Raytheon Technologies [RTX] on Tuesday posted handsome top and bottom-line gains in its first quarter driven largely by its commercial aerospace work and to a lesser degree its defense business.
Net income soared 29 percent to $1.4 billion, 97 cents earnings per share (EPS), from $1.1 billion (72 cents EPS), and benefited from various acquisition accounting adjustments and non-recurring charges that hampered the company a year ago. Adjusted income increased 4 percent to $1.8 billion ($1.22 EPS) and topped consensus estimates by 9 cents per share.
At the operating level, Collins Aerospace and Pratt & Whitney both turned in strong earnings growth on their commercial and defense work while income was down at the Raytheon Missiles & Defense (RMD), and Raytheon Intelligence & Space (RIS) segments due to lower program efficiencies and higher development programs at RMD.
Segment operating margin increased 230 basis points to 10.3 percent.
Sales in the quarter increased 10 percent to $17.2 billion from $15.7 billion a year ago, with all the gain organic.
The top-line results were driven by strong sales at the Collins Aerospace and Pratt & Whitney segments due to commercial aftermarket and original equipment sales. Defense sales in both businesses were also robust with Pratt & Whitney benefitting from F135 engine production and sustainment. Sales at RMD were higher on advanced technology and airpower programs while RIS sales remained flat versus a year ago.
Financial guidance for 2023 is unchanged, including free cash flow of around $4.8 billion. Free cash in the first quarter was a $1.4 billion outflow.
Backlog at the end of the quarter stood at $180 billion, a record, and up 3 percent from the end of 2022. Commercial aerospace work makes up $109 billion of the backlog and defense $71 billion. Orders in the quarter were strong at $21 billion, including $1.9 billion in classified awards at RIS.
The macro-environment overall is positive, with domestic and international demand for defense products increasing and the rebound in commercial air traffic ongoing, Greg Hayes, chairman and CEO of Raytheon Technologies, said on the company’s earnings call.
There is demand that hasn’t reached the backlog yet, Hayes said, highlighting that the company has received $2 billion in awards to replenish Ukrainian munitions with more expected later this year and into 2024, Hayes said. Once the Lower Tier Air and Missile Defense Sensor, called LTAMDS, is certified later this year, Defense Department and international orders will pick up, he said. The company is also expecting strong orders for its SPY-6 radar in low-rate production for the Navy, he said.
Hayes also said the company is “seeing some stabilization in the supply chain,” which has been a drag on industry due to impacts from the COVID-19 pandemic. Still, concerns remain.
Chris Calio, president and chief operating officer or Raytheon Technologies, said on the call that the supply chain “continues to be a challenge from a performance and cost perspective.” There has been “stabilization” around electronics components while challenges remain in castings, forgings, raw materials and machining, he said.
For defense suppliers, Raytheon Technologies has “significantly increased on-site support,” which has helped “clear bottlenecks, better execute engineering and quality initiatives and provide improved overall visibility,” Calio said. These actions improved material receipts by 5 percent year-over-year at RMD, increasing flow through the factories, he said.
Inflation “remains persistently high” and the company has nearly 2,000 cost reduction projects related to its supply chain that include negotiating better contract terms, moving to lower cost sources and redesigning parts to cut costs, Calio said. Other cost cutting efforts include ongoing footprint modernization and ongoing efficiency initiatives to reduce operating costs, he said.