RTX Stock Dives After Disclosing Engine Defect In Earnings Beat; Senate Debates Defense Bill

Defense giant RTX (RTX), formerly Raytheon Technologies, topped expectations for its Q2 report early Tuesday. RTX stock tumbled following results as its Pratt & Whitney jet engine unit disclosed a defect.

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Meanwhile, the Senate is scheduled to debate its version of the defense spending bill this week.

The missile and F-35 jet fighter components maker, which recently changed its name from Raytheon Technologies, reports after rival Lockheed Martin (LMT) topped estimates for its Q2 results last week. 

RTX adjusted earnings increased 11.2% to $1.29 per share. Earnings including acquisition accounting adjustments and non-recurring charges rose 2% to 90 cents per share. Sales surged 12% to $18.3 billion, with 12% revenue growth across all business segments.

Analysts expected RTX earnings growth to decelerate for the second quarter in a row, ticking up 1.7% to $1.18 per share on 8.3% revenue growth to $17.68 billion.

Collins Aerospace sales surged 17% to $5.85 billion, driven by a 29% increase in commercial aftermarket orders. Pratt & Whitney sales increased 15% to $5.7 billion. Wall Street saw revenue for both segments rising to $5.63 billion.

The company disclosed it discovered a manufacturing defect in its Pratt & Whitney unit from a rare condition in powered metal used to make certain engine parts, which will require “accelerated fleet inspection.” The defect does not impact engines currently in production, but a “significant portion” of the PW1100G-JM engine fleet will require removals and inspections in the next nine to 12 months. The PW1100G-JM engines power the A32neo commercial planes made by Airbus.  RTX estimates roughly 200 accelerated removals will be required by mid-September this year.

The initial assessment over the next several weeks is expected to reduce free cash flow by $500 million, and another 1,000 engines will require inspection this year, the Wall Street Journal reported.

Raytheon Intelligence & Space sales edged up 2% to $3.66 billion while Raytheon Missiles & Defense sales jumped 12% to $4 billion. The Raytheon Intelligence & Space and Raytheon Missiles & Defense businesses will merge under the Raytheon name in the second half of the year as part of a reorganization announced in January.

RTX’s Q2 backlog was $185 billion, with $112 billion from commercial aerospace orders and $73 billion from defense.

RTX narrowed its outlook for the year. The defense contractor forecasts adjusted earnings between $4.95 to $5.05 per share on $73 billion to $74 billion in sales. RTX previously guided earnings between $4.90 and $5.05 per share on $72 billion to $73 billion in revenue. The company lowered its free cash flow estimate to $4.3 billion from $4.8 billion, due to the engine defect.

For the year, analysts polled by FactSet see earnings rising 5% to $5.02 per share on 8.5% revenue growth to $72.7 billion.

Industrial Giant Flies Out Of Range On 89% EPS Jump, Raised Guidance

Defense Spending Vote

Elsewhere, the Senate began taking up the National Defense Authorization Act on July 18. A final vote for the NDAA bill has not yet been scheduled but could happen sometime this week, CNN reported, as the Senate aims to pass its version of the NDAA this month. The two chambers of Congress will negotiate a compromise later this year.

The $886 billion NDAA defense spending bill narrowly passed the House of Representatives along party lines in a 219-210 vote on July 14. Four Republicans opposed the bill while four Democrats supported it.

The NDAA included a 5.2% pay raise for military members, initiatives to counter China and an additional $300 million for support to Ukraine. The spending plan also increases investments in fifth and sixth generation aircraft such as the F-35.

It also contained measures to block Pentagon policies that reimburse travel costs for troops seeking abortion, ends coverage of hormone treatment and transition surgeries for transgender troops, slashes diversity and inclusion programs, and limits specific flags that can fly at military installations.

The Democrat-controlled Senate is broadly expected to reject the conservative social stipulations included by House Republicans. So far, senators proposed more than 800 amendments to the bill and more are likely, according to reports.

RTX Stock

RTX stock faded another 0.9% Wednesday and tumbled 10.2% to 87.09 Tuesday following results. Shares were trading in a flat base with a 104.91 buy point but the early move triggered the stop loss rule.

RTX stock fell well below its moving averages after diving nearly 13% at the open Tuesday. RTX stock has dropped 14.5% so far this year.

You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison

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