Raytheon Technologies [RTX] on Tuesday reported higher sales in its third quarter driven by continued strong demand for commercial aerospace products.
The ongoing recovery in the commercial aerospace business more than offset continued weakness in the company’s defense businesses. Raytheon Missiles and Defense (RMD) and Raytheon Intelligence and Space (RIS), the company’s two standalone defense businesses, posted lower sales on land warfare, air defense and Naval power programs, coupled with the divestiture of the training and services business.
Excluding the divestiture and negative foreign exchange impacts, organic sales at RIS were up 2 percent on classified work in sensing and effects programs.
Military sales were also lower in the Pratt & Whitney engine segment and the Collins Aerospace electronics segment. At Pratt, lower sales of F135 engines for the F-35 fighter jet were partially offset by higher revenue from F135 sustainment activities.
The company continues to be plagued by supply chain and labor constraints, particularly at RMD. These challenges led RTX to lower its sales guidance for the year to between $67 billion and $67.3 billion versus the prior outlook of between $67.8 billion to $68.8 billion. The new outlook is for organic growth of 5 to 6 percent versus the previous 6 to 8 percent.
RTX added a dime to the low end of its adjusted earnings guidance for 2022, with the outlook now between $4.70 and $4.80 EPS. The improved forecast is based on strong commercial aftermarket and original equipment product sales combined with “cost containment actions” across the company, Neil Mitchill, chief financial officer at RTX, said on the company’s earnings call.
Greg Hayes, chairman and CEO of RTX, put a price tag on the expected headwinds the company faced entering 2021, amounting to $1.5 billion of cost growth related to employee compensation, supply chain constraints and energy prices. Those costs are now closer to $2 billion and exclude a $200 million headwind based on the company ceasing activities in Russia stemming from that country’s unprovoked war against Ukraine.
The “good news” is the company has been cutting costs and has hundreds of cost cutting projects ongoing, he said.
Hayes said on an earnings call that there has been “some stabilization” in supply chain disruptions, highlighting that the company has 13,000 suppliers, of which about 400 are a problem. RTX is working closely with these suppliers to get them raw materials, including at better prices by leveraging the company’s contracts, providing contract labor and technical support, he said.
However, challenges will continue into 2023 and even 2024, Hayes said.
The availability of mostly assembled kits at its RMD defense plants are below expectations and will remain so for the rest of 2022, which led the company to lower sales guidance at the sector this year, he said.
“I do think as we’re looking through this by the end of next year, that we should start to see some of this abate because, as you know, the economy slowing down, more people available in the supply chain to work,” Hayes said.
For rocket motors, Hayes said he doesn’t expect a recovery until the first half of 2024.
“We’re fully prepared that next year is going to be kind of hand to mouth on the supply chain,” he said.
RTX has had some success getting the computer chips it needs and in hiring new employees, 27,000 so far this year, Hayes said. The company still needs another 10,000 hires this year, he said.
Sales in the quarter increased 5 percent to $17 billion from $16.2 billion a year ago. Net income dipped nearly a percent to just below $1.4 billion, 94 cents earnings per share (EPS), from $1.4 billion (93 cents EPS) a year ago. Segment operating marking fell 20 basis points to 9.6 percent.
Adjusting for the acquisition related charges, per share earnings fell 4 percent to $1.21 EPS, beating consensus estimates by 7 cents.
Guidance for 2023 will be provided in January, but company officials gave a rough outlook for next year.
Mitchill set the growth range in the mid- to high single-digits with commercial leading way. The company also expects to see profit margins expand, he said.
Defense will grow in 2023 but not “as robust as we would like” due to the continuing constraints around labor availability and the supply chain, Hayes said. Commercial aerospace will remain strong, driven by increased aircraft production by Boeing [BA] and
Airbus and the aftermarket, he said.
RTX tallied more than $22 billion in orders in the quarter, driving overall backlog to $168 billion, up 8 percent from $156 billion at the end of 2021. Defense backlog stood at $67 billion, up 6 percent from $63 billion at the end of 2021.
Free cash flow in the quarter was $263 million and the company still expects around $4 billion in free cash this year.