Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- RTX Corp (RTX, Financial) delivered strong operational and financial performance in Q2 with adjusted sales of $19.8 billion, up 10% organically.
- Adjusted EPS increased by 9% year-over-year to $1.41, driven by profit growth and margin expansion across all three segments.
- Free cash flow was robust at $2.2 billion, indicating strong cash generation capabilities.
- The company saw continued growth in its backlog, ending the quarter at $206 billion with a book-to-bill ratio of 1.25.
- RTX Corp (RTX) secured significant contract wins, including a 10-year MRO agreement with Air Canada and a $639 million award for SPY-6 radar production for the U.S. Navy.
Negative Points
- RTX Corp (RTX) recorded a $633 million pretax charge related to the expected resolution of several legacy legal matters.
- A $575 million pretax charge was taken due to the anticipated termination of a Raytheon fixed price development contract.
- The company revised its free cash flow outlook for the year to approximately $4.7 billion, down from the previous expectation of $5.7 billion.
- There are ongoing challenges with supply chain constraints, particularly in structural castings and isothermal forgings.
- RTX Corp (RTX) continues to face higher production costs and increased R&D and SG&A expenses, impacting profitability.
Q & A Highlights
Q: Chris, nice results. Just, I guess, maybe just on the GTF fleet management plan. It sounds like everything is going according to plan and remains on track. But maybe if you could just peel back the onion a little bit. I know you talked about some pacing items in the past about getting full life discs into the MRO shops and just material availability. It sounds like the MRO capacity is going as planned. But maybe any metrics or any color, what you're seeing? And any opportunities actually, where any of these metrics might still be able to come into the left before 2026?
A: Yes. Okay, Peter. Thanks for the question. Let me take you through where things stand. As you noted, our key assumptions around AOGs, wing-to-wing turnaround time, shop visit mix between heavy and light and customer compensation all remain consistent. And as I noted upfront, our assumptions on the inspection fallout rates and the findings are all consistent or even better than we planned. So good stability around the key assumptions. As you know, MRO output is the key enabler. And we're focused on improving the material flow, better processes in the shops, and we've added some capacity on this front. And again, we saw some good signs of progress here in the first half of the year. I mean, output was up 10% from Q1 to Q2. And first half output on the 1100 is up over 30% versus the first half in 2023. We continue to drive some output there, which is helpful. The key enabler of course, on the MRO output is material. You had mentioned that upfront. We're continuing to see some progress on structural castings. Structural castings are up about 5% sequentially and 14% year-over-year. So good progress there. And then on forgings, the powder metal parts, we continue to drive output there as well. Isothermal forgings were up almost 100% year-over-year, and we continue to add additional capacity for inspection and machining. For example, we've nearly doubled our sonic inspection capacity for the year. So again, driving on all the key enablers, Peter, to try to get this fleet in as healthy a shape as we possibly can. I'll also just note, unrelated to the fleet management plans, continue to drive OE output as well. OE deliveries were up sequentially, up 30% in the first half on a year-over-year basis despite grinding through some of the supply chain availabilities, and we're also pleased with the additions to the GTF backlog that were announced at Farnborough recently. So again, focusing on what we can control on the fleet management plan and continuing to drive both supply chain and new orders into the backlog.
Q: Chris, following on, on the GTF theme. I was wondering if you could comment on what the situation is with Airbus and their recent forecast cut because they've clearly not been getting as many new engines as they anticipated. So are those engines instead go into the spare engine pool?
A: Yes. Thanks, Rob. So again, you heard me say just a minute ago to Peter that our OE deliveries are up sequentially and up first half of the year, 30% on a year-over-year basis. We're not necessarily where we need to be with Airbus. But again, we're seeing strong growth sequentially and year-over-year. And our outlook reflects our assessment of where Airbus needs support from us, and we're aligned on what they need. You alluded to the fact that we're balancing both OE and spare engines and material, and that's true. And we need to do that for the support of the fleet. But again, I continue to be encouraged by what we continue to drive in terms of production and getting Airbus what they need. And I think in the back half, we're going to continue to balance the OE, spare engine and MRO needs. But I think we'll be in a position to get Airbus what they need.
Q: Chris or Neil, I'm not sure which. On the defense side, on Raytheon, could you maybe dig a little bit into what are the problem programs still remaining? Maybe a percentage of revenue, if that's what you want to handle it, or backlog? And then specifically to this decision to proactively cut losses and terminate the contract, not an easy decision, right? Are there other contracts where you could extinguish similarly? Or would that cause customer distress? And lastly, was there a cash impact to it?
A: Yes. Thanks, Myles. I'll start and then Neil can certainly chime in. Certainly not an easy decision. But we've been alluding to the fact that we've had a significant classified program out there that was, what we would say, not in our wheelhouse, meaning the work that we had taken on in this contract was pre-formation of RTX, was not within our core competency. And we struggled with that, and we struggled to get to the right technical solutions, and ultimately came to a point where we just didn't think it was productive anymore to continue to go down this path and ultimately decided it was in the best interest of us and the customer to just do a reset here and allow us to go focus our resources on some of the other programs that we've got. You had mentioned a handful of other, I'll call them classified development, fixed price development programs that we've been talking about. I would say those are much different in terms of risk profile than the one we took action on here. Those have some important milestones here in '24 and in '25. But we feel like we've got a much better handle on those than the one we're talking about here. And feel like we understand the risks much better there and what needs to be done to get them to closure.
Neil Mitchill: And just to add, Myles, in terms of the cash flow impact. So as I sit here today, there's really just a few changes that we made to our '24 outlook. The first is about $1 billion related to the legal matters. Placed out about $0.5 billion related to the contract matter that Chris just was talking about. And offsetting that is about $0.5 billion of improvement that we've seen operationally in our tax payments due to some planning that we've done. So net-net, that's $1 billion. And I would expect that, that mostly sits in the fourth quarter of this year. It will depend on when we get the final resolutions with the government agencies, but that's trending towards certainly late September or early in the fourth quarter.
Q: So Neil, maybe another one for you. Just you're going to do about $7.2 billion of net income this year on an adjusted basis and generate $4.7 billion of cash. Some of that is onetime items with the DOJ, the powder metal and tax. So how do we think about that gap closing on net income to cash flow? And then just on the DOJ, can you elaborate a little bit more how we think about that, the outcomes of it and
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
