Below are the transcripts from the Q3 earnings call.
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Operator
Good day and welcome to the RTX third quarter 2025 earnings conference call. My name is Desiree and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Chris Calio, Chairman and Chief Executive Officer Neil Mitchell, Chief Financial Officer and Nathan Weir, Vice President of Investor Relations. This call is being webcast live on the Internet and there is a presentation available for download for RTX website at www.rtx.com. please note except where otherwise noted, the Company will speak to results from continuing operations excluding acquisition, accounting adjustments and net non recurring and or significant items often referred to by management as other significant items. The Company also remind listeners that the earnings and cash flow expectations and any other forward looking statements provided in this call are subject to risks and uncertainties. RTX SEC filings, including its forms 8K, 10Q and 10K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. To ask a question you will need to press Star one on your telephone. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Calio.
Chris Calio CEO
Thank you and good morning everyone. We delivered a very strong quarter of results in Q3 which reflects our intense focus on execution, the broad utilization of our core operating system and the durable demand for our products on the top line. Sales were up 13% organically year over year with double digit growth in each of commercial OE, commercial aftermarket and defense adjusted segment operating profit was up 19% year over year with growth and margin expansion across all three segments and free cash flow was robust at 4 billion in the quarter, keeping us on track for the full year. Underpinning these results is the continued strength in the global demand for our products and services in commercial aerospace. Passenger air travel has remained resilient with global RPKs on track for approximately 5% growth this year. We continue to see positive OE production trends which drove a significant increase in production at Collins in the quarter as well as at Pratt which saw a 6% growth in large commercial engine deliveries. Commercial aftermarket also remains strong supported by our large and growing installed base including over 100 billion of out of warranty content at Collins and heavier shop visit content across our MRO activities. Aircraft retirements have remained low with only 1.5% of the V2500 fleet retired so far this year in Pratt, Canada with nearly 70,000 engines in service, has seen over 15% growth year to date in commercial aftermarket. On the defense side, we continue to be exceptionally well positioned to meet the growing needs of our US and international customers, in particular with respect to munitions and integrated air and missile defense, both core capabilities of our company. On the orders front, our book to Bill in the quarter was 1.63, resulting in a backlog of 251 billion, up 13% year over year. The activity in the quarter included 37 billion of new awards with 23 billion of defense and 14 billion of commercial orders. On the commercial side through Q3, our book to bill this year is 1.71 and our backlog has grown 18% since the end of 2024, showing the exceptional demand for our products and technologies at both Collins and Pratt. At raytheon we booked over 8 billion of orders for munitions, including approximately 2.5 billion for GEM-T to support multiple international customers and 2.1 billion for AMRAAM, the largest order in the 30 year history of that program. Raytheon was also awarded a significant counter drone contract for Coyote production from the US Army. Coyote has proven to be extremely effective in the field and we’ve recently developed a lower cost non-kinetic Coyote payload to combat drone swarms. And Pratt was awarded over 3 billion to support the F135 engine including the Lot 18 production contract. So overall our end markets and operational performance remain strong as we enter the fourth quarter. Based on this, we’re raising our full year outlook for adjusted sales and EPS and maintaining our free cash flow outlook of 7 to 7.5 billion. Neil will take you through the details in a few minutes, but before that let me provide an update on our strategic priorities on slide 4. Starting with executing on our commitments, our focus on driving performance improvements through our core operating system has continued to generate productivity across RTX through Q3, we have delivered 10% organic sales growth this year while keeping headcount flat across the organization. This has been a key enabler in driving six consecutive quarters of year over year adjusted segment margin expansion. With respect to the GTF Fleet management plan, our financial and technical outlook remains on track. PW1100 MRO output was up 9% in the quarter and is up 21% year to date. We continue to work with our supply chain partners to increase the flow of critical value stream material to ramp mro output. In Q3 we saw another quarter of solid progress with growth in isothermal forgings up 16% and structural castings up 29% year over year exiting the third quarter. This material flow has supported a record high number of PW1100 gate 3 starts, which is where we reassemble engines during a shop visit, putting Pratt in a position to deliver about 30% MRO output growth for the year and across the company, we continue to focus on increasing critical manufacturing capacity to support growth, including investing over 600 million this year in expansion projects. For example, Raytheon is on Track to invest 300 million in capacity expansion to to deliver the growing backlog. This includes the Redstone Missile Integration facility in Huntsville, Alabama which will increase site capacity by 50% and support the growing demand for our naval programs including the standard missile franchise. Shifting to Innovating for future growth, Pratt & Whitney Canada was selected by the EU’s Clean Aviation Program to design and integrate a hybrid electric propulsion demonstrator for regional aircraft. This System integrates a 250 kilowatt electric motor and advanced propeller technology from Collins and is expected to improve fuel efficiency by approximately 20%. Additionally, Collins is nearing final certification of its next generation braking system for the A321 XLR aircraft. The design incorporates proprietary carbon technology and is expected to extend brake life and drive improved profitability in our maintenance support portfolio. And Raytheon recently demonstrated two significant effector technology technology achievements. The AMRAAM team successfully completed the longest ever air to air shot from a fifth generation fighter and the Stormbreaker team in just 50 days designed, developed and tested a new ground launch demonstrator version of this air launched effector technology which will expand the capabilities and future applications for this product. And finally, we remain focused on leveraging the breadth and scale of rtx. As we’ve highlighted before, we continue to develop and deploy our data analytics and AI tools to improve productivity and the speed and quality of decision making in our business. We’re strategically using these tools to support the highest impact opportunities across the company, including increasing munitions and OE production rates, growing GTF MRO output and improving sales and inventory planning and management. For example, the Raytheon AMRAAM team has deployed multiple proprietary digital AI tools to proactively identify production bottlenecks and reduce rework, which has contributed to output more than doubling year to date through Q3 on the program. These examples highlight the progress that we continue to make across our strategic priorities and I’m pleased with the results they are yielding throughout the company. With that, let me turn it over to Neil to take you through the third quarter results and our updated outlook for the full year.
Neil G. Mitchill CFO
Neil all right, Chris, thanks. I’m on Slide 5. In the third quarter, adjusted sales of 22.5 billion were up 12% on an adjusted basis and 13% organically. As Chris mentioned, this was a very strong result in the quarter with commercial aftermarket up 18% and commercial Original Equipment and defense both up 10%. Adjusted segment operating profit of 2.8 billion was up 19% and we saw 70 basis points of consolidated segment margin expansion with contributions from all three segments. Adjusted earnings per share of $1.70 was up 17% from the prior year, driven primarily by segment operating profit growth. In addition, the quarter also benefited from several tax items including legal entity reorganizations which impacted EPS by approximately 12 cents. These items more than offset a 4 cent headwind from the recently enacted tax legislation. On a GAAP basis, EPS from continuing operations was $1.41 and included $0.29 of acquisition accounting adjustments. Free cash flow was very strong at 4 billion, driven by working capital improvement including strong collections and some advance payments tied to contract awards in the quarter that were accelerated from Q4. Cash flow for the quarter also included approximately 275 million for powdered metal related compensation and $220 million of tariff-related impacts. With respect to capital allocation. We returned over 900 million to share owners through dividends in the quarter and with our focus on further strengthening our balance sheet, we paid down $2.9 billion of debt in the quarter and finally during the quarter we completed the sale of the Actuation business and earlier this month we also completed the sale of Collins’ Simmons Precision products business for $765 million. Okay, turning to Slide 6, let me provide a few details on our updated outlook for the full year. As you’ve seen with our third quarter results, execution and momentum across all three segments continues to be strong. Given this operating performance along with the strength of our end markets, we are updating our outlook for the full year. On the top line, we are raising our full year adjusted sales outlook to a range of $86.5 billion to $87 billion, up from our prior range of $84.75 billion to $85.5 billion. This now translates to between 8 and 9% organic sales growth for the year, up from our prior range of 6 to 7% by channel at the RTX level and adjusting for divestitures, we now expect commercial aftermarket sales to grow mid teens year over year, up from our prior outlook of low teens, primarily driven by heavier shop visit content that we saw in Q3 at Pratt on the commercial Original Equipment side, we expect sales to grow around 10% for the year, up from our prior outlook of high single. digits year over year. And on defense, we continue to expect sales to grow mid single digits. On the bottom line. Given the performance across all 3 segments, we are increasing adjusted earnings per share 30 cents on the low end of our range and 25 cents on the high end. At the midpoint, the increase is primarily driven by approximately 20 cents of improved segment operating profit, with the rest coming from a few below the line items. And within this updated outlook, there is no change to the net tariff-related headwind we discussed on our last earnings call. All in we now see adjusted EPS at a new range of between $6.10 and $6.20 for the full year, up from our prior range of $5.80 to $5.95. Specific to Q4, we expect another quarter of strong operational performance at the segment level, with segment profit up around 10% year over year, excluding the impact of tariffs and recent divestitures at Collins Below the line, the Q3 12 cent tax benefit I mentioned will not repeat. We expect a higher effective tax rate. In the fourth quarter. On free cash flow, we are on track to achieve our outlook of between 7 and $7.5 billion for the year. The primary drivers of our fourth quarter free cash flow will be the same as we saw in the third quarter, segment operating profit growth and working capital improvement. And as we look beyond this year, we feel good about the momentum we’re seeing across our business, including our growing backlog and end market strength that continues to position us well for continued top line growth, margin expansion and solid free cash flow conversion. And like we do every year, we’ll be back on our fourth quarter earnings call in January with our detailed outlook for 2026. So with that, let me hand it over to Nathan to take you through the segment results for the third quarter.
Vice President of Investor Relations
All right, thanks Neil. Starting with Collins On Slide 7, sales were $7.6 billion in the quarter, up 8% on an adjusted basis and 11% organically driven by strength across all three channels. Adjusting for divestitures by channel, commercial OE sales were up 16% versus prior year, driven primarily by higher volume on narrow body platforms. Recall last year included the impact of the Boeing work stoppage in the quarter. Commercial aftermarket sales were up 13% driven by a 17% increase in mods and upgrades, a 13% increase in parts and repair and a 10% increase in provisioning. Defense sales were up 6% versus the prior year driven by higher volume across multiple programs and platforms including the survivable Airborne Operations center program. Adjusted operating profit of 1.2 billion was up 98 million versus the prior year as drop-through on higher commercial aftermarket defense and commercial OE volume along with lower R and D expense was partially offset by unfavorable commercial OE mix and the impact of higher tariffs across the business. Turning to Collins full year outlook, we continue to expect sales to grow mid single digits year over year on an adjusted basis and high single digits organically. And we now expect operating Profit growth between 325 and $375 million versus 2024 up from our prior expectation of between 275 and $350 million driven by drop-through in higher commercial aftermarket volume. Keep in mind this updated profit range includes an approximately $60 million year over year headwind associated with the business divestitures completed this year. Shifting to Pratt and Whitney on slide 8, sales of $8.4 billion were up 16% on both an adjusted and organic basis driven by strength across all channels. Commercial oe sales were up 5% driven by increased volume in large commercial engines and favorable mix. In Pratt Canada, commercial aftermarket sales were up 23% driven by higher volume in both large commercial engines and Pratt Canada. In military engines sales were up 15% in the quarter driven primarily by the F135 program including higher volume associated with July 18 contract award. Adjusted operating profit of 751 million was up $154 million versus the prior year driven by drop-through in higher commercial aftermarket and military volume. This growth more than offset increased large commercial OE deliveries, higher SGA expense and the impact of higher tariffs across the business. Turning to Pratt’s full year outlook, we now expect sales to grow low to mid teens on an adjusted and organic basis, an increase from our prior range of up low double digits driven by strength in commercial aftermarket and favorable commercial OE mix. And we now expect operating profit growth between 350 and $400 million versus 2024 up from our prior expectation of between 200 and $275 ...
