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    RTX Corp (RTX)

    Business Description

    RTX Corporation is a global aerospace and defense company that operates through three principal business segments: Collins Aerospace, Pratt & Whitney, and Raytheon. The company provides advanced aerospace and defense products and aftermarket service solutions for civil and military aircraft manufacturers, commercial airlines, and defense and commercial space operations . RTX sells electric power systems, environmental control systems, flight control systems, integrated avionics, aircraft engines, and advanced capabilities in integrated air and missile defense, smart weapons, missiles, and advanced sensors .

    1. Collins Aerospace - Provides advanced aerospace and defense products and aftermarket service solutions for civil and military aircraft manufacturers, commercial airlines, and defense and commercial space operations. Offerings include electric power systems, environmental control systems, flight control systems, and integrated avionics .

    2. Pratt & Whitney - Supplies aircraft engines for commercial, military, business jet, and general aviation customers. Produces engines for wide- and narrow-body aircraft and military aircraft such as the F-35 Lightning II .

    3. Raytheon - Delivers advanced capabilities in integrated air and missile defense, smart weapons, missiles, and advanced sensors for U.S. and foreign government and commercial customers .

    Q3 2024 Summary

    Initial Price$100.88July 1, 2024
    Final Price$124.39October 1, 2024
    Price Change$23.51
    % Change+23.30%

    What went well

    • RTX is experiencing strong free cash flow generation, with $4 billion year-to-date and expecting another strong operational fourth quarter, projecting 90% to 100% free cash flow conversion against adjusted net income in the long term.
    • The company has an exceptionally strong backlog in both defense and commercial segments, which is anticipated to drive productivity improvements and margin expansion across all three businesses.
    • RTX is investing heavily in R&D and innovation, leveraging RTX Ventures to make promising investments that will enhance their product portfolio, maintaining a fantastic product portfolio critical to the U.S. and allies for decades to come.

    What went wrong

    • Underperformance in certain business segments, particularly airborne and space systems. Christopher Calio acknowledged these areas have been more challenging and are under evaluation for strategic adjustments.
    • Challenges in balancing demands for the GTF engine between spare parts and original equipment deliveries. RTX is allocating resources between spares and MRO to support the fleet, indicating pressure on production and supply chain constraints.
    • Potential delays in strategic pivots affecting future growth. The evaluation and potential shift in strategy, especially in the space domain, may take time as these are long-cycle businesses, potentially impacting growth in the near term.

    Q&A Summary

    1. GTF Compensation Payments
      Q: Why aren't you paying more to customers affected by GTF issues?
      A: We expect to make about $1 billion in payments this year, with over $300 million made year-to-date. We're crediting customers as AOGs (Aircraft on Ground) occur and have agreements covering 75% of AOGs with 28 customers. Payments will ramp up in the fourth quarter, and we remain consistent with our financial assumptions.

    2. GTF Powdered Metal Parts Progress
      Q: How are you managing GTF deliveries and insertion of powdered metal parts?
      A: All engines delivered today have full-life powdered metal parts. We're balancing material allocation in MRO and expect to ramp up insertion of these parts as we head into 2025. Isothermal forgings are ramped up 38% year-over-year, aiding production.

    3. Collins Margin Outlook
      Q: Is the margin expansion at Collins still on track?
      A: We expect margins at Collins to grow but are monitoring OE levels and inflation. Absorption of higher volumes is crucial for better unit costs. We're taking cost reduction actions and focusing on structural improvements to drive margin expansion.

    4. Free Cash Flow Expectations
      Q: How should we think about free cash flow going forward?
      A: We're confident in achieving $4.7 billion in free cash flow this year. Longer term, we see no reason why we won't generate 90% to 100% free cash flow conversion against adjusted net income. Growth in aftermarket profit is a significant contributor to cash flow growth.

    5. Raytheon Growth Outlook
      Q: What acceleration should we expect from Raytheon into '25 and beyond?
      A: Demand at Raytheon is incredibly strong, with $16.6 billion in bookings and a backlog of $60 billion. The international backlog is up over 10 points to 44%, which will be a tailwind for growth in the coming years. Mix shift is already improving margins by over 100 basis points.

    6. Productivity Improvements
      Q: Can you add context to your views on productivity growth?
      A: We're seeing productivity improvements across the business. At Raytheon, we've achieved over $110 million in productivity benefits year-over-year, expecting about $200 million for the full year. Automation and factory improvements are driving efficiencies that will support margin expansion.

    7. Collins OE and Aftermarket
      Q: How do you view Collins' OE decline and aftermarket growth?
      A: Collins' OE sales were down due to lower narrow-body volumes and strike impacts. However, the aftermarket is up 9%, supported by continued flying of older platforms and low retirements. We expect aftermarket strength to continue as these platforms remain in service.

    8. Competitors in Defense Tech
      Q: How do you view emerging competitors like Palantir?
      A: We see them both as competition and potential partners. While we have strengths in scaling and production, we're learning from their agility and cost-effectiveness. Through RTX Ventures, we're investing in early-stage companies to access new technologies.

    9. Raytheon Airborne and Space Strategy
      Q: What's your strategy for growth in airborne and space systems?
      A: We're evaluating our portfolio, focusing on strengths like space protection, ISR, and C2. We aim to avoid low-margin fixed-price development programs and instead invest where we can offer profitable growth.

    10. Pratt Military Aftermarket Growth
      Q: How should we think about military aftermarket growth at Pratt?
      A: We saw 20% military growth at Pratt in the quarter, with aftermarket aligning with that. As the installed base grows and flight activity ramps up, we expect continued strong growth and margin improvement due to mix shifts.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Christopher T. CalioPresident and Chief Executive OfficerMay 2, 2024Christopher T. Calio is the President and Chief Executive Officer of RTX Corporation. He has held this role since May 2, 2024. Previously, he was President and COO of RTX Corporation from March 2023 to December 2023 .
    Kevin G. DaSilvaCorporate Vice President, TreasurerApril 2020Kevin G. DaSilva has been the Corporate Vice President, Treasurer of RTX Corporation since April 2020. He was previously Vice President and Treasurer at Raytheon Company. As of February 2024, he is 60 years old .
    Shane G. EddyPresident, Pratt & WhitneyMarch 2022Shane G. Eddy is the President of Pratt & Whitney, a position he has held since March 2022. He was previously the Senior Vice President and COO at Pratt & Whitney .
    Gregory J. HayesChairman and Chief Executive OfficerJune 2021 (Chairman), November 2014 (CEO)Gregory J. Hayes has been Chairman of RTX Corporation since June 2021 and CEO since November 2014. He has extensive experience in executive leadership and the aerospace and defense industry .
    Philip J. JasperPresident, RaytheonJanuary 2024Philip J. Jasper is the President of Raytheon, a position he has held since January 2024. He was previously President of Mission Systems at Collins Aerospace .
    Amy L. JohnsonCorporate Vice President, ControllerSeptember 2021Amy L. Johnson has been the Corporate Vice President and Controller of RTX Corporation since September 2021. She previously held finance positions at Pratt & Whitney .
    Ramsaran Maharajh, Jr.Executive Vice President and General CounselDecember 2021Ramsaran Maharajh, Jr. has been the Executive Vice President and General Counsel of RTX Corporation since December 2021. He held various legal positions at Raytheon Technologies Corporation .
    Neil G. Mitchill, Jr.Executive Vice President and Chief Financial OfficerApril 2021Neil G. Mitchill, Jr. has been the Executive Vice President and CFO of RTX Corporation since April 2021. He has held various financial roles at Raytheon Technologies Corporation and Pratt & Whitney .
    Stephen J. TimmPresident, Collins AerospaceFebruary 2020Stephen J. Timm is the President of Collins Aerospace, a position he has held since February 2020. He has been with RTX for 26 years and received a salary increase in 2022 to align with the CPG median .
    Dantaya M. WilliamsExecutive Vice President & Chief Human Resources OfficerJune 2020Dantaya M. Williams is the Executive Vice President & Chief Human Resources Officer at RTX Corporation, a position she has held since June 2020. She was previously Vice President of Human Resources for Pratt & Whitney .
    Troy BrunkPresident, Collins AerospaceJuly 17, 2024Troy Brunk was appointed as the President of Collins Aerospace on July 17, 2024. He is a 30-year veteran in the aerospace and defense industry and has led several strategic business units at Collins Aerospace .
    Heather RobertsonPresident, Collins' Mission Systems Strategic Business UnitJuly 17, 2024Heather Robertson is the President of Collins' Mission Systems Strategic Business Unit at RTX. She is a 24-year company veteran and assumed her role as part of a planned leadership transition announced on July 17, 2024 .

    Questions to Ask Management

    1. Given the challenges in the airborne and space systems leading to slower growth, can you elaborate on the specific strategies you're implementing to strengthen these areas, and what is the expected time frame for seeing tangible results?
    2. With the ongoing evaluation of your space business portfolio, how do you plan to address unprofitable segments, and what criteria will determine whether you invest further or exit these markets?
    3. Considering the importance of your GTF fleet management plan and the progress of powdered metal inspections, how confident are you in your current assumptions about fallout rates and financial impacts, and what potential risks could alter your outlook?
    4. As new defense technology companies gain traction, such as Palantir, how does RTX plan to stay competitive, and do you see these companies as competitive threats or potential partners?
    5. With the expectation of flat commercial OE at Collins and reliance on restarting shipments to Boeing, what contingency plans are in place if shipments don't resume as expected, and how will this affect your growth projections?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateOctober 21, 2023 October 24, 2023
    End Date/DurationN/ASettled in September 2024
    Total additional amount$11 billion $10 billion
    Remaining authorization$0.7 billion N/A
    DetailsReplaces December 2022 program; part of a $36-$37 billion capital return commitment through 2025 Fully executed ASR agreements

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Sales: $79.25 billion to $79.75 billion; 8% to 9% organic sales growth .
      2. Adjusted EPS: $5.50 to $5.58 .
      3. Free Cash Flow: Approximately $4.7 billion .
      4. Collins Aerospace:
        • Sales growth: High single digits (low end).
        • Operating profit: $575 million to $650 million .
      5. Pratt & Whitney:
        • Sales growth: Mid-teens (higher end).
        • Operating profit: $475 million to $525 million .
      6. Raytheon:
        • Sales growth: Mid-single digits organically.
        • Operating profit: $200 million to $250 million .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Sales: $78.75 billion to $79.5 billion; 8% to 9% organic sales growth .
      2. Adjusted EPS: $5.35 to $5.45 .
      3. Free Cash Flow: Approximately $4.7 billion .
      4. Collins Aerospace:
        • Sales growth: High single digits.
        • Operating profit: $650 million to $725 million .
      5. Pratt & Whitney:
        • Sales growth: Mid-teens.
        • Operating profit: $400 million to $475 million .
      6. Raytheon:
        • Sales growth: Mid-single digits organically.
        • Operating profit: $125 million to $200 million .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Full Year Sales: $78 billion to $79 billion; 7% to 8% organic growth .
      2. Adjusted EPS: $5.25 to $5.40 .
      3. Free Cash Flow: Approximately $5.7 billion .
      4. Collins Aerospace:
        • Sales growth: Mid- to high single digits.
        • Operating profit: $650 million to $725 million .
      5. Pratt & Whitney:
        • Sales growth: Low double digits.
        • Operating profit: $400 million to $475 million .
      6. Raytheon:
        • Sales growth: Low to mid-single digits.
        • Operating profit: $100 million to $200 million .
      7. Defense Book-to-Bill Ratio: Over 1.1 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Sales: $78 billion to $79 billion; 7% to 8% organic growth .
      2. Adjusted EPS: $5.25 to $5.40 .
      3. Free Cash Flow: About $5.7 billion .
      4. Segment Profit Growth: $2.3 billion improvement .
      5. CapEx: $100 million headwind .
      6. Payments Related to Powder Metal Impacts: $1.3 billion headwind .
      7. Interest Expense: $500 million headwind .
      8. Pension Cash Recovery: $300 million headwind .
      9. Tax Rate: Approximately 19.5% .
      10. Collins Aerospace:
        • Sales growth: Mid- to high single digits.
        • Operating profit: $650 million to $725 million .
      11. Pratt & Whitney:
        • Sales growth: Low double digits.
        • Operating profit: $400 million to $475 million .
      12. Raytheon:
        • Sales growth: Low to mid-single digits.
        • Operating profit: $100 million to $200 million .
      13. Sales Eliminations: 10% increase .