Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information to the reader in understanding our consolidated financial statements and notes thereto included in Item 8. Financial Statements and Supplementary Data of this Form 10-K, the changes in certain key items in those financial statements between select periods and the primary factors that accounted for those changes. In addition, we discuss certain accounting principles, policies and critical estimates that affect our financial statements. Our discussion also contains some additional context regarding our business, including industry considerations and the business environment, as well as certain forward-looking statements related to future events and expectations. This MD&A should be read in conjunction with the other sections of this Form 10-K, including Item 1A. "Risk Factors."
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 (Collins), Pratt & Whitney, Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD). The Company recently announced its intention to streamline the structure of its core businesses into three principal business segments: Collins Aerospace, Pratt & Whitney and Raytheon. The Company plans to determine the exact composition of each segment and implement the reorganization in the second half of 2023. All segment information included in this Form 10-K is reflective of the existing four segments of Collins, Pratt & Whitney, RIS and RMD in accordance with the management structure in place as of December 31, 2022. Unless the context otherwise requires, the terms "we," "our," "us," "the Company," "Raytheon Technologies," and "RTC" mean Raytheon Technologies Corporation and its subsidiaries.
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.
Collins 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 customers are covered under long-term aftermarket service agreements at both Collins and Pratt & Whitney, which are inclusive of both spare parts and services.
RIS, RMD, and the defense operations of Collins 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, the domestic and global political environment and the evolving nature of the global and national security threat environment. In addition, our defense businesses engage in both direct commercial sales, which generally require U.S. government licenses and approvals, as well as foreign military sales, which are government-to-government transactions initiated by, and carried out at the direction of, the U.S. government. Changes in these budget and spending levels, policies, or priorities, which are subject to U.S. domestic and foreign geopolitical risks and threats, may impact our defense businesses, including the timing of and delays in U.S. government licenses and approvals for sales, the risk of sanctions or other restrictions.
Government legislation, policies and regulations can impact our business and operations. Changes in environmental and climate change laws or regulations, including regulations on greenhouse gas emissions, carbon pricing, and energy taxes, could lead to new or additional investment in product designs and facility upgrades and could increase our operational and environmental compliance expenditures, including increased energy and raw materials costs and costs associated with manufacturing changes. In addition, government and industry-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, government-imposed travel restrictions and limitations, and government procurement practices can impact our businesses.
Business Environment
Global economic and political conditions, changes in raw material and commodity prices and supply, labor availability and costs, inflation, interest rates, international and domestic tax law changes, foreign currency exchange rates, energy costs and
supply, 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.
Global Supply Chain and Labor Markets. Global supply chain and labor markets are continuing to experience high levels of disruption, causing significant materials and parts shortages, including raw material, microelectronics and commodity shortages, as well as delivery delays, labor shortages, distribution problems and price increases. Current geopolitical conditions, including sanctions and other trade restrictive activities and strained intercountry relations, are contributing to these issues. We have had difficulties procuring necessary materials, including raw materials, components and other supplies, and services on a timely basis or at all. We have also had difficulties hiring qualified personnel, particularly personnel with specialized engineering experience and security clearances. Our suppliers and subcontractors have been impacted by the same issues, as well as ongoing pandemic-related issues, compounding the shortages for us because we rely on them, sometimes as sole-source providers. In addition, as the ongoing recovery in commercial air travel continues, the anticipated increase in new aircraft deliveries and increased demand for our products and services will add to these supply chain and labor market challenges.
We work continuously to mitigate the effects of these supply chain and labor constraints through targeted activities and ongoing programs. We work with our suppliers and subcontractors to assist in mitigation, arrange supply source alternatives, increase our inventory of available materials and parts, and regularly pursue cost reductions through a number of mechanisms. We also continuously monitor labor market conditions and trends and work to mitigate constraints through talent acquisition, partnership, sourcing and recruiting arrangements, workforce succession planning, and initiatives to attract, retain and rehire former employees.
Coronavirus Disease 2019 (COVID-19) Pandemic. The COVID-19 pandemic continues to negatively affect the global economy, our business and operations, the labor market, supply chains, inflation, and the industries in which we operate, although we continue to see signs of ongoing recovery in commercial air travel. While we believe that the long-term outlook for the aerospace industry remains positive due to the fundamental drivers of air travel demand, uncertainty continues with respect to when commercial air traffic capacity will fully return to and/or exceed pre-COVID-19 levels. The pace of the commercial aerospace recovery is tied to general economic conditions and may be impacted by inflation, an economic downturn, or government budget deficits, among other factors, and may also be impacted by a resurgence of the pandemic and corresponding travel restrictions and protocols. 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.
Geopolitical Matters. In response to the Russian military's invasion of Ukraine on February 24, 2022, the U.S. government and the governments of various jurisdictions in which we operate, including Canada, the United Kingdom, the European Union, and others, have imposed broad economic sanctions and export controls targeting specific industries, entities and individuals in Russia. The Russian government has implemented similar counter-sanctions and export controls targeting specific industries, entities and individuals in the U.S. and other jurisdictions in which we operate, including certain members of the Company's management team and Board of Directors. These government measures, among other limitations, restrict transactions involving various Russian banks and financial institutions and impose enhanced export controls limiting transfers of various goods, software and technologies to and from Russia, including broadened export controls specifically targeting the aerospace sector. These measures have adversely affected, and could continue to adversely affect, the Company and/or our supply chain, business partners or customers. In the quarter ended March 31, 2022, we reversed $1.3 billion of backlog, which would have been recognized over a span of approximately 10 years, and recorded certain impairment charges and increases to reserves related to operations at our Pratt & Whitney and Collins businesses, as discussed further in "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 8 of this Form 10-K. These adverse impacts have been mitigated in part by the identification of alternative suppliers and an increase in the global demand for our products as a result of the current geopolitical environment. Based on information available to date, we do not currently expect these issues will have a material adverse effect on our financial results.
China previously announced that it may take measures against RTC in connection with certain foreign military sales to Taiwan. In addition, China has indicated that it decided to sanction our Chairman and Chief Executive Officer Gregory Hayes, in connection with another potential foreign military sale to Taiwan involving RTC products and services. RTC is not aware of any specific sanctions against Mr. Hayes or RTC, or the nature or timing of any future potential sanctions or countermeasures. 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, 2022, our Contract liabilities include approximately $385 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.
New Legislation. In August 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Sciences Act and the Inflation Reduction Act were signed into law, each effective as of January 1, 2023. These new pieces of legislation include the implementation of a new corporate alternative minimum tax, an excise tax on stock buybacks, and tax incentives for energy and climate initiatives, among other provisions. We are evaluating the legislation and currently do not expect the legislation to have a material impact on our operations, financial condition or liquidity.
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)202220212020
Total net sales$67,074 $64,388 $56,587
Operating profit (loss)5,414 4,958 (1,889)
Operating profit (loss) margins8.1 %7.7 %(3.3)%
Operating cash flow from continuing operations$7,168 $7,142 $4,334
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 $175 billion and $156 billion as of December 31, 2022 and 2021, 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). 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, 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 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" of 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 following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context. 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 of United Technologies Corporation's (UTC's) business into three independent, publicly traded companies - UTC, Carrier Global Corporation (Carrier) and Otis Worldwide Corporation (Otis) (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-Generally Accepted Accounting Principles (non-GAAP) measures are useful to investors because they provide transparency to the underlying performance of our business, which allows for better year-over-year comparability. The organic change in Net sales, Cost of sales and Operating profit (loss) excludes Acquisitions and divestitures, net, and the effect of foreign currency exchange rate translation fluctuations and other significant non-operational items and/or significant operational items that may occur at irregular intervals (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. Restructuring costs generally arise from severance related to workforce reductions and facility exit costs. We are continuously evaluating our cost structure and have implemented restructuring actions in an effort to keep our cost structure competitive. 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, the amortization of customer contractual obligations related to loss making or below market contracts acquired, and goodwill impairment.
Net Sales
(dollars in millions)202220212020
Total net sales$67,074 $64,388 $56,587
The factors contributing to the total change year-over-year in Total Net Sales are as follows:
(dollars in millions)20222021
Organic (1)
$3,660 $724
Acquisitions and divestitures, net(676)6,961
Other(298)116
Total change$2,686 $7,801
(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 $3.7 billion organically in 2022 compared to 2021 primarily due to higher organic sales of $2.5 billion at Pratt & Whitney and $2.4 billion at Collins, partially offset by lower organic sales of $0.6 billion at RMD. The $0.7 billion decrease in net sales related to Acquisitions and divestitures, net in 2022 compared to 2021, was primarily driven by the sale of our global training and services business within our RIS segment in the fourth quarter of 2021. The decrease in other net sales of $0.3 billion in 2022 compared to 2021 represents the impact of foreign exchange.
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. 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 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.
See "Segment Review" below for further information by segment.
% of Total Net Sales
(dollars in millions)202220212020202220212020
Net sales
Products sales$50,773 $49,270 $43,319 76 %77 %77 %
Services sales16,301 15,118 13,268 24 %23 %23 %
Total net sales$67,074 $64,388 $56,587 100 %100 %100 %
Refer to "Note 21: 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 increased $1.5 billion in 2022 compared to 2021 primarily due to increases in external products sales of $1.5 billion at Collins and $1.2 billion at Pratt & Whitney, partially offset by decreases in external products sales of $0.7 billion at RMD and $0.5 billion at RIS. Net services sales increased $1.2 billion in 2022 compared to 2021 primarily due to increases in external services sales of $1.2 billion at Pratt & Whitney and $0.5 billion at Collins, partially offset by a decrease in external services sales of $0.5 billion at RIS primarily driven by the sale of the global training and services business in the fourth quarter of 2021.
Net products sales increased $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. 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.
Our sales to major customers were as follows:
% of Total Net Sales
(dollars in millions)202220212020202220212020
Sales to the U.S. government (1)
$30,317 $31,177 $25,962 45 %48 %46 %
Foreign military sales through the U.S. government5,042 5,546 4,585 8 %9 %8 %
Foreign government direct commercial sales4,327 4,993 3,974 6 %8 %7 %
Commercial aerospace and other commercial sales27,388 22,672 22,066 41 %35 %39 %
Total net sales$67,074 $64,388 $56,587 100 %100 %100 %
(1) Excludes foreign military sales through the U.S. government.
Cost of Sales
(dollars in millions)202220212020
Total cost of sales$53,406 $51,897 $48,056
Percentage of net sales80 %81 %85 %
The factors contributing to the change year-over-year in total Cost of sales are as follows:
(dollars in millions)20222021
Organic (1)
$2,368 $(1,293)
Acquisitions and divestitures, net(552)5,829
Restructuring3 (363)
FAS/CAS operating adjustment234 (643)
Acquisition accounting adjustments(348)345
Other(196)(34)
Total change$1,509 $3,841
(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 increase in total Cost of sales in 2022 compared to 2021 of $2.4 billion was primarily due to the organic sales increases at Collins and Pratt & Whitney noted above. The decrease related to Acquisitions and divestitures, net of $0.6 billion in 2022 compared to 2021 was primarily driven by the sale of our global training and services business within our RIS segment in the fourth quarter of 2021. The decrease in other cost of sales of $0.2 billion in 2022 compared to 2021 was primarily driven by the impact of foreign exchange, partially offset by charges recorded during the first quarter of 2022 at Pratt & Whitney and Collins related to impairment of customer financing assets for products under lease, inventory reserves, purchase order obligations, and the impairment of contract fulfillment costs that are no longer recoverable, all due to global sanctions on and export controls with respect to Russia. See "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 8 of this Form 10-K for additional information.
The organic decrease in total Cost of sales in 2021 compared to 2020 of $1.3 billion was primarily due to an organic Cost of sales decrease at Collins and RMD. The Collins decrease was primarily due to the sales decrease noted above, the benefit of cost reduction initiatives, and the absence of prior year significant unfavorable adjustments. The RMD decrease was primarily due to the absence of an unfavorable profit impact of $516 million related to inventory reserves, contract asset impairments and
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 related to Acquisitions and divestitures, net of $5.8 billion in 2021 compared to 2020 was primarily driven by the Raytheon merger on April 3, 2020, partially offset by the sale of the Collins 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 $0.4 billion decrease in Restructuring is primarily due to the absence of 2020 severance and restructuring actions at Pratt & Whitney and Collins related to the economic environment primarily caused by the COVID-19 pandemic, and ongoing cost reduction efforts.
For further discussion on FAS/CAS operating adjustment see the "FAS/CAS operating adjustment" subsection under the "Segment Review" section below. For further discussion on Acquisition accounting adjustments, see the "Acquisition accounting adjustments" subsection under the "Segment Review" section below.
% of Total Net Sales
(dollars in millions)202220212020202220212020
Cost of sales
Products$41,927 $41,095 $38,137 63 %64 %67 %
Services11,479 10,802 9,919 17 %17 %18 %
Total cost of sales$53,406 $51,897 $48,056 80 %81 %85 %
Net products cost of sales increased $0.8 billion in 2022 compared to 2021 primarily due to increases at Collins and Pratt & Whitney, partially offset by decreases in Acquisition Accounting Adjustments and RIS. The changes at Collins, Pratt & Whitney and RIS were related to the changes in products sales noted above. Net services cost of sales increased $0.7 billion in 2022 compared to 2021 primarily due to increases in external services cost of sales at Pratt & Whitney and Collins, partially offset by a decrease in external services sales at RIS, all driven by the services sales changes noted above.
Net products cost of sales increased $3.0 billion in 2021 compared to 2020 primarily due to increases 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 products 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, 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.
Research and Development
(dollars in millions)202220212020
Company-funded$2,711 $2,732 $2,582
Percentage of net sales4.0 %4.2 %4.6 %
Customer-funded (1)
$4,376 $4,485 $4,111
Percentage of net sales6.5 %7.0 %7.3 %
(1) 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.
Company-funded research and development in 2022 was relatively consistent with 2021. 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 decrease in customer-funded research and development of $0.1 billion in 2022 compared to 2021, was primarily driven by lower expenses on various programs at RMD, partially offset by an increase in expenses on the Next Generation Interceptor (NGI) program at RMD. 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 primarily related to the sale of the military GPS and space-based precision optics businesses in the third quarter of 2020.
Selling, General and Administrative
(dollars in millions)202220212020
Selling, general and administrative$5,663 $5,224 $5,540
Percentage of net sales8.4 %8.1 %9.8 %
Selling, general and administrative expenses increased $0.4 billion in 2022 compared to 2021, primarily driven by higher information technology-related costs at Corporate, Collins and Pratt & Whitney, and higher combined expenses at Collins and Pratt & Whitney principally driven by higher employee-related costs and $0.1 billion of charges related to increased estimates for credit losses due to global sanctions on and export controls with respect to Russia. See "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 8 of this Form 10-K for additional information on Russia sanctions.
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 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 2020 severance and restructuring actions at Collins and Corporate related to the economic environment primarily caused by the COVID-19 pandemic, the Raytheon merger and ongoing cost reduction efforts, partially offset by an increase in expenses of $0.4 billion related to the Raytheon merger, and higher employee-related costs.
Other Income, Net
(dollars in millions)202220212020
Other income, net$120 $423 $885
Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, and other ongoing and nonrecurring items.
The decrease in Other income, net of $0.3 billion in 2022 compared to 2021 was primarily due to the absence of 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, $69 million of charges associated with the disposition of two non-core businesses at Collins in the second quarter of 2022, a $42 million charge in the fourth quarter of 2022 associated with a divestiture of a small non-core Naval Power business at RMD, and the absence of prior year foreign government wage subsidies related to COVID-19 at Pratt & Whitney of $41 million, partially offset by the absence of 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.
The decrease in Other income, net of $0.5 billion in 2021 compared to 2020, was primarily due to the absence of $595 million of gains on the sales of the Collins 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 and an accrual of $147 million in the fourth quarter of 2021 related to the ongoing 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. The remaining change was spread across multiple items with no common or significant driver.
Operating Profit (Loss)
(dollars in millions)202220212020
Operating profit (loss)$5,414$4,958$(1,889)
Operating profit (loss) margin8.1 %7.7 %(3.3)%
The increase in Operating profit (loss) of $0.5 billion in 2022 compared to 2021 was primarily driven by a decrease in Acquisition accounting adjustments, the operating performance at our operating segments and a decrease in Corporate and Eliminations and other, partially offset by the change in our FAS/CAS operating adjustment, all of which are described below in "Segment Review."
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 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 2020 restructuring actions taken at our Collins and Pratt & Whitney segments and the absence of 2020 unfavorable profit impact of $516 million related to inventory reserves, contract
asset impairments and recognition of supplier related obligations for certain international contracts at RMD as further described in "Segment Review" below.
Non-service Pension Income
(dollars in millions)202220212020
Non-service pension (income)$(1,889)$(1,944)$(902)
The change in Non-service pension income of $0.1 billion in 2022 compared to 2021 was primarily driven by the impact of an increase in discount rates, partially offset by prior years' pension asset returns exceeding our expected return on plan assets (EROA) assumption.
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 years' pension asset returns exceeding our EROA assumption.
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 under the historical formula 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)202220212020
Interest expense$1,300 $1,330 $1,430
Interest income(70)(36)(42)
Other non-operating expense (income)(1)
46 28 (22)
Interest expense, net$1,276 $1,322 $1,366
Total average interest expense rate - average outstanding borrowings during the year:4.0 %4.1 %4.0 %
Total average interest expense rate - outstanding borrowings as of December 31:4.0 %4.0 %4.2 %
(1) Primarily consists of the gains or losses on assets associated with certain of our nonqualified deferred compensation and employee benefit plans, as well as the gains or losses on liabilities associated with certain of our nonqualified deferred compensation plans.
Interest expense, net in 2022 was relatively consistent with 2021.
Interest expense, net in 2021 was relatively consistent with 2020. Included in Interest expense, net was a decrease in interest expense primarily due to the repayment of long-term debt.
Income Taxes
202220212020
Effective income tax rate11.6 %15.9 %(24.4)%
The 2022 effective tax rate includes a benefit of $214 million related to the Foreign Derived Intangible Income (FDII) benefit, $207 million associated with legal entity and operational reorganizations implemented in 2022, and $164 million associated with U.S. research and development credits. The increase in the FDII benefit from 2021 is primarily attributable to the capitalization of research or experimental expenditures for tax-purposes, enacted as part of the Tax Cuts and Jobs Act of 2017 effective beginning January 1, 2022.
The 2021 effective tax rate includes tax benefits of $244 million associated with legal entity and operational reorganizations implemented in 2021, $172 million associated with U.S. research and development credits and $121 million associated with 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. 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, 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.
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)202220212020
Net income (loss) from continuing operations attributable to common shareowners $5,216 $3,897 $(3,109)
Diluted earnings (loss) per share from continuing operations$3.51 $2.58 $(2.29)
Net income from continuing operations attributable to common shareowners for 2022 includes the following:
•acquisition accounting adjustments of $1.5 billion, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.99;
•impairment charges and reserve adjustments related to the global sanctions on and export controls with respect to Russia of $210 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.14;
•combined charges associated with disposition of businesses at Collins and RMD of $102 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.07; and
•restructuring charges of $91 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.06.
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;
•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:
•$3.2 billion of primarily non-deductible goodwill and intangibles impairment charges related to our Collins segment, which had an unfavorable impact on diluted EPS from continuing operations of $2.37;
•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;
•significant unfavorable contract adjustments at Pratt & Whitney and Collins of $667 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.49;
•restructuring charges of $598 million, net of tax, which had an unfavorable impact on diluted EPS from continuing operations of $0.44;
•$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 businesses of $240 million, net of tax, which had a favorable impact on diluted EPS from continuing operations of $0.18.
Loss from Discontinued Operations Attributable to Common Shareowners
(dollars in millions, except per share amounts)202220212020
Loss from discontinued operations attributable to common shareowners $(19)$(33)$(410)
Diluted loss per share from discontinued operations$(0.01)$(0.02)$(0.30)
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.
Loss from discontinued operations attributable to common shareowners and the related change in diluted loss per share from discontinued operations in 2022 was relatively consistent with 2021.
The change in Loss from discontinued operations attributable to common shareowners of $377 million and the related change in diluted 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.
Net Income (Loss) Attributable to Common Shareowners
(dollars in millions, except per share amounts)202220212020
Net income (loss) attributable to common shareowners $5,197 $3,864 $(3,519)
Diluted earnings (loss) per share from operations$3.50 $2.56 $(2.59)
The changes in Net income (loss) attributable to common shareowners and diluted EPS from operations for 2022 compared to 2021 and for 2021 compared to 2020 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 Loss from Discontinued Operations Attributable to Common Shareowners.
SEGMENT REVIEW
We operate in four principal business segments: Collins, Pratt & Whitney, RIS and 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. The Company recently announced its intention to streamline the structure of its core businesses into three principal business segments: Collins Aerospace, Pratt & Whitney and Raytheon. The Company plans to determine the exact composition of each segment and implement the reorganization in the second half of 2023. All segment information included in this Form 10-K is reflective of the existing four segments of Collins, Pratt & Whitney, RIS and RMD in accordance with the management structure in place as of December 31, 2022.
For a detailed description of our businesses, see "Business" within Item 1 of this Form 10-K.
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 and Pratt & Whitney 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)202220212020
Collins Aerospace$20,597 $18,449 $19,288
Pratt & Whitney20,530 18,150 16,799
Raytheon Intelligence & Space14,312 15,180 11,069
Raytheon Missiles & Defense14,863 15,539 11,396
Total segment70,302 67,318 58,552
Eliminations and other(1)
(3,228)(2,930)(1,965)
Consolidated$67,074 $64,388 $56,587
(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)202220212020
Collins Aerospace$2,343 $1,759 $1,466
Pratt & Whitney1,075 454 (564)
Raytheon Intelligence & Space1,342 1,833 1,020
Raytheon Missiles & Defense1,519 2,004 880
Total segment6,279 6,050 2,802
Eliminations and other(1)
(174)(133)(107)
Corporate expenses and other unallocated items(2)
(318)(552)(590)
FAS/CAS operating adjustment1,520 1,796 1,106
Acquisition accounting adjustments(3)
(1,893)(2,203)(5,100)
Consolidated$5,414 $4,958 $(1,889)
(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) Includes the net expenses related to the U.S. Army's Lower Tier Air and Missile Defense Sensor (LTAMDS) project.
(3) 2020 includes the $3.2 billion goodwill impairment loss in the second quarter of 2020 related to two Collins reporting units. Refer to "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" in Item 8 of this Form 10-K for additional information.
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)202220212020
Gross favorable$1,368 $1,286 $994
Gross unfavorable(1,405)(1,176)(1,637)
Total net EAC adjustments$(37)$110 $(643)
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 period following the merger, most notably in 2020.
The change in net EAC adjustments of $147 million in 2022 compared 2021 was primarily due to unfavorable changes in net EAC adjustments of $183 million at RMD and $108 million at RIS, including the impact of acquisitions and dispositions, both spread across numerous individual programs, with no individual or common significant driver, and includes the impact of continued supply chain and labor market constraints. These unfavorable changes were partially offset by a favorable change in net EAC adjustments of $119 million at Collins, spread across numerous individual programs, with no individual or common significant driver, and a favorable change in net EAC adjustments of $26 million at Pratt & Whitney primarily due to a $50 million favorable contract adjustment resulting from a contract modification on a commercial aftermarket program in the second quarter of 2022.
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 2020, 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 spread across numerous individual programs with no individual or common significant driver.
Significant EAC adjustments, when they occur, are discussed in each business segment's discussion below.
Backlog and Defense Bookings. Total backlog was approximately $175 billion and $156 billion as of December 31, 2022 and 2021. Our backlog by segment, which does not include intercompany backlog, was as follows at December 31:
(dollars in billions)20222021
Collins Aerospace$25 $24
Pratt & Whitney100 85
Raytheon Intelligence & Space16 18
Raytheon Missiles & Defense34 29
Total backlog$175 $156
Included in total backlog is defense backlog of $69 billion and $63 billion as of December 31, 2022 and 2021, respectively. Our defense operations consist primarily of our RIS and RMD businesses and operations in the defense businesses within our Collins and Pratt & Whitney segments. Defense bookings were approximately $47 billion, $40 billion and $31 billion for 2022, 2021 and 2020 respectively. In the quarter ended March 31, 2022, we reversed $1.3 billion of total backlog related to our sales contracts in Russia at Pratt & Whitney and Collins as discussed further in "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 8 of this Form 10-K.
Backlog, which is equivalent to our 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.
Defense bookings exclude unexercised contract options and potential orders under ordering-type contracts (e.g., IDIQ type contracts). We reflect contract cancellations and terminations, 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
% Change
(dollars in millions)2022202120202022 compared with 2021
2021 compared with 2020
Net sales$20,597 $18,449 $19,288 12 %(4)%
Operating profit2,343 1,759 1,466 33 %20 %
Operating profit margins11.4 %9.5 %7.6 %
2022 Compared with 2021
Factors Contributing to Total Change
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netRestructuringCostsOtherTotal Change
Net sales$2,384 $(49)$- $(187)$2,148
Operating profit724 (12)19 (147)584
2021 Compared with 2020
Factors Contributing to Total Change
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netRestructuringCostsOtherTotal Change
Net sales$(574)$(333)$- $68 $(839)
Operating profit653 (91)320 (589)293
(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.
2022 Compared with 2021
The organic sales increase of $2.4 billion in 2022 compared to 2021 primarily relates to higher commercial aerospace aftermarket sales of $1.7 billion, including increases across all aftermarket sales channels, and higher commercial aerospace OEM sales of $1.0 billion, both principally driven by the recovery of commercial air traffic which has resulted in an increase in flight hours, aircraft fleet utilization and narrow-body commercial OEM volume growth. These increases were partially offset by lower military sales of $0.3 billion in 2022 compared to 2021 primarily due to lower material receipts and decreased volume.
The organic profit increase of $0.7 billion in 2022 compared to 2021 was primarily due to higher commercial aerospace operating profit of $1.2 billion principally driven by the higher commercial aerospace aftermarket sales discussed above, partially offset by the absence of a favorable $52 million impact from a contract-related matter in 2021. The increase in commercial aerospace operating profit was partially offset by lower military operating profit of $0.2 billion principally driven by the lower military sales discussed above, and higher selling, general and administrative expenses of $0.2 billion, which includes the benefits of cost reduction initiatives.
The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the disposition of two non-core businesses in the second quarter of 2022.
The decrease in Other operating profit of $0.1 billion in 2022 compared to 2021 primarily relates to $141 million of pretax charges related to increased estimates for credit losses, inventory reserves, recognition of purchase order obligations and a loss resulting from the exit of our investment in a Russia-based joint venture, all due to global sanctions on and export controls with respect to Russia in the first quarter of 2022. In addition, we recognized $69 million of charges associated with the disposition of two non-core businesses in the second quarter of 2022. See "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 1 of this Form 10-K for additional information on Russia sanctions.
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, predominantly 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 continued to recover from the 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 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 military GPS and space-based precision optics businesses.
Pratt & Whitney
% Change
(dollars in millions)2022202120202022 compared with 20212021 compared with 2020
Net sales$20,530$18,150$16,79913 %8 %
Operating profit (loss)1,075454(564)137 %180 %
Operating profit (loss) margins5.2 %2.5 %(3.4)%
2022 Compared with 2021
Factors Contributing to Total Change
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netRestructuringCostsOtherTotal Change
Net sales$2,478 $- $- $(98)$2,380
Operating profit (loss)773 - (13)(139)621
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
(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.
2022 Compared with 2021
The organic sales increase of $2.5 billion in 2022 compared to 2021 primarily reflects higher commercial aftermarket sales of $1.8 billion primarily due to an increase in shop visits and related spare part sales as the commercial aerospace environment continues to recover. The increase also includes higher commercial OEM sales of $0.9 billion driven by favorable mix and higher volume on commercial engine shipments. These increases were partially offset by lower military sales of $0.2 billion primarily due to lower sales on F135 production volume and lower volume on legacy aftermarket programs, partially offset by higher F135 sustainment volume.
The organic profit increase of $0.8 billion in 2022 compared to 2021 was primarily driven by higher commercial aerospace operating profit of $1.1 billion principally due to the aftermarket sales volume increase discussed above and favorable OEM mix. The organic profit increase also includes slightly higher military operating profit primarily driven by favorable mix. These increases were partially offset by a combined increase in selling, general and administrative expenses and research and development costs of $0.3 billion. The year over year increase in commercial aerospace operating profit includes a $50 million favorable contract adjustment on a commercial aftermarket program in the second quarter of 2022. In 2021, our organic profit included approximately $50 million related to foreign government wage subsidies due to COVID-19.
The decrease in other operating profit of $0.1 billion in 2022 compared to 2021 was primarily due to $155 million of pretax charges related to impairment of customer financing assets for products under lease, increased estimates for credit losses,
inventory reserves and recognition of purchase order obligations, all due to global sanctions on and export controls with respect to Russia in the first quarter of 2022. See "Note 1: Basis of Presentation and Summary of Accounting Principles" within Item 1 of this Form 10-K for additional information on Russia sanctions.
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 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 including 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 lower selling, general and administrative expenses were primarily driven by the absence of a $257 million charge in 2020 for allowances for 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.
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 2020.
Defense Bookings - In addition to a number of smaller bookings, in 2022 Pratt & Whitney booked $4.9 billion for F135 production Lots 15, 16 and 17, $1.4 billion for F135 sustainment, $251 million for tanker production Lots 7 and 8 and $210 million for F117 sustainment.
Raytheon Intelligence & Space
% Change
(dollars in millions)2022202120202022 compared with 20212021 compared with 2020
Net sales$14,312$15,180 $11,069 (6)%37 %
Operating profit1,3421,833 1,020 (27)%80 %
Operating profit margins9.4 %12.1 %9.2 %
Bookings$12,391$14,019 $10,568 (12)%33 %
2022 Compared with 2021
Factors Contributing to Total Change in Net Sales
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netOtherTotal Change
Net sales$(184)$(627)$(57)$(868)
(1) See "Segment Review" above for definition of organic. A reconciliation of these measures to reported U.S. GAAP amounts is provided in the table above.
Factors Contributing to Change in Operating Profit
(dollars in millions)VolumeNet change in EAC adjustmentsAcquisitions /Divestitures, netMix and other performanceTotal Change
Operating profit$(9)$(69)$(118)$(295)$(491)
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
2022 Compared with 2021
The organic sales decrease of $0.2 billion in 2022 compared to 2021 was driven by lower Command, Control and Communications sales of $0.3 billion partially offset by higher sales at both Cyber, Training and Services and Sensing and Effects. The lower Command, Control and Communications sales were primarily driven by an anticipated decrease in production volumes on certain tactical communications systems programs. The higher Cyber, Training and Services sales were driven by certain classified cyber programs. The higher Sensing and Effects sales were primarily driven by an increase in sales on classified programs and an increase due to certain electro-optical development programs transitioning into production, partially offset by a decrease in surveillance and targeting systems due to lower production volume on certain legacy programs.
The decrease in operating profit of $0.5 billion and the related decrease in operating profit margins in 2022 compared to 2021, were primarily due to an unfavorable change in mix and other performance of $0.3 billion driven by the absence of a prior year $239 million gain, net of transaction costs, on the sale of the global training and services business, as further discussed in "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K and acquisition / divestitures, net of $0.1 billion described below.
The decrease in net sales and operating profit due to acquisitions / divestitures, net primarily relates to the sale of the global training and services business in the fourth quarter of 2021.
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, a favorable change 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 in 2020 for loss reserves related to a domestic classified fixed price development program in a net loss position.
Backlog and Bookings - Backlog was $16 billion at December 31, 2022 compared to $18 billion at December 31, 2021. In addition to a number of smaller bookings, in 2022, RIS booked $5.0 billion on a number of classified contracts, and a major award for a prototype Missile Track Custody system for the U.S. Space Force. RIS also booked $311 million on the Next-Generation Overhead Persistent Infrared (Next-Gen OPIR) GEO missile warning and defense contract for the U.S. Space Force, $271 million to provide communications satellite payloads to a commercial customer, and $253 million on the Development, Operations and Maintenance (DOMino) cyber program for the Department of Homeland Security (DHS).
Raytheon Missiles & Defense
% Change
(dollars in millions)2022202120202022 compared with 20212021 compared with 2020
Net sales$14,863$15,539 $11,396 (4)%36 %
Operating profit1,5192,004 880 (24)%128 %
Operating profit margins10.2 %12.9 %7.7 %
Bookings$20,048$15,650 $9,716 28 %61 %
2022 Compared with 2021
Factors Contributing to Total Change in Net Sales
(dollars in millions)Organic(1)
Acquisitions /Divestitures, netOtherTotal Change
Net sales$(628)$- $(48)$(676)
(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$(25)$(183)$- $(277)$(485)
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
2022 Compared with 2021
The organic sales decrease of $0.6 billion in 2022 compared to 2021 was primarily due to lower net sales of $0.7 billion from our Land Warfare and Air Defense programs, lower net sales of $0.3 billion from our Air Power programs, and lower net sales of $0.2 billion on our Naval Power programs. These decreases were partially offset by higher net sales of $0.4 billion from our Strategic Missile Defense programs. The decrease in Land Warfare and Air Defense programs includes lower sales on certain international air and missile defense programs primarily driven by lower material receipts as a result of supply chain constraints and anticipated decreases in production. The decrease in Air Power programs includes lower net sales on the Paveway program and the Advanced Medium Range Air-to-Air Missile (AMRAAM) program. The lower net sales in Naval Power programs was driven by lower volume across multiple programs, partially offset by higher net sales from SPY-6 programs. The increased sales in Strategic Missile Defense programs included higher net sales from the Next Generation Interceptor (NGI) program.
The decrease in operating profit of $0.5 billion and the related decrease in operating profit margins in 2022 compared to 2021 were primarily due to a change in mix and other performance of $0.3 billion and a net unfavorable change in EAC adjustments of $0.2 billion. The change in mix and other performance includes unfavorable program mix and a $42 million charge associated with a divestiture of a small non-core Naval Power business. The net unfavorable change in EAC adjustments was spread across numerous programs and includes the impact of continued supply chain and labor market constraints.
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 $0.6 billion, 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 $0.5 billion due to the Raytheon merger on April 3, 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.
Backlog and Bookings- Backlog was $34 billion at December 31, 2022 compared to $29 billion at December 31, 2021. In 2022, RMD booked $3.5 billion on a number of classified contracts, including a strategic competitive award. RMD also booked $1.1 billion for the SPY-6 Hardware Production and Sustainment contract for the U.S. Navy, $1.0 billion to provide Guidance Enhanced Missile (GEM-T) for an international customer, $1.0 billion for the first Hypersonic Attack Cruise Missile (HACM) for the U.S. Air Force, $972 million for AMRAAM for the U.S. Air Force and Navy and international customers, $762 million for AIM-9X Sidewinder short-range air-to-air missiles for the U.S. Navy and Air Force and international customers, $698 million to provide National Advanced Surface-to-Air Missile System (NASAMS) for Ukraine, $662 million on Stinger for the U.S. Army, $648 million for Standard Missile-3 (SM-3) for the Missile Defense Agency (MDA), $415 million on Evolved Seasparrow Missile (ESSM) for the U.S. Navy and international customers, $405 million on a Surveillance Radar Program (SRP) for an international customer, $384 million for Excalibur Rapid Demonstration Phase 2 for the U.S. Army, $353 million for the Lower Tier Air and Missile Defense Sensor (LTAMDS) Pre-planned Product Improvement program for the U.S. Army, $247 million on MIR replenishment for an international customer through our consolidated Raytheon-Rafael joint venture, $218 million to provide Patriot engineering support services for the U.S. Army and international customers, $217 million on Tomahawk for the U.S. Navy, $209 million for Naval Strike Missiles (NSM) Coastal Defense System (CDS) for the U.S. Navy, and $207 million for integrated effectors and sensors for Counter-Unmanned Aircraft Systems (C-UAS) defense system for the U.S. Army.
Corporate and Eliminations and other
Eliminations and other reflects the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller non-reportable business segments, including Forcepoint, which was acquired as part of the Raytheon merger and subsequently disposed of on January 8, 2021, as further discussed in "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
Corporate expenses and other unallocated items consists of costs and certain other unallowable corporate costs not considered part of management's evaluation of reportable segment operating performance including restructuring and merger costs related to the Raytheon merger, net costs associated with corporate research and development, including the LTAMDS program and certain reserves.
Net SalesOperating Profit
(dollars in millions)202220212020202220212020
Eliminations and other$(3,228)$(2,930)$(1,965)$(174)$(133)$(107)
Corporate expenses and other unallocated items- - - (318)(552)(590)
The increase in eliminations and other sales in 2022 compared to 2021 was primarily due to an increase in intersegment eliminations, principally driven by Collins and RIS. Eliminations and other operating profit in 2022 was relatively consistent with 2021.
The increase in eliminations and other sales in 2021 compared to 2020 was primarily due to the sale of our Forcepoint business in the first quarter of 2021 and an increase in intersegment eliminations, principally driven by RIS. The change in eliminations and other operating profit in 2021 compared to 2020 was primarily due to the sale of our Forcepoint business in the first quarter of 2021.
The change in corporate expenses and other unallocated items of $234 million in 2022 compared to 2021 was primarily driven by the absence of an accrual of $147 million in the fourth quarter of 2021 related to the ongoing DOJ investigation into contract pricing matters at RMD, a decrease in expenses related to the LTAMDS project and lower restructuring costs, partially offset by an increase in information technology-related costs.
The change in corporate expenses and other unallocated items of $38 million in 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 $147 million in the fourth quarter of 2021 related to the ongoing DOJ investigation into contract pricing matters at RMD and an increase in net expenses related to the LTAMDS project.
FAS/CAS operating adjustment
The segment results of RIS and RMD include pension and PRB expense as determined under U.S. government Cost Accounting Standards (CAS), which we generally recover through the pricing of our products and services to the U.S. government. The difference between our CAS expense and the Financial Accounting Standards (FAS) service cost attributable to these segments under U.S. GAAP is the FAS/CAS operating adjustment. The FAS/CAS operating adjustment results in
consolidated pension expense in operating profit equal to the service cost component of FAS expense under U.S. GAAP. The segment results of Collins Aerospace and Pratt & Whitney generally include FAS service cost.
The CAS expense calculation is different from the FAS requirements and calculation methodology. While the ultimate liability for pension costs under FAS and CAS is similar, the pattern of cost recognition is different. Our CAS pension expense is comprised primarily of CAS service cost, as well as amortization amounts resulting from demographic or economic experience different than expected, changes in assumptions, or changes in plan provisions. Unlike FAS, CAS expense is only recognized for plans that are not fully funded. Consequently, if plans become or cease to be fully funded under CAS due to our asset or liability experience, our CAS expense will change accordingly.
The components of the FAS/CAS operating adjustment were as follows:
(dollars in millions)202220212020
FAS service cost (expense)$(365)$(405)$(354)
CAS expense1,885 2,201 1,460
FAS/CAS operating adjustment$1,520 $1,796 $1,106
The change in our FAS/CAS operating adjustment of $276 million in 2022 compared to 2021 was driven by a $316 million decrease in CAS expense, partially offset by a $40 million decrease in FAS service cost. The decrease in CAS expense was primarily due to an increase in applicable discount rates as a result of U.S. qualified pension plan funding relief included in the American Rescue Plan Act of 2021 (ARPA).
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 $51 million increase in FAS service cost. The increase in our CAS expense was primarily due to the Raytheon merger.
In December 2020, we approved a change to the Raytheon Company domestic defined benefit pension plans for non-union participants to cease future benefit accruals based on an employee's years of service and compensation under the historical formula effective December 31, 2022. The plan change does not impact participants' historical benefit accruals. Benefits for service after December 31, 2022 will be based on a cash balance formula.
Acquisition accounting adjustments
Acquisition accounting adjustments include the amortization of acquired intangible assets related to acquisitions, the amortization of the property, plant and equipment fair value adjustment acquired through acquisitions, the amortization of customer contractual obligations related to loss making or below market contracts acquired, and goodwill impairment. These adjustments are not considered part of management's evaluation of segment results.
The components of Acquisition accounting adjustments were as follows:
(dollars in millions)202220212020
Goodwill impairment charge$- $- $(3,183)
Amortization of acquired intangibles (1,912)(2,404)(2,142)
Amortization of property, plant and equipment fair value adjustment(89)(111)(69)
Amortization of customer contractual obligations related to acquired loss-making and below-market contracts108 312 294
Acquisition accounting adjustments$(1,893)$(2,203)$(5,100)
Acquisition accounting adjustments related to acquisitions in each segment were as follows:
(dollars in millions)202220212020
Collins Aerospace$(800)$(641)$(3,926)
Pratt & Whitney(243)(160)(117)
Raytheon Intelligence & Space(303)(563)(394)
Raytheon Missiles & Defense(547)(838)(607)
Total segment(1,893)(2,202)(5,044)
Eliminations and other- (1)(56)
Acquisition accounting adjustments$(1,893)$(2,203)$(5,100)
The change in the Acquisition accounting adjustments of $0.3 billion in 2022 compared to 2021, is primarily driven by a decrease in RIS and RMD intangibles amortization related to the Raytheon merger, partially offset by the absence of $116 million of amortization of customer contractual obligations due to the accelerated liquidation of below-market contract reserves at Collins in 2021 driven by the termination of two customer contracts.
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 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 2020. 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 at Collins 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.
LIQUIDITY AND FINANCIAL CONDITION
(dollars in millions)20222021
Cash and cash equivalents$6,220 $7,832
Total debt31,914 31,485
Total equity74,178 74,664
Total capitalization (total debt plus total equity)106,092 106,149
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.
At December 31, 2022, we had cash and cash equivalents of $6.2 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, 2022, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $7.0 billion, consisting of a $5.0 billion revolving credit agreement, which expires in April 2025, and a $2.0 billion revolving credit agreement, which was renewed in September 2022 and expires in September 2023. As of December 31, 2022, there were no borrowings outstanding under these agreements.
From time to time, we use commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The commercial paper notes have original maturities of not more than 364 days from the date of issuance. As of December 31, 2022, our maximum commercial paper borrowing limit was $5.0 billion as the commercial paper is backed by our $5.0 billion revolving credit agreement. We had $0.5 billion of commercial paper outstanding at December 31, 2022, which is reflected in Short-term borrowings in our Consolidated Balance Sheet. The proceeds from these borrowings have primarily been used to
fund payments related to the impact of a provision enacted in the Tax Cuts and Jobs Act of 2017 requiring the capitalization of research and experimental expenditures for tax purposes. At December 31, 2022, short-term commercial paper borrowings outstanding had a weighted-average interest rate of 4.4%.
We have an existing universal shelf registration statement, which we filed with the Securities and Exchange Commission (SEC) on September 22, 2022, for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement.
The Company offers voluntary supply chain finance (SCF) programs with global financial institutions which enables our suppliers, at their sole discretion, to sell their receivables from the Company to the financial institutions at a rate that leverages our credit rating, which might be beneficial to them. Our suppliers' participation in the SCF programs 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 programs. In addition, we do not pay for any of the costs of the programs incurred by those suppliers that choose to participate, and have no direct financial relationship with the financial institutions, as it relates to sales of receivables made by those suppliers. As such, the SCF programs do not impact our working capital, cash flows or overall liquidity.
We believe our cash on hand and future operating cash flows will be sufficient to meet our future operating cash needs. Further, we continue to have access to the commercial paper markets and our existing credit facilities, and our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.
Cash Flow - Operating Activities
(dollars in millions)202220212020
Net cash flows provided by operating activities from continuing operations$7,168 $7,142 $4,334
Net cash flows used in operating activities from discontinued operations- (71)(728)
2022 Compared with 2021 Operating Activities - Continuing Operations
Cash flows provided by operating activities in 2022 were relatively consistent with 2021 and benefited from an improvement in working capital, which was more than offset by the net increase in tax payments resulting from a change in tax law discussed below. Included in the change in working capital was a favorable impact from accounts receivable driven by higher collections resulting from increased sales volume and a related increase in factoring as discussed below. The change in working capital also included a favorable impact from contract assets compared to 2021 primarily due to the timing of billings and collections, and increases in accounts payable and accrued liabilities primarily driven by higher inventory purchasing activity, deferred revenue and advanced payments. This impact was largely offset by an unfavorable impact from inventory principally due to current year increases to support sales volume growth.
The Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Higher sales volume in the current year supported increased factoring activity that resulted in approximately $2.3 billion of increased cash flows provided by operating activities during 2022, compared to a decrease in cash flows provided by operating activities of $0.2 billion during 2021. Factoring activity includes amounts factored on certain aerospace receivables at the customers' request for which we may be compensated by the customer.
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 and Pratt & Whitney due to an increase in sales volume as commercial aerospace recovered.
Factoring activity resulted in a decrease of approximately $0.2 billion in cash provided by operating activities during 2021, compared to a decrease of approximately $1.3 billion in cash provided by operating activities during 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.
Operating Activities - Continuing Operations
We made pension and PRB contributions to trusts of $94 million, $59 million, and $1,025 million in 2022, 2021, and 2020, 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, 2022, the total investment by the U.S. qualified pension plans in RTC shares was less than 1% of total plan assets.
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 extended and expanded 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. Global pension and PRB cash funding requirements are expected to be approximately $0.4 billion in 2023, which includes benefit payments to be paid directly by the company.
We made net tax payments of $2.4 billion, $1.1 billion, and $1.7 billion in 2022, 2021, and 2020, respectively. A provision enacted in the Tax Cuts and Jobs Act of 2017 related to the capitalization of research and experimental expenditures for tax purposes became effective on January 1, 2022. As this provision was not deferred legislatively, we have made incremental tax payments of $1.6 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 $27.6 billion, of which $19.4 billion is payable in 2023. 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
Cash flows provided by operating activities from discontinued operations in 2022 and 2021 were not significant as the Separation Transactions occurred on April 3, 2020. The $657 million increase in cash flows provided by operating activities from discontinued operations in 2021 compared to 2020 was primarily driven by the absence of prior year separation costs as the Separation Transactions occurred in 2020.
Cash Flow - Investing Activities
(dollars in millions)202220212020
Net cash flows (used in) provided by investing activities from continuing operations$(2,829)$(1,364)$3,343
Net cash flows used in investing activities from discontinued operations- - (241)
Our investing activities primarily include capital expenditures, cash investments in customer financing assets, investments in and dispositions of businesses, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, and settlements of derivative contracts not designated as hedging instruments.
2022 Compared with 2021 Investing Activities - Continuing Operations
The $1.5 billion change in cash flows (used in) provided by investing activities in 2022 compared to 2021 primarily relates to the absence of 2021 investments in and dispositions of businesses, as discussed below.
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 2020 of $3.2 billion, and investments in and dispositions of businesses, as discussed below.
Investing Activities - Continuing Operations
There were no material acquisitions in 2022. Investments in businesses in 2021 of $1.1 billion primarily related to the acquisitions of FlightAware at Collins and SEAKR Engineering Inc. at RIS. Investments in businesses in 2020 of $0.4 billion primarily related to the acquisition of Blue Canyon Technologies at RIS. For additional detail, see "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
There were no material dispositions of businesses in 2022. 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 military GPS and space-based precision optics businesses. For additional detail, see "Note 2: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" within Item 8 of this Form 10-K.
Capital expenditures were $2.3 billion, $2.1 billion and $1.8 billion in 2022, 2021, and 2020, respectively. Capital expenditures increased $154 million in 2022 compared to 2021, primarily due to investments in production facilities at Pratt & Whitney. Capital expenditures increased $339 million in 2021 from 2020, primarily due to increases at RIS and RMD principally driven by the Raytheon merger and increases at Pratt & Whitney.
Payments on customer financing assets were $150 million, $231 million, and $280 million in 2022, 2021 and 2020, respectively. The decrease in payments in 2022 compared to 2021 was primarily due to fewer engines added to our leased asset pool. 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. Receipts from customer financing assets were $179 million, $389 million and $368 million in 2022, 2021 and 2020, respectively. The decrease in receipts in 2022 compared to 2021 was primarily driven by the absence of the prior year sale and leaseback transaction. Receipts in 2021 were relatively consistent with 2020, as both periods included similar sale and leaseback transactions for the sale of equipment. Refer to "Note 12: Leases" within Item 8 of this Form 10-K for additional discussion of these transactions.
In 2022, 2021, and 2020 we increased other intangible assets by approximately $487 million, $308 million, $312 million, respectively, which primarily relates to collaboration payment commitments made under our 2012 agreement to acquire Rolls-Royce's collaboration interests in International Aero Engines AG (IAE) and exclusivity payments made on contractual commitments included within intangible assets that are amortized over the term of the underlying economic benefit. At December 31, 2022, we had commercial aerospace financing and other contractual commitments, including exclusivity and collaboration payment commitments, of approximately $15.3 billion, on a gross basis before reduction for our collaboration partners' share. Refer to "Note 18: 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 14: 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 2022, 2021, and 2020 we had net cash payments of $205 million, $16 million, and $32 million, respectively, from the settlement of these derivative instruments not designated as hedging instruments.
Investing Activities - Discontinued Operations
Cash flows used in investing activities from discontinued operations in 2022 and 2021 were not significant as the Separation Transactions occurred on April 3, 2020. The $241 million decrease in cash flows used in investing activities from discontinued operations in 2021 compared to 2020 was due to the fact that the Separation Transactions occurred in 2020.
Cash Flow - Financing Activities
(dollars in millions)202220212020
Net cash flows used in financing activities from continuing operations$(5,859)$(6,756)$(3,860)
Net cash flows provided by (used in) financing activities from discontinued operations- 71 (1,414)
Our financing activities primarily include the issuance and repayment of commercial paper and other short-term and long-term debt, payment of dividends and stock repurchases.
2022 Compared with 2021 Financing Activities- Continuing Operations
The $0.9 billion change in cash flows used in financing activities in 2022 compared to 2021 was primarily driven by the absence of 2021 repayments of long-term debt, including debt extinguishment costs, net of issuances of $0.8 billion and an increase in commercial paper borrowings, net of $0.7 billion, partially offset by an increase in share repurchases of $0.5 billion, as discussed below.
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.
Financing Activities- Continuing Operations
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, 2022 was as follows:
Payments Due by Period
(dollars in millions)202320242025Thereafter
Long-term debt-principal$588 $1,270 $1,590 $27,801
Long-term debt-future interest1,257 1,220 1,193 14,552
Our share repurchases were as follows for the years ended December 31:
(dollars in millions; shares in thousands)202220212020
$Shares$Shares$Shares
Shares of common stock repurchased (1)
$2,803 29,943 $2,327 28,003 $47 330
(1) Relates to share repurchases that were settled in cash during the period.
At December 31, 2022, management had remaining authority to repurchase approximately $6.0 billion of our common stock under the December 12, 2022 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)202220212020
Dividends paid per share of common stock$2.160 $2.005 $2.160
Total dividends paid$3,128 $2,957 $2,732
On February 3, 2023, the Board of Directors declared a dividend of $0.55 per share payable March 23, 2023 to shareowners of record at the close of business on February 24, 2023.
Financing Activities - Discontinued Operations
Cash flows provided by financing activities from discontinued operations in 2022 and 2021 were not significant as the Separation Transactions occurred on April 3, 2020. The $1.5 billion decrease in cash flows used in financing activities from discontinued operations in 2021 compared to 2020 was due to the fact that the Separation Transactions occurred in 2020.
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 Estimates at Completion (EACs) at least annually or when a change in circumstances warrants a modification to a previous estimate. For significant contracts, we review our EACs more frequently. Due to the nature of the work required to be performed on many of the Company's performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment by management on a contract by contract basis. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities relate to management's judgment about the ability and cost to achieve the schedule, consideration of customer-directed delays or reductions in scheduled deliveries, technical requirements, customer activity levels, such as flight hours or aircraft landings, and related variable consideration. Management 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, including any impact from rising costs or inflation, 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 changes. Cost estimates may also include the estimated cost of satisfying our industrial cooperation agreements, sometimes in the form of either offset obligations or in-country industrial participation (ICIP) agreements, required under certain contracts. These obligations may or may not be distinct depending on their nature. If cash is paid to a customer to satisfy our offset obligations it is recorded as a reduction in the transaction price. Changes in estimates of net sales, cost of sales and the related impact to operating profit on contracts recognized over time are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation's percentage of completion in the current period. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. Our EAC adjustments also include the establishment of and changes to loss provisions for 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)202220212020
Total net sales$152 $296 $(407)
Operating profit (loss)(37)110 (643)
Income (loss) from continuing operations attributable to common shareowners (1)
(29)87 (508)
Diluted earnings (loss) per share from continuing operations attributable to common shareowners (1)
$(0.02)$0.06 $(0.37)
(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. This had the impact of reducing EAC adjustments for these segments in the short term period following the merger, most notably in 2020. 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 certain 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 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 in conjunction with the related impacts of the COVID 19 pandemic.
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. Management 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, 2022, our exclusivity assets, net of accumulated amortization, were approximately $2.6 billion, and our remaining estimated commitments, net of collaborator share, were approximately $6.2 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 testing our reporting units and indefinite-lived intangible assets for impairment, we may perform both qualitative and quantitative assessments. For the quantitative assessments that are performed for goodwill, we utilize a combination of discounted cash flows (DCF) and market-based valuation methodologies. For the quantitative assessments of indefinite-lived intangible assets, fair value is primarily based on the relief from royalty method. These quantitative assessments incorporate significant assumptions that include sales growth rates, projected operating profit, terminal growth rates, discount rates, royalty rates and comparable multiples from publicly traded companies in our industry. 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, 2022 and determined that no adjustments to the carrying value of goodwill were necessary. For those reporting units where we performed a quantitative test, we estimated the fair value of our reporting units using a combination of DCF and market-based valuation methodologies. As noted above, these methodologies involve significant assumptions that are subject to variability. The key assumptions used in our quantitative 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, the discount rate, and comparable multiples from publicly traded companies in our industry. We consider both internal and external factors and refresh key assumptions annually or as considered necessary. Material changes in these estimates could occur and result in impairments in future periods.
Based on our annual impairment analysis as of October 1, 2022, the reporting units that were closest to impairment were two previously combined Collins reporting units with fair values in excess of book values, including goodwill, of 15% and 17%. The combined value of goodwill allocated to these two reporting units is approximately $9.5 billion as of the date testing was performed. All other reporting units 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 significant assumptions noted above, 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 or in the inputs and assumptions used in estimating the fair value of our reporting units, could require the Company to record a non-cash impairment charge.
In 2020, we recognized goodwill impairments of $3.2 billion related to two Collins 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, 2022 and determined that no adjustments to the carrying value of these assets were necessary. As noted above, our indefinite-lived intangible assets impairment analysis involves significant assumptions that are subject to variability. Material changes in these assumptions could occur and result in impairments in future periods.
Contingent Liabilities. As described in "Note 18: 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, 2022:
(dollars in millions)Increase in Discount Rate of 25 bpsDecrease in Discount Rate of 25 bps
Projected benefit obligation increase (decrease)$(1,144)$1,194
Net periodic benefit income increase (decrease)(23)28
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 consult with and consider the opinions of financial and other professionals in determining the appropriate capital market assumptions. Return projections are validated using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns. As a result of this analysis at year end 2022, our weighted average pension EROA assumption for 2023 increased to 7.1%. 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 2022 net periodic benefit income by approximately $139 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 18: 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 18: Commitments and Contingencies" within Item 8 of this Form 10-K for further discussion of these and other government matters.