adjustments to the carrying value of goodwill were necessary. We estimated the fair value of our reporting units using a discounted cash flow (DCF) model based on our most recent long-range plan in place at the time of our impairment testing. The key assumptions used in the DCF analysis include our business projections, including revenue growth rates and operating profit margins, the long-term growth rate used to calculate the terminal value of the reporting unit, and the discount rate. We consider both internal and external factors and refresh key assumptions annually or as considered necessary. As part of our 2021 analysis, we used a slightly higher long-term growth rate assumption as compared to our 2020 analysis, based on our review of historical growth rates for our business and industry, long-term inflation estimates, and industry reports on projected future long-term growth for the industry. Material changes in these estimates could occur and result in impairments in future periods.
Based on our annual impairment analysis as of October 1, 2021, the reporting unit that was closest to impairment was a Collins Aerospace reporting unit with a fair value in excess of book value, including goodwill, of 15%. All other factors being equal, a
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10% decrease in expected future cash flows, either due to a delay in the return to pre-pandemic revenue levels or other factors, would result in an excess of fair value over net book value of approximately 3%. Alternatively, all other factors being equal, a 50 basis points decrease in the assumed long-term growth rate would result in an excess of fair value over net book value of approximately 7%. The discount rate that we used in our 2021 analysis was consistent with the discount rate used in our 2020 analysis. All other factors being equal, a 50 basis points increase in the discount rate would result in an excess of fair value over net book value of approximately 4%.
All other reporting units had a fair value substantially in excess of book value.
In 2020, we recognized goodwill impairments of $3.2 billion related to two Collins Aerospace reporting units. Refer to "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K for additional details.
We also completed our annual indefinite-lived intangible assets impairment testing as of October 1, 2021. Based on this analysis, all of our indefinite-lived intangible assets had a fair value substantially in excess of book value.
The Company continuously monitors and evaluates relevant events and circumstances that could unfavorably impact the key assumptions in determining the fair value of our reporting units, including long-term revenue growth projections, profitability and expectations for net cash flows, discount rates including changes to U.S. treasury rates and equity risk premiums, tax rates, recent market valuations from transactions by comparable companies, volatility in the Company's market capitalization, and general industry, market and macro-economic conditions. It is possible that future changes in such circumstances, including significant future negative developments in the COVID-19 pandemic, or future changes in the inputs and assumptions used in estimating the fair value of our reporting units, including the expected long-term recovery of airline travel to pre-COVID-19 levels, would require the Company to record a non-cash impairment charge.
Contingent Liabilities. As described in "Note 19: Commitments and Contingencies" within Item 8 of this Form 10-K, contractual, regulatory and other matters in the normal course of business may arise that subject us to claims or litigation, including with respect to matters relating to technical issues on programs, government contracts, performance and operating cost guarantees, employee benefit plans, legal, and environmental, health and safety matters. In particular, the design, development, production and support of aerospace technologies is inherently complex and subject to risk. Technical issues associated with these technologies may arise in the normal course and may result in financial impacts, including increased warranty provisions, customer contract settlements, and changes in contract performance estimates. These impacts could be material to the Company's results of operations, financial condition and liquidity. 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. Estimating our liability based on both the likelihood of any adverse judgments or outcomes, and the costs associated with these matters, requires significant judgment. The inherent uncertainty related to the outcome of these matters could result in amounts materially different from any provisions made with respect to their resolution.
Employee Benefit Plans. We sponsor domestic and foreign defined benefit pension and 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) expense reported in the Consolidated Financial Statements.
Assumptions used in the accounting for these employee benefit plans require judgement. Major assumptions include the discount rate and 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, which are subject to macroeconomic factors, as well as plan specific expected cash flows. For our significant plans, we utilize a full yield curve approach in the estimation of the service cost and interest cost components of net periodic benefit expense by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant discounted projected cash flows.
The following table shows the sensitivity of our pension and PRB plan liabilities and net periodic benefit income to a 25 basis point change in the discount rates for benefit obligations, interest cost and service cost as of December 31, 2021:
(dollars in millions)Increase in Discount Rate of 25 bpsDecrease in Discount Rate of 25 bps
Projected benefit obligation increase (decrease)$(1,923)$2,023
Net periodic benefit income increase (decrease)(32)(9)
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The discount rate sensitivities assume no change in the shape of the yield curve that will be applied to the projected cash outflows for future benefit payments in order to calculate interest and service cost. A flattening of the yield curve results in a narrowing of the spread between interest and obligation discount rates and would decrease our net periodic benefit income. Conversely, a steepening of the yield curve would result in an increase in the spread between interest and obligation discount rates and would increase our net periodic benefit income.
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, as well as economic and other indicators of future performance. We may consult with and consider the opinions of financial and other professionals in determining the appropriate capital market assumptions. Return projections are validated using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns. 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.
Net periodic benefit income is also sensitive to changes in the EROA. An increase or decrease of 25 basis points in the EROA would have increased or decreased our 2021 net periodic benefit income by approximately $136 million.
Refer to "Note 11: Employee Benefit Plans" within Item 8 of this Form 10-K for discussion of current and prior year discount rate and EROA assumptions.
ACCOUNTING STANDARDS
For a discussion of recent accounting pronouncements, see the Accounting Pronouncements section in "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 8 of this Form 10-K.
COMMITMENTS AND CONTINGENCIES
Refer to "Note 19: Commitments and Contingencies" within Item 8 of this Form 10-K for discussion on contractual commitments and contingencies.
GOVERNMENT MATTERS
As described above in "Critical Accounting Estimates-Contingent Liabilities," our contracts with the U.S. government are subject to audits. Such audits may recommend that certain contract prices should be reduced to comply with various government regulations, or that certain payments be delayed or withheld. We are also the subject of one or more investigations and legal proceedings initiated by the U.S. government with respect to government contract matters. See "Note 13: Income Taxes" and "Note 19: Commitments and Contingencies" within Item 8 of this Form 10-K for further discussion of these and other government matters.