RTX [RTX] on Tuesday posted flat earnings in its fourth quarter compared to a year ago due to various acquisition accounting adjustments and corporate expenses while sales increased largely due to work supporting commercial aircraft.
Net income of $1.4 billion, $1.05 earnings per share (EPS), was clipped by $499 million in accounting adjustments and $40 million in higher corporate costs, partially offset by a gain from a customer settlement. Net income a year ago was $1.4 billion (96 cents EPS).
Excluding the accounting adjustments and any restructuring costs, adjusted net earnings of $1.29 EPS were 4 cents ahead of consensus estimates and 2 cents higher than a year ago.
Sales in the quarter increased 10 percent to $19.9 billion from $18.1 billion a year ago, driven by double-digit gains at the Collins Aerospace, and Pratt & Whitney segments, and a 3 percent increase at the Raytheon defense segment on advanced technology and air power programs.
The Raytheon business has struggled somewhat on the bottom-line despite growing sales. Chris Calio, president and chief operating officer of RTX, during the company’s earnings call said profitability remains challenged largely due to legacy fixed-price development programs, and to a lesser extent from ongoing supply chain—he described these as “unfavorable material costs and supplier delinquencies”—and operational issues.
Working through the fixed-price development programs by completing technical milestones will result in improvements on these contracts, Calio said. Going forward, the Raytheon segment will be more “disciplined” in the work it bids on, he said.
A second focus area for improving Raytheon’s performance is protecting against “supplier inflation” in new contracts, Calio said. This will take time but will improve margins, he said.
Third, Calio said, is improving supply chain performance and material flow, noting that material receipts were up 8 percent in 2023. Raytheon will maintain a focus on improving material receipts this year, he said.
Raytheon is also focused on indirect costs, including consolidating “sub-business units” to lower overhead, streamline, and better position for profitable growth, Calio said.
Finally, Raytheon will benefit as development programs transition to production, and foreign military and direct commercial sales increase, which all carry higher margins.
Despite the headwinds at Raytheon, Calio said the segment has benefited from some productivity improvements, pointing to the GEM-T Patriot missile for air defense. Annual output of the missile increased by 50 percent without additional capital investment or manpower by refining “work instructions, increased test equipment uptime, and reduced product cycle time,” he said.
For the year, the Raytheon segment posted $26.4 billion in sales, up 5 percent from $25.2 billion a year ago. Operating profit of $2.4 billion was down slightly but still flat after rounding and backlog stood at $52 billion. Operating margin at the Raytheon segment in 2023 declined 70 basis points to 9 percent.
Military sales in the quarter were also up at Pratt and Collins, with the former benefitting from sustainment volume and the latter on timing of deliveries.
Overall, in 2023, RTX’s sales increased 3 percent to $68.9 billion from $67 billion in 2022. Net income slid 39 percent to $3.2 billion ($2.23 EPS) from $5.2 billion ($3.51 EPS) a year ago. Net income suffered a $2.9 billion pre-tax charge earlier in the year related to powder metal used in commercial engine production. Free cash flow in the fourth quarter was $3.9 billion and for the year $5.5 billion.
Backlog at the end of 2023 was $196 billion, including $78 billion in defense work.
In 2024, RTX is expecting sales between $78 billion and $79 billion, representing 7 to 8 percent organic growth over 2023, led by Pratt and followed by Collins and then Raytheon on an organic basis. The pending sale of Raytheon’s cyber security business is expected to close by the end of March, a $1.3 billion headwind to sales and $80 million in operating profit in 2024, Neil Mitchill, RTX’s chief financial officer, said on the earnings call.
Adjusted earnings per share this year are forecast to be between $5.25 and $5.40 versus $5.06 in 2023. The increase in earnings will be driven by segment profits and a lower share count. Free cash flow is expected to be around $5.7 billion. Collins is expected to lead segment profit growth in 2024 followed by Pratt and then Raytheon.
In 2025, RTX is projecting around 6 percent growth in sales, segment operating margin upward of 5.5 percent, and free cash flow of $7.5 billion.