Raytheon Technologies [RTX] on Tuesday posted higher sales and earnings in its second quarter driven by the ongoing recovery in commercial air travel, but the company’s defense businesses were largely down in the period.
The company’s defense business continues to be beset by supply chain challenges and labor availability, and was also impacted by delays in some contract awards, Greg Hayes, chairman and CEO of Raytheon Technologies, said on a call with analysts.
For most of its commercial businesses, Raytheon Technologies has long-term agreements in place with suppliers that provide a hedge against inflation and also give suppliers more clarity on demand, ensuring that stocks, for the most part, are available, Hayes said.
However, on the defense side, very few long-term supplier agreements are in place due to government contracting rules, he said. That means once the company is under contract, it then puts suppliers on contract, “and we’re seeing lead times double and sometimes triple,” catching the company “off-guard a little bit by how much pressure there is in the supply chain.”
This is due to labor availability, Hayes said. Most workers laid off two years ago during a downturn in aerospace and defense aren’t coming back “because the labor market is so tight in this country,” he said. Raytheon Intelligence & Space (RIS), one of the company’s defense segments, is struggling hire all the engineers it needs, he said.
Hayes also said in the company’s defense plants it typically has “kits” available with 90 to 95 percent of the parts ready for assembly, but in the second quarter the rates were around 50 percent, which means lower productivity and rework. During the second half of the year the company is working to get those rates up to about 80 percent, but “That’s a big get,” he said. “But we absolutely have to do that.”
Net income jumped 25 percent to $1.3 billion, 88 cents earnings per share (EPS), from $1 billion (69 cents EPS) a year ago. Excluding acquisition accounting and other one-time costs, adjusted earnings were $1.16 per share, topping consensus estimates by 4 cents EPS.
Sales were up 3 percent to $16.3 billion from $15.9 billion a year ago, with organic growth of 4 percent, partially offset by a 1 percent decline related to divestitures.
Growth was driven by the commercial aftermarket followed by commercial original equipment sales at the Pratt & Whitney aircraft engine and Collins Aerospace segments.
Defense work at Collins was down on supply chain constraints and an expected decline in support for the F-35 fighter program. Defense sales were up at Pratt, 5 percent, on an F135 engine production contract and F135 aftermarket volume. The F135 powers the F-35.
The RIS and Raytheon Missile & Defense Segments both turned in lower sales and operating income due to the divestiture of a global training business, lower revenue from C3 and sensors and effects programs, supply chain issues, less work on some land warfare and air defense programs, higher development costs and lower program efficiencies.
Despite the strong commercial performance, the outlook for the rest of the year remains unchanged, as a better-than-expected commercial aerospace market is offset by the supply chain and labor challenges and award timing in defense.
“I think the only thing that’s going to solve labor availability, I hate to say this, is a slowdown int the economy because right now, there just simply aren’t enough people in the workforce for all of our suppliers,” Hayes said.
Given Russia’s war in Ukraine and an outlook for higher defense spending in the U.S. and by its allies, the outlook for defense is strong, the company said. Defense orders in the second quarter were nearly 1.4 times sales and defense backlog stood at $65 billion versus $63 billion at the end of 2021, 3 percent higher. Hayes said defense backlog will continue to increase this year.
For the year, sales are expected to range between $67.8 billion and $68.8 billion and adjusting earnings between $4.60 and $4.80 EPS. Free cash flow is still pegged at $6 billion. In the quarter, free cash flow was $807 million.