RTX Corporation (RTX) Q3 2026 Earnings Call Transcript

Operator: Good day, and welcome to the RTX Third Quarter 2026 Earnings Conference Call. My name is Latif, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes.

Nathan Ware: On the call today are Christopher T. Calio, Chairman and Chief Executive Officer Neil Mitchill, chief financial officer and Nathan Ware, vice president of investor relations. This call is being webcast live on the Internet and there is a presentation available for download from 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 nonrecurring and or significant items often referred to by management as Other Significant Items. The company also reminds listeners that the earnings in 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 8-K, 10-Q, and 10-K, 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 1 question per caller to give everyone the opportunity to participate. To ask a question, you will need to press star-11 on your telephone. You may ask further questions by reinserting yourself into the queue as time permits.

Operator: With that, I will turn the call over to Mr. Calio.

Christopher T. Calio: Thank you, good morning, everyone. Our continued execution and operational focus enabled us to deliver another very strong quarter of results across RTX. On the top line, adjusted sales were $25 billion up 12% organically with double digit growth across commercial OE, commercial aftermarket, and defense. Adjusted EPS of $2.26 was up $0.56 or 33% year over year, including $0.25 from IEPA cost recovery. And free cash flow was again strong at $2.1 billion So, overall, we are very pleased with the continued momentum in our performance across the company in Q3. We also continue to see robust global demand for our products and services and are very well positioned to meet our growing customer needs across commercial aerospace and defense. RTX ended Q3 with another record backlog of $340 billion up 36% year over year and 18% sequentially. On the defense side, we booked nearly $59 billion of awards with a book to bill of 4.57x. Driven by approximately $23 billion for Tomahawk and over $14 billion for AMRAAM, as we converted those framework agreements into multiyear production contracts at Raytheon. And earlier this month, we also signed multiyear contracts for SM-6, and SM-3 IIA. Very pleased with our collaboration with the Department of Defense on these contracts. Which reinforce the need for our highly capable and proven systems they will be a significant revenue driver for Raytheon over the next decade. Neil will provide some more details in a few minutes. On the commercial side, we received over $22 billion of new orders in the quarter, representing over 60% year over year growth across both OE and aftermarket. Most notably, Pratt announced significant GTF engine orders and commitments. Including British Airways selection of the GTF to power up to 60 A320neo family aircraft, adding another new GTF operator to its expanding fleet. So far this year, we have received over 800 GTF orders and commitments and have a backlog of over 8 thousand engines. And commercial orders at Collins were up over 20% year over year, driven by the growing installed base, and breadth of its content offerings. Another strong quarter of awards across the company. Okay. Let me shift to the current operating environment as we look to close out the year. In commercial aerospace, we continue to see positive trends with increasing OE production rates on key platforms, which is growing our installed base. For example, Collins' commercial installed base, and Pratt's narrow body powered fleet have grown mid single digits year over year. In Q3, commercial aftermarket also remained resilient, with 16% organic growth despite global RPKs declining slightly year over year. Our MRO demand continued to be strong, and engine retirements were in line with our expectations. Additionally, we continue to see strength across business aviation with global business jet departures up year to date. And as a reminder, about 60% of the Pratt Canada fleet has not yet seen a first shop visit. On the defense side, we remain exceptionally well positioned to meet growing demand given our proven capabilities regional partnerships, and ability to produce at scale. In The US, we are encouraged by the broad support for defense spending. Including the need to expand munitions depth and integrated air and missile defense capabilities. In our ongoing discussions with the Department of Defense, give us further confidence that our key programs will remain funding priorities. Internationally, demand is also rising with defense budgets expected to grow across the European, Asia Pacific, and MENA regions next year. Including significant spending by Germany, Poland, and Japan. Across these regions, we have partnerships with local companies and suppliers that help support the production of key systems including Patriot, Gemt, standard missile, Coyote, and military engines. In Europe, for example, we have over 130 different suppliers that support our production work in that region. And while the US government is currently operating under a continuing resolution, our record backlog provides clear visibility to our sales expectations in the fourth quarter and throughout next year. So our focus remains squarely on execution. Overall, based on our performance to date, we are again raising our full year outlook for adjusted sales EPS and free cash flow. Neil will take you through the details of the third quarter and our updated outlook in a few minutes. But first, let me provide an update on our strategic priorities on Slide 4. I will start with operational execution. We continue to leverage our core operating system to drive output and productivity across the company. At Pratt, we are making progress across key GTF initiatives. On the GTFF fleet management plan, financial and technical outlook remains on track. PW1.1 thousand MRO output was up over 35% year-over-year in the quarter. And is up over 30% year-to-date. Sequentially, AOGs were relatively stable as this MRO output largely offset the expected engine removals from the seasonally high utilization of the fleet during the summer months. We continue to expect AOG reductions in Q4. We are also pleased that the first GTF advantage powered aircraft was delivered to United Airlines. And entered into service earlier this month. As a reminder, the Advantage will double the time on-wing performance. We expect the production ramp to continue next year. We are also progressing certification of the hot section plus upgrade package that will bring 90 to 95% of the Advantage time on-wing benefit back to the installed base. And we will start incorporating this package into MRO visits early next year. Shifting to Collins. We are advancing structural cost actions to support further margin expansion. This includes consolidating operations, increasing manufacturing hours at best cost locations, and reducing overhead layers. Enabled by these actions, Collins has delivered double digit organic sales growth this year while reducing indirect labor headcount. And at Raytheon, we are increasing munitions output as we improve material flow across the supply chain and drive productivity in our operations. Year to date, output across our critical munitions is up over 90% year over year, with material receipts at Raytheon up double digits over the same period. Across RTX, we are also deploying AI and digital tools to improve speed and decision making in our operations. For example, through a recent acquisition, Pratt is integrating AI powered engine inspection software to accelerate borescope analytics. Already in use on legacy programs, this capability is being implemented across our MRO networks, and has reduced overall inspection time by more than 30% where it is been deployed. Next is innovation and future growth. In Q3, we invested $2.8 billion in company and customer funded research and development and CapEx to advance our technology road map and expand capacity. On the technology front, we are innovating to meet our customers' evolving needs. We are continuing to develop products with AI and machine learning capabilities, For example, Collins is leveraging AI in certain products to assist air traffic controllers in making faster and smarter decisions. And Raytheon has sensors deployed in the field that are using AI to identify objects, and classify threats. Also in the quarter, Collins completed altitude test of its next generation enhanced power and cooling system, known as ePACS, which delivers a significant increase in cooling across critical aircraft systems, and is being offered to support technology upgrades on the F-35. It can also be used on other future defense, and commercial aircraft platforms. And Raytheon is progressing its composable weapon strategy to address the evolving needs of our customers. This construct uses proven technologies from across our product portfolio as building blocks to develop new solutions we can field at faster scale. For example, we are developing a new effector where we are taking the rocket motor and steering control from 1 program, and combining it with the seeker from another program to cost effectively meet a specific mission requirement on an accelerated timeline. On the capacity front, we continue to invest to support higher output levels. In the quarter, Raytheon completed a $50 million expansion of its manufacturing facility in Forest, Mississippi. This investment will support production ramps for the next generation jammer program and other radar systems. And in connection with the munitions contracts that I mentioned earlier, we are making incremental investments in our supply chain and operations to ramp capacity support significantly higher production rates. On the commercial side, Collins announced a new partnership with Etihad Engineering to expand MRO services in The Middle East. This agreement will double Collins' footprint for nacelle services in the region and support growing A350 and 787 fleets. And Pratt announced an expansion of precision parts manufacturing in Poland. This investment will increase capacity of complex component assembly, for both commercial and military engines. Including the GTF, and F-35. And so we are pleased to see that our disciplined focus on our strategic priorities is delivering operational improvement and new capabilities for our customers. Finally, I want to acknowledge the leadership update we announced last month. As you saw, Shane G. Eddy has decided to retire from the company after more than 40 years in the aerospace and defense industry. Shane's been a great partner and teammate, and I want to thank him for his leadership at Pratt. We are fortunate to have a very strong bench, and are excited that Jill Albertelli is taking over as the president of Pratt and Whitney. Jill is currently the president of military engines, and brings over 3 decades of experience across Pratt. Okay. With that, I will hand it over to Neil to take you through the third quarter results, and our updated outlook in more detail. Neil?

Neil G. Mitchill Jr.: All right. Thanks, Christopher. I am on slide 5. In the third quarter, adjusted sales of $25 billion were up 11% year over year on an adjusted basis and 12% organically. This strong top line organic growth, driven by all 3 channels. With commercial OE up 10% commercial aftermarket up 16%, defense up 10%. Adjusted segment operating profit of $3.9 billion was up 39% year over year driven by drop through on higher sales volume across the company, improved productivity at Raytheon, and AIPA cost recovery. Segment margins expanded 310 basis points year over year including the benefit of approximately 160 basis points from IEEPA. Adjusted earnings per share of $2.26 was up 33% from the prior year driven by about 43 cents of operational segment profit growth and approximately 25 cents of IEEPA recovery. This growth more than offset roughly 12 cents of below the line items primarily from an expected higher tax rate and lower pension income. On a GAAP basis, earnings per share from continuing operations was $1.89 and included 26 cents of acquisition accounting adjustments, and 11 cents of restructuring and all other non-recurring items. Free cash flow in the quarter was $2.1 billion, included approximately $165 million of powder metal related compensation and approximately $300 million of IEEPA recovery. As Chris mentioned, we converted 4 munition framework agreements into undefinitized contracts. Over the next several years, Raytheon will be focused on ramping the supply chain, our operations, and capacity to meet the associated production requirements. As a reminder, these contracts include funding approach that will essentially preserve upfront free cash flow. We will be making CapEx and other investments on these contracts over the next 2 to 3 years, and we will recognize revenue as costs are charged to the programs. Therefore, we expect to see sales and profit contributions over the next several years as we capacitize and then ramp to achieve full rate production over the multiyear terms of each contract. And over time, these contracts have the potential to support margin expansion at Raytheon as we scale production. So, overall, we delivered strong financial performance across RTX, we are pleased with the significant growth in our backlog. Let's turn to Slide 6, and I will take you through our updated outlook for the full year. Given our performance to date as well as the IEPA recovery, we are increasing our full year outlook. On the top line, we are raising our full year adjusted sales outlook by $2 billion on the low end and $1.5 billion on the high end to a new range of $97 billion to $97.5 billion up from our prior range of $95 billion to $96 billion The sales increase is driven by continued defense performance, commercial OE strength at Collins, and higher GTF aftermarket volume at Pratt. This translates to full year RTX organic sales growth of between 10% to 11% up from our prior range of between 8% to 9%. By channel, we now expect commercial OE sales to grow high single digits which is at the higher end of our prior expectation of mid to high single digits. Driven by the production ramp at Collins. Within commercial aftermarket, we now expect sales to grow low double digits to low teens across the company, is up from our prior expectation of low double digits driven by higher GTF aftermarket volume. And for defense sales, we now expect low double digit growth up from our prior range of high single digits primarily driven by the performance at Raytheon. On the bottom line, we are increasing our outlook for adjusted earnings per share by 55 cents on the low end and 50 cents on the high end. We now see adjusted EPS between $7.65 and $7.75 for the full year, up from our prior range of $7.10 to $7.25. At the midpoint of our updated outlook, this increase is primarily driven by approximately 28 cents of performance across the company and approximately 25 cents of IEEPA recovery. We have included the updated outlook for the associated below the line items in the appendix of our webcast. Finally, we now expect free cash flow to be between $9.0 billion and $9.2 billion for the full year, up from our prior range of $8.5 billion to $8.75 billion driven primarily by EBITDA recovery. As we look beyond this year, based on the fundamentals of our company, our record backlog position and operating momentum, we expect another year of top and bottom line growth improving operational margins, and strong free cash flow generation. And as we do every year, we will be back on our fourth quarter call in January with our detailed outlook for 2027. With that, I will hand it over to Nathan to take you through the segments in more detail.

Nathan Ware: Thanks, Neil. Starting with Collins on slide 7. Sales were $8.4 billion in the quarter. Up 10% on an adjusted basis and 12% organically. Driven by strength across all channels. Excluding divestitures, commercial OE sales were up 23%, driven by higher volume on narrow body, and wide body platforms. Commercial aftermarket sales were up 9%, driven by an 18% increase in mods and upgrades, a 12% increase in provisioning, and a 7% increase in parts and repair. Defense sales were up 7% versus the prior year. Driven by higher volume across multiple programs. Adjusted operating profit of $1.8 billion was up $594 million versus the prior year, driven by drop through on higher commercial volume, commercial mix, approximately $250 million of IEEPA recovery. In the quarter, Collins expanded margins by 560 basis points year over year. Including the benefit of structural cost actions and 300 basis points of IEEPA recovery. Turning to Collins' full year outlook. Based on year to date commercial OE performance, we now expect sales to grow high single digits on an adjusted basis versus our prior range of mid to high single digits. Organically, we now expect low double digit growth versus our prior range of high single digits to low double digits. With respect to operating profit, we now expect growth between $925 million and $975 million versus 2025, up from our prior expectation of between $550 million and $625 million. Driven by the drop through on increased sales volume, ongoing structural cost reduction initiatives, and approximately $250 million of IEEPA recovery. Shifting to Pratt and Whitney on slide 8. Sales of $9.2 billion were up 10% on an adjusted and organic basis. Driven by strength in commercial aftermarket. Commercial OE sales were down 5% driven by large commercial engine mix. Commercial aftermarket sales were up 21% driven by higher MRO volume. Primarily GTF. In military engines, sales were up 2%, driven by higher volume across multiple programs partially offset by the prior year benefit from F-35 contract award timing. Adjusted operating profit of $968 million was up $17 million versus the prior year, driven by drop through on higher commercial aftermarket volume, approximately $160 million of IEEPA recovery. This was partially offset by large commercial OE engine mix, commercial aftermarket mix, and higher SG and A expense. In the quarter, Pratt's margins of 10.5% included 170 basis points of IEEPA recovery. Turning to Pratt's full year outlook. We continue to expect sales to grow high single digits on both an adjusted and organic basis. Most likely towards the top half of this range given the strength in commercial aftermarket. With respect to operating profit, we now expect growth between $475 million and $525 million versus 2025 up from our prior expectation of between $275 million and $350 million, driven by the drop through on increased sales volume and approximately $170 million of IEEPA recovery. Turning to Raytheon on Slide 9. Sales of $8 billion in the quarter, were up 14% on both an adjusted and organic basis. Driven by higher volume on naval programs and land and air defense systems. Including Patriot, standard missile, and Tomahawk. Adjusted operating profit of $1.1 billion was up $275 million versus the prior year, driven by improved productivity, higher volume, and favorable mix. Including Patriot programs. Net productivity improved a $104 million year-over-year and included approximately $85 million of benefits in the quarter associated with an international contract modification and a favorable adjustment related to an offset obligation. In the quarter, Raytheon expanded margins by 190 basis points year over year. Bookings in the quarter were $52.3 billion resulting in a book to bill of 6.54x and a backlog of $130 billion On a rolling 12 month basis, Raytheon's book to bill is 2.9x. In addition to the munitions contracts that Christopher mentioned earlier, other key awards in the quarter included $3.1 billion to provide training systems for the British Army, $3 billion of classified awards, and $1.8 billion for SPY-6 production. Turning to Raytheon's full year outlook. We now expect sales to grow low teens on both an adjusted and organic basis. This is up from our prior range of high single digits to low double digits due to the strength Neil mentioned. And we now expect operating profit to grow between $800 million and $850 million versus 2025 up from our prior expectation of between $575 million and $650 million driven by the drop through on increased sales volume, improved productivity, and favorable program mix. With that, I will hand it back over to Christopher for some closing remarks.

Christopher T. Calio: Okay. Thanks, Nathan. We delivered another strong quarter of results and are confident in our updated full year outlook. Reflecting the continued execution across the company. And I want to thank all of our employees for their dedication to our mission. RTX is exceptionally well positioned across commercial aerospace and defense, with our leading franchises, growing installed base, and record backlog. We remain focused on executing on our commitments investing in the right technologies and capacity, and leveraging our breadth and scale to drive top and bottom line growth this year and beyond. With that, let's open it up for questions.

Operator: In the end interest of time and to allow for broader participation, you are asked to limit yourself to 1 question. Ask a question, you will need to press star 1-1 on your telephone. Our first question comes from the line of Sheila Kahyaoglu of Jefferies. Your line is open, Sheila.

Sheila Kahyaoglu: Sure. Good morning, Christopher, Neil, and Nathan.

Christopher T. Calio: Good morning. 14% was a standout as well.

Sheila Kahyaoglu: Obviously, some 1-timers in that margin number. As we think about where you are today and the continuous margin improvement, can you talk about specifically Raytheon and where we are on the missiles and munitions ramp? As there are a number of additional UCLAs in hand now? And how do you think about the volume and margin opportunity as that begins to feather in 2026 and thereafter?

Christopher T. Calio: Yeah. Thanks, Sheila. You know, as you noted, we are pretty pleased with Raytheon's organic sales growth here in the quarter. And even more so with the execution that underpinned it. Output across our critical munitions was up over 90% and we are seeing output growth across other critical munitions programs as well. So very happy with the operational performance the team is showing to ramp given the needs that are out there in the market. With respect to the conversion of the framework agreements to the YUCAs, again, a lot of hard work went into that, a lot of collaboration with the Department of Defense. You know, that is all in about $70 billion in combined value. That provides Raytheon almost a decade of demand visibility. Obviously, not only for us, but for our supply chain as we seek to take these rates up anywhere from 2x to 4x. And, you know, these are binding contracts. They have got robust terms, including price, delivery schedules, and the like. And so now we have shifted into the execution phase. Lining up the supply chain, putting up POs for tooling and test equipment, all the things we need to do to make that rate And we have also been working really closely with the department on all the actions necessary to accelerate the production. Know, streamlining test requirements, improving producibility where we can, addressing obsolescence, qualifying new suppliers, You know, in 2025 alone, Raytheon added 150 new suppliers. We have gotta get that supply base as strong as we possibly can. And so right now, it is about just removing any and all bottlenecks so we can get to these higher rates. Terms of how this sort of feathers in, and we are gonna execute these contracts over the next say, 7 to 10 years. And as Neil noted upfront, we are gonna account for these like other defense programs. You know, revenue will be on a cost to cost basis. And as we scale production, continue to drive the efficiencies given the volumes here and given you know, the visibility we have given the supply chain. We think these contracts have the potential to support margin expansion at Raytheon, above and beyond where they are today. Thank you so much.

Operator: Thank you. Our next question comes from the line of Peter Arment of Baird.

Peter Arment: Your line is open, Peter. Hey, thanks. Morning, Christopher and Neil. Nice results.

Christopher T. Calio: Good morning. Thank you. Thank you, Christopher.

Peter Arment: Hey, probably a question for both of you, but Christopher, thinking about supporting all this growth tied to the Framework deals and the Aero ramp. But how are you thinking about like cash conversion? You had a strong raise for 2026. Any puts and takes, you know, that we should be thinking about going forward from here just regarding either framework CapEx or advances? Any color here would be helpful. Thanks.

Christopher T. Calio: Yes. I will start and certainly ask Neil to pile in as well, Peter. Again, if you just look at the fundamentals of this business, you know, they are pretty strong, robust demand, large installed base. So, again, we think this supports our business being able to generate that 90 to a 100% of free cash flow to adjusted net income We have been pretty consistent in saying that. And, you know, there will be investments associated with the UCAs and the demand that we are seeing. But they incorporate a collaborative funding approach to help with some of the upfront you know, free cash flow. So, again, for us right now, it is all about focusing on meeting this demand. We have got a $340 billion backlog. We got to make sure that we have got the supply chain where it needs to be. The capacity, not only in our own shops, but, again, with some of these key suppliers. So that is where the focus is gonna be. Yeah, Christopher.

Neil G. Mitchill Jr.: Maybe I will add a couple of thoughts on some of the things that we have incurred in 2026 and how they might play out as we start to turn the corner and look at 2027. Not gonna give a 2027 outlook today for free cash flow, but you know, as I sit back and think about the underpinning of the drivers, the first thing is we have obviously been tailing down on the powdered metal payments, so expect that to be probably about a $500 million tailwind as we head into 2027. You heard us talk this morning about the AIPA refunds. So we had about $300 million in cash coming in the third quarter. there is another $50 million that will come in the fourth quarter. And then that will be largely behind us. So that will turn into a bit of a headwind I am thinking there is probably about $100 million of pension headwind as well. So all of that sort of nets to you know, about zero. So you step back and you think about the underlying drivers of the business Christopher just talked about how the frameworks will play out, largely a cash neutral event as we head into 2027. So then it comes down to segment operating profit growth, which we are expecting to see. We are gonna have operational expansion of the margins. So excluding the benefit that we just talked about from IEPA, we will still grow our margins, and we are gonna keep an eye on the need for probably a little bit higher working capital as we continue to support, you know, strong levels of organic sales growth. You saw we took our guidance up today, added 2 points of organic growth this year. We have seen some working capital draw, still seeing increased turns on inventory and working capital, but as we kind of position ourselves for continued growth and delivering this $340 billion of backlog I could see a little bit of headwind there. But all in all, expect cash flow to be up next year really well positioned, about 70% of the way to our 2026 goal so far and, still some work to do here in the in the fourth quarter, but feel good about where we sit today.

Christopher T. Calio: Thank you. Appreciate the color. The color. Thanks, guys. You bet.

Operator: Thank you. Our next question comes from the line of Robert Stallard of Vertical Research.

Robert Stallard: Your line is open, Robert. Thanks so much. Good morning.

Christopher T. Calio: Hey. Good morning, Robert. Christopher, it is probably 1 for you. Obviously, the airlines are struggling with the higher cost of fuel at the moment. We have seen some of them pulling down their flight activity plans for the fourth quarter. I was wondering if you are seeing any change in behavior from your airline customers as a result of these challenges they are going through? Yeah. Thanks, Robert. You know, you are right. We are closely engaging with the airlines and doing bottoms-up sort of fleet planning and understanding kind of where their head is in 2027, the impact. Of the cost headwinds that you just mentioned. Looking obviously at the consumer and the consumer health. But what we have seen is what you saw in our numbers here in Q3, which has been resilient demand and a resilient, you know, consumer. I mean, we had 16% organic growth in commercial aftermarket in Q3. Our GTF p w 11 output was up significantly 35% year over year. And that demand is gonna continue into next year and grow. Content has continued to be strong on the V2.5 thousand. And then as you heard Nathan say upfront, you know, Collins had continued organic growth across all 3 channels with mods and upgrades and provisioning both up double digits. And we are also seeing, again, retirements that have been relatively low and in line with our expectations. So as we sit here today, Robert, demand has continued to be resilient. We think it is durable. And, again, we are gonna watch all the other things you know, that everyone else is watching as we are kinda head into 2027 on jet fuel and the other cost headwinds. But if you just step back for a minute, you kinda let your mind linger past some of these near term issues, I mean, there are really strong fundamentals that underpin our aftermarket growth. I mean, there is the out of warranty flight hours. there is pricing. there is a growing installed base. So we feel very good medium, long term about our commercial aftermarket positioning. that is great. Thanks, Christopher.

Operator: Thank you. Our next question comes from the line of Kristine Liwag of Morgan Stanley.

Kristine Liwag: Your line is open, Kristine. Maybe, Neil, you had talked about with the ammunition contract that you have received with that $70 billion of multi-year contracts, you are seeing production rates increasing 2x to 4x over time. But, you know, these are just from the contracts that have converted into firm orders. But you have also got multiple framework agreements that have yet to convert to orders When we think about the opportunity set that is ahead, including what you already got, how should we think about the cadence of revenue and earnings contribution on an annual basis? Like, when does this start to peak Is this really more of an acceleration in 2028 and beyond? Could we see some of this in 2027? I know you do not wanna give 2027 guidance yet, but just help us understand, how we should think about the cadence of revenue and growth.

Neil G. Mitchill Jr.: Sure. Thank you for the question, Kristine. Good morning. So, you know, obviously, are a few variables here, the most important of which is, you know, how the defense budgets play out, in the coming months. But you know, nonetheless, we are very confident in the demand and need for these important munitions. So as you pointed out, we got 2 of the frameworks converted to undefinitized contracts in the third quarter. We had 2 more that came here in the fourth quarter, so those will be included in our fourth quarter bookings. And, you know, we have booked a little bit of revenue on this here in 2026 and we certainly do expect some of that to, you know, ramp up in 2027 as we begin to facilitate. But I think importantly, before I even, you know, get further on that, we got this enormous backlog to deliver. And so as I look at Raytheon's, you know, 2027 and beyond outlook, it shows very strong top line growth opportunity in its in its base backlog, and then you put this on top of it as well. And so we will get into the specifics as you pointed out today, certainly, I see this as, you know, starting to ramp you know, over the next 2 years in earnest. And really continuing through 2030 when we get into full rate production for the suite of munitions that we will be providing. Great. Thank you. Thanks. You are welcome.

Operator: Our next question comes from the line of Myles Walton of Wolfe Research.

Myles Walton: Your line is open, Myles. Thanks. Good morning.

Neil G. Mitchill Jr.: Looking at the margin performance of Collins, excluding the AIPA, you are nicely ahead of 18%. The implied Q4 margins come back down to at or below where you were in the first half.

Myles Walton: I am curious, you talked about the cost savings initiatives having impact How sustainable are those?

Christopher T. Calio: And maybe what should we be thinking-- Myles. Lost you there, Myles, but I-- From what we did hear, you were-- We will-- yeah, we will-- We will reframe the question as we like it. No, we heard the question on Collins There you go.

Myles Walton: There you go. Go ahead. We hear you now. Great. So I was just looking at the margin performance at Collins. Excluding IEPA, you were nicely above 18% in the quarter. It looks like Q4 margin implied you dropped back to mid-16%. I am just curious, was there anything special about the quarter which is interesting because you had very high OE rates? And then maybe make a comment of the opportunity for expansion to 2027 that, Neil, I think you alluded to expansion across the business.

Neil G. Mitchill Jr.: Yeah. Well, obviously, we are really pleased with where Collins operational margins were in the third quarter, and there really was nothing I would call out that was particularly unusual about the third quarter. So it is good to see the traction that they are getting. Everything we have been talking about for the last 5 years, frankly, about higher OE production, getting good absorption, the aftermarket drop through, the increased content on the installed base is coming to fruition, and we got good defense performance as well. At really good margins. So the third quarter was strong and very clean. As we walk to the fourth quarter, you are right, we see a little bit of pullback on the margins and what I will tell you there is there is a couple of things. First, obviously, we will not have the AIPA refunds repeat for Collins. that is all behind us here in the third quarter. We are investing in that business. it is really important for us to make sure that we are prepared for next generation technology, and so we will see a little bit higher research and development in the fourth quarter as we usually do, but it is ramping a bit. We are also increasing our digital spend there. that is a key element of the transformation that Collins is going through in terms of their you know, reducing complexity automating back office functions, etcetera. So that comes into play here in the fourth quarter. We do see a little bit higher OE volume in the fourth quarter, probably gives us about 40 basis points of margin headwind and a few other timing items. But fundamentally, the Collins margins remain really strong, and we expect the operational margins to continue to expand into 2027, and we will talk more about that, obviously, in January.

Operator: Maybe just, Myles, to hit on 1 part of your question on sort of the sustainability on the structural cost reduction.

Christopher T. Calio: I would tell you and Collins would tell you that we are in the relatively you know, early, you know, stages of that, and we have continued to see some really good some really good progress there. You heard Neil talk about some of those initiatives. it is consolidating operations, increasing cost at best cost locations, really attacking the overhead layers. And you saw sort of the indirect headcount reduction that we referenced in our remarks. So these actions are gonna continue to compound over time. And provide some nice tailwinds to Collins margins. Thanks. Thank you. You are welcome.

Operator: Our next question comes from the line of Ronald Epstein of Bank of America.

Ronald Epstein: Your line is open, Ronald. Hey. Good morning, guys. Maybe just a quick follow on here. to a couple of the questions that were asked. On the UCAs, if they are not the definitized, how are you? Hope they will be, right, political winds change and all that sort of stuff, Are you guys protected? Can you talk about that a little bit?

Christopher T. Calio: Yeah, absolutely, Ronald. And I will not get into the detailed terms. But what I will say is that we are protected if there are changes in the budgetary environment and changes in volumes. That was a critical part of our discussions. We wanna move out quickly and get to these rates. The department, you know, understood that. But, you know, was also cognizant of the fact that things could change in this budget environment and that we have got, you know, the protections we need to feel good about moving out on these investments. I will say, though, Ronald, even with the sort of the budget risk that sort of sits out there, I do believe that our critical munitions will be prioritized no matter how the match in the ultimately shake out between, is there going to be a reconciliation, what is in the base, think these UCAs are a testament to how critical these munitions programs are and that they will continue to be prioritized as we go through the budget process. So, again, feel confident that we will see these go through, but protected you know, on the downside just in case. And then if I may. When we were walking around AUSA, 1 thing came up pretty much in every meeting we did. Nobody can get printed circuit boards. And then people are having problems getting capacitors and resistors and this and that. So as you think about these ramps, and just real fundamental components that are in short supply. Some of it largely because of what is going on in the, you know, the AI build out How are you guys thinking about that? Right? Because you have got this big sucking sound coming from a whole other side of industrials. that is absorbing a lot of parts that you guys would normally use. Yeah. Absolutely, Ronald. You are hitting on the single, you know, biggest enabling factor in getting to these enhanced rates, the 2x to 4x that I mentioned before. it is absolutely gonna take a change in how we do things with our supply chain. You heard me mention upfront some of the things we are doing differently in collaboration with the department in terms of know, streamlining test requirements, things that sit generally speaking, within the department's peer purview. How do we be more efficient in how we do testing? How do we look at our requirements and really interrogate them to make sure that everything is absolutely necessary? And then how do we work with them to bring additional suppliers into the defense industrial base? I mean, you are right. There are certain pieces that we are competing with other industries. You mentioned the AI build out. I mean, keep in mind, we are looking for a little bit different things than some of those folks. But working with the government to, you know, make sure that the folks that are producing the things that we need are prioritizing us, and we are not gonna be left behind by virtue of AI build out or other things. Help put critical minerals in that same, you know, category. Those are things that are going to be important for both the commercial and defense, and we have been working those for a long time. And the Department's helped there as well in terms of helping us secure long term supply you know, to make sure that we have got what we need for 2027 and beyond. So just tell you that the supply chain focus is acute and is where we are putting a lot of our energy, focus, and investment.

Analyst: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Seth Seifman of JPMorgan.

Seth Seifman: Your line is open, Seth. Thanks very much, and good morning, everyone. Christopher, I wanted to ask, when you think about the NDAA this year and the right-to-repair provisions that are in there. And, you know, you guys have the big defense portfolio, not just in Raytheon, but also in Pratt and Collins. How do you think about the potential impact of that on the company?

Christopher T. Calio: Yeah. Thanks, Seth. I will not speculate too much right now as I know that legislative process is ongoing and as you noted, the 2027 budget is not final. You know, again, we wanna be supportive of our customers and their sustainment needs, but we are also gonna need the kinds of protections around IP and protections around the investments, you know, that we have made and to make sure that, you know, we can balance those needs and the life cycle ownership needs of the customer. So again, I think, ultimately, you know, we will get to the right place on this, and we will see how it shakes out.

Analyst: Okay. Very good. Thank you.

Operator: Thank you. Our next question comes from the line of Scott Deuschle of Deutsche Bank.

Scott Deuschle: Your line is open, Scott. Hi, good morning.

Neil G. Mitchill Jr.: Neil, can you characterize where Pratt and Whitney's free cash flow conversion is today? Relative to its after tax earnings? And then how you expect that to trend over the next few years? Scott, thank you. Listen, As I look at Pratt, first of all, it is generating, you know, some substantial cash flow, in 2026. It has been every year since the trough of COVID, so it is a very productive and cash flow positive entity. Keep in mind, you know, about half of it is commercial engines. Quarter of it is military, a quarter of it is Pratt Canada. what is great about. You know, as we look forward, as you all know, we have made substantial investments in expanding our MRO capacity, getting our know, facilities put together for, assembly of GTF engines, expect that to you know, continue as we continue to increase our volumes. But on the GTFF aftermarket, we have been doing a number of overhauls that are pay at shop visit, and those full interval shop visits are coming due here this year and into the next several years. And each of those shop visits brings with it cash payments. So Pratt will be, you know, a tailwind to RTX's free cash flow over the next 3 years. I am not gonna put a number on it today, but you have heard the kind of growth rates we have demonstrated over the last 2 years in the MRO output. We expect, you know, strong, you know, call it low double digit increases in shop visits. As we go into 2027 and beyond. And so with that, we will come the cash flow that we expect to return the investment on the GTFF. Can you say what percent of GTF shop visits are pay at overhaul? So, you know, we have talked about the contracting landscape before, and about 80% of the you know, contracts for the GTFF program are under a long term contract. And I would say, you know, the vast majority of them are at a pay and shop visit. Contract. And so, you know, the good news is as you have looked at the results of RTX and, Pratt, a key part of that over the last few years, we have generated substantial free cash flow. And we have at the same time, we have made substantial investments in overhauls over the last few years. And so the contract asset has grown at Pratt, but over the next, you know, 3 to 5 years, we will start to see that come down and generate tailwinds for the business.

Analyst: Thank you. Thank you.

Operator: Thank you. Our next question comes from the line of John Godyn of Citigroup. Please go ahead, John.

John Godyn: I was hoping we could just stay on Pratt for a bit and maybe revisit margins. Obviously, modeling Pratt margins has a lot of moving parts. You had the AIIPA. I am just curious how you guys self assess performance recently, and when we look out to a world where aftermarket trends stay strong, as you described, AOGs are declining, How should we think about the shape of a margin breakout eventually? Any additional color would be helpful.

Christopher T. Calio: I will start. John, and then I will ask, you know, Neil to chime in. Look. When you think about Pratt and Pratt's know, margin expansion and performance, it does center around the GTF. You heard us talk earlier today about the MRO performance. On the 1.1 thousand up 37% year over year. No turnaround time, you know, has come down, and that is with heavier shop visits. So you know, really strong performance from an MRO perspective, which will help drive AOGs down here in the fourth quarter. And then it is really shifting, you know, to the GTFF Advantage and HSP. Those are gonna be the 2, you know, main thrust behind margin expansion in our large commercial engine, you know, business. GTFA is in production today. As you know, we talked about it is EIS with United earlier, so we are very pleased about that. We are taking a disciplined approach to that production cutover. You know, this configuration will get cut in over a period of several years to manage the risk. there is a large proportion of the bill material that is common, there is some that is unique. We wanna make sure those are up at the right rates as we cut that in. And then on Hot Section Plus, which, as you know, is the effectively, the derivative of the GTFF advantage, you get 90 to 95% of the durability benefits in a in a kit. We are working with Airbus and regulators to finalize certification. Anticipate it is gonna be installed into MRO early next year. And we also expect that cut in to be more aggressive and faster than the 1 I just described on the GTFF know, Advantage. So, again, it is really going to come down to continuing on the MRO output on GTF and then the cutover on GTF advantage. And then the cut over on HSP and our GTF shop visits.

Neil G. Mitchill Jr.: Christopher, the only thing I would add maybe to just put some numbers around what we are talking about here. We have talked about, Pratt, entitled to low to mid teens margins over the longer term. And when I look at the performance of the business, and the mix of installs and spare engines, the growing GTF aftermarket, the continued steady v 2.5 thousand shop visit outlook that we have for the next several years. All of those things contribute to margin growth year over year through the next 5 years. it is gonna be a gradual growth But importantly, as I just talked about a few minutes ago, you know, it will come with, you know, significant cash flow tailwind as well. As we convert, you know, these shop visits to paying shop visits. So the formula for margin expansion is in place. You know, we have got good traction on the aftermarket, on the pricing. And I think that the team is focused on the right things at Pratt and Whitney to drive that growth over the next several years.

Analyst: You are welcome.

Operator: Thank you. Our next question comes from the line of Scott Mikus of Melius.

Scott Mikus: Your line is open, Scott. Christopher, the company is generating a lot of free cash flow, and there is some sensitivity around stock buybacks for defense contractors. But earlier this year, we saw Northrop file to have its consent decree related to Orbital ATK acquisition either waived or modified. The administration allows that to go through. Would you look at acquiring a solid rocket motor supplier to help you with the ramp on missiles?

Christopher T. Calio: Yeah. Thanks. I appreciate it, Scott. Again, I think when we look at our supply chain, we are looking at all our possible constraints. We see constraints, as I mentioned earlier, in castings, and we are investing in our own Asheville facility there. We see constraints in rocket motors, as you noted. I talked earlier about critical minerals. So we are always looking whether or not we deploy capital to bring, you know, additional sources of supply, you know, in terms of qualifying new suppliers. And we are also always looking at places to deploy capital to bring certain suppliers in house if we feel like it is a major bottleneck. On Rocket Motors in particular, I will tell you we are expanding the supply base and entering into partnerships with other solid rocket motor suppliers because I think that is just an area that we are just-- you are never going to have enough suppliers there. I think the demand is gonna be you know, incredibly high, and we need to continue, you know, to spread that risk across a number of suppliers is why you have seen some of our announcements we have made. In terms of our partnerships with other rocket motor suppliers. So, again, just stepping back, we are always looking at ways to shore up our supply chain. No immediate plans on rocket motors. Again, that is more of a partnership strategy. But always looking for ways to strengthen the base. Got it. Thank you.

Operator: Our next question comes from the line of Matt Akers of BNP Paribas. Your line is open, Matt. Matt, please make sure your line is open. it is open. And if you are on a speakerphone, lift your handset. We will go to the next question. Which comes from the line of Gautam Khanna of TD Cowen. Gautam, your line is open.

Gautam Khanna: Yes. Good morning, guys. I was wondering if you could characterize Raytheon's foreign backlog given all the orders on the U.S. side this quarter? And then also, if you could talk a little bit about. Do the missile framework agreements because they are for mature programs, do the profit rates on those approximate that of the foreign backlog? Is it a should we view it as a substantial mix tailwind over time? Thank you.

Operator: Well, on the on the last part of your question, Gautam, you know, as I said earlier, as we continue to move into the production phase, and we start to see the efficiencies come from the higher volumes, and from our supply base.

Christopher T. Calio: Again, we think that these can support margin expansion, you know, at Raytheon. On the international side, again, continues to be you know, a very strong portion of the Raytheon backlog. You know? Our international bookings at Raytheon are up 1.5 times year to date on a year over year basis. So that international demand continues to be very, very strong. Again, I know there is been some overhang regarding questions on the budget and the like, but our international, you know, customers continue to have really strong demand for our product, whether that be Europe, MENA, Asia Pac. So the demand internationally continues to be exceptionally robust.

Neil G. Mitchill Jr.: And just to put a finer point, sorry if I missed it, Christopher. 37% of the total backlog is international. it is 52% if you exclude the munitions contracts, Tomahawk and AMRAAM that we added. So still very substantial. We booked $9 billion worth of international orders at Raytheon during the third quarter, a little overshadowed by the size of Tomahawk and AMRAAM, but still really, really strong bookings, and we expect some more here in the fourth quarter. So just a little extra color there.

Analyst: You are welcome.

Operator: Thank you. The last question comes from the line of Kenneth Herbert of RBC Capital Markets. Please go ahead, Kenneth.

Kenneth Herbert: Yeah. Hi, good morning. Thanks for squeezing me in. As you look at the strong aftermarket growth in Pratt, you have obviously talked a lot about the GTFF strength. Much of that growth was GTF? And can you give us any more update on what you are seeing on PW4, V25 and maybe Pratt Canada aftermarket in the quarter?

Neil G. Mitchill Jr.: Thanks, Kenneth. Listen, the majority of that growth came from the GTFF aftermarket. We are still seeing really solid content on the V2.5 thousand. So Q3 was lifted a little bit by, you know, particularly strong content on the V program. So you know, a little bit a little bit of growth there as well. We see that actually slowing down in the fourth quarter just on the mix of the inductor and the engines going through the shop. But as I, you know, said in the last call, we expected about 800 shop visits for 2026. We are right on track to that rate through the end of the third quarter, and we see no change to that outlook in the fourth quarter. And frankly, I think we see that number of shop visit inductions pretty flat and consistent year over year with, again, increasing content on the v. But you know, as we look at where we are today and the top line growth Pratt, a lot of that is being driven off of our GTF program. Which over time will far outweigh the structure decline in the V25 500 powered aircraft.

Analyst: Okay. Thank you. You are welcome.

Operator: Thank you. With that, I will now turn the call back over to Nathan Ware.

Nathan Ware: All right. Thank you, Latif. That concludes today's call. As always, the Investor Relations team will be available for follow-up questions. Thank you all for joining us, and have a good day. Take care, everybody.

Operator: This now concludes today's conference. You may now disconnect.