RTX [RTX] on Tuesday posted strong sales although net income rose marginally due to various accounting adjustments and a customer insolvency and the company also disclosed an issue in its commercial aircraft engine business that led it to lower free cash flow guidance for the year by $500 million.
The engine issue at Pratt has to do with microscopic contaminants in powdered metal used to manufacture turbine discs in PW1100G-JM engines that could reduce the life of the discs. The engines power the Airbus A320neo commercial aircraft.
RTX will accelerate removals and inspections on these engines that are in airline fleets. By mid-September, the company expects to remove about 200 engines for inspection and about 1,200 engines total in the next nine to 12 months.
The company will have a better idea of future financial impacts by the time it reports third quarter results in October, Greg Hayes, RTX chairman and CEO, said during an earnings call with analysts. Current production of powdered metal parts at Pratt is not impacted, Chris Calio, the company’s president and chief operating officer, said on the call.
Net income rose 2 percent to $1.33 billion, 90 cents earnings per share (EPS), from $1.3 billion (88 cents EPS) a year ago. Segment operating margin grew 30 basis points to 9.1 percent.
Excluding acquisition accounting adjustments, the impact from an airline insolvency, and restructuring and portfolio transformation costs, adjusted earnings of $1.29 EPS topped consensus estimates by 11 cents per share.
Sales increased 12 percent to $18.3 billion from $16.3 billion a year ago. Excluding divestitures, organic growth was a strong 13 percent.
At the operating level, the strong sales were widely distributed with commercial aftermarket and original equipment business primarily driving double-digit percentage gains at the Collins Aerospace and Pratt segments, and air power, advanced technology, and land warfare and defense programs at the Raytheon Missiles and Defense (RMD) segment. The Raytheon Intelligence and Space (RIS) segment also recorded a small top-line gain on sensing and effects, cyber and services work.
The higher sales drove the increase in net income. The RMD segment has strong operating earnings on program efficiencies and better sales. Operating profit was lower at RIS on productivity issues related to some classified fixed-price development contracts and higher operating expenses.
The classified RIS programs are in the test phases and it will be 18 to 24 months before the issues are behind the company, Neil Mitchill, chief financial officer, said during the call.
Orders in the quarter were exceptionally strong at $25 billion, driving backlog to a record $185 billion, up nearly 3 percent from $180 billion at the end of the first quarter. Commercial work accounted for $112 billion and defense $73 billion of the backlog. Defense orders tallied $13 billion.
Given strong results so far this year and continued strength in the commercial aircraft aftermarket, RTX raised its sales outlook for 2023 by $1 billion to between $73 billion and $74 billion. The company increased its expected adjusted earnings outlook by a nickel at the low-end of the prior guidance range to between $4.95 and $5.05 EPS. Free cash flow is now forecast to be $4.3 billion versus the prior $4.8 billion due to the powdered metal issue at Pratt.
So far, RTX has received about $2 billion in orders from the Defense Department to replenish munitions stocks related to military aid to Ukraine and expect about $2.5 billion more in the next year for Ukraine replenishment, Hayes said. Additionally, the company expects further orders for its Patriot missile systems, Advanced Medium-Range Air-to-Air Missiles, and Excalibur munitions, and foresees more demand for Javelin anti-tank weapons and Stinger anti-aircraft missiles, he said.