RTX (RTX) Annotations

We expect commercial aircraft volumes will be up around 20% year-over-year.

n 2022, we captured $86 billion in new bookings, resulting in backlog growth of 12%, a book-to-bill of 1.28 and a near record backlog at the end of the year of $175 billion.

As I said, we've got a block upgrade going in now through MRO that increases time on wing. On average, about 20% just based on the geography that you're in. And we've got some other, I'd say, durability and reliability hardware and software fixes that we put in as well. So we want to – we obviously want to get to the contractual levels that we have promised, and we've got a plan to go do that with these upgrades, Seth. I will tell you, keep in mind, you've got the GTF advantage that's going to start cutting in 2024. As you know, that's the next generation of the GTF, more thrust, better fuel burn, start flight testing in Q4 with Airbus, and we remain on track there in – for 2024 EIS.

a little bit about the time on wing. What we've been reading lately from comments from some of the leasing companies and comments in the press is the time on wing on new generation engines has been falling short of expectations. And so a) kind of to what degree do you share that perception and kind of where does it need to get; b) what specifically in the engine do you need to kind of improve to get it there; and then the last part is, I think you mentioned the GTF aftermarket profits were positive for the first time. And just with a relatively young pool of engines and maybe some time on wing challenges, how do profits get to positive?

So that's giving us this confidence. But as Chris said, it's going to be the end of 2023 before we see structural castings back to 2019 levels. Again, we've got confidence they have been bringing people on, they have been training people.

commercial large structural casting. It sounded more constructive today than your commentary in previous quarters. I was wondering what changed in the supply chain that you're seeing to make you more confident? How much of that is the OEMs walking away from, like Airbus walking away from the 75 per month versus you're seeing that ease through investments they're making or maybe labor easing?

I said that we saw some improvement on castings, but it's not where it needs to be, so casting is still there. Rocket Motors continues to be a pacing item at R&D. And microelectronics, while the lead times have stabilized, they haven't come down and back to 2019 historical levels.

Greg and Chris, hey, following up on the supply chain what issues did the same versus 2022 versus what issues are different, I mean considering the strengthening visibility on demand, I would have assumed that we've seen a lot more improvement by now. So what's the root of the problem? And can you provide more details on the actions you're taking to get this resolved by the second half of the year?

David, it’s something we focus a lot on. Obviously, we are, I would tell you, at Collins and at Pratt in lockstep with Boeing and Airbus in terms of their production rates. Obviously, some of the challenges that we’ve talked about at Pratt on the supply chain with structural castings is limited, I would say, some of our ability to meet some of the demand out there. That’s starting to ease. And again, we are working very closely with Airbus on the A320 production rate. As far as 737, that’s really a Collins story. And we – the outlook that Neil talked about, that assumes those rates that you talked about around 31 aircraft or so a month on average. I think they were a little light on that in the fourth quarter, but we think we’ll get back to that. They still have roughly 200 aircraft that be delivered that are in inventory, too, from when the line was shut down, which, again, also is part of Collins’ upside for the year. As far as 787, we see that, as you said, I think it’s one a month going to two a month and perhaps up to three. Again, I think that’s – that will all depend upon Boeing’s ability to continue to get the aircraft out the door. But we are working with them on a daily, weekly basis to make sure that we can support them. But we don’t see anything in our supply chain today that would prevent us from delivering either at Boeing or Airbus to the rates that they need.

And maybe I’ll just put a couple of financial numbers around that to help out a little bit. But at Pratt for 2023, we think the aftermarket there will be up between 20% and 25% from a sales perspective. So think about the legacy shop visits being about 15% to 20% up year-over-year. On the OE side, that would imply about a mid-teens sort of a sales growth there. So we see strong growth, obviously, in the commercial business. And I guess while I’m on Pratt, I’ll just throw out a couple of the Collins numbers just so everyone has them. In their aftermarket business, think about that as being up sort of low double digits to low teens, sequentially kind of growing in the low single-digit percentage kind of range. And on the OE side, up low to mid-teens year-over-year. So again, with all that OE growth that we see across the narrow and wide-body platforms, you’ll see that both at Pratt and Collins.

Peter, I think you’re spot on. I think as we look at 2023 and then 2024, there is more growth potential at RMD than there probably is any business outside of Collins just because, again, the backlog is so strong. I would tell you, given the challenges that we saw in supply chain last year and driving material in, I think we’ve taken a more conservative view of 2023 performance there. I think total material inputs at RMD last year were around $6 billion. This year, we’re looking at about $6.5 billion. But quite frankly, the demand is out there for more. So that $6.5 billion should also drive some productivity, $100 million to $150 million. Again, I think that’s actually light by historical standards, but we’re – I hate to say that we’re conservative again and again. But really we set these targets. So we think we can absolutely deliver. We’re not going to have to go back and relook at these in the middle of the year. But there is certainly the demand out there for higher top line and that would result in higher bottom line. But most of that growth, I think, will come in 2024 when we really see supply chain back to where we had seen it pre-pandemic. And that is the key for RMD. They’ve got the orders. We’ve got the capacity. We just have to bring – drive the material in and that $6.5 billion that we see next year is going to have to continue to grow significantly to meet the demand out there that we see.

So when we get to June, we’ll be able to lay out that in more detail. It also be aligned with the format of our new operating segments at that time. But I think there’s going to be some puts and takes, but we’re all focused on driving margin improvements and making the right investments to drive that automation in the factory and digitization. I should add to Greg’s comments earlier about the free cash flow walk. We’ll probably see about $0.5 billion of capital headwind between 2022 and 2023.

Because in the two aerospace segments, the 2024, 2025 incrementals required to get there are a lot better than 2023. And then obviously, on the defense side, it requires a pretty big step up. So help me with that math? And I guess, just what’s the latest medium-term outlook for each of the segment margins? Neil Mitchill Yes. Noah, let me take a stab at that one for you because as you look out to 2025, clearly, we’ve had in 2022, some supply chain and labor impacts that have kind of caused us to come in a little lower than our initial expectations. However, when you think about that backlog that we’ve been talking about, it’s $175 billion at the company level, $69 billion, $70 billion within the defense.

e $2 billion of inflation is a real number we saw it last year. We were able to overcome it through cost reduction as well as some additional pricing. And again, we will see pricing benefits again in 2023, especially on the commercial aftermarket side. Keep in mind also on the defense side about 1/3 of our business is cost type, cost reimbursable and so some of that inflation gets passed automatically along to our customer at the Department of Defense. As I think about that $2 billion, right about $1.2 billion I think Chris said is product related and about $800 million of that is people cost. And that is a real number. We’ve got roughly $20 billion in compensation costs across RTX that’s about a 4% increase year-over-year for $800 million. It’s a big number.

Supplier delinquencies were down. At Pratt, we saw some uptick in casting deliveries. So those are some of the green shoots that we saw at the end of the year. But I’ll tell you, it’s not where we need to be, especially for the back half of 2023. The kinds of things that we’re focused on, candidly are the things that we can control.

So is all that being equal, we still see – and we had always talked about a $10 billion free cash flow in 2025. Realistically, I think that number is going to be $9 billion. Now most of that growth from, let’s call it, $5 billion this year to $9 billion is going to come from segment operating profit, which should grow between 2022 and 2025 by about $5 billion. And that just assumes an execution on the current demand that we have in backlog, right? That’s – there’s nothing else magic about that except the continued return of people flying and the defense budgets remaining very robust. So we see a path to the $9 billion. I don’t see a path to the $10 billion today because of the R&D.

At Collins, we expect full year sales to be up low double digits, primarily driven by continuation of the commercial aero recovery. Military sales at Collins are expected to be up mid-single digits for the year as well. We expect Collins adjusted operating profit to grow between $750 million and $825 million versus last year, and this is primarily driven by drop-through on commercial aftermarket, higher OE production ramp and increased defense volumes. At Pratt & Whitney, we expect full year sales to be up low to mid-teens versus prior year, principally driven by higher OE deliveries in both Pratt's large commercial engine and Pratt Canada businesses, as well as continued growth in legacy large commercial engines, GTF aftermarket and Pratt Canada shop visits. Military sales at Pratt are expected to be flat, driven by higher F135 sustainment volume, which will offset lower F135 material inputs. We expect Pratt's adjusted operating profit to grow between $200 million and $275 million versus last year, primarily on higher aftermarket volume, which is partially offset by a higher large commercial OE delivery impact. Turning to RI&S, we expect full year sales to be flat versus the prior year and adjusted operating profit to be up between $75 million and $125 million, driven by improved net program efficiencies. And in R&D, we expect sales to grow low-to-mid single digits versus 2022 as the effects of the supply chain constraints ease in the back half of the year and for adjusted operating profit to be up between $175 million and $225 million versus prior year, driven by improved net program efficiencies, which will be partially offset by continued mix headwinds.

At the RTX level, we expect full year 2023 sales of between $72 billion and $73 billion, which represents organic growth of 7% to 9% year-over-year. From an earnings perspective, we expect adjusted earnings per share of $4.90 to $5.05, up 3% to 6% year-over-year. And we expect to generate free cash flow of about $4.8 billion. I should note, we are not assuming the legislation requiring R&D capitalization for tax purposes will be repealed in our outlook. And as a result, in 2023, we'll have a cash payment of about $1.4 billion related to the current law.

RMD's bookings in the quarter were $6 billion for a book-to-bill of 1.48. And for the full year, RMD's book-to-bill was 1.37, resulting in a record backlog of $34 billion.

R&D