Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K
 
  
CURRENT REPORT

Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Date of Report (date of earliest event reported): May 7, 2020
________________________________________________________________________________
RAYTHEON TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
________________________________________________________________________________ 
Delaware
001-00812
06-0570975
(State of Incorporation)
(Commission File Number)
(IRS Employer Identification Number)

870 Winter Street
Waltham, Massachusetts 02451
(Address of Principal Executive Offices) (Zip Code)
 
(Registrant’s telephone number, including area code)
(781) 522-3000

(Former name or former address, if changed since last report)
____________________________________________________________________________________________________________________________________________________________________________________

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Common Stock ($1 par value)
 
RTX
 
New York Stock Exchange
(CUSIP 75513E 101)
 
 
 
 
2.150% Notes due 2030
 
RTX 30
 
New York Stock Exchange
(CUSIP 75513E AB7)
 
 
 
 
Floating Rate Notes due 2020
 
RTX 20B
 
New York Stock Exchange
(CUSIP 75513E AA9)
 
 
 
 
____________________________________________________________________________________________________________________________________________________________________________________





Item 8.01. Other Events.

Raytheon Technologies Corporation (formerly known as United Technologies Corporation) (“RTC” or the “Company”) is filing this Current Report on Form 8-K to provide certain financial information with respect to Raytheon Company, a Delaware corporation (“Raytheon”), and pro forma financial information reflecting the Separation, the Distributions and the Merger (all as defined below). As previously reported, on April 3, 2020, the Company completed the previously announced separation of its business into three independent, publicly traded companies – Carrier Global Corporation (“Carrier”), Otis Worldwide Corporation (“Otis”) and the Company (the “Separation”). The Separation was effected by the distributions (the “Distributions”) of all of the outstanding shares of common stock of Carrier and all of the outstanding shares of common stock of Otis to the Company’s shareowners who held shares of the Company’s common stock as of the close of business on March 19, 2020. Also as previously reported, on April 3, 2020, following the completion of the Distributions and pursuant to the terms and conditions of the Agreement and Plan of Merger, dated as of June 9, 2019, and amended as of March 9, 2020, by and among the Company, Light Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub”), and Raytheon, Merger Sub merged with and into Raytheon (the “Merger”), with Raytheon surviving the Merger as a wholly owned subsidiary of the Company. At the effective time of the Merger, the Company changed its name to “Raytheon Technologies Corporation”. For certain additional information relating to the completion of the Separation, the Distributions and the Merger, please refer to the Current Report on Form 8-K filed by the Company on April 8, 2020.

Included in this Current Report on Form 8-K are (a) the unaudited consolidated balance sheets of Raytheon as of March 29, 2020 and December 31, 2019, and the related unaudited consolidated statements of operations, comprehensive income, equity and cash flows for the quarterly periods ended March 29, 2020 and March 31, 2019, including the related notes, which are attached hereto as Exhibit 99.1 and incorporated by reference herein and (b) the unaudited pro forma combined financial information of RTC reflecting the Separation, the Distributions and the Merger, including the unaudited pro forma combined balance sheet as of March 31, 2020 and the unaudited pro forma combined statement of operations for the quarterly period ended March 31, 2020, which are attached hereto as Exhibit 99.2 and incorporated by reference herein.
 
Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The unaudited consolidated balance sheets of Raytheon as of March 29, 2020 and December 31, 2019, and the related unaudited consolidated statements of operations, comprehensive income, equity and cash flows for the quarterly periods ended March 29, 2020 and March 31, 2019, including the related notes, are attached hereto as Exhibit 99.1 and incorporated by reference herein.

(b) Pro Forma Financial Information.
 
The unaudited pro forma combined financial information of RTC reflecting the Separation, the Distributions and the Merger, including the unaudited pro forma combined balance sheet as of March 31, 2020 and the unaudited pro forma combined statement of operations for the quarterly period ended March 31, 2020, are attached hereto as Exhibit 99.2 and incorporated by reference herein.

(d) Exhibits

Unaudited consolidated financial statements (and notes thereto) of Raytheon Company as of March 29, 2020 and December 31, 2019 and for the quarterly periods ended March 29, 2020 and March 31, 2019
Unaudited pro forma combined financial information of RTC as of March 31, 2020 and for the quarterly period ended March 31, 2020
104
Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document


2




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
 
RAYTHEON TECHNOLOGIES CORPORATION
 
 
 
 
 
 
Date:
May 7, 2020
By:
/s/ Anthony F. O’Brien
 
 
 
 
Name: Anthony F. O’Brien
 
 
 
 
Title: Executive Vice President and Chief Financial Officer
 
 
 
 
 
 



3
Exhibit
Exhibit 99.1


















RAYTHEON COMPANY
(A Delaware Company)
Consolidated Financial Statements
For the Quarters Ended March 29, 2020 and March 31, 2019



RAYTHEON COMPANY
TABLE OF CONTENTS
 

2


FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS
RAYTHEON COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions, except per share amounts)
 
Mar 29, 2020
 
Dec 31, 2019
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
3,118

 
$
4,292

Receivables, net
 
1,784

 
1,364

Contract assets
 
6,054

 
6,122

Inventories
 
699

 
671

Prepaid expenses and other current assets
 
611

 
633

Total current assets
 
12,266

 
13,082

Property, plant and equipment, net
 
3,366

 
3,353

Operating lease right-of-use assets
 
909

 
875

Goodwill
 
14,879

 
14,882

Other assets, net
 
2,290

 
2,374

Total assets
 
$
33,710

 
$
34,566

 
 
 
 
 
Liabilities, Redeemable Noncontrolling Interests and Equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
999

 
$
1,499

Contract liabilities
 
3,085

 
3,267

Accounts payable
 
1,489

 
1,796

Accrued employee compensation
 
1,062

 
1,813

Other current liabilities
 
1,293

 
1,416

Total current liabilities
 
7,928

 
9,791

Accrued retiree benefits and other long-term liabilities
 
8,521

 
8,553

Long-term debt
 
3,262

 
3,261

Operating lease liabilities
 
738

 
706

Commitments and contingencies (Note 8)
 


 

 
 
 
 
 
Redeemable noncontrolling interests
 
34

 
32

 
 
 
 
 
Equity
 
 
 
 
Raytheon Company stockholders’ equity
 
 
 
 
Common stock, par value, $0.01 per share, 1,450 shares authorized, 279 and 278 shares outstanding at March 29, 2020 and December 31, 2019, respectively
 
3

 
3

Additional paid-in capital
 
19

 

Accumulated other comprehensive loss
 
(9,063
)
 
(9,260
)
Retained earnings
 
22,268

 
21,480

Total Raytheon Company stockholders’ equity
 
13,227

 
12,223

Noncontrolling interests in subsidiaries
 

 

Total equity
 
13,227

 
12,223

Total liabilities, redeemable noncontrolling interests and equity
 
$
33,710

 
$
34,566


The accompanying notes are an integral part of the unaudited consolidated financial statements.

3


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
 
Three Months Ended
(In millions, except per share amounts)
 
Mar 29, 2020
 
Mar 31, 2019
Net sales
 
 
 
 
Products
 
$
6,005

 
$
5,562

Services
 
1,160

 
1,167

Total net sales
 
7,165

 
6,729

Operating expenses
 
 
 
 
Cost of sales—products
 
4,338

 
4,002

Cost of sales—services
 
907

 
875

General and administrative expenses
 
728

 
739

Total operating expenses
 
5,973

 
5,616

Operating income
 
1,192

 
1,113

Non-operating (income) expense, net
 
 
 
 
Retirement benefits non-service expense
 
192

 
181

Interest expense
 
43

 
44

Interest income
 
(11
)
 
(13
)
Other (income) expense, net
 
25

 
(20
)
Total non-operating (income) expense, net
 
249

 
192

Income before taxes
 
943

 
921

Federal and foreign income taxes
 
153

 
146

Net income
 
790

 
775

Less: Net income (loss) attributable to noncontrolling interests in subsidiaries
 
2

 
(6
)
Net income attributable to Raytheon Company
 
$
788

 
$
781


The accompanying notes are an integral part of the unaudited consolidated financial statements.

4


RAYTHEON COMPANY 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 
Three Months Ended
(In millions)
Mar 29, 2020

 
Mar 31, 2019

Net income
$
790

 
$
775

Other comprehensive income (loss), before tax:
 
 
 
Pension and other postretirement benefit plans, net:
 
 
 
Amortization of prior service cost
1

 
1

Amortization of net actuarial loss
303

 
276

Pension and other postretirement benefit plans, net
304

 
277

Foreign exchange translation
(45
)
 
8

Cash flow hedges
2

 
(10
)
Unrealized gains (losses) on investments and other, net

 

Other comprehensive income (loss), before tax
261

 
275

Income tax benefit (expense) related to items of other comprehensive income (loss)
(64
)
 
(56
)
Other comprehensive income (loss), net of tax
197

 
219

Total comprehensive income (loss)
987

 
994

Less: Comprehensive income (loss) attributable to noncontrolling interests in subsidiaries
2

 
(6
)
Comprehensive income (loss) attributable to Raytheon Company
$
985

 
$
1,000


The accompanying notes are an integral part of the unaudited consolidated financial statements.


5


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
 
(In millions)
 
Common stock

 
Additional paid-in capital

 
Accumulated other comprehensive income (loss)

 
Retained earnings

 
Total Raytheon Company stockholders’ equity

 
Noncontrolling interests in subsidiaries(1)

 
Total equity

Balance at December 31, 2019
 
$
3

 
$

 
$
(9,260
)
 
$
21,480

 
$
12,223

 
$

 
$
12,223

Net income (loss)
 
 
 
 

 
 
 
788

 
788

 

 
788

Other comprehensive income (loss), net of tax
 
 
 
 
 
197

 
 
 
197

 
 
 
197

Dividends declared
 
 
 

 
 
 

 

 
 
 

Common stock plans activity
 
 
 
68

 
 
 
 
 
68

 
 
 
68

Share repurchases
 
 
 
(49
)
 
 
 
 
 
(49
)
 
 
 
(49
)
Balance at March 29, 2020
 
$
3

 
$
19

 
$
(9,063
)
 
$
22,268

 
$
13,227

 
$

 
$
13,227

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
$
3

 
$

 
$
(8,618
)
 
$
20,087

 
$
11,472

 
$

 
$
11,472

Net income (loss)
 
 
 
 
 
 
 
781

 
781

 

 
781

Other comprehensive income (loss), net of tax
 
 
 
 
 
219

 
 
 
219

 
 
 
219

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
5

 
5

 
 
 
5

Dividends declared
 
 
 
1

 
 
 
(265
)
 
(264
)
 
 
 
(264
)
Common stock plans activity
 
 
 
61

 
 
 
 
 
61

 
 
 
61

Share repurchases
 
 
 
(62
)
 
 
 
(504
)
 
(566
)
 
 
 
(566
)
Balance at March 31, 2019
 
$
3

 
$

 
$
(8,399
)
 
$
20,104

 
$
11,708

 
$

 
$
11,708

(1)
Excludes redeemable noncontrolling interests which are not considered equity.
The accompanying notes are an integral part of the unaudited consolidated financial statements.

6


RAYTHEON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
(In millions)
 
Mar 29, 2020
 
Mar 31, 2019
Cash flows from operating activities
 
 
 
 
Net income
 
$
790

 
$
775

Adjustments to reconcile to net cash provided by (used in) operating activities, net of the effect of acquisitions and divestitures
 
 
 
 
Depreciation and amortization
 
153

 
140

Stock-based compensation
 
52

 
59

Deferred income taxes
 
(50
)
 
(44
)
Changes in assets and liabilities
 
 
 
 
Receivables, net
 
(424
)
 
236

Contract assets and contract liabilities
 
(117
)
 
(731
)
Inventories
 
(28
)
 
(124
)
Prepaid expenses and other current assets
 
(48
)
 
(59
)
Income taxes receivable/payable
 
183

 
181

Accounts payable
 
(205
)
 
(484
)
Accrued employee compensation
 
(757
)
 
(523
)
Accrued retiree benefits
 
285

 
219

Other, net
 
68

 
(56
)
Net cash provided by (used in) operating activities
 
(98
)
 
(411
)
Cash flows from investing activities
 
 
 
 
Additions to property, plant and equipment
 
(239
)
 
(274
)
Additions to capitalized internal-use software
 
(16
)
 
(10
)
Payments for purchases of acquired companies, net of cash received
 

 
(8
)
Net cash provided by (used in) investing activities
 
(255
)
 
(292
)
Cash flows from financing activities
 
 
 
 
Dividends paid
 
(263
)
 
(245
)
Repayments of long-term debt
 
(500
)
 

Repurchases of common stock under share repurchase programs
 

 
(500
)
Repurchases of common stock to satisfy tax withholding obligations
 
(49
)
 
(66
)
Other
 
(9
)
 
(5
)
Net cash provided by (used in) financing activities
 
(821
)
 
(816
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(1,174
)
 
(1,519
)
Cash, cash equivalents and restricted cash at beginning of year
 
4,298

 
3,624

Cash, cash equivalents and restricted cash at end of period
 
$
3,124

 
$
2,105


The accompanying notes are an integral part of the unaudited consolidated financial statements.

7


RAYTHEON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation
We prepared the accompanying unaudited consolidated financial statements of Raytheon Company and all wholly-owned, majority-owned or otherwise controlled subsidiaries on the same basis as our annual audited financial statements. We omitted certain information and footnote disclosures normally included in our annual audited financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Our quarterly financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019. As used in this report, the terms “we,” “us,” “our,” “Raytheon” and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another meaning.

In the opinion of management, our financial statements reflect all adjustments, which are of a normal recurring nature, necessary for presentation of financial statements for interim periods in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates, and any such differences may be material to our financial statements. Specifically, our Estimate at Completion (EAC) process related to our long-term contracts include assumptions and estimates regarding labor productivity and availability, the availability of materials and the execution by our subcontractors, among other variables, which could change as a result of the coronavirus pandemic. For more information on our EAC process, see “Note 3: Changes in Estimates under Percentage of Completion Contract Accounting.” We have evaluated the impact of the coronavirus pandemic on the valuation of our assets, including goodwill, and have determined we do not have any impact as of March 29, 2020.

Accounting pronouncements adopted and issued but not effective until after March 29, 2020 did not and are not expected to have a material impact on our financial position, results of operations or liquidity.

Note 2: Merger with United Technologies Corporation (UTC)
Pursuant to the Agreement and Plan of Merger dated as of June 9, 2019 by and among United Technologies Corporation (UTC), Light Merger Sub Corp., a wholly owned subsidiary of UTC (Merger Sub) and Raytheon, as amended (the Merger Agreement), on April 3, 2020, Merger Sub merged with and into Raytheon (the Merger) with Raytheon becoming a wholly owned subsidiary of UTC, and UTC was renamed Raytheon Technologies Corporation (RTC). Upon completion of the Merger, pursuant to the Merger Agreement, each share of Raytheon common stock that was issued and outstanding immediately prior to the completion of the Merger (other than shares held by Raytheon as treasury stock) was converted into the right to receive 2.3348 fully paid and nonassessable shares of RTC common stock, and, if applicable, cash in lieu of fractional shares. Immediately after the Merger, former holders of Raytheon common stock owned approximately 43% and pre-Merger holders of UTC common stock owned approximately 57% of the common stock of RTC.

Note 3: Changes in Estimates under Percentage of Completion Contract Accounting
We have a companywide standard and disciplined quarterly Estimate at Completion (EAC) process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by our subcontractors, the availability and timing of funding from our customer, and overhead cost rates, among other variables. These estimates 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.

Based on this analysis, any quarterly adjustments to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the

8


cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred exceed total estimates of revenue to be earned on a performance obligation related to complex aerospace or defense equipment or related services, or product maintenance or separately priced extended warranty, a provision for the entire loss on the performance obligation is recognized in the period the loss is identified.

Net EAC adjustments had the following impact on our operating results:
 
Three Months Ended
(In millions, except per share amounts)
Mar 29, 2020
 
Mar 31, 2019
Operating income
$
198

 
$
123

Net income attributable to Raytheon Company
156

 
97



In addition, net revenue recognized from our performance obligations satisfied in previous periods was $160 million and $158 million in the first quarters of 2020 and 2019, respectively. This primarily relates to EAC adjustments that impacted revenue.

Note 4: Inventories
Inventories consisted of the following: 
(In millions)
 
Mar 29, 2020
 
Dec 31, 2019
Materials and purchased parts
 
$
76

 
$
78

Work in process
 
603

 
574

Finished goods
 
20

 
19

Total
 
$
699

 
$
671



Precontract costs are costs incurred to fulfill a contract prior to contract award. Precontract costs, including general and administrative expenses that are specifically chargeable to the customer, are deferred in inventories if we determine that the costs are probable of recovery under a specific anticipated contract. All other precontract costs, including start-up costs, are expensed as incurred. Costs that are deferred are recognized as contract costs upon the receipt of the anticipated contract. We included deferred precontract costs of $228 million and $182 million in inventories as work in process at March 29, 2020 and December 31, 2019, respectively.

Note 5: Contract Assets and Contract Liabilities
Our contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. The noncurrent portion of deferred revenue is included in accrued retiree benefits and other long-term liabilities in our consolidated balance sheets.

Net contract assets (liabilities) consisted of the following:
(In millions, except percentages)
 
Mar 29, 2020
 
Dec 31, 2019
 
$ Change
 
% Change
Contract assets
 
$
6,054

 
$
6,122

 
$
(68
)
 
(1.1
)%
Contract liabilities—current
 
(3,085
)
 
(3,267
)
 
182

 
(5.6
)%
Contract liabilities—noncurrent
 
(136
)
 
(143
)
 
7

 
(4.9
)%
Net contract assets (liabilities)
 
$
2,833

 
$
2,712

 
$
121

 
4.5
 %


The $121 million increase in our net contract assets (liabilities) from December 31, 2019 to March 29, 2020 was primarily due to a $182 million decrease in our current contract liabilities, primarily driven by revenue recognized on certain international programs with milestone payments or advances, partially offset by a $68 million decrease in our contract assets, principally due to the timing of milestone payments on certain international programs and the timing of approvals on direct commercial sales contracts for precision guided munitions to certain Middle Eastern customers, partially offset by contractual billing terms on U.S. government and foreign military sales contracts.

For direct commercial sales contracts for precision guided munitions to certain Middle Eastern customers for which we have not yet obtained the regulatory approval and licenses, we had approximately $1.2 billion of total contract value, recognized approximately $400 million of sales for work performed to date and received approximately $450 million in advances as of

9


March 29, 2020. On a contract by contract basis, we had $100 million and $150 million of net contract assets and net contract liabilities, respectively, related to the contracts pending approval.

In the first quarters of 2020 and 2019, we recognized revenue of $916 million and $894 million related to our contract liabilities at January 1, 2020 and January 1, 2019, respectively.

Impairment losses recognized on our receivables and contract assets were de minimis in the first quarters of 2020 and 2019.

Note 6: Acquisitions, Divestitures and Goodwill
In pursuing our business strategies, we acquire and make investments in certain businesses that meet strategic and financial criteria, and divest of certain non-core businesses, investments and assets when appropriate. We did not have any acquisitions or divestitures in the first quarter of 2020.

A rollforward of goodwill by segment was as follows: 
(In millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Balance at December 31, 2019
 
$
1,703

 
$
2,984

 
$
4,154

 
$
4,103

 
$
1,938

 
$
14,882

Effect of foreign exchange rates and other
 
(1
)
 
(2
)
 

 

 

 
(3
)
Balance at March 29, 2020
 
$
1,702

 
$
2,982

 
$
4,154

 
$
4,103

 
$
1,938

 
$
14,879



Note 7: Derivatives and Other Financial Instruments
Derivatives—Our primary market exposures are to foreign exchange rates and interest rates, and we use certain derivative financial instruments to help manage these exposures. We execute these instruments with financial institutions that we judge to be credit-worthy. The majority of our foreign currency forward contracts are denominated in currencies of major industrial countries. We do not hold or issue derivative financial instruments for trading or speculative purposes.

We use foreign currency forward contracts to fix the functional currency value of specific commitments, payments and receipts denominated in foreign currencies. The aggregate notional amount of our outstanding foreign currency forward contracts was $1,498 million and $1,487 million at March 29, 2020 and December 31, 2019, respectively. The net notional exposure of these contracts was $658 million and $746 million at March 29, 2020 and December 31, 2019, respectively.

The fair value of asset derivatives included in other assets, net and liability derivatives included in other current liabilities in our consolidated balance sheets related to foreign currency forward contracts were as follows:
(In millions)
 
Mar 29, 2020
 
Dec 31, 2019
Asset derivatives
 
$
38

 
$
29

Liability derivatives
 
37

 
15



The fair value of these derivatives is Level 2 in the fair value hierarchy because they are determined based on a market approach utilizing externally quoted foreign currency forward rates for similar contracts.

Our foreign currency forward contracts contain offset or netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. We measure and record the impact of counterparty credit risk into our valuation and at March 29, 2020 and December 31, 2019, the fair value of our counterparty default exposure was $1 million and less than $1 million, respectively, and was spread across numerous highly rated counterparties.

There were no interest rate swaps outstanding at March 29, 2020 or December 31, 2019.


10


Other Financial InstrumentsWe hold financial instruments, including cash and cash equivalents and long-term debt. The carrying amount for cash and cash equivalents approximated its fair value. The carrying value of long-term debt was recorded at amortized cost. The estimated fair value of long-term debt was determined based on quoted prices in inactive markets, which falls within Level 2 of the fair value hierarchy. The carrying value and estimated fair value of long-term debt were as follows:
(In millions)
 
Mar 29, 2020
 
Dec 31, 2019
Carrying value of long-term debt(1)
 
$
4,261

 
$
4,760

Fair value of long-term debt(2)
 
4,761

 
5,337


(1)
Carrying value of long-term debt at March 29, 2020 and December 31, 2019 includes current portion of long-term debt carrying value of $999 million and $1,499 million, respectively.
(2)
Fair value of long-term debt at March 29, 2020 and December 31, 2019 includes current portion of long-term debt fair value of $1,000 million and $1,513 million, respectively.

In the first quarter of 2020, we repaid $500 million of debt, which matured in February 2020, using cash on hand.

Supplemental Cash Flow Information—Cash and cash equivalents reported within our consolidated balance sheets excludes restricted cash of $6 million at both March 29, 2020 and December 31, 2019, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.

Note 8: Commitments and Contingencies
Environmental MattersWe are involved in various stages of investigation and cleanup related to remediation of various environmental sites. Our estimate of the liability of total environmental remediation costs includes the use of a discount rate and takes into account that a portion of these costs is eligible for future recovery through the pricing of our products and services to the U.S. government. We regularly assess the probability of recovery of these costs, which requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract activity. We consider such recovery probable based on government contracting regulations and our long history of receiving reimbursement for such costs, and accordingly have recorded the estimated future recovery of these costs from the U.S. government within prepaid expenses and other current assets in our consolidated balance sheets. Our estimates regarding remediation costs to be incurred were as follows:
(In millions, except percentages)
 
Mar 29, 2020
 
Dec 31, 2019
Total remediation costs—undiscounted
 
$
192

 
$
188

Weighted-average discount rate
 
5.1
%
 
5.1
%
Total remediation costs—discounted
 
$
132

 
$
124

Recoverable portion
 
86

 
81



We also lease certain government-owned properties and generally are not liable for remediation of preexisting environmental contamination at these sites. As a result, we generally do not provide for these costs in our consolidated financial statements.

Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage, and the unresolved extent of our responsibility, it is difficult to determine the ultimate outcome of environmental matters. However, we do not expect any additional liability to have a material adverse effect on our financial position, results of operations or liquidity.

Financing Arrangements and Other—We issue guarantees, and banks and surety companies issue, on our behalf, letters of credit and surety bonds, to meet various bid, performance, warranty, retention and advance payment obligations for us or our affiliates. These instruments expire on various dates through 2028. Additional guarantees of project performance for which there is no stated value also remain outstanding. The stated values outstanding consisted of the following:
(In millions)
 
Mar 29, 2020
 
Dec 31, 2019
Guarantees
 
$
224

 
$
219

Letters of credit
 
3,423

 
3,485

Surety bonds
 
71

 
83



We provide guarantees and letters of credit to certain affiliates to assist them in obtaining financing on more favorable terms, making bids on contracts and performing their contractual obligations. While we expect our affiliates to satisfy their loans and meet their project performance and other contractual obligations, their failure to do so may result in a future obligation to us. We periodically evaluate the risk of our affiliates failing to meet their obligations. At March 29, 2020, we believe the risk that our

11


affiliates will not be able to meet their obligations is minimal for the foreseeable future based on their current financial condition. All obligations were current at March 29, 2020. We had an estimated liability of $2 million and $3 million at March 29, 2020 and December 31, 2019, respectively, related to these guarantees.

We have entered into industrial cooperation agreements, sometimes in the form of either offset agreements or ICIP agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. At March 29, 2020, the aggregate amount of our offset agreements, both agreed to and anticipated to be agreed to, had an outstanding notional value of approximately $9.9 billion. These agreements are designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. Offset agreements may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects, and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for activities such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. Such activities may also vary by country depending upon requirements as dictated by their governments. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customers and typically require cash outlays that represent only a fraction of the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for penalties in the event we fail to perform in accordance with offset requirements. Historically, we have not been required to pay any penalties of significance.

As a U.S. government contractor, we are subject to many levels of audit and investigation by the U.S. government relating to our contract performance and compliance with applicable rules and regulations. Agencies that oversee contract performance include: the Defense Contract Audit Agency (DCAA); the Defense Contract Management Agency (DCMA); the Inspectors General of the U.S. Department of Defense (DoD) and other departments and agencies; the Government Accountability Office (GAO); the Department of Justice (DOJ); and Congressional Committees. Other areas of our business operations may also be subject to audit and investigation by these and/or other agencies. From time to time, agencies investigate or conduct audits to determine whether our operations are being conducted in accordance with applicable requirements. Such investigations and audits may be initiated due to a number of reasons, including as a result of a whistleblower complaint. Such investigations and audits could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, the suspension of government export licenses or the suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in no adverse action against us. Our final allowable incurred costs for each year are also subject to audit and have, from time to time, resulted in disputes between us and the U.S. government, with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA) or their related courts of appeals. In addition, the DOJ has, from time to time, convened grand juries to investigate possible irregularities by us. We also provide products and services to customers outside of the U.S., and those sales are subject to local government laws, regulations and procurement policies and practices. Our compliance with such local government regulations or any applicable U.S. government regulations (e.g., the Foreign Corrupt Practices Act (FCPA) and International Traffic in Arms Regulations (ITAR)) may also be investigated or audited. Other than as specifically disclosed herein, we do not expect these audits, investigations or disputes to have a material effect on our financial position, results of operations or liquidity, either individually or in the aggregate.

In 2019, Raytheon received a subpoena from the Securities and Exchange Commission (SEC) seeking information in connection with an investigation into whether there were improper payments made by Thales-Raytheon Systems (TRS), Raytheon or anyone acting on their behalf in connection with TRS or Raytheon contracts in certain Middle East countries since 2014. In the first quarter of 2020, the DOJ advised Raytheon it had opened a parallel investigation. Raytheon maintains a rigorous anti-corruption compliance program, is cooperating fully with the SEC’s inquiry, and is examining whether there has been any conduct that is in violation of Raytheon policy. At this point there is no ability to predict the outcome of the SEC’s or DOJ’s inquiry. Based on the information available to date, however, we do not believe the results of this inquiry will have a material adverse effect on our financial condition, results of operations or liquidity.

In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened against, or initiated by, us. We do not expect any of these proceedings to result in any additional liability or gains that would materially affect our financial position, results of operations or liquidity. In connection with certain of our legal matters, we may be entitled to insurance recovery for qualified legal costs or other incurred costs. We do not expect any insurance recovery to have a material impact on the financial exposure that could result from these matters.


12


Note 9: Stockholders’ Equity
The changes in shares of our common stock outstanding were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 29, 2020
 
Mar 31, 2019
Beginning balance
 
278.4

 
282.1

Stock plans activity
 
1.3

 
1.1

Share repurchases
 
(0.4
)
 
(3.1
)
Ending balance
 
279.3

 
280.1



From time to time, our Board of Directors authorizes the repurchase of shares of our common stock. In November 2017, our Board authorized the repurchase of up to $2.0 billion of our outstanding common stock. At March 29, 2020, we had approximately $0.7 billion available under the repurchase program. However, the Merger Agreement restricted us from repurchasing shares other than to satisfy tax withholding obligations. For more information refer to “Note 2: Merger with United Technologies Corporation (UTC).”

Share repurchases also include shares surrendered by employees to satisfy tax withholding obligations in connection with restricted stock, restricted stock units (RSUs) and Long-term Performance Plan (LTPP) awards issued to employees.

Our share repurchases were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 29, 2020
 
Mar 31, 2019
 
 
$
Shares

 
$
Shares

Shares repurchased under our share repurchase programs
 
$


 
$
500

2.8

Shares repurchased to satisfy tax withholding obligations
 
49

0.4

 
66

0.3

Total share repurchases
 
$
49

0.4

 
$
566

3.1



Our Board of Directors approved and declared dividends of $0.9425 per share during the first quarter of 2019. There were no dividends declared during the first quarter of 2020 as a result of the Merger. Dividends are subject to quarterly approval by our Board of Directors.

Stock-based Compensation Plans
Restricted Stock and RSUs—During the first quarter of 2020, we granted 1.2 million combined shares of restricted stock and RSUs with a weighted-average grant-date fair value of $145.04 per share, calculated under the intrinsic value method. These awards generally vest in equal installments on each of the second, third and fourth anniversary dates of the award’s grant date.

LTPP—During the first quarter of 2020, we granted RSUs subject to the 2020–2022 LTPP with an aggregate target award of 0.1 million units and a weighted-average grant-date fair value of $240.26 per share. The performance goals for the 2020–2022 LTPP awards are independent of each other and based on three metrics, as defined in the LTPP award agreements: return on invested capital (ROIC), weighted at 50%; total shareholder return (TSR) relative to a peer group, weighted at 25%; and cumulative free cash flow from continuing operations (CFCF), weighted at 25%. The ultimate award, which is determined at the end of the three-year cycle, can range from zero to 200% of the target award and includes dividend equivalents, which are not included in the aggregate target award numbers. The grant-date fair value is based upon the value determined under the intrinsic value method for the CFCF and ROIC portions of the award and the Monte Carlo simulation method for the TSR portion of the award.

Forcepoint Plans—Forcepoint unit appreciation rights and profits interests vest over a specified period of time and settlement is subject to a liquidity event defined as either a change in control or an initial public offering of the joint venture. In certain limited circumstances other vesting conditions may apply. The impact attributable to these other vesting conditions was income of $15 million and $2 million for the first quarters of 2020 and 2019, respectively. At March 29, 2020, there were 174 thousand combined units and/or profits interests authorized for award under these plans. The Merger does not qualify as a change in control for the Forcepoint Plan awards.


13


Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes gains and losses associated with pension and other postretirement benefit (PRB) plans, foreign exchange translation adjustments, gains and losses on derivative instruments qualified as cash flow hedges included in the assessment of effectiveness, and unrealized gains (losses) on available-for-sale investments. The computation of other comprehensive income (loss) and its components are presented in the consolidated statements of comprehensive income.
A rollforward of accumulated other comprehensive income (loss) was as follows:
 
Pension and PRB plans, net(1)

 
Foreign exchange translation

 
Cash flow hedges(2)

 
Unrealized gains (losses) on investments and other, net(3)

 
Total

 
 
 
 
 
(In millions)
 
 
 
 
Balance at December 31, 2019
$
(9,132
)
 
$
(124
)
 
$
1

 
$
(5
)
 
$
(9,260
)
Before tax amount
304

 
(45
)
 
2

 

 
261

Tax (expense) or benefit
(64
)
 

 

 

 
(64
)
Net of tax amount
240

 
(45
)
 
2

 

 
197

Balance at March 29, 2020
$
(8,892
)
 
$
(169
)
 
$
3

 
$
(5
)
 
$
(9,063
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
(8,483
)
 
$
(131
)
 
$
(2
)
 
$
(2
)
 
$
(8,618
)
Before tax amount
277

 
8

 
(10
)
 

 
275

Tax (expense) or benefit
(58
)
 

 
2

 

 
(56
)
Net of tax amount
219

 
8

 
(8
)
 

 
219

Balance at March 31, 2019
$
(8,264
)
 
$
(123
)
 
$
(10
)
 
$
(2
)
 
$
(8,399
)

(1)
Pension and PRB plans, net is shown net of cumulative tax benefits of $2,364 million and $2,428 million at March 29, 2020 and December 31, 2019, respectively.
(2)
Cash flow hedges are shown net of cumulative tax of zero at both March 29, 2020 and December 31, 2019.
(3)
Unrealized gains (losses) on investments and other, net are shown net of cumulative tax expense of $1 million at both March 29, 2020 and December 31, 2019.

Material amounts reclassified out of accumulated other comprehensive loss (AOCL) related to the amortization of net actuarial loss associated with our pension plans were $300 million and $273 million before tax in the first quarters of 2020 and 2019, respectively. This component of AOCL is included in the calculation of net periodic pension expense (income). See “Note 10: Pension and Other Employee Benefits” for additional details.

We expect $2 million net of tax of net unrealized gains on our cash flow hedges at March 29, 2020 to be reclassified into earnings at then-current values over the next 12 months as the underlying hedged transactions occur.

Note 10: Pension and Other Employee Benefits
We have pension plans covering the majority of our employees hired prior to January 1, 2007, including certain employees in foreign countries (Pension Benefits). Our primary pension obligations relate to our domestic Internal Revenue Service (IRS) qualified pension plans. In addition, we provide certain health care and life insurance benefits to retired employees and to eligible employees upon retirement through PRB plans.

We also sponsor nonqualified defined benefit and defined contribution plans to provide benefits in excess of qualified plan limits. We have set aside certain assets in separate trusts, which we expect to be used to pay for trust obligations. The fair value of marketable securities held in trusts, which are considered Level 1 assets under the fair value hierarchy, consisted of the following:
(In millions)
 
Mar 29, 2020
 
Dec 31, 2019
Marketable securities held in trusts
 
$
703

 
$
753



Included in marketable securities held in trusts in the table above was $451 million and $476 million at March 29, 2020 and December 31, 2019, respectively, related to the nonqualified defined contribution plans. The liabilities related to the nonqualified defined contribution plans were $456 million and $489 million at March 29, 2020 and December 31, 2019, respectively.


14


The components of net periodic pension expense (income) were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 29, 2020
 
Mar 31, 2019
Operating expense
 
 
 
 
Service cost
 
$
125

 
$
105

Non-operating expense
 
 
 
 
Interest cost
 
227

 
261

Expected return on plan assets
 
(340
)
 
(359
)
Amortization of prior service cost
 
1

 
1

Amortization of net actuarial loss
 
300

 
273

Total pension non-service expense
 
188

 
176

Net periodic pension expense (income)
 
$
313

 
$
281



Net periodic pension expense (income) includes income of $1 million from foreign Pension Benefits plans in both the first quarters of 2020 and 2019.

Net periodic PRB expense was $6 million in both the first quarters of 2020 and 2019.

Long-term pension and PRB liabilities consisted of the following:
(In millions)
 
Mar 29, 2020
 
Dec 31, 2019
Long-term pension liabilities
 
$
7,674

 
$
7,687

Long-term PRB liabilities
 
369

 
369

Total long-term pension and PRB liabilities
 
$
8,043

 
$
8,056



We made the following contributions to our pension and PRB plans:
 
Three Months Ended
(In millions)
Mar 29, 2020
 
Mar 31, 2019
Required pension contributions
$
30

 
$
64

PRB contributions
4

 
4

Total
$
34

 
$
68



We periodically evaluate whether to make discretionary contributions. We did not make any discretionary contributions to our pension plans during the first quarters of 2020 or 2019.

Note 11: Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. All IRS examinations related to originally filed returns are closed through the 2016 tax year. In 2018, we amended tax returns for tax years 2014-2016 to reflect refund claims related to increased Research and Development tax credits, which will be subject to audit. We are also under audit by multiple state and foreign tax authorities.

The balance of our unrecognized tax benefits, exclusive of interest, was $238 million and $227 million at March 29, 2020 and December 31, 2019, respectively, the majority of which would affect our earnings if recognized. There were no significant changes in the balance during the first quarter of 2020.

We accrue interest and penalties related to unrecognized tax benefits in tax expense. Interest and penalties recognized during the first quarters of 2020 and 2019 and accrued as of March 29, 2020 and December 31, 2019 were de minimis.


15


Note 12: Business Segment Reporting
Our reportable segments, organized based on capabilities and technologies, are: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint. Segment total net sales and operating income include intersegment sales and profit generally recorded at cost-plus a specified fee, which may differ from what the selling entity would be able to obtain on sales to external customers. Eliminations include intersegment sales and profit eliminations. Corporate operating income includes expenses that represent unallocated costs and certain other corporate costs not considered part of management’s evaluation of reportable segment operating performance and the allocation of resources to the segment. Acquisition Accounting Adjustments include the amortization of acquired intangible assets related to historical acquisitions and the adjustments to record acquired deferred revenue at fair value as part of our purchase price allocation process.

Segment financial results were as follows: 
 
Three Months Ended
Total Net Sales (in millions)
Mar 29, 2020
 
Mar 31, 2019
Integrated Defense Systems
$
1,722

 
$
1,550

Intelligence, Information and Services
1,731

 
1,777

Missile Systems
2,151

 
2,006

Space and Airborne Systems
1,894

 
1,653

Forcepoint
148

 
158

Eliminations
(481
)
 
(414
)
Total business segment sales
7,165

 
6,730

Acquisition Accounting Adjustments

 
(1
)
Total
$
7,165

 
$
6,729

 
 
Three Months Ended
Intersegment Sales (in millions)
 
Mar 29, 2020
 
Mar 31, 2019
Integrated Defense Systems
 
$
21

 
$
21

Intelligence, Information and Services
 
185

 
168

Missile Systems
 
68

 
43

Space and Airborne Systems
 
201

 
173

Forcepoint
 
6

 
9

Total
 
$
481

 
$
414



16


 
 
Three Months Ended
Operating Income (in millions)
 
Mar 29, 2020
 
Mar 31, 2019
Integrated Defense Systems
 
$
337

 
$
258

Intelligence, Information and Services
 
142

 
187

Missile Systems
 
239

 
190

Space and Airborne Systems
 
244

 
212

Forcepoint
 
(16
)
 
(9
)
Eliminations
 
(50
)
 
(47
)
Total business segment operating income
 
896

 
791

Acquisition Accounting Adjustments
 
(21
)
 
(28
)
FAS/CAS Operating Adjustment
 
370

 
366

Corporate(1)
 
(53
)
 
(16
)
Total
 
$
1,192

 
$
1,113


(1)
In the fourth quarter of 2019, we were selected by the U.S. Army for the Lower Tier Air and Missile Defense Sensor (LTAMDS). The net expenses related to the LTAMDS project of $26 million in the first quarter of 2020 are included in Corporate operating income as they are not included in management’s evaluation of business segment results. No amounts were recorded in the first quarter of 2019.
 
 
Three Months Ended
Intersegment Operating Income (in millions)
 
Mar 29, 2020
 
Mar 31, 2019
Integrated Defense Systems
 
$
2

 
$
2

Intelligence, Information and Services
 
18

 
17

Missile Systems
 
6

 
4

Space and Airborne Systems
 
20

 
17

Forcepoint
 
4

 
7

Total
 
$
50

 
$
47



The FAS/CAS Operating Adjustment, which is reported as a separate line in our segment results above, represents the difference between the service cost component of our pension and PRB expense or income under Financial Accounting Standards (FAS) in accordance with U.S. GAAP and our pension and PRB expense under U.S. government Cost Accounting Standards (CAS). The results of each segment only include pension and PRB expense under CAS that we generally recover through the pricing of our products and services to the U.S. government.

The pension and PRB components of the FAS/CAS Operating Adjustment were as follows:
 
 
Three Months Ended
(In millions)
 
Mar 29, 2020
 
Mar 31, 2019
FAS/CAS Pension Operating Adjustment
 
$
366

 
$
362

FAS/CAS PRB Operating Adjustment
 
4

 
4

FAS/CAS Operating Adjustment
 
$
370

 
$
366



Total assets for each of our business segments were as follows:
Total Assets (in millions)
 
Mar 29, 2020
 
Dec 31, 2019

Integrated Defense Systems(1)
 
$
5,045

 
$
5,103

Intelligence, Information and Services(1)
 
4,387

 
4,291

Missile Systems(1)
 
8,525

 
8,408

Space and Airborne Systems(1)
 
7,245

 
6,979

Forcepoint(1)
 
2,364

 
2,424

Corporate
 
6,144

 
7,361

Total
 
$
33,710

 
$
34,566


(1)     Total assets includes intangible assets. Related amortization expense is included in Acquisition Accounting Adjustments.


17


We disaggregate our revenue from contracts with customers by geographic location, customer-type and contract-type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.
 
 
Three Months Ended March 29, 2020
Disaggregation of Total Net Sales 
(in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Other

 
Total

United States
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales to the U.S. government(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
$
236

 
$
213

 
$
857

 
$
654

 
$
43

 
$

 
$
2,003

Cost-type contracts
 
457

 
1,111

 
726

 
723

 
2

 

 
3,019

Direct commercial sales and other U.S. sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
1

 
30

 
3

 
21

 
37

 

 
92

Cost-type contracts
 

 
9

 

 
1

 
1

 

 
11

Asia/Pacific
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
45

 
30

 
83

 
39

 

 

 
197

Cost-type contracts
 
17

 
10

 
29

 
9

 

 

 
65

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
144

 
42

 
52

 
62

 
13

 

 
313

Cost-type contracts
 
17

 

 
1

 

 

 

 
18

Middle East and North Africa
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
158

 
4

 
113

 
92

 

 

 
367

Cost-type contracts
 
77

 
8

 
6

 
21

 

 

 
112

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
320

 
14

 
77

 
5

 
9

 

 
425

Cost-type contracts
 

 

 
29

 

 

 

 
29

All other (principally Europe)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
168

 

 
49

 
24

 

 

 
241

Cost-type contracts
 
18

 

 
28

 
2

 

 

 
48

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
40

 
57

 
29

 
40

 
37

 

 
203

Cost-type contracts
 
3

 
18

 
1

 

 

 

 
22

Total net sales
 
1,701

 
1,546

 
2,083

 
1,693

 
142

 

 
7,165

Intersegment sales
 
21

 
185

 
68

 
201

 
6

 
(481
)
 

Acquisition Accounting Adjustments
 

 

 

 

 

 

 

Reconciliation to business segment sales
 
$
1,722

 
$
1,731

 
$
2,151

 
$
1,894

 
$
148

 
$
(481
)
 
$
7,165

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

18


 
 
Three Months Ended March 29, 2020
Total Net Sales by Geographic Area (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

United States
 
$
694

 
$
1,363

 
$
1,586

 
$
1,399

 
$
83

 
$
5,125

Asia/Pacific
 
223

 
82

 
165

 
110

 
13

 
593

Middle East and North Africa
 
555

 
26

 
225

 
118

 
9

 
933

All other (principally Europe)
 
229

 
75

 
107

 
66

 
37

 
514

Total net sales
 
$
1,701

 
$
1,546

 
$
2,083

 
$
1,693

 
$
142

 
$
7,165

 
 
Three Months Ended March 29, 2020
Total Net Sales by Major Customer (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Sales to the U.S. government(1)
 
$
693

 
$
1,324

 
$
1,583

 
$
1,377

 
$
45

 
$
5,022

U.S. direct commercial sales and other U.S. sales
 
1

 
39

 
3

 
22

 
38

 
103

Foreign military sales through the U.S. government
 
483

 
52

 
308

 
187

 

 
1,030

Foreign direct commercial sales and other foreign sales(1)
 
524

 
131

 
189

 
107

 
59

 
1,010

Total net sales
 
$
1,701

 
$
1,546

 
$
2,083

 
$
1,693

 
$
142

 
$
7,165

(1)
Excludes foreign military sales through the U.S. government.
 
 
Three Months Ended March 29, 2020
Total Net Sales by Contract-Type (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Fixed-price contracts
 
$
1,112

 
$
390

 
$
1,263

 
$
937

 
$
139

 
$
3,841

Cost-type contracts
 
589

 
1,156

 
820

 
756

 
3

 
3,324

Total net sales
 
$
1,701

 
$
1,546

 
$
2,083

 
$
1,693

 
$
142

 
$
7,165

 

19


 
 
Three Months Ended March 31, 2019
Disaggregation of Total Net Sales
 (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Other

 
Total

United States
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales to the U.S. government(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
$
221

 
$
224

 
$
708

 
$
548

 
$
37

 
$

 
$
1,738

Cost-type contracts
 
424

 
1,152

 
699

 
659

 
4

 

 
2,938

Direct commercial sales and other U.S. sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
1

 
33

 
9

 
26

 
44

 

 
113

Cost-type contracts
 

 
4

 

 
1

 

 

 
5

Asia/Pacific
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
40

 
73

 
124

 
30

 

 

 
267

Cost-type contracts
 
18

 
11

 
16

 
9

 

 

 
54

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
168

 
41

 
32

 
48

 
16

 

 
305

Cost-type contracts
 
17

 

 

 

 

 

 
17

Middle East and North Africa
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
269

 
3

 
115

 
74

 

 

 
461

Cost-type contracts
 
48

 
5

 
5

 
19

 

 

 
77

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
195

 
7

 
145

 
18

 
8

 

 
373

Cost-type contracts
 

 

 
19

 

 

 

 
19

All other (principally Europe)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign military sales through the U.S. government
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
81

 
1

 
34

 
17

 

 

 
133

Cost-type contracts
 
10

 

 
15

 
2

 

 

 
27

Direct commercial sales and other foreign sales(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-price contracts
 
34

 
49

 
42

 
29

 
39

 

 
193

Cost-type contracts
 
3

 
6

 

 

 

 

 
9

Total net sales
 
1,529

 
1,609

 
1,963

 
1,480

 
148

 

 
6,729

Intersegment sales
 
21

 
168

 
43

 
173

 
9

 
(414
)
 

Acquisition Accounting Adjustments
 

 

 

 

 
1

 
(1
)
 

Reconciliation to business segment sales
 
$
1,550

 
$
1,777

 
$
2,006

 
$
1,653

 
$
158

 
$
(415
)
 
$
6,729

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

20


 
 
Three Months Ended March 31, 2019
Total Net Sales by Geographic Area (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

United States
 
$
646

 
$
1,413

 
$
1,416

 
$
1,234

 
$
85

 
$
4,794

Asia/Pacific
 
243

 
125

 
172

 
87

 
16

 
643

Middle East and North Africa
 
512

 
15

 
284

 
111

 
8

 
930

All other (principally Europe)
 
128

 
56

 
91

 
48

 
39

 
362

Total net sales
 
$
1,529

 
$
1,609

 
$
1,963

 
$
1,480

 
$
148

 
$
6,729

 
 
Three Months Ended March 31, 2019
Total Net Sales by Major Customer (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Sales to the U.S. government(1)
 
$
645

 
$
1,376

 
$
1,407

 
$
1,207

 
$
41

 
$
4,676

U.S. direct commercial sales and other U.S. sales
 
1

 
37

 
9

 
27

 
44

 
118

Foreign military sales through the U.S. government
 
466

 
93

 
309

 
151

 

 
1,019

Foreign direct commercial sales and other foreign sales(1)
 
417

 
103

 
238

 
95

 
63

 
916

Total net sales
 
$
1,529

 
$
1,609

 
$
1,963

 
$
1,480

 
$
148

 
$
6,729

(1)
Excludes foreign military sales through the U.S. government.
 
 
Three Months Ended March 31, 2019
Total Net Sales by Contract-Type (in millions)
 
Integrated Defense Systems

 
Intelligence, Information and Services

 
Missile Systems

 
Space and Airborne Systems

 
Forcepoint

 
Total

Fixed-price contracts
 
$
1,009

 
$
431

 
$
1,209

 
$
790

 
$
144

 
$
3,583

Cost-type contracts
 
520

 
1,178

 
754

 
690

 
4

 
3,146

Total net sales
 
$
1,529

 
$
1,609

 
$
1,963

 
$
1,480

 
$
148

 
$
6,729


 
Note 13: Remaining Performance Obligations
Remaining performance obligations represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (IDIQ)). As of March 29, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $51,312 million. We expect to recognize revenue on approximately half and three-quarters of the remaining performance obligations over the next 12 and 24 months, respectively, with the remainder recognized thereafter.

Certain events have caused increased attention on U.S. defense sales to the Kingdom of Saudi Arabia (KSA). KSA represents less than 5% of our sales and $2.9 billion of our remaining performance obligations at March 29, 2020. Although we currently do not expect to be prevented from doing business in KSA, if government action impairs our ability to fulfill our contractual obligations or otherwise to continue to do business in KSA, it would have a material adverse effect on our financial results.

Note 14: Subsequent Events
On April 3, 2020, the Merger was completed, with Raytheon becoming a wholly owned subsidiary of UTC, and UTC was renamed Raytheon Technologies Corporation. Upon completion of the Merger, pursuant to the Merger Agreement, each share of Raytheon common stock that was issued and outstanding immediately prior to the completion of the Merger (other than shares held by Raytheon as treasury stock) was converted into the right to receive 2.3348 fully paid and nonassessable shares of RTC common stock, and, if applicable, cash in lieu of fractional shares.

On May 1, 2020, to obtain the regulatory approvals required to complete the Merger, we completed the sale of our airborne tactical radios business for $234 million in cash, net of transaction-related costs. This business was part of our SAS segment. As this transaction occurred subsequent to the Merger, the gain of $211 million was not recorded in the consolidated statement of operations, but rather was recorded as an adjustment to the fair value of net assets acquired in the purchase accounting for the Merger.


21


We have evaluated potential subsequent events through May 7, 2020, the date the interim financial statements were available to be issued, and noted no subsequent events which would require recognition or disclosure in the interim financial statements other than those specifically disclosed.

22
Exhibit
Exhibit 99.2

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Overview

Effective as of 12:01 a.m. on April 3, 2020, United Technologies Corporation (since renamed Raytheon Technologies Corporation, as described below) (“UTC”) completed the previously announced separation into three independent companies through the distribution of all of the outstanding shares of common stock of Carrier Global Corporation (“Carrier”) and Otis Worldwide Corporation (“Otis”) to UTC shareowners through separate spin-off transactions (the “Separation and the Distributions”).

Additionally, pursuant to the agreement dated as of June 9, 2019, and amended as of March 9, 2020 (the “Merger Agreement”), UTC and Raytheon Company (“Raytheon”) completed their previously announced merger of equals (the “Merger”) effective as of 8:30 a.m. on April 3, 2020, with the combined company renamed Raytheon Technologies Corporation (“Raytheon Technologies”, “RTC” or the “Company”). Upon completion of the Merger, each share of Raytheon common stock that was issued and outstanding immediately prior to the completion of the Merger (other than excluded shares) was converted into the right to receive 2.3348 fully paid and nonassessable shares of RTC common stock, and, if applicable, cash in lieu of fractional shares, less any applicable withholding taxes. Immediately after the Merger, former holders of Raytheon common stock owned approximately 43% and pre-Merger holders of UTC common stock owned approximately 57% of the common stock of RTC. The Company now trades on the New York Stock Exchange under the ticker “RTX.”
Beginning in the second quarter of 2020, the financial results of Carrier and Otis for periods prior to April 3, 2020 will be reflected as discontinued operations in the Company’s consolidated financial statements.

In contemplation of the Separation and the Distributions, in the first quarter of 2020 Carrier and Otis issued $9.25 billion and $5.3 billion, respectively, of unsecured, unsubordinated notes in multiple series and distributed the net proceeds to UTC. Additionally, Carrier and Otis entered into term loan credit agreements providing for unsecured, unsubordinated 3-year term loan credit facilities in the amount of $1.75 billion and $1 billion, respectively, that were fully utilized in the first quarter of 2020 and those net proceeds were distributed to UTC. UTC utilized the cash provided by the Otis and Carrier financings, described above, to pay down approximately $17 billion of existing UTC debt, the majority of which was paid down in the first quarter of 2020. The above is collectively referred to as the “Financing Transactions.”

In conjunction with the Separation and the Distributions, separation and distribution, tax matters and other agreements (together, the “separation agreements”) were entered into among UTC, Carrier and Otis. Through these separation agreements the Company recognized certain assets and liabilities that may be due to or from Otis and Carrier, respectively, subsequent to the spin-offs.

Additionally, for the three months ended March 31, 2020, UTC incurred $1.5 billion of costs in connection with the Separation and the Distributions and the Merger (“transaction costs”) and Raytheon incurred $10 million for the Merger. These costs are one-time in nature and have been excluded from the unaudited pro forma condensed combined statement of operations.

The Separation and the Distributions, the Financing Transactions, the assets and liabilities resulting from the separation agreements, and the transaction costs, described above, are collectively referred to as the “Separation, Distributions and Related Transactions” below.

For certain additional information relating to the completion of the Separation and the Distributions and the Merger, please refer to the Current Report on Form 8-K filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on April 8, 2020.

Unaudited Pro Forma Condensed Combined Financial Information
The accompanying unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of SEC Regulation S-X and gives effect to the following transactions:
The Separation, Distributions and Related Transactions; and

UTC’s merger with Raytheon with acquisition accounting applied to Raytheon as the accounting acquiree.





The historical consolidated financial information in the unaudited pro forma condensed combined financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the Separation, Distributions and Related Transactions as well as the Merger, (2) factually supportable and (3) with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the combined results of the Company.
The unaudited pro forma condensed combined financial information does not give effect to any cost savings, operating synergies or revenue synergies that may result from the Separation and the Distributions or the Merger or the costs to achieve any synergies.
The unaudited pro forma condensed combined financial information has been presented for informational purposes only and is not necessarily indicative of what the Company’s financial position or results of operations would have been had the transactions been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the Company.
The unaudited pro forma condensed combined financial information contains estimated adjustments, based upon available information and certain assumptions that we believe are reasonable under the circumstances. The assumptions underlying the pro forma adjustments are described in greater detail in the accompanying notes to the unaudited pro forma condensed combined financial information. In many cases related to the Merger, these assumptions are based on preliminary information and estimates.
The unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the Separation, Distributions and Related Transactions as well as the Merger, based on the historical financial position and results of operations of RTC and Raytheon as follows:
The unaudited pro forma condensed combined balance sheet as of March 31, 2020 was prepared based on:
(1)
the historical unaudited condensed consolidated balance sheet of UTC as of March 31, 2020; and
(2)
the historical unaudited consolidated balance sheet of Raytheon as of March 29, 2020.
The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2020 was prepared based on:
(1)
the historical unaudited condensed consolidated statement of operations of UTC for the three months ended March 31, 2020; and
(2)
the historical unaudited consolidated statement of operations of Raytheon for the three months ended March 29, 2020.
The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2020 assumes the Separation, Distributions and Related Transactions and the Merger occurred on January 1, 2019. The unaudited pro forma condensed combined balance sheet as of March 31, 2020 assumes the Separation, Distributions and Related Transactions and the Merger occurred on that date.
This historical financial information included in the unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with the accompanying notes, as well as the following historical consolidated financial statements and related notes of UTC and Raytheon:
UTC’s unaudited condensed consolidated financial statements and related notes as of and for the quarter ended March 31, 2020, included in RTC’s Quarterly Report on Form 10-Q filed with the SEC on May 7, 2020;
Raytheon’s unaudited consolidated financial statements and related notes as of and for the quarter ended March 29, 2020 included in Exhibit 99.1 within this Current Report on Form 8-K;
The Company’s Current Report on Form 8-K filed with the SEC on April 8, 2020. The unaudited pro forma combined statement of operations for the year ended December 31, 2019 contained in that Current Report on Form 8-K was not materially impacted by subsequent revisions to assumptions used to estimate the preliminary fair value of net assets acquired; and
UTC’s Form S-4 Registration Statement (as amended) filed with the SEC on September 4, 2019 and declared effective on September 9, 2019.

2



UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of March 31, 2020
(Dollars, in millions)
 
 
Historical United Technologies Corporation
 
Separation, Distributions and Related Transactions (Note 3)
 
Pro Forma United Technologies Corporation Post Separation
 
Historical Raytheon Company After Reclassifications (Note 4)
 
Pro Forma Merger Adjustments (Notes 5 and 6)
 
 
Pro Forma Combined Company
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
8,001

 
$
(2,756
)
 
$
5,245

 
$
3,118

 
$

 
 
$
8,363

Accounts receivable, net
 
13,104

 
(4,198
)
 
8,906

 
1,784

 
(43
)
(a)
 
10,647

Contract assets, current
 
4,549

 
108

 
4,657

 
6,054

 

 
 
10,711

Inventory, net
 
11,506

 
(2,127
)
 
9,379

 
699

 

 
 
10,078

Other assets, current
 
1,715

 
1,095

 
2,810

 
611

 
245

(b)
 
3,666

Total Current Assets
 
38,875

 
(7,878
)
 
30,997

 
12,266

 
202

 
 
43,465

Customer financing assets
 
3,496

 

 
3,496

 

 

 
 
3,496

Future income tax benefits
 
1,444

 
(680
)
 
764

 
529

 
(519
)
(c)
 
774

Fixed assets, net
 
12,484

 
(2,326
)
 
10,158

 
3,615

 
1,135

(d)
 
14,908

Operating lease right-of-use assets
 
2,624

 
(1,400
)
 
1,224

 
909

 
43

(d)
 
2,176

Goodwill
 
47,481

 
(11,207
)
 
36,274

 
14,879

 
5,889

(e)
 
57,042

Intangible assets, net
 
25,600

 
(1,476
)
 
24,124

 
261

 
18,969

(f)
 
43,354

Other assets
 
7,568

 
(6,256
)
 
1,312

 
1,251

 
(43
)
(g)
 
2,520

Total Assets
 
$
139,572

 
$
(31,223
)
 
$
108,349

 
$
33,710

 
$
25,676

 
 
$
167,735

Liabilities and Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
1,725

 
$
(67
)
 
$
1,658

 
$

 
$

 
 
$
1,658

Accounts payable
 
10,976

 
(2,878
)
 
8,098

 
1,489

 
(43
)
(h)
 
9,544

Accrued liabilities
 
11,055

 
(848
)
 
10,207

 
2,409

 
365

(i)
 
12,981

Contract liabilities, current
 
6,384

 
2,503

 
8,887

 
2,884

 
(43
)
(j)
 
11,728

Long-term debt currently due
 
1,362

 
(218
)
 
1,144

 
999

 

 
 
2,143

Total Current Liabilities
 
31,502

 
(1,508
)
 
29,994

 
7,781

 
279

 
 
38,054

Long-term debt
 
43,232

 
(17,283
)
 
25,949

 
3,262

 
439

(k)
 
29,650

Future pension and postretirement benefit obligations
 
3,225

 
1,355

 
4,580

 
8,043

 
2,607

(l)
 
15,230

Operating lease liabilities
 
2,126

 
(1,087
)
 
1,039

 
738

 

 
 
1,777

Contract liabilities, long-term
 
5,554

 
(5,554
)
 

 

 

 
 

Other long-term liabilities
 
11,903

 
(5,001
)
 
6,902

 
625

 
2,512

(c)(m)
 
10,039

Total Liabilities
 
$
97,542

 
$
(29,078
)
 
$
68,464

 
$
20,449

 
$
5,837

 
 
$
94,750

Commitments and contingent liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interest
 
$
95

 
$
(95
)
 
$

 
$
34

 
$

 
 
$
34

Shareowners’ Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 

 

 

 

 

 
 

Common stock
 
23,099

 
2,425

 
25,524

 
22

 
10,886

(n)
 
36,432

Treasury Stock
 
(32,665
)
 

 
(32,665
)
 

 
22,268

(n)
 
(10,397
)
Retained earnings
 
60,826

 
(4,668
)
 
56,158

 
22,268

 
(22,378
)
(n)
 
56,048

Unearned ESOP shares
 
(61
)
 

 
(61
)
 

 

 
 
(61
)
Total Accumulated other comprehensive loss
 
(11,788
)
 
1,059

 
(10,729
)
 
(9,063
)
 
9,063

(n)
 
(10,729
)
Total Shareowners’ Equity
 
39,411

 
(1,184
)
 
38,227

 
13,227

 
19,839

 
 
71,293

Noncontrolling interest
 
2,524

 
(866
)
 
1,658

 

 

 
 
1,658

Total Equity
 
$
41,935

 
$
(2,050
)
 
$
39,885

 
$
13,227

 
$
19,839

 

$
72,951

Total Liabilities and Equity
 
$
139,572

 
$
(31,223
)
 
$
108,349

 
$
33,710

 
$
25,676

 
 
$
167,735

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Information.”


3



UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Three months ended March 31, 2020
(Dollars and shares, in millions, except per share amounts)
 
 
Historical United Technologies Corporation
 
Separation, Distributions and Related Transactions (Note 3)
 
Pro Forma United Technologies Corporation Post Separation
 
Historical Raytheon Company After Reclassifications (Note 4)
 
Pro Forma Merger Adjustments (Notes 5 and 7)
 
 
Pro Forma Combined Company
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales
 
$
12,432

 
$
(4,266
)
 
$
8,166

 
$
6,005

 
$
(74
)
(o)
 
$
14,097

Service sales
 
5,778

 
(2,584
)
 
3,194

 
1,160

 

 
 
4,354

 
 
18,210

 
(6,850
)
 
11,360

 
7,165

 
(74
)
 
 
18,451

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
 
9,781

 
(3,148
)
 
6,633

 
4,338

 
277

(p)
 
11,248

Cost of services sold
 
3,627

 
(1,686
)
 
1,941

 
907

 
(1
)
(p)
 
2,847

Research and development
 
671

 
(136
)
 
535

 
161

 
1

(q)
 
697

Selling, general, and administrative
 
2,248

 
(1,319
)
 
929

 
556

 
(47
)
(r)
 
1,438

 
 
16,327

 
(6,289
)
 
10,038

 
5,962

 
230

 
 
16,230

Other income (expense), net
 
(76
)
 
94

 
18

 

 

 
 
18

Operating profit
 
1,807

 
(467
)
 
1,340

 
1,203

 
(304
)
 
 
2,239

Non-service pension (benefit) cost
 
(188
)
 
20

 
(168
)
 
192

 
(300
)
(s)
 
(276
)
Debt extinguishment costs
 
660

 
(660
)
 

 

 

 
 

Interest expense (income), net
 
380

 
(173
)
 
207

 
57

 
(5
)
(t)
 
259

Income (loss) from operations before income taxes
 
$
955

 
$
346

 
$
1,301

 
$
954

 
$
1

 
 
$
2,256

Income tax expense (income)
 
941

 
(662
)
 
279

 
164

 
(3
)
(u)
 
440

Net income (loss)
 
$
14

 
$
1,008

 
$
1,022

 
$
790

 
$
4

 
 
$
1,816

Less: Noncontrolling interest in subsidiaries’ earnings from operations
 
97

 
(43
)
 
54

 
2

 

 
 
56

Net income (loss) attributable
to UTC common shareowners
 
$
(83
)
 
$
1,051

 
$
968

 
$
788

 
$
4

 
 
$
1,760

Pro forma earnings per share of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.10
)
 
 
 
 
 
 
 
 
 
 
$
1.17

Diluted
 
$
(0.10
)
 
 
 
 
 
 
 
 
 
 
$
1.16

Pro forma weighted average common shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
858.4

 
 
 
 
 
 
 
 
(v)
 
1,506.7

Diluted
 
858.4

 
 
 
 
 
 
 
 
(w)
 
1,517.6

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Information.”

4



NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Note 1: Basis of presentation
Beginning in the second quarter of 2020, the Separation and the Distributions qualify as discontinued operations to the Company and are, therefore, presented in the unaudited pro forma condensed combined financial information in accordance with the guidance in ASC 205, Financial Statement Presentation. As such, the unaudited pro forma condensed combined financial statement of operations does not allocate any general corporate overhead expenses of UTC prior to the Merger to Otis and Carrier, including corporate overhead that had previously been reflected in the Carrier and Otis segment results as a part of UTC prior to the Merger. Additionally, certain assets and liabilities that were a part of the historical operations of Carrier and Otis but were reported within the Corporate segment of UTC prior to the Merger have been included in the unaudited pro forma condensed combined balance sheets of Otis and Carrier below as those balances will not be a part of the continuing operations of the Company. Based on this and other estimates and assumptions, the unaudited pro forma condensed combined financial information does not reflect what the results of operations would have been on a standalone basis and are not necessarily indicative of the future operations of the Company. Refer to Note 3 for further details on the Separation and the Distributions of Otis and Carrier.
The unaudited pro forma condensed combined financial information also reflects the Merger under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Management has determined that UTC is the acquirer for financial accounting purposes. In identifying UTC as the accounting acquirer, the Company considered the structure of the transaction and other actions contemplated by the Merger Agreement, relative outstanding share ownership and market values, the composition of the Company’s board of directors, the relative size of UTC and Raytheon, and the designation of certain senior management positions of the Company. Under the acquisition method of accounting, the preliminary purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess purchase price allocated to goodwill. To prepare the unaudited pro forma condensed combined financial information, management adjusted Raytheon’s assets and liabilities to their estimated fair values based on preliminary valuations. As of the date of this filing, the Company has not completed the detailed valuations necessary to finalize the required estimated fair values and estimated useful lives of Raytheon’s assets to be acquired and liabilities to be assumed and the related allocation of the purchase price. Accordingly, the final acquisition accounting adjustments may be materially different from the unaudited pro forma adjustments.
In order to obtain the regulatory approvals required to complete the Merger, both UTC and Raytheon were required by regulatory authorities to dispose of certain businesses, none of which were determined to be material to the operations of the Company and, accordingly, the anticipated disposals are not reflected in the unaudited pro forma condensed combined statement of operations. The unaudited pro forma condensed combined balance sheet reflects the Raytheon business at fair value less cost to sell.
The unaudited pro forma condensed combined financial information has been prepared in a manner consistent with UTC’s pre-Merger accounting policies. Certain financial information of Raytheon as presented in its historical consolidated financial statements has been reclassified to conform to the presentation in UTC’s pre-Merger consolidated financial statements for the purposes of preparing the unaudited pro forma condensed combined financial information. Now that the Merger has been completed, more detailed review of Raytheon’s accounting policies could result in additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the Company’s consolidated financial statements.
Note 2: Accounting policies
The unaudited pro forma condensed combined financial information reflects adjustments to conform Raytheon’s results to UTC’s pre-Merger accounting policies. Refer to Note 4 for detail of adjustments made. Additionally, in connection with the Separation and the Distributions and the Merger, the Company determined that the duration of its contracts or programs, which is generally longer than one year, would represent its operating cycle and accordingly contract-related assets and liabilities are presented as current in the unaudited pro forma condensed combined balance sheet. Refer to Note 3 for details of the adjustment made.

5



Note 3: The Separation, Distributions and Related Transactions
The following presents the adjustments to UTC’s balance sheet as of March 31, 2020 to remove Otis and Carrier on a discontinued operations basis and adjust for pro forma impacts of the Related Transactions:
(Dollars, in millions)
 
Otis Distribution
 
Carrier Distribution
 
Related Transactions
 
Separation, Distributions and Related Transactions
Assets:
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,207

 
$
768

 
$
781

(vii)
$
2,756

Accounts receivable, net
 
2,888

 
2,674

 
(1,364
)
(iv)
4,198

Contract assets, current
 
518

 
651

 
(1,277
)
(iv)
(108
)
Inventories and contracts in progress, net
 
571

 
1,556

 

 
2,127

Other assets, current
 
290

 
279

 
(1,664
)
(iv)
(1,095
)
Total Current Assets
 
5,474

 
5,928

 
(3,524
)
 
7,878

Customer financing assets
 

 

 

 

Future income tax benefits
 
359

 
321

 

 
680

Fixed assets, net
 
688

 
1,638

 

 
2,326

Operating lease right-of-use assets
 
535

 
865

 

 
1,400

Goodwill
 
1,608

 
9,599

 

 
11,207

Intangible assets, net
 
462

 
1,014

 

 
1,476

Other assets
 
289

 
2,440

 
3,527

(i) (iii) (iv)
6,256

Total Assets
 
$
9,415

 
$
21,805

 
$
3

 
$
31,223

Liabilities and Equity (Deficit):
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
67

 
$

 
$

 
$
67

Accounts payable
 
1,102

 
1,776

 

 
2,878

Accrued liabilities
 
1,582

 
1,935

 
(2,669
)
(ii) (iv) (v)
848

Contract liabilities, current
 
2,541

 
510

 
(5,554
)
(iv)
(2,503
)
Long-term debt currently due
 

 
218

 

 
218

Total Current Liabilities
 
5,292

 
4,439

 
(8,223
)
 
1,508

Long-term debt
 
6,254

 
11,029

 

 
17,283

Future pension and postretirement benefit obligations
579

 
456

 
(2,390
)
(vi)
(1,355
)
Operating lease liabilities
 
379

 
708

 

 
1,087

Contract liabilities, non-current
 

 

 
5,554

(iv)
5,554

Other long-term liabilities
 
706

 
1,456

 
2,839

(iv)(vi)
5,001

Total Liabilities
 
$
13,210

 
$
18,088

 
$
(2,220
)
 
$
29,078

Commitments and contingent liabilities
 
 
 
 
 
 
 
 
Redeemable noncontrolling interest
 
$
95

 
$

 
$

 
$
95

Shareowners’ Equity:
 
 
 
 
 
 
 
 
Capital Stock:
 

 

 

 

Common stock
 
(2,509
)
 

 
84

 
(2,425
)
Treasury Stock
 

 

 

 

Retained earnings
 

 
4,370

 
298

 
4,668

Unearned ESOP shares
 

 

 

 

Total Accumulated other comprehensive loss
(1,918
)
 
(982
)
 
1,841

(vi)
(1,059
)
Total Shareowners’ Equity
 
(4,427
)
 
3,388

 
2,223

 
1,184

Noncontrolling interest
 
537

 
329

 

 
866

Total Equity
 
$
(3,890
)
 
$
3,717

 
$
2,223

 
$
2,050

Total Liabilities and Equity
 
$
9,415

 
$
21,805

 
$
3

 
$
31,223

i.
Pursuant to the tax matters agreement entered into among UTC, Carrier and Otis, Carrier and Otis will be required to make payments to RTC, primarily representing the respective remaining net tax liabilities retained by RTC attributable to U.S. income tax on previously undistributed earnings of Carrier’s and Otis’ international subsidiaries resulting from the passage of the Tax Cuts and Jobs Act of 2017. Accordingly, UTC has a future receivable for amounts paid by UTC on behalf of Otis and Carrier, which is expected to be approximately $720 million that is recorded within Other assets.

6



ii.
Pursuant to the tax matters agreement, certain tax liabilities which are attributable to separation activities and transferred to Carrier and Otis at separation will be paid by Carrier and Otis to UTC. Carrier and Otis will be reimbursed by RTC for such amounts paid. Accordingly, a payable in the amount of $151 million has been recorded by UTC within Accrued liabilities.
iii.
Pursuant to the tax matters agreement, Otis and Carrier are responsible for unrecognized tax benefits retained by RTC to the extent a reserve relates exclusively to the Otis business or Carrier business, respectively. Accordingly, UTC has a $58 million receivable recorded in Other assets for amounts due from Otis and Carrier related to these unrecognized tax benefits.
iv.
As noted above, in connection with the Separation and the Distributions and the Merger, RTC determined that the duration of its contracts and programs, the average duration of which exceeds one year, represents its operating cycle, and accordingly accounts receivable of $1.4 billion, contract assets of $1.3 billion, and other current assets of $1.7 billion were reclassified from Other assets to Accounts receivable, Contract assets, current, and Other assets, current, respectively. Additionally, $2.3 billion of accrued liabilities were reclassified from Other long-term liabilities to Accrued liabilities and $5.6 billion of contract liabilities were reclassified from Contract liabilities, long-term to Contract liabilities, current, respectively.
v.
Reflects an adjustment for directly-attributable costs related to the Separation and the Distributions of $229 million, which were not yet incurred, and therefore accrued by UTC as of March 31, 2020. Such costs primarily represent costs to separate IT systems and professional services related to the separation.
vi.
In the second quarter of 2020, the Company recognized a curtailment to its domestic defined benefit pension plan due to the Separation and the Distributions, which resulted in an increase to Future pension and postretirement benefit obligations of $2.4 billion, with a related increase in accumulated other comprehensive loss of $1.8 billion and decrease in deferred tax liabilities recorded within Other long-term liabilities of $550 million. The curtailment loss of approximately $19 million recorded by the Company in the second quarter of 2020 has been excluded from the unaudited condensed combined pro forma statement of operations.
vii.
In connection with the Separation and the Distributions and the Merger, on April 1, 2020 and April 2, 2020, UTC distributed a total additional $781 million of cash to Carrier and Otis, representing excess cash required by UTC in order to achieve the net indebtedness required by the terms of the Merger Agreement as well as initial working capital needs of Carrier and Otis.
The following presents the adjustments to UTC’s statement of operations for the three months ended March 31, 2020 to remove Otis and Carrier on a discontinued operations basis and for pro forma impacts of the Related Transactions:
(Dollars, in millions)
 
Otis Distribution
 
Carrier Distribution
 
Related Transactions
 
Separation, Distributions and Related Transactions
Net Sales:
 
 
 
 
 
 
 
 
Product sales
 
$
1,123

 
$
3,143

 
$

 
$
4,266

Service sales
 
1,843

 
741

 

 
2,584

 
 
2,966

 
3,884

 

 
6,850

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of products sold
 
913

 
2,235

 

 
3,148

Cost of services sold
 
1,157

 
529

 

 
1,686

Research and development
 
38

 
98

 

 
136

Selling, general, and administrative
 
419

 
629

 
271

(ii)
1,319

 
 
2,527

 
3,491

 
271

 
6,289

Other income (expense), net
 
(65
)
 
(29
)
 

 
(94
)
Operating profit
 
374

 
364

 
(271
)
 
467

Non-service pension (benefit) cost
 
(3
)
 
(17
)
 

 
(20
)
Debt extinguishment costs
 

 

 
660

(ii)
660

Interest expense (income), net
 
5

 
37

 
131

(i)(ii)
173

Income (loss) from operations before income taxes
 
$
372

 
$
344

 
$
(1,062
)
 
$
(346
)
Income tax expense (income)
 
111

 
99

 
452

(i)(ii)
662

Net income (loss)
 
$
261

 
$
245

 
$
(1,514
)
 
$
(1,008
)
Less: Noncontrolling interest in subsidiaries’ earnings
 
37

 
6

 

 
43

Net income (loss) attributable to UTC common shareowners
 
$
224

 
$
239

 
$
(1,514
)
 
$
(1,051
)
i.
Reflects a reduction in interest expense of $125 million as result of UTC’s paydown of debt to meet its targeted indebtedness, in connection with the Merger Agreement, calculated using a weighted average interest rate of 3.7%, based on the indebtedness of UTC during the year ended December 31, 2019 that is assumed to have been extinguished as of January 1, 2019, as well as a related reduction in tax benefit of $23 million. A 1/8% change in the estimated interest rate would increase or decrease the interest expense of UTC by $4.8 million.
ii.
Reflects the elimination of non-recurring transaction costs incurred by UTC of $937 million, primarily related to debt extinguishment costs incurred in connection with the Financing Transactions as well as accounting, tax and other professional services costs pertaining to the separation and the establishment of Otis and Carrier as stand-alone public companies, facility relocation costs, costs to separate information systems and costs of retention bonuses. Additionally, net tax charges related to separation activities of $475 million were incurred during the three months ended March 31, 2020.
Note 4: Reclassification adjustments
Certain reclassifications have been made to the historical presentation of Raytheon’s balance sheet and statement of operations to conform to the financial statement presentation of pre-Merger UTC.

7



Reclassifications to Raytheon’s consolidated balance sheet as of March 29, 2020 are as follows:
(Dollars, in millions)
Before Reclassifications
 
Reclassifications
 
Notes
 
After Reclassifications
Assets:
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,118

 
 
 
 
 
$
3,118

Accounts receivable, net
1,784

 
 
 
 
 
1,784

Contract assets, current
6,054

 
 
 
 
 
6,054

Inventories and contracts in progress, net
699

 
 
 
 
 
699

Other assets, current
611

 
 
 
 
 
611

Total Current Assets
12,266

 
 
 
 
 
12,266

Customer financing assets

 
 
 
 
 

Future income tax benefits

 
529

 
(i)
 
529

Fixed assets, net
3,366

 
249

 
(ii)
 
3,615

Operating lease right-of-use assets
909

 
 
 
 
 
909

Goodwill
14,879

 
 
 
 
 
14,879

Intangible assets, net

 
261

 
(iii)
 
261

Other assets
2,290

 
(1,039
)
 
(i)(ii) (iii)
 
1,251

Total Assets
$
33,710

 
 
 
 
 
$
33,710

Liabilities and Equity:
 
 
 
 
 
 
 
Short-term borrowings
$

 
 
 
 
 
$

Accounts payable
1,489

 
 
 
 
 
1,489

Accrued liabilities

 
2,409

 
(iv)(v) (vii) (viii)
 
2,409

Accrued employee compensation
1,062

 
(1,062
)
 
(vii)
 

Contract liabilities, current
3,085

 
(201
)
 
(viii)
 
2,884

Long-term debt currently due
999

 
 
 
 
 
999

Other current liabilities
1,293

 
(1,293
)
 
(iv)
 

Total Current Liabilities
7,928

 
 
 
 
 
7,781

Long-term debt
3,262

 
 
 
 
 
3,262

Future pension and postretirement benefit obligations

 
8,043

 
(vi)
 
8,043

Other long-term liabilities

 
625

 
(v) (vi)
 
625

Accrued retiree benefits and other long-term liabilities
8,521

 
(8,521
)
 
(vi)
 

Operating lease liabilities
738

 
 
 
 
 
738

Total Liabilities
$
20,449

 
 
 
 
 
$
20,449

Commitments and contingent liabilities
 
 
 
 
 
 
 
Redeemable noncontrolling interest
$
34

 
 
 
 
 
$
34

Shareowners’ Equity:
 
 
 
 
 
 
 
Common Stock
3

 
19

 
(ix)
 
22

Treasury Stock

 
 
 
 
 

Retained earnings
22,268

 
 
 
 
 
22,268

Unearned ESOP shares

 
 
 
 
 

Additional Paid-in Capital
19

 
(19
)
 
(ix)
 

Total Accumulated other comprehensive loss
(9,063
)
 
 
 
 
 
(9,063
)
Total Shareowners’ Equity
13,227

 
 
 
 
 
13,227

Noncontrolling interest

 
 
 
 
 

Total Equity
$
13,227

 
 
 
 
 
$
13,227

Total Liabilities and Equity
$
33,710

 
 
 
 
 
$
33,710

i.
Represents the reclassification of $529 million of non-current deferred income tax benefits from Other assets to Future income tax benefits.
ii.
Represents the reclassification of $249 million of computer software developed for internal use from Other assets to Fixed assets, net.    
iii.
Represents the reclassification of $261 million of intangible assets from Other assets to Intangible assets, net.
iv.
Represents the reclassification of Other current liabilities to Accrued liabilities.
v.
Represents the reclassification of $106 million of long-term environmental remediation costs and $41 million of asset retirement obligations from Accrued liabilities to Other long-term liabilities.
vi.
Represents the reclassifications of $8 billion from Accrued retiree benefits and other long-term liabilities to Future pension and postretirement benefit obligations and $478 million from Accrued retiree benefits and other long-term liabilities to Other long-term liabilities.
vii.
Represents the reclassification of Accrued employee compensation to Accrued liabilities.

8



viii.
Represents the reclassification of loss reserves from Contract liabilities, current to Accrued liabilities.
ix.
Represents the reclassification of Additional paid-in capital to Common stock.
Reclassifications to Raytheon’s consolidated statement of operations for the three months ended March 29, 2020 are as follows:
(Dollars, in millions)
Before Reclassifications
 
Reclassifications
 
Notes
 
After
Reclassifications
Net Sales:
 
 
 
 
 
 
 
Product sales
$
6,005

 
 
 
 
 
$
6,005

Service sales
1,160

 
 
 
 
 
1,160

 
7,165

 
 
 
 
 
7,165

Costs and expenses:
 
 
 
 
 
 
 
Cost of products sold
4,338

 
 
 
 
 
4,338

Cost of services sold
907

 
 
 
 
 
907

Research and development

 
161

 
(i)
 
161

Selling, general, and administrative
728

 
(172
)
 
(i) (iv)
 
556

 
5,973

 
 
 
 
 
5,962

Other income, net

 
 
 
 
 

Operating Profit
1,192

 
 
 
 
 
1,203

Non-service pension (benefit) cost
192

 
 
 
 
 
192

Interest expense (income), net

 
57

 
(ii) (iii)
 
57

Interest expense
43

 
(43
)
 
(iii)
 

Interest income
(11
)
 
11

 
(iii)
 

Other (income) expense, net
25

 
(25
)
 
(ii)
 

Income (loss) before income taxes
$
943

 
 
 
 
 
$
954

Income tax expense (income)
153

 
11

 
(iv)
 
164

Net income
$
790

 
 
 
 
 
$
790

Less: Noncontrolling interest in subsidiaries’ earnings (loss)
2

 
 
 
 
 
2

Net income (loss) attributable to Raytheon common stockholders
$
788

 
 
 
 
 
$
788

i.
Represents the reclassification of $161 million of research and development costs from Selling, general, and administrative expenses to Research and development expenses.
ii.
Represents the reclassification of Other (income) expense, net, which primarily relates to mark-to-market of marketable securities held in trusts associated with certain nonqualified deferred compensation and employee benefit plans, to Interest expense (income), net.
iii.
Represents the reclassification of Interest expense and Interest income to Interest expense (income), net.
iv.
Represents the reclassification of $11 million of state income taxes from Selling, general, and administrative expenses to Income tax expense (income).
Note 5: Purchase price accounting and estimated merger consideration
The unaudited pro forma condensed combined balance sheet has been adjusted to reflect a preliminary allocation of the purchase price to Raytheon’s identifiable assets acquired and liabilities assumed, with the excess recorded as goodwill. The preliminary purchase price allocation in this unaudited pro forma condensed combined financial information is based upon an estimated purchase price of approximately $33.2 billion as determined by (1) the opening price per share of RTC common stock as of April 3, 2020 multiplied by the approximately 648 million shares of RTC common stock that were issued (400 million from Treasury stock) to Raytheon stockholders in connection with the Merger, and the approximately 6.2 million shares of RTC common stock that were issued to Raytheon equity award holders in exchange for awards that vested upon completion of the Merger, (2) the portion of the fair value attributable to pre-Merger completion service for replacement equity awards that were exchanged for the outstanding awards held by Raytheon employees, and (3) estimated cash consideration payable in lieu of fractional shares owed to Raytheon equity and equity award holders.
The pro forma purchase price adjustments are preliminary and are subject to change. Increases or decreases in the estimated fair value of assets and liabilities may result in adjustments that could materially impact the unaudited pro forma condensed combined financial information.
Total estimated merger consideration is calculated as follows:
(Dollars, in millions)
 
Amount
Fair value of RTC common stock issued for Raytheon outstanding common stock and vested equity awards
 
$
33,063

Fair value attributable to pre-merger service for replacement equity awards
 
113

Total estimated merger consideration
 
$
33,176


9




The fair value of RTC common stock issued for Raytheon outstanding common stock and vested equity awards is calculated as follows:
(Dollars and shares in millions, except per share amounts)
 
Amount
Number of Raytheon ordinary shares outstanding as of April 3, 2020
 
277.3

Number of Raytheon stock awards vested as a result of the Merger (i)
 
0.4

Total outstanding shares of Raytheon common stock and equity awards entitled to merger consideration
 
277.7

Exchange ratio (ii)
 
2.3348

Shares of RTC common stock issued for Raytheon outstanding common stock and vested equity awards
 
648.3

Price per share of RTC common stock (iii)
 
51.00

Fair value of RTC common stock issued for Raytheon outstanding common stock and vested equity awards
 
33,063

(i)
Represents Raytheon stock awards that vested as a result of the Merger, which is considered a “change in control” for purposes of the Raytheon 2010 Stock Plan. Certain Raytheon restricted stock awards and Raytheon RSU awards, issued under the Raytheon 2010 Stock Plan vested on an accelerated basis as a result of the Merger. Such vested awards were converted into the right to receive RTC common stock determined as the product of (1) the number of vested awards, and (2) the exchange ratio.
(ii)
The exchange ratio is equal to 2.3348 in accordance with the Merger Agreement.
(iii)
The price per share of RTC common stock is based on the RTC opening stock price as of April 3, 2020.
The fair value of RTC common stock issued to replace Raytheon outstanding equity awards is calculated as follows:
(Dollars and shares in millions, except per share amounts)
 
Amount
Number of Raytheon stock awards outstanding (i)
 
2.7

Exchange ratio (ii)
 
2.3348

RTC equity awards issued for Raytheon outstanding stock awards
 
6.2

Price per share of RTC common stock (iii)
 
51.00

Fair value of RTC equity awards issued for Raytheon outstanding stock awards
 
317

Less: Estimated fair value allocated to post acquisition compensation expense
 
(205
)
Fair value of awards included in purchase accounting
 
113

(i)
Represents Raytheon stock awards that were replaced with RTC stock awards upon completion of the Merger. Raytheon stock awards include awards issued under the Raytheon 2010 Stock Plan and Raytheon 2019 Stock Plan, inclusive of Raytheon restricted stock awards, Raytheon RSU awards, and Raytheon PSU awards.
(ii)
The exchange ratio is equal to 2.3348 in accordance with the terms of the Merger Agreement.
(iii)
The price per share of RTC common stock is based on the RTC opening stock price as of April 3, 2020.
The following is a preliminary estimate of the assets to be acquired and the liabilities to be assumed by UTC, as if the Merger had occurred on March 31, 2020:
(Dollars, in millions)
 
Amount
Current assets, including cash acquired
 
$
12,468

Fixed assets
 
4,750

Goodwill
 
20,768

Intangible assets
 
19,230

Other assets
 
2,170

Total Assets
 
$
59,386

Future pension and postretirement benefit obligations
 
10,650

Long-term debt, including current portion
 
4,700

Other liabilities assumed
 
10,826

Total Liabilities
 
$
26,176

Redeemable noncontrolling interest
 
34

Total consideration transferred
 
$
33,176


Note 6: Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
a)
Accounts receivable, net: Represents the elimination of accounts receivable of $43 million owed to UTC from Raytheon.
b)
Other assets, current: Represents elimination of deferred sales commissions of $22 million, an increase of $211 million for the fair value of Raytheon’s assets that were sold on May 1, 2020 in order to obtain certain regulatory approvals required to complete the Merger and an increase of $56 million for the elimination of deferred state income taxes which under historical Raytheon policy reduced future recoverable amounts.

10



c)
Future income tax benefits: Deferred income taxes are included in Future income tax benefits and Other long-term liabilities in the unaudited pro forma condensed combined balance sheet as of March 31, 2020. Deferred tax adjustments include a $519 million decrease in Future income tax benefits and a $2.5 billion increase in Other long-term liabilities. These are as a result of the estimated tax impact for the pro forma adjustments. Pro forma adjustments were tax effected at the applicable blended statutory tax rates, generally 23% in 2020. This estimate is preliminary and subject to change based upon final determination of fair values and tax rates. Additionally, the amounts recorded for deferred taxes relating to undistributed earnings may change now that the Separation and the Distributions have been completed.
d)
Fixed assets, net: Represents the adjustment in carrying value of Raytheon’s fixed assets from its recorded net book value to its preliminary estimated fair value. The estimated fair value is expected to be depreciated over the estimated useful lives of the assets, generally on a straight-line basis. The fixed assets acquired primarily consist of the following:
(Dollars, in millions)
Estimated Useful Life
 
Raytheon Historical Carrying Amount Before Reclassification
 
Fair Value Adjustment
 
Estimated Fair Value
Land
 
 
$
81

 
$
518

 
$
599

Buildings and improvements
20 years
 
1,119

 
431

 
1,550

Machinery, tools and equipment
6 years
 
1,218

 
186

 
1,404

Other, including assets under construction
 
 
948

 

 
948

Total Fixed Assets
 
 
$
3,366

 
$
1,135

 
$
4,501

Right of use assets
 
 
909

 
43

 
952

Total
 
 
$
4,275

 
$
1,178

 
$
5,453

The pro forma adjustment to Fixed assets, net also reflects the elimination of Raytheon’s historical accumulated depreciation of $5.2 billion against the gross carrying value of the related fixed assets of $8.6 billion.
e)
Goodwill: Represents a net increase in goodwill of $5.9 billion, comprised of the elimination of Raytheon’s historical goodwill balance of $14.9 billion, offset by $20.8 billion of goodwill resulting from the Merger. Goodwill resulting from the Merger represents the excess of estimated merger consideration over the preliminary fair value of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. The estimated goodwill to be recognized is attributable primarily to expected synergies, expanded market opportunities, and other benefits that RTC believes will result from combining its operations with the operations of Raytheon. The goodwill created in the Merger is not deductible for tax purposes and is subject to material revision as the purchase price allocation is completed.
f)
Intangible assets, net: Represents adjustments to record the preliminary estimated fair value of intangibles of approximately $19.2 billion, which represents an increase of $19 billion over Raytheon’s net book value of intangible assets prior to the Merger. The estimated fair values of identifiable intangible assets are preliminary and are determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The final fair value determinations for identifiable intangible assets may differ from this preliminary determination, and such differences could be material. The intangible assets acquired primarily consist of the following:
(Dollars, in millions)
Estimated Useful Life
 
Amortization method
 
Estimated Fair Value
Amortized:
 
 
 
 
 
Customer relationships and other
25 years
 
Pattern of economic benefit
 
$
12,900

Developed technology and royalty agreements
6-8 years
 
Pattern of economic benefit
 
890

Unamortized:
 
 
 
 
 
Trademarks and other
 
 
 
 
5,440

Total
 
 
 
 
$
19,230


Pro forma amortization expense of the acquired intangible assets was $375 million for the three months ended March 31, 2020. The following table summarizes the expected pro forma amortization expense of the acquired intangible assets for the years 2020 through 2025, which has been prepared to reflect the Merger as if it occurred on January 1, 2019. The finalization of the detailed valuation work may have a material impact on the valuation of intangible assets

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and the purchase price allocation.
 
 
Remaining
(Dollars, in millions)
April 1, 2020 – December 31, 2020
2021
2022
2023
2024
2025 and thereafter
Amortization expense
$
1,122

$
920

$
1,025

$
1,111

$
971

$
6,780


g)
Other assets: Represents the elimination of deferred sales commissions of $29 million and a $14 million decrease of the pension and postretirement benefit assets based upon the application of purchase accounting.
h)
Accounts payable: Represents the elimination of accounts payable of $43 million owed to UTC by Raytheon.
i)
Accrued liabilities: Represents adjustment for directly attributable transaction costs related to the Merger not yet accrued by UTC and Raytheon of approximately $110 million and $80 million, respectively, a $153 million increase related to the recognition of onerous contracts at fair value, a $28 million accrual for change in control payments due to certain Raytheon personnel shortly after the Merger and a $6 million decrease of pension and postretirement liabilities based upon the application of purchase accounting.
j)
Contract liabilities, current: Reflects a decrease in deferred revenue of $43 million as a result of fair value purchase accounting.
k)
Long-term debt: Reflects an increase of $439 million in Raytheon indebtedness to fair value in connection with preliminary purchase price allocation.
l)
Future pension and postretirement benefit obligations: Represents an increase of the pension and postretirement benefit obligation based upon the application of purchase accounting.
m)
Other long-term liabilities: Reflects a $2.5 billion increase as a result of the estimated deferred tax impact of pro forma adjustments and a $5 million decrease in deferred revenue as a result of fair value purchase accounting.
n)
Total Shareowners’ Equity: Represents the elimination of Raytheon common stock, additional paid-in capital, retained earnings, and accumulated other comprehensive loss, as well as the following adjustments to reflect the capital structure of the Company.
(Dollars, in millions)
Common Stock
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Loss
Fair value of RTC common stock issued for Raytheon common stock and equity awards (i)
$
10,908

$

$

$

    Issuance of RTC treasury shares for Raytheon common stock and equity awards (i)

22,268



Elimination of Raytheon historical shareholders’ equity (i)
(22
)

(22,268
)

Adjustments related to pensions and postretirement benefits (ii)



(8,892
)
Recognition of Merger-related transaction costs (iii)


(110
)

Elimination of cash flow hedge and treasury rate lock losses (iv)



(2
)
Elimination of foreign currency translation adjustment (v)



(169
)
Total
$
10,886

$
22,268

$
(22,378
)
$
(9,063
)
(i)
Represents an adjustment to increase the common stock and additional paid-in capital of the Company for 248 million of additional shares issued and the use of 400 million treasury shares for the total of the 648 million shares issued as consideration for the Merger, and to eliminate the par value of the Raytheon common stock acquired.
(ii)
Represents an adjustment to eliminate unamortized prior service costs and actuarial losses, as a result of fair value purchase accounting.
(iii)
Represents recognition of approximately $110 million of anticipated transaction costs that are directly attributable to the Merger but that were not incurred by UTC as of March 31, 2020.
(iv)
Represents elimination of accumulated other comprehensive losses associated with Raytheon cash flow hedges and treasury rate locks in connection with purchase accounting.
(v)
Represents adjustment to eliminate foreign currency translation associated with the translation of non-USD denominated entities to USD, which was recorded by Raytheon, as a result of fair value purchase accounting.

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Note 7: Adjustments to Pro Forma Condensed Combined Statement of Operations
o)
Product sales: Represents a decrease for the elimination of $69 million in revenues earned by UTC on sales to Raytheon that would be considered intercompany transactions and will be eliminated in the consolidated financial statements of the Company following completion of the Merger, as well as a $5 million decrease related to the preliminary fair value of Raytheon’s deferred revenue in purchase accounting. The pro forma adjustment related to the reduction in deferred revenue reflects the difference between prepayments related to extended arrangements and the preliminary fair value of the assumed performance obligations as they are satisfied, assuming the Merger was completed on January 1, 2019.
p)
Cost of products and services sold: Represents adjustments to cost of products and services sold comprised of the following:
1. Cost of products sold:
Three Months Ended
(Dollars, in millions)
3/31/2020
Amortization of acquired intangible assets (i)
$
354

Depreciation of fixed assets step-up (ii)
10

Adjustment to pension service cost (iii)
(8
)
Elimination of costs related to intercompany sales from UTC to Raytheon (iv)
(69
)
Amortization of onerous contracts (v)
(10
)
Total pro forma adjustment to cost of products sold
$
277

 
 
2. Cost of services sold:
Three Months Ended
(Dollars, in millions)
3/31/2020
Depreciation of fixed assets step-up (ii)
$
1

Adjustment to pension service cost (iii)
(2
)
Total pro forma adjustment to cost of services sold
$
(1
)
(i)
Represents net impact of removal of historical amortization expense and amortization expense recognized due to the identification of definite-lived intangible assets in purchase accounting.
(ii)
Represents adjustment to depreciation expense due to the recognition of Raytheon’s fixed assets at their preliminary fair values in purchase accounting, depreciated over their estimated remaining useful lives, determined in accordance with UTC policy.
(iii)
Represents the impact of the pension and postretirement service cost expense as determined under UTC’s plan assumptions.
(iv)
Represents elimination of cost of sales relating to transactions between UTC and Raytheon that would be considered intercompany transactions and will be eliminated in the consolidated financial statements of the Company following the Merger.
(v)
Represents amortization of onerous contracts recorded at their preliminary fair values in purchase accounting.
q)
Research and development expenses: Reflects an increase of $1 million in depreciation expense due to the recognition of Raytheon’s fixed assets at their preliminary fair values in purchase accounting.
r)
Selling, general and administrative expenses: Represents adjustments to selling, general and administrative expenses comprised of the following:
 
Three Months Ended
(Dollars, in millions)
3/31/2020
Depreciation of fixed assets step-up (i)
$

Adjustment to pension service cost (ii)
(1
)
Elimination of deferred commissions amortization (iii)
(7
)
Elimination of transaction costs (iv)
(39
)
Total pro forma adjustment to selling, general, and administrative expenses
$
(47
)
(i)
Represents adjustment to depreciation expense due to the recognition of Raytheon’s fixed assets at their preliminary fair values in purchase accounting, depreciated over their estimated remaining useful lives, determined in accordance with UTC policy.
(ii)
Represents the impact of the pension and postretirement service cost expense as determined under UTC’s plan assumptions.
(iii)
Represents elimination of amortization recognized on deferred commissions that are eliminated in purchase accounting.
(iv)
Represents the elimination of non-recurring transaction costs incurred related to the Merger.

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s)
Non-service pension (benefit) cost: Reflects an adjustment to Non-service pension (benefit) cost for the elimination of prior service cost and actuarial loss amortization, which was recorded by Raytheon, as a result of the application of purchase accounting.
t)
Interest expense (income), net: reflects the amortization of the incremental fair value of assumed debt recognized in connection with purchase accounting.
u)
Income tax expense (income): reflects the tax effect of pro forma adjustments. The pro forma adjustments were tax effected at the applicable blended statutory tax rate, generally 23%. RTC’s effective tax rate may be materially different after conclusion of final acquisition accounting, removal of one-time items reflected in historical amounts, analysis of the post-closing geographical mix of income, and other factors. Adjustments to tax assets and liabilities will occur in conjunction with the finalization of the purchase accounting, and these items could be material.
v)
Basic weighted average number of shares outstanding: Reflects the pro forma issuance of 648 million shares of RTC common stock issued in exchange for Raytheon outstanding common stock and equity awards that vested immediately upon closing of the Merger in accordance with the Merger Agreement.
w)
Diluted weighted average number of shares outstanding: Reflects 7.4 million dilutive UTC shares as of March 31, 2020 that were excluded from the pre-Merger UTC calculation of diluted EPS due to UTC’s net loss recorded for the three months ended March 31, 2020, as well as the pro forma issuance of 3.5 million shares of RTC common stock issued in exchange for Raytheon outstanding common stock and equity awards that vested immediately upon closing of the Merger and the issuance of shares of common stock under replacement equity awards issued in accordance with the Merger Agreement. In connection with the Merger, unvested awards held by certain Raytheon employees were converted to RTC restricted stock awards, such that the total value of equity awards held by Raytheon employees post-Merger is substantially economically equivalent to the value of such awards prior to the Merger.

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