RTX [RTX] on Tuesday said third quarter earnings swung to a loss due to an issue with a commercial aircraft engine component that it disclosed in July when it reported second quarter results.
Sales also tumbled due to the engine issue at the Pratt & Whitney segment, which stems from the discovery of microscopic contaminants in powder metal used to manufacture turbine discs in PW1100G-JM engines that could reduce disc life. The engines power Airbus A320neo commercial planes.
The net loss in the quarter was $984 million, 68 cents earnings per share (EPS), versus net income of $1.4 billion (94 cents EPS) a year ago. The $2.2 billion after-tax powder metal charge was in line with the company’s expectations.
Excluding the powder metal charge and nearly $500 million in additional charges related to acquisition accounting adjustments, restructuring and other items, adjusted earnings of $1.8 billion ($1.25 EPS) in the quarter were 2 percent higher than a year ago and topped consensus estimates by three cents per share.
Sales fell 21 percent to $13.5 billion from $17 billion a year ago driven by a $5.4 billion hit related to the powder metal challenges. Excluding the powder metal impacts, adjusted sales increased 12 percent to $19 billion.
Greg Hayes, chairman and CEO of RTX, told investors the company is confident it has the powder metal matter under control and does not see any additional material financial impacts.
With a handle on the engine issue combined with a strong outlook for defense and commercial aviation, pending sales of the company’s cybersecurity, intelligence, and services business, and its Collins actuation business, RTX’s board has approved a $10 billion accelerated share repurchase program that will begin on Wednesday, Hayes said. The accelerated share repurchases are in addition to $2.6 billion worth of the company’s stock already repurchased this year and falls within a recently announced $11 billion share buyback program, he said.
“Simply put, we see a significant discount between the intrinsic value of RTX and our current stock price,” Hayes said during the company’s earnings call.
Investors welcomed the accelerated share repurchase announcement, sending RTX’s stock price up $5.25, or nearly 7.2 percent, to close at $78.38 on Tuesday.
The pending $1.3 billion sale of the cybersecurity business was announced on Tuesday although the buyer has not been disclosed. France’s Safran Group is acquiring the actuation business. The two deals will bring RTX $3 billion in combined proceeds, Hayes said.
Excluding the powder metal impacts, top line growth was driven by commercial original equipment and aftermarket business at Collins Aerospace and Pratt & Whitney, higher sales of F135 military engines on sustainment and development work, and increased volume on AIM-9X missiles and classified technology programs at the Raytheon defense segment.
RTX tallied a strong $22 billion in orders during the quarter including $7.4 billion at Raytheon, driving backlog to a record high of $190 billion, up 13 percent from a year ago. Defense backlog stood at $50 billion.
U.S. support for Ukraine’s weapons needs in that country’s war against Russia have led to about $3 billion in orders so far for RTX, mainly to replenish Defense Department stockpiles, Hayes said. Another $4 billion of orders are expected during the next two years with those deliveries occurring over the next two to three years, he said.
President Joe Biden’s supplemental request last week for additional Ukraine funding will eventually result in larger orders for RTX, Hayes said. He expects an eventual large uptick in orders for the NASAMS short-range air-defense missiles, Advanced Medium-Range Air-to-Air Missiles, and Patriot GEM-T air defense missiles.
Excluding the various charges, RTX’s bottom-line benefitted by strength at Collins and Pratt & Whitney due to commercial work, more than offsetting a decline at the defense segment. Raytheon was down due to lower program efficiencies, which included headwinds on fixed-price development programs.
The defense business continues to see some “pockets” of inflation within the manufacturing base and this challenge is expected to continue into 2024, Neil Mitchill, RTX’s chief financial officer, said on the call. The company will continue to pursue strategic initiatives to offset inflation pressure, he said.
For 2023, RTX expects sales to be $68.5 billion, which is the top end of the prior guidance range. The outlook for earnings was narrowed to between $4.98 to $5.02 EPS from the prior range of between $4.95 to $5.05 EPS. Earnings guidance was tightened due to a change in research and development guidance from the Internal Revenue Service (IRS) that is a three cents headwind for the year.
Free cash flow in the quarter was $2.8 billion and the outlook for the year is $4.8 billion, a $500 million increase from earlier projections due to a positive impact from the IRS guidance.