Chris Calio:

Thank you, and good morning, everyone. As you saw from our press release this morning, RTX delivered strong operational and financial performance in the second quarter as we continue to execute on our customer commitments and strategic priorities. Let me start with the highlights on Slide 3. We saw another quarter of excellent top line growth with adjusted sales of $19.8 billion, which were up 10% organically. Adjusted EPS of $1.41 was up 9% year-over-year, driven by profit growth and margin expansion across all three segments, and free cash flow was strong at $2.2 billion. We also saw continued growth in our backlog, which ended the quarter at $206 billion with a book-to-bill of 1.25. There were also some notable contract wins in the quarter, including a 10-year MRO agreement to support Collins significant content on Air Canada's 787 fleet of up to 70 aircraft, including avionics, air management and electric power systems. Collins also received a multibillion-dollar award for the U.S. Air Force's next-generation survivable airborne operations center, and Raytheon received a $639 million award for SPY6 radar production for the U.S. Navy. As you saw in early July, Germany placed an additional order for Patriot Systems. This is on top of the $1.2 billion order they placed for multiple systems in the first quarter of the year. We also saw some positive GTF announcements at the Farnborough Airshow earlier this week, with over 700 GTF engines ordered, including options and commitments. These include Cebu Pacific selecting the GTF to power the carriers order for up to 152 additional single-aisle aircraft and Avalon selecting the GTF engine for up to 160 aircraft. So another quarter of robust orders with significant wins already secured early here in Q3 and more expected as the year progresses. We also continue to make progress on our critical initiatives. Specifically regarding the GTF fleet management plan, we remain on track with our financial and operational outlook consistent with our prior comments. As of the end of Q2, we have inspected over 6,000 powder metal parts that are in the field across all programs and the associated fallout rate remains below the 1% we had assumed and the findings are consistent with the assumptions that underpin our fleet management plan. At our MRO facilities, throughput of engines continues to improve, and overall capacity is expanding with the recent addition of two new MRO shops into the network. PW1100 MRO output increased 10% versus the first quarter. We expect this ramp to continue in the second half of the year. As it relates to the PW1100 fleet, AOGs have leveled out over the past few months and remain in line with our expectations. We've also now reached support agreements with 20 of our customers, covering roughly 65% of the impacted fleet and the terms are in line with our assumptions. Beyond our operational performance, let me also comment on the legal and contract charges we outlined in our press release this morning, and then Neil will provide a more detail in a bit. We're nearing completion of agreements with the Department of Justice, SEC and Department of State to resolve several legal matters. These matters primarily arose out of legacy Raytheon Company and Rockwell Collins prior to the merger and acquisition of these companies. We've already taken robust corrective actions to address the legacy gaps that led to these issues, being implementing enhanced compliance and training measures. We also took a charge related to the anticipated termination of Raytheon fixed price development contract that was entered into before the merger. As we've been discussing in the last few quarters, we've been battling through some challenges in a handful of fixed price development programs, including this one. But this specific contract is unique in terms of its scope, deliverables and associated risk profile, which led us to pursue termination. So we're pleased to be putting these matters behind us. And as I highlighted earlier, our operational performance was very strong in the quarter. Given this performance and the continuing strength of our end markets, we are raising our outlook for adjusted sales and EPS. We've also revised our cash outlook for the year as a result of matters I just discussed. Lastly, as you saw in May, we raised our dividend 7% and remain on track to return $36 billion to $37 billion of capital to share owners from the merger through the end of next year. Okay, with that, let's move to Slide 4, and I'll spend a few minutes on our strategic priorities that will enable us to drive best-in-class performance across RTX, including meeting customer demand, continued sales growth, margin expansion across our segments and strong cash flow generation. Given our growing installed base and the unprecedented demand for our products, our first priority is executing on our commitments, powered by our core operating system, our focus is on driving incremental operational improvements to ramp output and deliver on this demand. Today, we have over 4,000 core projects being worked across the company. For example, at Collins, our avionics business improved first pass yield by 2x in its fire detection product line by reconfiguring the production sell-out, creating digital tools and upgrading equipment. And at Raytheon, the team conducted a core leadership week to identify initiatives to more than double weekly output on a key component of our AIM9X effector. As a result, the team achieved a 90% increase in output in the quarter, is on track to hit their full year target by the end of Q3. We also continue to add capacity to meet the demands of the industrial ramp-up. During the quarter, we announced a $200 million investment in our carbon break facility in Spokane, Washington. Once complete, it will add 70,000 square feet of manufacturing footprint to meet rapidly growing demand for our Collins brake solutions. And on the defense side, we're investing in test equipment and tooling to more than double production capacity by year-end in our Coyote program, which is a low-cost kinetic effector for the counter unmanned aircraft systems that directly address today's drone threats. In addition to creating new capacity, we continue to modernize our existing footprint as part of our Industry 4.0 initiatives. Across RTX, we have now connected 26 factories with our proprietary digital analytics technology, providing us with real-time data to boost equipment efficiency, improve quality and yield higher output. This represents a 30% increase in connected sites since the start of the year, and we remain on track to connect 40 factories by the end of the year. These incremental efficiency, capacity and technology improvements are critical to meeting the needs of our customers as we operate in the strongest demand environment in our history. Let me move now to our second priority, innovating for future growth. We are executing on our cross-company technology roadmap to develop differentiated solutions in areas such as sustainability, advanced propulsion, next-generation sensing, connected battle space and hypersonics, this year alone, we will spend over $7.5 billion on company and customer-funded research and development to mature and introduce new capabilities to our customers and sell our product pipeline. For example, we are working on a number of hybrid electric demonstrator programs to deliver advanced propulsion technologies and enable greater fuel efficiency across all future aircraft segments. Recently, our Collins, Pratt and Technology Research Center teams completed a significant milestone in the development of our hybrid electric demonstrator, validating the integrated system functionality of the engine, electric motor, batteries and high-voltage electric power distribution. And in the quarter, we delivered the first TPY2 radar that incorporates our proprietary gallium nitride technology. This technology is a game changer for our sensing capability, providing expanded surveillance range and supporting additional missions in the space domain and hypersonic defense. We also continue to invest in our digital transformation and AI. This year, we are adding an additional 30-plus use cases that generate incremental productivity and cost savings across RTX using advances in artificial intelligence and deep learning. In total, we have over 200 AI use cases currently deployed across various internal functions. Our AI investments are also enabling new and improved capabilities in our products such as predicting equipment failures and aiding human operators in executing complex tasks. These types of investments in innovation will allow us to continue to develop next-gen products and solutions well into the future. Our third priority is to fully leverage our breadth and scale across RTX to drive value for our stakeholders. Specifically, this includes creating a more efficient and competitive cost structure and managing our common supply chain. For example, over 35% of our product procurement spend is with common suppliers that support all three of our businesses. We're using a unified RTX approach to our contracts and sourcing strategy. It also includes harmonizing our product lifecycle and management processes developing integrated solutions for strategic campaigns and pursuits such as NGAD, FLORA and next-generation commercial platforms. And of course, we'll also continue to review our portfolio and prune where needed as well as target bolt-on M&A to support our RTX technology roadmap and grow our core franchises. And underlying all three of these priorities is our unwavering commitment to safety, quality and compliance and everything that we do. It's what we and our customers expect and a commitment we will never compromise on. Putting it all together, I'm extremely excited and confident about the future of RTX. With that, before I turn it over to Neil, I want to acknowledge the leadership update we announced last week. As you saw, Steve Tim has decided to retire after 28 years with the company. Steve was a great partner in teammate, and I want to thank him for his leadership at Collins, and we're very fortunate to have a strong bench and are very excited that Troy Brunk is taking over as the new President of Collins. Troy has served as the President of three of the six Collins business units is uniquely qualified for the role . Okay. Let me turn it over to Neil to take you through the second quarter results in more detail. Neil?

Nathan Ware:

Thanks, Neil. Starting with Collins on Slide 7. Sales were $7 billion in the quarter, up 10% on both an adjusted and organic basis, driven by strength in commercial aftermarket, commercial OE and defense. By channel, commercial aftermarket sales were up 12%, driven by a 16% increase in parts and repair, a 15% increase in provisioning and a 9% decrease in mods and upgrades. With mods and upgrades coming off a difficult prior year compare that benefited from the 5G mandate. Commercial OE sales for the quarter were up 10% versus the prior year, driven by growth in narrow-body, wide-body and regional platforms, and defense sales were up 7%, primarily due to higher volume. Adjusted operating profit of $1.15 billion was up $230 million or 25% from the prior year driven primarily by drop-through on higher commercial aftermarket volume as well as higher defense and commercial OE volume. Looking ahead, on a full year basis, we now expect Collins sales to grow high single digits on both an adjusted and organic basis up from the prior range of mid- to high single digits, driven by continued strength in commercial air traffic and defense volume. And we continue to expect operating profit growth between $650 million and $725 million versus 2023. Shifting to Pratt & Whitney on Slide 8. Sales of $6.8 billion were up 19% on both an adjusted and organic basis with sales growth across all three channels. Commercial lease sales were up 33% in the quarter on higher engine deliveries and favorable mix in the large commercial engine business. Commercial aftermarket sales were up 15% in the quarter, driven by higher volume and favorable mix in both the large commercial engine and Pratt Canada businesses. And in the military engine business, sales were up 16%, primarily driven by higher sustainment volume across the F-135 and F-117 platforms. Adjusted operating profit of $537 million was up $101 million versus the prior year. Drop-through on higher commercial aftermarket volume and favorable mix as well as favorable large commercial OE mix was partially offset by headwinds from large commercial OE engine deliveries and the absence of a $60 million favorable prior year contract matter. Drop-through from higher military volume and favorable mix was more than offset by higher production costs and higher R&D and SG&A expenses. Turning to Pratt's full year outlook. We now expect sales to grow mid-teens on an adjusted organic basis, up from our prior range of low double digits driven by stronger military volume and higher commercial OE, and we continue to see adjusted operating profit growth between $400 million and $475 million versus 2023. Now turning to Raytheon on Slide 9. Adjusted sales of $6.6 billion in the quarter were down 2% as a result of the cybersecurity divestiture completed in the first quarter. On an organic basis, sales were up 4%, primarily driven by higher volume on land and air defense systems, including Patriot, counter UAS programs and Stinger. Adjusted operating profit of $709 million was up $47 million versus the prior year, driven primarily by drop-through on higher volume, favorable mix and improved net productivity, partially offset by the impact of the cybersecurity divestiture, and Raytheon had $5 billion of bookings in the quarter, resulting in a backlog of $51 billion. On a rolling 12-month basis, Raytheon's book-to-bill is 1.13. In addition to the SPY-6 award that Chris mentioned earlier, Raytheon also had $928 million of classified awards and a $393 million award from NASA to design, produce and deliver four units that will provide advanced earth observation. Looking ahead, we now expect Raytheon sales to grow by mid-single digits organically, up from the prior range of low to mid-single digits, driven by improved material flow. As a result, we now expect Raytheon's operating profit to grow between $125 million and $200 million versus 2023, up from the prior range of between $100 million and $200 million, and this includes the impact from the cybersecurity divestiture. With that, I'll turn it back over to Chris to wrap things up.

Operator:

[Operator Instructions] The first question comes from the line of Peter Arment from Baird. Peter Arment, your line is open.

Chris Calio:

Good morning.

Chris Calio:

Yes. Okay. Peter, thanks for the question. Let me take you through where things stand. As you noted, our key assumptions around AOGs, lingering turnaround time, shop visit mix between heavy and light and customer compensation all remain consistent. And as I noted up front, our assumptions on the inspection follow-up rates and the findings are all consistent, or even better than we planned. So good stability around the key assumptions. As you know, MRO output is the key enabler and we're focused on improving the material flow, better processes in the shops and we've added some capacity on this front. And again, we saw some good signs of progress here in the first half of the year. I mean, output was up 10% from Q1 to Q2 and first half output on the 1100 is up over 30% versus the first half in 2023. So continue to drive some output there, which is helpful. The key enabler of course on the MRO output is material. You had mentioned that, no upfront. We're continuing to see some progress on structural castings. Structural castings are up about 5% sequentially and 14% year-over-year, so good progress there. And then on forging, the powdered metal parts. We continue to drive output there as well. Isothermal forging were up almost 100% year-over-year. And we continue to add additional capacity for inspection and machining. For example, we've nearly doubled our sonic inspection capacity for the year. So again, driving on all the key enablers, Peter, to try to get this fleet in as healthier shape as we possibly can. I'll also just note, sort of unrelated to the fleet management plans. We continue to drive OE output as well. OE deliveries were up sequentially, up 30% in the first half on a year-over-year basis, despite sort of grinding through some of the supply chain portabilities. And we're also pleased with the additions to the GTS backlog that were announced at Farnborough recently. So again, focusing on what we can control on the fleet management plan and continuing to drive both supply chain and new orders into the backlog.

Operator:

Thank you. And our next question coming from Robert Stallard from Vertical Research. Robert Stallard, your line is open.

Chris Calio:

Good morning, Rob.

Rob Stallard:

Chris, following on the GTF theme, I was wondering if you could comment on what the situation is with Airbus and their recent forecast cut, because they've clearly not been getting as many new engines as they anticipated. So those engines instead go into the spare engine pool? Thank you.

Operator:

Thank you. And our next question coming from the line of Myles Walton from Wolfe Research. Miles Walton, your line is open.

Chris Calio:

Good morning.

Chris Calio:

Yes, thanks, Myles. I'll start and then Neil can certainly chime in. Certainly not an easy decision, but we've been alluding to the fact that we've had a significant classified program out there that was, we would say, not in our wheelhouse. Meaning the work that we had taken on, and this contract was pre-formation of RTX, was not within our core competency. And we struggled with that, and we struggled to get to the right technical solutions, and ultimately came to a point where, we just didn't think it was productive anymore to continue to go down this path. And ultimately decided it was in the best interest of us, and the customer to just kind of do a reset here, and allow us to go focus our resources on some of the other programs that we've got. You had mentioned a handful of other, I'll call them classified development, fixed price development programs that we've been talking about. I'll say those are much different in terms of risk profile than the one we took action on here. Those have some important milestones here in '24 and in '25. But we feel like we've got a much better handle on those than the one we're talking about here. And feel like we understand the risks much better there, and what needs to be done to get them to closure.

Myles Walton:

Okay. Thanks for the color.

Operator:

Thank you. And our next question, coming from the line of Sheila Kahyaoglu from Jefferies. Sheila, your line is open.

Chris Calio:

Good morning.

Neil Mitchill:

Sure. Let me start with free cash. You just heard me talk about sort of the changes that we rolled into our outlook for the year. As I think about the absolute value of the $4.7 billion, remember, that includes a couple of non-recurring items that are pretty substantial. And if you adjust for those things, you kind of get to a $7 billion, $7.5 billion, maybe even higher level of free cash flow that is operational. So, I think as we look forward, Sheila, and we get the powder metal payments behind us this year and next year, just a little color, so far we're a little less than $200 million into our $1.3 billion in powder metal outflows this year. We expect that to obviously ramp up. You heard us talk about doubling the number of customers that, we've got agreements with, and about two-thirds of the fleet under agreement. So, I would expect third and fourth quarter kind of be split pretty evenly, with respect to the rest of the payments this year. But if you look at the underlying operations, you can see that there's real strong organic sustainable cash flow. And I think that's what we'll be looking to see sustain itself over time. Now, in particular, there's some working capital improvement. I've talked about like $1.1 billion of improvement year-over-year and arriving at our $4.7 billion. Obviously, inventory was a use of cash in the first half. We expect that to turn around in the second half, which is typical for our business. We've got a little bit of headwind from the OE production rates that we've contemplated in that, but we're seeing stronger collections on the customer side. So, that balances for the rest of this year. So, that's how I would characterize the free cash flow situation today. As it relates to the DOJ and the outcomes, I think we feel very certain about the amount of cash impact that's going to happen this year. As we talked about in our prepared remarks, we've reached agreements in principle. There's some work to do to get that finalized with the various government agencies. That could take a few months, but when it happens, that will get filed and be available publicly. And then shortly thereafter we'll be required to make the payments associated with that. There's very little that lingers beyond that. I'd say it's in the $50 million a year kind of range following 2024, so it's manageable. Those costs will include some residual payments on the global trade related consent agreement, as well as some internal costs that we'll obviously invest in to continue to improve our processes, as we support the monitor activities. So, I would leave it at that for now with those items.

Neil Mitchill:

Yes, thank you.

Doug Harned:

Thank you. Good morning.

Doug Harned:

What you've talked about and what we've heard as well is that, your shop on the GTF, that a lot of the shops visit times, you've brought that down significantly the time in the shop, which is great. And so, presumably, this is with improved parts availability that's allowed you to do that. And I know in Q1 you did divert resources away from V2500 work in order to better enable you to provide GTF parts. And so, two things on this. I guess first, and where do you stand now on V2500 MRO? Is that kind of back to normal? And then second, even though those shop visit times seem to have come down significantly, everything we've seen is that induction wait times are still quite long. And perhaps, if you could address those two issues, it would be really helpful?

Chris Calio:

Yes. Before I do that, Doug, I'll just say on the V, I mean, obviously our customers are relying heavily on that, given the other stress in the fleet. So, we're heavily focused on making sure that, V inductions, turnaround times and what not, that the support is there for the customer base. On the GTF MRO, you're right. In the shop, when we've got material flowing, when we've got material in the right positions in gate two and gate three. We are seeing significant reduction in shop turnaround time, both our shops and our partners, which is really encouraging. The induction times are really a function of what we would call the parking lot. Doug, there are a lot of engines that came off wing, obviously, when the AD hit. People did some of that proactively. So, we are still working through a large parking lot of engines that need to get inducted into the shop. But again, we're encouraged by what we're seeing when the material is there, which is why we're so heavily focused on making sure the supply chain is healthy. You heard me talk about structural castings, isothermal forgings. These are the things that are going to be the biggest unlock for us as we take the AOG numbers down, and support our customers.

Operator:

Thank you. Our next question, coming from the line of Ronald Epstein from Bank of America. Ronald, your line is open.

Chris Calio:

Good morning, Samantha. How are you doing? Let me start there. I mean, we're seeing significant improvement in the interiors business. And frankly, the second half story for Collins is going to rely substantially on the aftermarket uptick there, in mods and upgrades. And the one thing I would say about the Collins portfolio of businesses as we've seen really strong performance across all the segments, the - SBU segments there. And many of them are at or above, frankly above, where we were in 2019. Interiors is the one place where we're still lagging. So we're encouraged by the orders we are seeing there. And we do expect that to translate to substantial growth in the second half of this year that's going to be driving a substantial part of Collins aftermarket year-over-year.

Seth Seifman:

Hi, thanks very much and good morning.

Seth Seifman:

Chris, Neil, I wonder if you could address the free cash flow target for next year. Kind of talk about whether you feel like that still stands, areas of risk, areas of opportunity and kind of your level of confidence?

Seth Seifman:

Thank you very much.

Kristine Liwag:

Hi. Good morning Chris, Neil and Nathan.

Kristine Liwag:

Maybe back with Pratt, you guys have highlighted that isothermal forgings are getting better. You're seeing doubled capacity increases in sonic inspections, which are all good, but structural castings continue to be an issue. Can you provide more color on why structural casting continues to linger. And then also, I mean, look, this historically has been one of the bottlenecks for previous aerospace ramp ups. So I guess, how is your approach different this time around to mitigate risk? And any color you could provide on the underlying tightness would be helpful?

Neil Mitchill:

One thing I would add there, too, is that we've forward deployed a lot of our own people to these suppliers to help sort through the assessments that are required around the inspection criteria. As you know, these are parts that are built to extremely tight tolerances. And it's important to have our engineering teams working collaboratively with the supply base. To make sure that we can clear those items, as they come through the production process. And that's been something that I think we've put a lot of effort into over the last couple of years, frankly, but we've ramped that up recently.

Operator:

Thank you. Our next question coming from the line of Cai von Rumohr from TD Cowen. Cai von Rumohr, your line is open.

Chris Calio:

Good morning.

Chris Calio:

Hi Cai, thanks for the comments. Overall, we're pleased with the first half results as you kind of outlined there, and we've updated our full year guide to reflect that strong top line growth. When we think about the segments and what's going on there, there are some headwinds. We've got some higher product costs, primarily in the defense pieces of Pratt and Collins. We've got a little bit of under-absorption with some of the lower OE rates. And we've seen some higher E&D. Now we have offset some of those headwinds with some below-the-line items, such as corporate spending reductions and tightening. So there are a few moving pieces here, but we've got good momentum as we enter the second half of the year, and we're confident in the updated outlook.

Cai Von Rumohr:

Terrific, thank you very much.

Operator:

Thank you. Our next question coming from the line of Jason Gursky from Citi. Jason Gursky, your line is open.

Chris Calio:

Yes. Thank you, Jason. And as you might imagine, having been a Farnborough this week, there was a lot of conversation around the future of narrow-body on sustainability and on when those platforms will be launched and get into service. I will just - I'll kind of maybe break this into sort of near medium and then longer term. Near medium, our focus and you sort of alluded to this, is on the GTF advantage. Right now, we're about 90-plus percent of the way through that testing. We've got some good results out of our environmental and durability, and so we're continuing down that certification path. As you know, another 1% of fuel burn, 4% thrust, but a more durable and reliable engine. So that's the near term. As we think about sort of the medium, longer term, I will tell you, we're evaluating and investing in a number of key enabling technologies for insertion into future GTF configurations. Think, composite fan blades, advanced materials like CMCs, planetary gear system. And then you referenced hybrid electric. Some of those numbers that were coming out of Farnborough are, what I would call hybrid electric or electric applications. And you think about that for the narrow-body, I view that as more of an assist, if you will, around sort of corner points of the flight envelope, lower platform, smaller platforms, the hybrid electrical view more work. And we continue to invest there and have made some really strong strides in some of our demonstrator programs. So again, we've said this before, the GTF architecture continues to have runway. And so, these are all the enabling technologies that we continue to invest in that we think we're going to be able to insert in that for the next-generation single-aisle. I'll also make the point that many of us in the industry are focused on fuel efficiency, and rightly so. I will tell you that we're also really focused on durability and reliability. As we continue to go push efficiency gains in the engine, there's always going to be trade-offs. We've got to make sure that those trades make sense, which is why we continue to invest in things like advanced coatings, and other advanced manufacturing techniques that can help with the durability of the engines. If you talk to operators today, the number one thing that they want in addition to sustainability and fuel efficiency is time on win. We've got to make sure that as we're driving efficiency and rightly so, that we're also focused on the durability of the engines in the time on wing. That's frankly how - that's what the customers need and that's what we need for our business model.

Matt Akers:

Yes. Hi, guys. Good morning. Thanks for the question. I wanted to see if you could touch on divestitures a little bit. You've been pretty active there. Could you talk about just kind of what inning we're in there? What's left to divest? And specifically, are you able to give the revenue and EBIT contribution from the Hoist & Winch deal?

Chris Calio:

Yes. Maybe just to add to that, Matt, we do have a robust and rigorous process, to take a hard look at the portfolio every year. And while there are businesses that might be solid performers, we want to make sure that they fit into the criteria long-term within RTX, namely technology differentiation and strong aftermarket tails, right? So continuing to look at the portfolio through that prism. I'll also remind you that we've set up an RTX Ventures. We've been making investments in early-stage companies keeping our eye on some of those trends, both commercial and defense. And so those may yield some opportunities as well for bolt-ons that fit into, again, our criteria.

Operator:

Thank you. And our next question coming from the line of David Strauss from Barclays. David Strauss, your line is open.

Chris Calio:

Hi David.

Neil Mitchill:

Sure, David. Listen, I'm not going to get into specific rates per se, but I'll tell you that, obviously, we started the year with a more aggressive outlook in terms of what that rate ramp would look like. What I would tell you is that we're in the low 30s in the first half of the year. And we do expect the rate to ramp up as the year goes on. So it's not a flat rate assumption, but I'd say it's a calculated increase. And you'll be able to hear from Boeing next week. I think I'm sure they'll have something to say about their rates. I'd say today, we're aligned with the airframers, but we're monitoring it just like everybody else. On the Airbus front, Chris talked about it already same thing. We're aligned there with the Airbus team on output. There is always a desire to increase those rates, but we're doing the best we can to balance between airline customers and the OEMs here. But I'd say from an outlook perspective, we're reasonably well calibrated, barring some change that we're not aware of right now.

Neil Mitchill:

You're welcome.

Scott Mikus:

Thank you. This is Scott Mikus on for Rob Spingarn.

Scott Mikus:

Neil or Chris in the past, you've mentioned that you don't exactly like the business model where the engine OEMs go through a heavy development cycle, lose cash on the OE sales and have to recoup your investment in the aftermarket. So I'm just wondering with the general misalignment of profit drivers between the airframers and the engine OEMs that can create tension when allocating scarce resources. On a future clean sheet aircraft program, is there going to be a broader industry discussion to better align those profit drivers between the airframers and engine OEMs?

Scott Mikus:

Thanks. I'll stick with one.

Noah Poponak:

Hi, good morning guys.

Neil Mitchill:

Hi Noah.

Chris Calio:

Thanks, Noah. So let me just step back and give you sort of a powder metal sort of ramp-up and insertion background here. So as we've talked about before, since late last year, everything coming off the line going to the OEMs had the full life powder metal parts. Now all spare engines have those as well. MRO was always a, I'll call it, a phased ramp-up. And so we'll start to see this ramp up here in the second half of the year, and it's going to continue to accelerate into 2025 and into 2026. Again, we've put a lot of emphasis on isothermal forging production. As I said, upfront, we put a lot of demand into the system, as you might imagine, given what's happened with the fleet. And we've seen some solid progress we need to continue to see some more ramp up. And as we said before, when a shop - excuse me, when an engine comes into the shop for a visit, we do an evaluation based on the work scope it needs, where it operates, when it was naturally going to see another shop visit to determine whether or not insertion of those parts makes sense. Again, we're trying to get the longest time on wing that we can and make sure that we allocate these resources appropriately. And so that -- those are all the things that go into decision as to which engines get the full life parts in, which we can do an inspection and do all the other things in the engine, because it was already slated to come back in advance of the time limits that, we've established. So there's a lot of moving pieces here. But suffice it to say, it's going to be a continued ramp back half of this year, '25 and '26 on powdered metal production and insertion and MRO.

Chris Calio:

The assumptions remain similar, Noah. But I'll tell you, each customer negotiation is different based upon where they operate and how they operate. And so the agreements are tailored to those, I would say, airline-specific metrics and criteria. But we're using the same, I'll call it, key assumptions that we outlined upfront across the board.

Operator:

Thank you. And final question coming from the line of Scott Deuschle from Deutsche Bank. Scott, your line is open.

Chris Calio:

Hi, Scott.

Chris Calio:

Yes. Thanks, Scott. So yes, we - on the seating question, we continue to work our way through the certification there. These are actually a lot more complex, and I think people understand and the certification requirements are relatively high bar, but we think we have our arms around what we need to do there to get these certified and ultimately into the hands of airframers and the airlines. On the heat exchanger, I'll just remind everyone that, that was a part that we had to move as a result of the conflict in Russia/Ukraine, out of Russia, and then set up another source here, and set up a separate supply chain, and that has taken some time. But we're starting to ramp up there to the rates that we need to support what we think Boeing's demand is.

Chris Calio:

Thank you.

Chris Calio:

All right. Thanks, Olivia. That concludes today's call. As always, I and the Investor Relations team will be available for follow-up questions. I really appreciate everyone joining us today, and have a good day.

Operator:

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

Greg Hayes:

Thanks, and good morning, everyone. As you all know, next week at our annual shareholders meeting, I'll be stepping down as CEO and turning the reigns over to Chris Calio. For the past two years, Chris has had responsibility for leading our three business units, Pratt & Whitney, Collins and Raytheon. There's no better evidence of his success than our results this quarter with strong sales and operating profit growth and a record backlog of over $200 billion. I'll be back at the conclusion of the call for some final comments, but let me turn it over to Chris right now to give you an overview of the company and our first quarter performance. Chris?

Neil Mitchill:

Thanks, Chris. I'm on Slide 4. As Chris said, we got off to a really good start this year on a number of our key financial metrics across RTX with Collins, Pratt and Raytheon all making progress in line with our expectations. Additionally, we completed the sale of Raytheon cybersecurity business at the end of the first quarter with gross proceeds of $1.3 billion and we've made progress on deleveraging the balance sheet, having paid down over $2 billion of debt since we initiated the ASR last year. RTX sales of $19.3 billion were up 12% organically versus prior year, and that is on top of 10% growth in the first quarter of last year. Demand strength was also reflected in our backlog, which is now $202 billion and up 12% year-over-year. Segment operating profit growth of 10% was partially offset by expected headwinds from lower pension income and higher interest expense. And our effective tax rate for the quarter included a current period foreign tax benefit. Adjusted earnings per share of $1.34 was up 10% year-over-year. And on a GAAP basis, EPS from continuing operations was $1.28 and included $0.29 of acquisition accounting adjustments, a $0.21 benefit related to tax audit settlements, an $0.18 net gain related to the cyber business sale, a $0.13 charge related to initiating alternative titanium sources, and $0.03 of restructuring and other nonrecurring items. And finally, free cash flow was an outflow of $125 million in the first quarter, in line with our expectations, and a $1.3 billion year-over-year improvement. As planned, the timing of defense milestones and increase in shop visits, along with inventory build to support our growth drove higher working capital this quarter. Okay. Let me turn to our business units and some of the progress we made in the quarter. You heard Chris give a status update on the GTF fleet management plan, so let me touch on our top priorities at Raytheon and Collins. At Raytheon, the business continues to see incredible demand. And as we said on our last call, we're taking actions to advance our key franchises, improve our supply chain, and drive margin expansion. In the quarter, Raytheon saw 50 basis points of sequential margin improvement and 20 basis points on a year-over-year basis. On the material front, we saw a double-digit increase in material receipts in the first quarter versus prior year, the fourth consecutive quarter of growth, which of course is driving the top line, but more importantly, helping to alleviate bottlenecks in the manufacturing processes and burn down overdue sales. Moving over to Collins, our focus remains on driving incremental margins through continued commercial OE and aftermarket growth and the benefit from ongoing structural cost reduction. In the quarter, Collins saw strong sales growth and 90 basis points of margin expansion on both a sequential and year-over-year basis. And we expect future volume increases to drive continued fixed cost absorption benefits across the business this year. On the cost reduction front, we continue to make progress as well. For example, Collins is in the process of shifting 2.7 million manufacturing hours to best cost locations by the end of 2025. To date, over 2 million of those hours have already been moved, with 400,000 more planned for the rest of the year. And finally, we also achieved an incremental $105 million of RTX gross merger cost synergies in the quarter, and we're approaching the $2 billion target we updated last year. So good progress on our top priorities to start the year. With that, based on our first quarter results and strong backlog, we remain on track to deliver our full year outlook, including full year sales of between $78 billion and $79 billion, which translates to between 7% and 8% organic revenue growth. In addition, we continue to see adjusted earnings per share between $5.25 and $5.40 and free cashflow of approximately $5.7 billion. Now, let me hand it over to Jennifer to take you through the segment results. Jennifer?

Chris Calio:

Thanks, Jennifer. I'm on Slide 8. With our portfolio strength and current demand, our overall backlog is at a record $202 billion. And our focus as a team remains on executing this backlog to meet our customer commitments and driving operational performance. And our top priorities for the year remain unchanged. First, at Pratt, it's about continuing to execute the GTF fleet management plan. Second, at Raytheon, it's about delivering the backlog and improved margins. And third, at Collins, it's about generating strong incremental margins. As I discussed, our core operating system underpins our execution on these priorities and drives continuous improvement across RTX. At the same time, we're investing over $10 billion in research and development, modernization, and digital capabilities, continuing to evaluate our portfolio for incremental opportunities to further enhance our focus and prioritize future investments. And as we do this, we remain on track to return $36 billion to $37 billion of capital to shareowners from the date of the merger through next year. So with that, let me turn it over to Neil.

Operator:

[Operator Instructions] Our first question comes from the line of Myles Walton of Wolfe Research. Your question please, Myles.

Neil Mitchill:

Good morning, Myles. This is Neil. I'll start out, and Chris can add anything here. But a couple of things on the Pratt aftermarket. I think 9% aftermarket growth in the first quarter was largely as we expected. We took the first quarter to make sure that we started off on a strong foot with respect to the GTF aftermarket overhauls, and I'm sure Chris can provide a little more color there. In doing so, there was a little bit lighter material allocation to the V2500s. We're actually down a handful of shop visits year-over-year in the first quarter, a little bit -- around 175 or so. We still feel confident though that we'll hit 800 shop visit inductions on the V2500 for the full year. And so what we expect to play out over the remainder of the year is that we will see more and more of those shop visits come in. We'll also see the content on those shop visits increase. So we'll see better drop through on the legacy aftermarket. Back in January, we talked about the PW2000s and PW4000s. There's some puts and takes there. They largely offset for the year. So it's really about seeing that legacy aftermarket continue to grow. So full year, still expect low teens sort of growth in the aftermarket of Pratt and we're confident that we'll see the material flowing to support that.

Myles Walton:

All right, thanks. Makes sense.

Kristine Liwag:

Hey, good morning, everyone.

Kristine Liwag:

Greg, thank you for your leadership over the years. And, Jennifer, wish you the best in your next endeavor. So, maybe on GTF, Chris, thank you for providing more color in the GTF fleet management plan. And at this point, it seems like everything is progressing well. So as we look forward to understanding the risk retirement, are there other milestones you're monitoring to see if there could be potential risk reduction? Is there a number of specific completed AOGs or more customer agreements to be completed? Any sort of gauge to help us understand risk retirement would be helpful?

Kristine Liwag:

Great. Thank you very much.

Kristine Liwag:

Very helpful. Appreciate it.

Seth Seifman:

Hey, thanks very much and good morning. Maybe kind of a small picture question here, but it is one that we get a lot. When you think about the trajectory of aircraft on ground, and it seems like we are right around the highest level we'll see here at -- in the 550-ish level, when we think about where that goes from here, do we think of that more as a plateau for the remainder of the year or for a couple of quarters? Or do we start to see some progress there? And when you think about where turnaround times are kind of now and the improvement that you can make over the next few quarters, is there anything that you can kind of lay out for us to gauge that?

Seth Seifman:

Thank you very much.

Ron Epstein:

Hey, good morning, guys.

Ron Epstein:

Could you speak a little bit to the supplemental that got through the house and how that plays out for your defense business. What goodies are in there for you guys?

Ron Epstein:

Great, and if I may, just a quick follow on. You had some challenges with the fixed development -- fixed price development program within missiles. How's that going?

Neil Mitchill:

Chris, I'll just add with respect to the productivity, in the first quarter we saw about a $58 million year-over-year Q1 to Q1 improvement. Of course, we had the exercise of an option last year, which accounts for maybe, 55% of that improvement. But nonetheless, we're expecting $200 million year-over-year and continue to expect $200 million year-over-year. And so, good progress in the first quarter. But there's still three quarters to go, but we are encouraged by the shift that we've seen here in the first quarter so far.

Operator:

Thank you. Our next question comes from the line of Cai Von Rumohr of TD Cowen. Your question please, Cai.

Neil Mitchill:

Sure. Kai, let me start here. I mean, we had a really strong start to Pratt's first quarter. Most of that was on the back of commercial OE deliveries, up 40% almost in the first quarter on a unit basis. So that obviously drove the top line and some good mix there too between installs and spare engines as we look to position the GTF fleet as best we can to start the year. I think some of that's going to moderate clearly as the rest of the year unfolds. So I think we had a good start out of the gate on installs. On the aftermarket side, you're right, we're going to see more of the mid-single-digit type of growth in the next three quarters. So again, that will be fueled by V2500s coming up a little bit. The top line is going to be also bolstered by GTF aftermarket, which of course doesn't come with nearly as much profit, but will certainly help the fleets get healthier. And military also had a really strong first quarter start. The material coming in in the first quarter was positioned to support the aftermarket principally in the military business. And we do see that slowing down a bit in the next part of the year. So those are the key ingredients. Not going to get into the specifics on a quarterly cadence here, but we're just one quarter into the year, but do -- a good start to the year, and we'll see we're kind of holding on to our guidance at this point.

Operator:

Thank you. Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Your line is open, Sheila.

Neil Mitchill:

All right, let me start, Sheila. As I think about -- first, let's start with the first quarter for Collins. It was a really good quarter. We had about $145 million of profit growth on an adjusted basis. We've talked about the Collins growth trajectory really being driven by the aftermarket. Now, there's still a long ways to go. We put out a range of $650 million to $725 million for the full year. And so what we're going to see is increased drop-through on the continued cost reduction essentially that Collins embarked upon several years ago. And we're starting to see the cost associated with achieving that cost reduction ease, as well as the benefit from the actions start to drop through in the form of stronger incrementals. So feel like the aftermarket trajectory supports that at this juncture. And that I think is going to really continue to be the key driver for the Collins profit growth for the rest of the year. If I just comment for a minute on the $175 million. As we said in our remarks, that charge related to some procurement of titanium, which I know you all know is an important commodity for the aerospace industry. Given a number of ongoing supply chain dynamics around aerospace-grade titanium in particular, especially as it relates to the titanium that we use in our landing gear manufacturing at Collins, we've taken some steps to secure alternative sources for that supply. And it's taken us some time to do that, frankly. So specific to the charge, we reached an agreement with tow new suppliers during the quarter in connection with those agreements as well as some sanctions imposed by Canada, which were announced in February. We took a charge to reflect two things. One was the higher purchase commitment cost that came about as a result of these two new agreements. And the second is the impairment of about $75 million of costs that had been previously capitalized on the balance sheet associated with a specific program that are no longer recoverable. So as we talked about since 2022, we've been evaluating our global sourcing strategies to mitigate the potential impact of sanctions and other restrictions. And frankly, we've de-risked that in many areas. And I think this is an important step in putting this issue behind us. So, feel good about the agreements we have, but they're certainly at a higher cost, and so we took a charge to deal with that.

Neil Mitchill:

You're welcome.

Doug Harned:

Yes, good morning. Thank you. On the defense side, so in Raytheon you made a leadership transition, Wes Kremer retired in Q1. Can you talk about how, if at all, you're thinking about the strategy differently? And I'd say in two areas, one, you mentioned a little bit about this before in terms of bringing margins up to your objectives in 2025, which presumably fixed price contracts play into that, but also the supply chain progress. And then second, back in Paris, you talked about a need for a new strategy on the space side, to really reinvigorate growth there. Can you comment on how you're thinking about those now with the new leader in place in Phil Jasper? Thanks.

Doug Harned:

Very good, thank you.

David Strauss:

Thanks, Good morning. Best of luck, Greg. I enjoyed working with you. Same thing, Jennifer. Chris, on the GTF plan, I think it's calling for disc replacement, replacement on 3,000 or so engines. Can you just tell us at this point how many have actually seen full replacement actually having been done at this point? That's my first question. Then the second question, you reached an agreement with Spirit Airlines in the quarter that was made public. Is that amount kind of on a per-AOG basis representative of your other customer agreements? Because that would seem to imply a higher compensation number than you've baked into your forecast? Thanks.

David Strauss:

Thank you. Our next question comes from the line of Rob Stallard of Vertical Research. Your line is open, Rob.

Chris Calio:

Good morning, Rob.

Greg Hayes:

Obviously.

Chris Calio:

Yeah. Hey, Rob. Yeah, as you pointed out, significant content at Collins on 737 and 787, so across the main growth platforms there at Boeing. I would say that, I mean, we've kind of mentioned this upfront, we've got some, I guess, some uncertainty around rates today. We think that we've calibrated a lot of that in, but again I know the Boeing company will provide their guidance tomorrow, so we won't get out ahead of them. We're just kind of focused on working with them, supporting them through the dynamics in play, and preparing to take whatever actions we think necessary, depending on the guidance that they provide. But I'll just say that the team has worked very hard to go drive the material and we need to support their rates, and we've got the capacity to do so.

Operator:

Thank you. Our next question comes from the line of Noah Poponak of Goldman Sachs. Please go ahead, Noah.

Chris Calio:

Hi, Noah.

Neil Mitchill:

No, let me start with defense and I'll hand it off to Chris to hit your first question. But, listen, I think we had a number of headwinds last year. I think you're all well aware of that. And so as we put together our outlook for this year, we essentially assumed no productivity for the year. Now, as Chris said, and I talked about earlier, that's a significant step-up from what we experienced last year, and largely last year was driven by a handful of fixed price development programs, but we're not out of the woods there. So what I would say is, we took an approach that is not assuming a huge uptick. Remember, this is a business that several years ago was kicking off $300 million, $400 million, and $500 million of positive productivity. There is still positive productivity in the Raytheon business each quarter, but it's been overwhelmed by the negatives. And so at this point, I think we're really pleased to see a quarter like this to start the year. There's work to do, obviously, to get multiple quarters together that look like this one going forward. And that's what we're focused on. We're really focused on improving the health of the supply chain and moving the material through that you could see has come in, and now we got to get it through the entire manufacturing process to meet these important needs of our customers. And that's really where our focus is. I do think it will step up in ‘25. One encouraging thing is we had significant orders during the quarter and the margins in that new backlog are very healthy. The mix of those new orders, about 60% foreign sales. So it's a good start, but one quarter at a time. Chris, maybe a couple of comments?

Noah Poponak:

Neil, the fixed price development programs that have been a challenge in Raytheon Defense, when do those end? When do those move out of development?

Noah Poponak:

Okay, thanks for taking my questions. And, Greg and Jennifer, thanks for all the help over the years.

Operator:

Thank you. Our next question comes from the line of Peter Arment of Baird. Peter, please go ahead.

Chris Calio:

Yeah, I think that's right, Peter. I think it is a multi-year process. To your point, if you just think about what's going on out there today, the integrated air missile defense, the demand there is exceptionally strong. Obviously, Patriot, NASAMS and of course, GEM-T and the like, you saw a huge order from NATO at the end of last year for us, and the demand continues to be really strong. To your point, when we look at our margins throughout the year, our margin progression story at Raytheon, we're expecting a tailwind from mix as we increase the international backlog. About 60% of Raytheon's Q1 bookings were international, and so that's provided us a nice tailwind, and we expect that to continue.

Operator:

Thank you. Our next question comes from the line of Matt Akers of Wells Fargo. Please go ahead, Matt.

Chris Calio:

So let me start with the, now with the wing to wing turnaround time. Yeah, it's in that range that we've provided in that 250, 300. Again, a lot of that will continue to be dependent on the mix of work scopes. We're still believing that it's going to be more of a 90% heavy, 10% lighter shop visit. And with that, we'll stay within that range. If we can find a way to come up with medium work scopes and other things that can alleviate the need for new, we'll call it non-powdered metal, material repair development and the like, perhaps we'll be closer to the lower end of that range, but we're in there today, given the shop visit mix that we see and the material flow that we see.

Matt Akers:

Great. I guess the aftermarket?

Matt Akers:

Great. Thank you.

Operator:

Thank you. Our next question comes from the line of Jason Gursky of Citigroup. Please go ahead, Jason.

Chris Calio:

Yeah. Hey, Jason. Look, I think, given the threat environment we described and we kind of laid out in the question on the supplemental, we're going to continue to see strong top line growth at Raytheon and strength in bookings. And again, if you just kind of go region by region, it's replenishment in the US, it's the integrated air and missile defense in Europe, it's naval munitions in Asia. So, again, feel like the strength of demand is going to continue to be there. And then the other thing I'll say, Jason, is we're also thinking through some of the advanced capabilities that we're trying to bring to market as well. LTAMs, which I mentioned up front, the 360-degree radar, the refresh on AMRAAM, SPY-6 radar, which has gone through its initial sea trials, counter-UAS capabilities with our Coyote system, and then things like high-power microwave as you look to sort of the drone swarm threat that continues to build. So again, strong demand for the existing pipeline of products. We continue to invest in that next generation product, which we think meets the emerging threats.

Neil Mitchill:

I was just going to comment on the book-to-bill. I mean, certainly, really strong first quarter With top line sales projected to where we see them, it's obviously going to change the math a little bit on the book-to-bill calculation, but we still expect a book to bill over 1.1 for this year. And I think it's going to be strong next year. But obviously as sales go up too, that'll level off a little bit. But the backlog is going to continue to grow. To put a finer point on some of the awards for this year, we see AMRAAM, we've talked about LTAMDS, both with the US Army and Poland, certainly Patriot, SPY-6, and SM-3. So a good list of potential things. The large international ones can be lumpy. They can come in this year. They could fall into next year. But, we see a lot of demand signals that are really strong there.

Neil Mitchill:

No problem. Thank you.

Gavin Parson:

Thanks. Good morning.

Gavin Parson:

First, I was wondering if you guys could just give an update on what ratio of GTF customer compensation agreements have actually been completed. And then second, if you could just give a little more detail on the OE rate uncertainty you talked about. I know we're waiting for Boeing tomorrow, but if you're actually already seeing a lower pull on any of those programs and if that's considered in Collins guidance? Thank you.

Gavin Parson:

Thank you.

Greg Hayes:

Okay, thank you, Latif. I'll keep these comments brief, but as I step back from the day-to-day responsibility as CEO of RTX, I want to take this opportunity to thank our team for their trust and support over this past decade. Any success we have had is the result of the hard work and dedication of the entire team, the senior leadership team, but also the whole 185,000 people that make RTX a great company that it is. I also want to thank our investors. It's been an interesting decade or so in the role. And thank you for your patience as we've transitioned and transformed what was United Technologies, a multi-industry company, into RTX, which is, I believe, the best positioned A&D company in the world today. We've got great products, great portfolio of people and technologies, and a great backlog that I think is going to serve us well into the future. There is, of course, always more to do. We can talk a lot about that. I think Chris is absolutely on the right track, that is focusing on execution, focusing on technology and making sure we have the best team possible. And I can't think of a better leader than Chris to lead RTX for the next decade or so. You should all know that Chris has the full support of the Board, but not just the Board, the entire senior leadership team and the entire organization. And I look forward to working with Chris in the near term and watching from the sidelines beyond that as he is successful. I also want to thank Jennifer. Jennifer and I have worked together for a decade from Sikorsky's disposition to the integration of Raytheon and UTC and lately for the last three years as Head of Investor Relations, she's been a great resource for the company and a great friend. So, Jennifer, thank you. With that I think that's all. Thanks for listening today. Jennifer, Nathan and team will be available all day to answer whatever questions you have. But thanks for listening and take care.

Greg Hayes:

All right, thank you, and good morning, everyone. We've got a lot to cover today, but let me start with the news we shared last month, which I'm sure you all saw. Effective on May 2, the date of our annual share owners meeting, Chris Calio will become the new CEO of RTX. Chris's appointment is the result of a very deliberate and thoughtful succession planning process conducted by our Board of Directors over the past three years. While I'm going to remain in my role as Executive Chairman, Chris will be taking the reins of the company. As you all know, I've worked with Chris for many years and I can't think of a better person to take on this role. Chris has a deep understanding of our industry our customers' needs, and our operation. And most importantly, he's an outstanding leader. Here I'd like to say that I'm honored to have led this organization for almost the last 10-years. But most importantly, I'd like to thank each and every employee, who has supported our mission over the last decade. We would not have been able to accomplish all we did if not for you. Going forward, I have the utmost confidence in Chris's ability to lead this great company and continue to drive performance and value creation for all of our stakeholders for years to come. With that, let me turn it over to Chris to take you through an update on our end markets and the year. Chris?

Neil Mitchill:

Thanks Chris. Turning to slide three, we finished the year strong and ahead of our expectations with solid growth in organic sales across all three segments, even as the year-over-year comparisons became more difficult. And overall segment operating profit for the year was up 18% versus 2022. We also ended the year with strong free cash flow as you heard from Chris. For the fourth quarter, we had adjusted sales of $19.8 billion, up 10% organically versus the prior year. This was primarily driven by growth in commercial aerospace, as well as growth across defense in all three segments. Adjusted earnings per share of $1.29 was a bit better than our expectations and up 2% as profit from higher commercial aftermarket at Pratt and Collins and drop through on higher defense volume was partially offset by the expected headwinds from higher interest taxes and lower pension income. Keep in mind we dealt with about $2.3 billion of inflationary headwinds in 2023 of which about a quarter of that was in the fourth quarter, which we largely overcame through pricing and cost reduction actions. On a GAAP basis, earnings per share from continuing operations was $1.05 per share and included $0.29 of acquisition accounting adjustments, a $0.06 benefit related to a customer settlement, and $0.01 net charges associated with restructuring and other non-recurring items. And finally, we delivered free cash flow with $3.9 billion in the quarter, bringing our total free cash flow for the year to $5.5 billion, which is about $700 million ahead of our prior outlook, as powder metal related impacts have shifted and year-end collections were stronger than expected. With that, let me hand it over to Jennifer to take you through the segment results and I'll come back and share our thoughts on 2024 and 2025.

Neil Mitchill:

Thank you, Jennifer. Let's turn to slide seven. Before I get into the specifics on our ‘24 financial outlook just a couple of comments on the environment as we look ahead. So let me start with the positives. As Chris said global RPMs are back to 2019 levels. However, they have not fully recovered with respect to long-haul international travel, particularly widebody, but that is expected to continue to be a tailwind for us going forward. On the narrowbody side, demand for new aircraft remains strong, which continues to support both OE and aftermarket growth. Specific to the commercial OE side, with increasing commercial production rates, we expect commercial OE revenue will be up between about 10% and 15% in 2024. Now, with respect to commercial aftermarket, we currently expect sales to be up over 10% in ‘24, and that's on top of the 23% growth we saw in ‘23. Turning to defense, global defense spending remains elevated, which will continue to support our backlog ahead as our key programs remain well funded. Across RTX, we remain laser focused on driving operational excellence to deliver cost reduction and further margin expansion. In 2023, we achieved $295 million of incremental RTX merger cost synergies, keeping us on track to achieve our $2 billion in gross cost synergy goal by the end of 2025. On the challenges side, there are certain pockets where inflation remains elevated, we will see the lingering effect of the past couple of years inflation as we deliver on our backlog. In ‘24, we expect to see about $1.7 billion of material and labor inflation, which we expect to be more than offset by higher pricing and the benefits from our digital transformation projects and other aggressive cost reduction initiatives across the company. And as Chris said before, we continue to focus on executing on our GTF fleet management plans and are working relentlessly to mitigate further disruption to our customers. And of course, we're continuing to support the health of the supply chain. While we are seeing continued improvements, there are areas that remain challenged where we are dedicating resources, including suppliers, who provide structural castings and rocket motors. Two critical areas that continue to pace our recovery. And as I mentioned back in October, we continue to see headwinds due to the actions we have taken to preserve the improved funded status of our pension plans, as well as the recognition of historical asset experience. And finally, we're keeping an eye on the U.S. and global tax environment, congressional action on the fiscal year ‘24 budget, and of course the broader geopolitical and macroeconomic environment. So with that backdrop, let me tell you how this translates to our financial outlook for the year on slide eight. At the RTX level, we expect another year of solid growth and adjusted sales, segment operating profit, and earnings per share, along with continued strength and free cash flow. Before I get into the details, let me share with you a couple of key assumptions embedded in our outlook as it relates to the two dispositions we announced last year. First, with respect to the Raytheon cybersecurity business, we have assumed that this transaction will close here in the first quarter. Therefore, on a reported basis, we will see about a $1.3 billion year-over-year reduction in reported sales, and about an $80 million year-over-year headwind to operating profit. The Collins ‘24 outlook still includes the actuation business as we continue to work on the business disposition. So with that, starting with sales at the RTX level, we expect full-year 2024 sales of between $78 billion and $79 billion, which translates to organic growth of between 7% and 8% year-over-year. From an earnings perspective, we expect adjusted EPS of between $5.25 and $5.40, and that's up 4% to 7% year-over-year. And we expect to generate free cash flow of about $5.7 billion for the year. And despite only being up $200 million year-over-year, there were strong operational improvement. So let me take you through the moving pieces. First, we're expecting strong segment profit growth and working capital improvement to drive $2.3 billion of improvement year-over-year. Embedded in that is about a $100 million headwind on higher CapEx in ‘24 as we continue to invest in capacity expansion, digital transformation, and operational modernization. Payments related to powder metal impacts are expected still be a headwind of about $1.3 billion. We’ll also see a net headwind of about $500 million, primarily from higher interest expense principally from the debt we issued to fund the ASR. And finally a headwind of about $300 million from lower pension cash recovery. Now let me turn to our EPS walk, starting at the segment level, operating profit growth of about 16% is expected to result in approximately $0.72 of EPS growth at the midpoint of our outlook range. With respect to pension while markets have improved since our call in October there will still be a headwind of about $0.36 year-over-year. And as I just mentioned, given the increased debt outstanding, interest expense will be a $0.30 headwind. A lower average outstanding share count resulting from our recent ASR will provide a tailwind of about $0.37. And finally, our tax rate in ‘24 is expected to be approximately 19.5% versus the 18.5% in 2023. This combined with higher corporate investments in digital transformation will result in a $0.16 headwind year-over-year. All of this brings us to our outlook range 5.25 to 5.40 per share. Okay with that let’s go to slide nine, to get into our outlook by segment where we expect continued organic sales and earnings growth across all three businesses. Starting with Collins we expect full-year sales to be up mid to high-single-digits on both an adjusted and organic basis, primarily driven by both widebody and narrowbody commercial or reproduction ramps and continued commercial aftermarket. Military sales at Collins are expected to be up low to mid-single-digits for the year. With respect to Collins adjusted operating profit, we expected to grow between $650 million and $725 million versus last year. This is primarily driven by drop through on higher volume across all three channels, as well as higher pricing and the benefit from continued costs reduction initiatives. Turning to Pratt & Whitney, we expect full-year sales to be up low-double-digits on an adjusted and organic basis versus prior year driven by higher OE deliveries in Pratt’s large commercial engine and Pratt Canada businesses, as well as continued growth in shop visits across legacy large commercial engines, GTF, and Pratt Canada. Military sales at Pratt are expected to be up mid-single-digits driven by higher F-135 sustainment volume as heavy overhauls continue to ramp. As a result, we expect Pratt's adjusted operating profit to grow between $400 million and $475 million versus last year primarily on commercial aftermarket drop through and military growth, which will be partially offset by higher large commercial OE deliveries. And at Raytheon, on our organic basis, we expect sales to grow low to mid-single-digits versus 2023, as we deliver our backlog and continue to see supply chain improvement. Adjusted operating profit at Raytheon is expected to be up between $100 million and $200 million versus prior year driven by drop through on higher volume and improvement in productivity, which will be partially offset by mix headwinds. Keep in mind we'll see about $80 million of year-over-year headwind from the divestiture of the cybersecurity business this year. And to wrap up our outlook at the RTX level, higher intercompany activity will increase sales eliminations by about 10% year-over-year. And we've included an outlook for some of the below the line items and pension in the webcast appendices. Finally, let me make a few comments on our 2025 financial commitments. As you know, there have been some significant changes in the macro environment since we first established these long-term targets, impacts ranging from Russian sanctions, elevated inflation, issues with labor availability, and of course the associated disruptions throughout the supply chain. And we continue to take incremental actions to further reduce costs, realign our business units, increasing pricing, and investing in productivity improvements to combat these headwinds. Other factors underlying our long-term assumptions however have been also positive, such as the pace of the commercial air recovery and demand for our defense products and services. All that said despite those puts and takes we continue to expect Collins and Pratt to be within the sales and operating profit 2020 to 2025 growth targets we discussed last year at our Investor Day. However, because of the recent performance at Raytheon, we are recalibrating our outlook for this segment. When taking into account divestitures, we now expect the 2020 to 2025 annual growth rate for adjusted sales to be between 3% and 3.5% that's down slightly from our previous expectation of 3.5% to 4.5% for the same period and driven largely by the initiatives we talked about upfront it will take some time to convert over the next couple of years. As you know, demand remains strong and our robust backlog will continue to support significant top-line growth going forward. Similarly, with respect to Raytheon's adjusted operating profit growth, given the continued productivity challenges we described, we now see Raytheon's 2020 to 2025 annual growth rate to be between 1% and 2.5%, which is down from our prior outlook of between 5.5% to 7.5%. As a result of this segment change, we now see the RTX level adjusted sales annual growth rate from 2020 through 2025 to be between 5.5% and 6% on an organic basis, that's down slightly from our prior outlook of between 6% and 7%. And taking into account the adjustment to Raytheon's operating profit outlook, we now see overall RTX adjusted margin expansion to be between 500 and 550 basis points between 2020 and 2025. And that's down from our prior outlook of between 550 and 650 basis points. However, importantly, there is no change to our RTX 2025 free cash flow target of $7.5 billion, as we remain confident in the significant cash generating capability of our businesses and we are continuing to drive structural cost reduction and working capital improvements as we invest in the business and deliver on our commitment to return $36 billion to $37 billion of capital to share owners with the date of the merger through ‘25. So with that, I'll hand it back to Greg to wrap things up.

Operator:

[Operator Instructions] The first question comes from the line of Robert Stallard of Vertical Research. Please go ahead, Robert.

Chris Calio:

Good morning.

Robert Stallard:

Chris, inevitably a first question on the GTF situation. It does sound like some things have moved since your update in October. And I think you mentioned that the scheduling of the AOG looks like it's going to be slightly different profile and also there could be a related cash impact of that? So I don't know if you could give us some more color on that to development?

Robert Stallard:

Thanks, Chris.

Operator:

Thank you. Our next question comes from the line of Cai Von Rumohr of Cowen. Your question, please, Cai.

Neil Mitchill:

Hey, Cai. Good morning, it's Neil. Yes, and I'll take that one. So, you know, as Chris was just talking about when we closed out ‘23, for a variety of reasons, the cash flows shifted to the right. So the impact in ‘23 for powdered metal related dispersion was essentially zero. So we moved about half of that into 2024, that's the $1.3 billion that you're seeing. Still holding a $1.5 billion in our ‘25 outlook. And then we see the rest spilling into early 2026. So we'll continue to work, obviously, the agreements with our customers, and that will drive the ultimate timing of the payments, but you can see our assumptions that we've laid out there.

Neil Mitchill:

You're welcome.

Sheila Kahyaoglu:

Good morning, everyone. I can't help, but compare and contrast given GE just reported this morning and they're talking about margins being flattish in aerospace based on OE mix and LEAP services mix? So, you know, just looking at Pratt, can you talk about the dynamics there given GTF volumes are growing, early GTF shops as it's climbed higher? So what drives margins 100 basis points higher? What's embedded into the guide? Neil, you gave great color on the revenue assumption. Can you give some assumptions on maybe the aftermarket specifics on the margins as well as the military overalls increasing? Is that beneficial?

Sheila Kahyaoglu:

Great. Thank you.

Operator:

Thank you. Our next question comes from the line of Myles Walton of Wolfe Research. Your question, please, Myles?

Neil Mitchill:

Thanks, Myles. Good morning. Let me start, let me maybe start to frame the answer to that question with a little bit of an updated walk between ‘23 and ‘25 on free cash flow to get to the $7.5 billion. And then I'll talk about, you know, what obviously offset the reduction in the profit as part of that. So, as we look from ‘23 of $5.5 billion, that $2 billion increase is going to come principally from, you know, what I would call operational growth, about $4.8 billion, $2.9 billion of which is going to come from the pre-tax segment operating profit, and you pointed out that, that will be lower than our prior guide, and that's around the midpoint. The remaining growth is going to come from working capital improvement, about $2.2 billion, about half of which we will deal with here in ‘24 as we look to hold our inventory flat. So our ‘23 headwind operationally was about $600 million, so we're looking year-over-year to improve that. And then we'll have about a half of the, I'm sorry, $400 million of CapEx between ‘23 and ‘25, so that'll be a headwind. And then I just talked about the $1.5 billion powdered metal impact and about $1 billion headwind that split pretty evenly between -- sorry pretty evenly between interest and improvement in taxes and then finally a few $100 million of pension headwind. All of that should get you to $7.5 billion. So what's changed as we look out to 2025, there's been really three things that are different. The first is we've got about $1 billion net of tax lower operating profit baked into this long-term guide. But that's been offset by about $700 million of improvement in taxes, most notably on the back of improvements in our R&D position, as well as a $200 million based on the assumptions we see today with respect to our pension outlays. And then a little bit of additional working capital. So those are the key drivers.

Myles Walton:

Thank you.

Peter Arment:

Thanks. Good morning, everyone. Hey, Chris, on Raytheon, you talked about some of the headwinds. Could you maybe give us a little more color on just where we are in terms of the profile of the fixed price development programs and whether we're peaking now? And then kind of related to all this just is when should we start to see more of that mixed shifts from more of the FMS that you kind of talked about where we could see some better pricing flow in terms? Thanks.

Neil Mitchill:

Chris, maybe I would add Just a couple of the financial points around our assumptions, financially going into 2024. As you think about the $100 million to $200 million profit increase, the first thing I would say is in ‘23, we had about a $240 million headwind associated with these negative productivity. As you said two-thirds, 70% associated with these fixed-price development programs, principally a couple of them. As we look to ‘24, our assumption is that our absolute value of productivity is zero. So we'll see about a $200 million improvement year-over-year. We'll see about $100 million at the midpoint from volume and a little bit of headwind as the lower margins roll through the backlog in ‘24. And that's what we've contemplated both in the ‘24 and the ‘25 outlook. All of that gets you down to our guide, of course, is that $80 million ahead I talked about. And as you kind of look into ‘25, our productivity assumption is about $100 million step up. So again, this business at one-time generated $300 million, $400 million, $500 million a year of productivity. But we need some time for that to play through to see those kinds of margins. But 2025 would not mark the peak of where we see Raytheon's margin potential.

Chris Calio:

You're welcome.

Noah Poponak:

Hey, good morning, everyone.

Noah Poponak:

Neil, just want to make sure I have the -- I guess, the starting point and the implied margin correct in this new $500 million to $550 million, ‘20 to ‘25, so given restatements and the like. So I'm looking at 2020 segment operating margin all in of $8.2 implying that the ‘25 is $13.2 to $13.7, so is that correct? And then can you just talk a little more about getting there from this ‘24 guidance it would seem to either require a pretty nice step up in the Raytheon defense margin or acceleration in the incrementals at Pratt and Collins or all of the above?

Noah Poponak:

Okay, and just to make sure I have your -- you said to Myles correct, in the $5.7 million of free cash this year and the $7.5 million next year, each of those assumes about $1 billion of positive change in working capital each year, is that right?

Noah Poponak:

Okay, thanks very much.

Operator:

Thank you. Our next question comes from the line of Doug Harned of Bernstein & Company. Please go ahead, Doug.

Chris Calio:

Yes, thanks Doug. I mean, first of all, I'll tell you that we are engaging with our customers each and every day to try to figure out how best to support them, whether that's through induction, whether that's through special support, whether that's the spare engine allocation, whatever it may be. And you're right, Doug, there are some customers out there, 10 to 12, I think, as we've talked about before, they're going to be more impacted than others. There's some that are all Pratt fleets, whether it be GTF and V2500. So again, working very hard with them to come up with a compensation structure relative to the powdered metal AOG situation. That's fair, and that can give them a little bit of lift. Obviously, it won't make up for all of the disruption that they're having in their fleet and all of the things that they've got to do to accommodate for these removals. But again, doing the best we can to come up with a fair set of compensation structures to help out during these trying times. And then, of course, communicate with them consistently about what we're seeing in terms of the assumptions that we're talking about here. Full life incorporation, MRO, MRO output, all the things that are going to drive better fleet support for them. So obviously don't want to be in a position where we're putting our customers in harm's way and where they're going to be very upset with us and want to take action. But I'll tell you, we've got a track record of coming to agreement with our customers on some of the more difficult problems we've faced. I'm confident we're going to be able to do it again.

Chris Calio:

Right now, Doug, the wing-to-wing turnaround time remains consistent with what we had talked about previously. I will tell you, and we kind of alluded to this earlier, we are continuing to aggressively pursue with our aftermarket partners. Again, we've got some Tier 1 aftermarket providers as part of the GTF aftermarket network trying to come up with, you know, what I would call light or medium type work scopes that can take the, you know, in shop time, down further. Again, trying to maximize the time on wing, just depends on the operator, depends on the condition of the engine, but we're aggressively pursuing a number of work scopes that can take the in-shop time down. In addition, I think you've heard us talk about this before, we've industrialized a significant number of repairs on the GTF, I want to say about 1,300 in 2023. We've got another significant step up here in 2024 [Technical Difficulty]

David Strauss:

Thanks. Good morning.

David Strauss:

Wanted to ask, what exactly is the bottleneck, Chris, to be able to ramp up production of full-life discs, given that I think the powdered metal switch occurred a while ago I guess I'm just kind of confused there why it's not easier to ramp up the production of these full-life discs? And then could you touch on what you're expecting for large commercial engine deliveries in ‘24 and your confidence in being able to meet Airbus's requirements? Thanks.

David Strauss:

Thanks very much.

Ronald Epstein:

Hey, good morning, guys.

Ronald Epstein:

Just change the subject a little bit. Everybody seems to be talking about the powdered metal thing. And Collins, Collins outlook looks really good. Can you give some color around how much of that is being driven by widebody and interiors and if you're starting to really see a pickup there. Because the one thing that we're all kind of waiting for is the pickup in the widebody market. And that interior's business is generally a good leading indicator of what's going on.

Chris Calio:

Yes, maybe the only thing I would add to that, Ron, is that Steve and team are very focused on the transformation within interiors. I think there's some opportunity to consolidate sites, to continue to remove ERP systems. As you know, there's been an integration that's been going on in that interiors business in particular. So I think a lot of good work on continuing to transform the cost footprint in the interiors business. So when that volume continues to come back, it'll be at the types of margins that you would expect.

Greg Hayes:

You know, Ron, that's actually an ongoing process. We're in the process of working with a number of airlines as they are going through their retrofit. And keep in mind, that is a three- to five-year process to upgrade these things. So we are still finishing out things that we had signed up for back in 2018, 2019. But again, as Neil said, the business is coming back. But given the long cycle nature of these upgrades, you're not going to see a heck of a lot of that in ‘24, more than ‘25 and certainly more than ‘26.

Chris Calio:

Welcome. Sure.

Seth Seifman:

Yes, thanks. So, good morning. Maybe just following up on Collins and kind of the growth outlook for this year when we think about how much OE production rates are rising. We think about the strengths in the aftermarket. What's the potential for upside on the top line there? And I guess how much is a drag on the military business? It's a pretty significant chunk of the portfolio and given the growth rate in the second-half and what you're forecasting overall for ‘24, it seems like maybe this isn't a business that's really a military business that's going to participate in the budget growth and outlay growth that we're seeing now?

Chris Calio:

Again, I'll just add, much like the interiors, I think Steve and team have a plan to continue to drive structural cost reduction within Collins to help, you know, margin expansion. We've talked about, you know, moving engineering presence to best cost locations by 2025 by significant number, same with manufacturing hours. So a lot of Center of Excellence activity going on in Collins that will continue to help with their cost footprint and support the margin expansion.

Chris Calio:

Thank you.

Operator:

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

Gregory J. Hayes:

All right. Thank you, and good morning, everyone. Before we start, I want to spend just a minute acknowledging the tragic situation playing out in Israel today. It has been devastating to see what has unfolded there over the last couple of weeks and our thoughts and prayers are with the people impacted including the thousands of RTX employees that call Israel home. With that said, let me turn to an update on our end markets. On the commercial aero side, air travel demand remains strong. We're seeing solid air traffic growth with global revenue passenger miles essentially back to 2019 levels and domestic air travel well above 2019 levels. We also expect strong demand for holiday and business travel for the remainder of the year, supporting continued aftermarket strength for both wide-body and narrow-body aircraft. On the defense side, the elevated threat environment is continuing to drive increased defense spending globally. Just one example in the quarter, the United States approved moving forward with the sale of F-35 aircraft to South Korea. That's estimated to be worth about $5 billion and will support further growth with this customer for F-35 content for years to come. Additionally, the U.S. State Department approved a significant sale to Spain for the Patriot air and missile defense systems earlier this month. And that's expected to include approximately $1 billion of Raytheon content. And as Russia's invasion of Ukraine unfortunately continues, we are seeing significant demand from the U.S. and our allies for advanced air defense systems and munitions. During this past quarter, this included additional orders for NASAMS, Excalibur, which are precision guided artillery shells, Stinger anti-aircraft munitions, and TOW anti-tank guided missiles. Domestically, despite what we've seen over the last few weeks in DC, we remain confident that there is bipartisan support for increased defense spending and RTX continues to be well-positioned across all three of our businesses. Shifting to Pratt & Whitney. Let me give you an update on the powdered metal manufacturing quality matter. Our efforts to-date have been heavily focused on ensuring the safety of our engines. As you saw in the press release this morning, we have finalized the charge recorded here in the quarter, which is in-line with what we had previously disclosed. So, just a few thoughts on the powdered metal issue. Through the early stages of removals and inspections of the PW1100 engine, which powers the A320 Neo aircraft, our outlook both financially and operationally remains consistent with our expectations. We've also made significant progress on the safety assessments for the other Pratt & Whitney powered fleets. That includes the PW1500, which powers the A220, the PW1900 which powers the Embraer E2, and the V2500, which powers the legacy A320. With the analyses substantially complete, we do not expect any significant incremental financial impact as a result of those fleet management plans. The focus of both Pratt & Whitney and the entire RTX organization is on maintaining the trust of our customers, and our partners, and we are relentlessly working to improve upon the plans we have in place today. As I said to many of you over the last few months, we remain confident in the future of RTX because the demand for our products is robust, our end markets remain resilient across both commercial aerospace and defense, and our team is laser focused on driving performance excellence to meet our customer needs. Our backlog is now a record $190 billion with a pipeline of both existing franchises and new technology developments. As we always have, we continue to actively manage our portfolio. As you saw this morning, we reached an agreement to sell Raytheon’s cyber services business and a cash sale for approximately $1.3 billion, which combined with the recently announced sale of Collins actuation business, this will generate approximately $3 billion of gross proceeds in 2024. So with that, let's turn to slide two. As we also announced this morning, our Board has approved a $10 billion accelerated share repurchase program or ASR, which we will be initiating tomorrow. Simply put, we see a significant discount between the intrinsic value of RTX and our current stock price. The long-term outlook of the GTF remained strong, and Pratt’s franchises extend well beyond the GTF. The V2500 has about 6,000 engines still flying and is in the sweet spot of its aftermarket cycle. Pratt Canada continues to be the world's premier small engine manufacturer with an installed base of more than 60,000 engines. And the military business of Pratt is the sole provider of engines the fifth generation fighters. Collins, has a great portfolio, with 70% of their product line serving is number one or two in their segments, and strong margin expansion opportunities. And lastly, our newly combined Raytheon segment has an incredible number of well-established franchises along with a growing portfolio of next generation technologies. This includes LTAMDS, which is the next generation Patriot Defense System, and the Hypersonic Attack Cruise Missile or HACM. Given the fundamental strength of the company and growth opportunities ahead, our Board recently approved an $11 billion authority to repurchase RTX shares. This includes $10 billion through an ASR program to help capture some of that value more immediately. The new authorization replaces the company’s previous program, which was approved in December of 2022. This ASR of course is on top of the $2.6 billion we've already repurchased year-to-date. Altogether, this will increase our capital return commitment to share owners to $36 billion to $37 billion through 2025 from the time of the merger. That's up from our previous range of $33 billion to $35 billion. As I said, this ASR program will commence almost immediately and will be funded through a combination of short and long-term debt. And importantly, we'll begin the process of deleveraging in 2024 in parts supported by the proceeds from the recently announced dispositions that I just mentioned. So despite near-term headwinds, the future of RTX remains bright and we remain steadfast in our commitment to deliver long-term shareowner value. With that, let me hand it over to Chris, to provide additional color on the Pratt matters and to cover the Q3 highlights.

Neil G. Mitchill:

Thanks, Chris. I'm on slide four. As you saw, we finalized our estimate for the PW1100 powered metal matter here in the third quarter, and have recorded a $5.4 billion sales charge our share of which resulted in a $2.9 billion operating profit impact. This is in-line with what we communicated in September, and resulted in reported sales of $13.5 billion in the third quarter. As Chris said, we had adjusted sales of $19 billion for the quarter up 12% organically versus the prior year. Growth was primarily driven by strong demand across our commercial OE and aftermarket businesses as OEMs continue to ramp production and airlines supported the busy summer travel season. We also saw positive growth in defense, as we continue to execute on our growing backlog. On a GAAP basis, earnings per share from continuing operations was a loss of $0.68 and included a $1.53 charge from the Pratt matter, as well as $0.40 from acquisition accounting adjustments, restructuring and other non-recurring and non-operational items. Adjusted earnings per share of $1.25 was up 3% year-over-year with higher segment operating profit partially offset by lower pension income, a higher effective tax rate and higher interest expense. As Chris alluded to you, the IRS recently provided guidance on R&D capitalization with respect to customer funded R&D for certain cost plus contracts. This means a portion of our previously capitalized R&D costs for tax purposes will now be currently deductible. While this will result in a slightly higher effective tax rate going forward and will reduce our cash tax payments. In the quarter, this resulted in about a $0.02 headwind to adjusted earnings per share for the full year, we expect this to be about $0.03 of headwind. Finally, as we had anticipated, we had strong free cash flow generation in the quarter of $2.8 billion which included a benefit of approximately $500 million from the IRS's R&D capitalization guidance, I just discussed. Now with that, let's turn to slide five, to get into the Q3 segment result. So before I begin, just a reminder, we are now reporting as three business units Collins, Pratt and Raytheon. Starting with Collins, adjusted sales were $6.7 billion in the quarter, up 17% on both an adjusted and organic basis, driven primarily by continued strength in commercial OE and aftermarket growth. By channel, commercial aftermarket sales were up 30%, driven by a 35% increase in both provisioning, as well as parts and repair, while modifications and upgrades were up 9% in the quarter. Sequentially, commercial aftermarket sales were up 6%. Commercial OE sales were up 27% versus the prior year, driven by growth in both narrow-body and wide-body platforms. And military sales were down 1% primarily due to the timing of deliveries. Adjusted operating profit of $1.04 billion was up $287 million or 38% in the prior year with drop through on higher commercial aftermarket and OE volume, partially offset by higher production costs, unfavorable military mix, and higher SG&A expenses. For the full year, given the continued strength in commercial OE and aftermarket, we now expect Collins sales range to be up low to mid-teens an increase from the previous range of up low double digits to low teens. With respect to operating profit, we are maintaining adjusted operating profit in our prior range of up $825 million to $875 million versus the prior year. Shifting to Pratt & Whitney on Slide 6. As it relates to the powder metal matter for the PW1100, in September, we communicated that we expected the gross financial impact to be in the range of $6 billion to $7 billion with an expected Q3 pretax operating profit impact of approximately $3 billion. As I just mentioned in the third quarter, we recorded a $5.4 billion sales charge resulting in a $2.9 billion pretax operating profit impact, representing our net program share in line with where we expected. Recall, I mentioned that certain elements of the gross $6 billion to $7 billion cost will be booked upfront and the remainder will be booked over the remaining life of the contract. So looking at Pratt's quarterly results on an adjusted basis, sales of $6.3 billion were up 18% and 17% on an organic basis with sales growth across all three channels. Commercial OE sales were up 25% in the quarter, driven by higher engine deliveries and favorable mix in the large commercial engine business. Commercial aftermarket sales were up 21% in the quarter, driven by both higher volume and content as well as favorable mix in both the large commercial engine and Pratt & Whitney Canada businesses. And in the military business, sales were up 7% driven by higher F135 development and sustainment volume. Adjusted operating profit of $413 million was up $95 million from the prior year with drop through on higher commercial aftermarket sales partially offset by higher commercial OE volume, higher production costs, unfavorable military mix as well as higher R&D expenses. Looking ahead, due to higher commercial OE and military volume, we now expect Pratt's adjusted sales to be towards the higher end of our prior range, or up mid-teens versus prior year. Given the higher military sales, as well as better mix across OE and aftermarket, we're also increasing Pratt's adjusted operating profit from our prior range of up $200 million to $275 million to a new range of up $350 million to $400 million versus the prior year. Turning now to Raytheon on Slide 7. Sales of $6.5 billion in the quarter were up 3% on an adjusted and organic basis, primarily driven by higher volume in Naval Power programs, including AIM9X and Advanced Technology Classified programs. Adjusted operating profit of $570 million was down $124 million versus the prior year driven primarily by higher volume on lower margin programs and lower net program efficiencies including additional headwind on certain fixed price development programs. In addition, as expected, there was an unfavorable impact of about $20 million from a significant contract option exercised in the quarter. Raytheon had $7.4 billion of bookings in the quarter, including $1.9 billion in classified awards, a $412 million award for the next generation short range interceptor program, and a $383 million award for Hawk and Patriot sustainment. This resulted in a book to bill of 1.16 and backlog of $50 billion. Year-to-date, Raytheon has a book to bill of 1.17. For the full year, we continue to expect sales to be up low to mid-single digits with respect to operating profit while the supply chain continues to improve as evidenced by the increase in material receipts we have seen in the last three quarters, Raytheon continues to have productivity and mix challenges. These stem from a combination of the fixed price development programs we have previously discussed, as well as higher production costs. As a result, we're reducing Raytheon's adjusted operating profit from the prior range of up $125 million to $175 million to a new range of up $25 million to up $75 million versus the prior year. Before I hand it back to Greg, just a couple of comments on the environment for 2024. Overall, we anticipate another year of solid growth in organic sales, segment operating profit, margin and free cash flow. However, the level of free cash flow growth will be tempered by the step up in cash impacts associated with the powder metal matter, as well as some headwind from cash taxes related to R&D. While commercial air travel demand has been incredibly strong from passengers and airlines, we see growth beginning to normalize as we head into 2024, with RPKs back at 2019 levels and the year over year compares becoming more difficult. However, overall, we expect continued growth in OE and aftermarket including the on-going recovery of the wide body. On the defense side, we continue to expect strong international and domestic demand which is already driven at 2023 year to date book to bill of 1.22 and a record defense backlog that will continue to convert to solid growth over the next several years. While inflation has begun to moderate, there are still pockets that remain persistently high within our manufacturing base, we expect this to continue into the next year. We'll continue working all the mitigation actions we've had in place the past two years and will implement additional strategic initiatives to offset the pressure we expect to see in 2024. Finally, as you know, we have seen a lot of volatility in the financial markets and interest rates. We expect this to drive further pension headwind next year that could be about $0.45 on a year over year basis given current market conditions and the actions we are taking to preserve improved funded status of the pension plan. So obviously, a lot of moving pieces here, but we are focused on driving execution an aggressive cost reduction and remain optimistic as we look ahead towards 2024 and 2025. With that, I'll hand it back to Greg to wrap things up.

Operator:

In the interest of time and to allow for broader participation, you are asked to limit yourself to one question. (Operator Instructions). Our first question comes from the line of Peter Arment of Baird.

Gregory J. Hayes:

Good morning.

Gregory J. Hayes:

No, I think -- thanks, Peter. What we laid out, as you recall, back in September, we talked about the fact that some of the costs associated with the inspection interval, will end up in contract accounting at Pratt. And that'll depress margins on the aftermarket by about a point over time. Not significant, but it’s all contemplated in the Pratt guidance as we think about 2024, 2025.

Gregory J. Hayes:

Thanks Peter.

Noah Poponak:

Hey, good morning, everyone.

Noah Poponak:

Can you spend a little more time on defense margins? I mean, I heard the specifics you noted in the quarter, but just you know, continues to move lower. Is there some bigger, broader thing happening at the at the end market level. And Neil, did you ever provide a new consolidated, once you consolidated the two segments, margin target that's in the 25s. And just, you know, as you, as you spoke to 24 earlier in the call, can you just kind of update us on how you're expecting that defense margin to progress into the middle of the decade from here.

Neil G. Mitchill:

Thanks, Chris. Let me just pick up on that where you left off. We definitely did provide a consolidated view, you're looking at margins around the midpoint, a little bit north of 12% when you get into 2025. I think as we look at the backlog, and the mix of what we see the sales shifting to between now and then we talked about, this year being sort of the low point of our mix, more domestically focused that we see that increasing over the next couple of years to be bit heavier on the foreign side, not surprising given the demand signals that we're seeing. So those are going to be the key drivers that get us heading in that direction. What we do know is that we have a really large backlog, $50 billion on the defense side right now and expect that to continue to grow. And we're focused on executing as we transition a number of programs as Chris was alluding to from early production to full rate production and those programs mature. So we know the formula for driving productivity. We have seen some challenges this year. And I think on the development programs, we'll see that happen over the next 12 months, but that's the story longer term.

Neil G. Mitchill:

It's going to be more weighted to 2025. We've got, as you know, a growing backlog here, but that will play out in sales probably later next year and accelerating through 2025.

Operator:

Thank you. Our next question comes from the line of Myles Walton of Wolfe Research.

Christopher Calio:

Myles, this is Chris. Maybe I'll kick it off. The single, I think, biggest lever that we've got here and you kind of alluded to it is MRO output. I mean, obviously, it's a challenging time for the customers. There's going to be a fair amount of the aircraft on the ground. We've got to accelerate MRO output. And the key parts of those are capacity and material flow. On the capacity side, you heard about the expansions that we're doing both within the Pratt shops and across the network. In terms of material flow, you've heard us talk about this before, our objective is to put in full life HPT and HPC disks at these shop visits. And we've got to go continue to ramp those up. Again, that ramp up is well underway and progressing in key process steps like the powdered metal production, forging and heat treat. Investments have already been made and that capacity is in place. And then for more downstream processes like sonic inspection and machining, we're accelerating capacity there to make sure that we can meet this demand. And so some of this performed by Pratt and our partners and some by third parties. But again, very, very focused on the inspection capacity and the machining capacity. But at the end of the day, MRO output is what's going to support our customers and ultimately take down the AOGs and therefore take down the penalties we're going to have to pay to our customers.

Christopher Calio:

Yeah. Fair enough. It is the same, but we've accelerated as best we can. Some of these investments, I mean, they were in our plan. We've accelerated as much of that spend as we can. And again, it's bringing on the inspection capacity into the MRO shops. That's a key to unlocking, sort of the MRO throughput that I talked about. And then just, beyond that for a second Myles, you heard us talk earlier about the 35 or so day turnaround times on those project visits. And again, we know those aren't preponderance of the visits we're going to get. But there's a lot of learning’s that go on and a lot of learning curve that gets tackled when we're doing these things. So it's how quickly can we tear down? Inspection limits, repairs, test sell time, literally every part through every gate and MRO, taking time out and being more efficient and putting more resources in those areas.

Operator:

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

Gregory J. Hayes:

Good morning.

Christopher Calio:

Sure. Yeah, thanks for the question. So I think we had telegraphed on the last calls, we're going through our analysis is that those fleets would be far more manageable in terms of the impact. And while we will have, inspections and life limits on the 1500 in 1900. As we said, they will largely fall within the shop visit forecast we have today. The maintenance intervals on those frankly, are shorter than on the 1100. And so that's why many of these life limits and inspections fit within those plans. On the V2500, again, we've continued down that, inspection, accelerated inspection path we've had in place for about two years now. We're about halfway through that, through that fleet. And as we continue to do those inspections and learn more and analyze the data from those inspections. We're able to pinpoint, certain engines based on sort of their profile. Parts they've got in them thrust, you know, other characteristics that we've targeted for accelerated, you know, inspections. But again, think that's very manageable. That's a total of about a 100 or less shop visits stretched out over four years. And again, those are largely going to be project visit work scopes. And we've got a lot of experience on project visit work scope on the V2500. Those are in a 40 to 45 day turnaround time. We've become very, very proficient at those. So again, that's why we're calling those very manageable and will not have significant financial or operational impact.

Operator:

Thank you. Our next question comes from the line of Sheila Kahyaoglu of Jefferies.

Christopher Calio:

All right. Thanks, Sheila. Let me start with, what we need to do on free cash flow. So we were pleased to see $2.8 billion of free cash flow for the quarter, clearly strong and in line with the trajectory we need to see for the full year. And as you look at the fourth quarter, there's really two major parts that are going to drive, getting to the $4.8 billion. The first is clearly operating profit and we feel comfortable with that given the ranges we just put out there. And we need to see about $2 billion and a little over $2 billion of working capital improve in the fourth quarter. And I would break that down into about three buckets, about $500 million of inventory improvement Again, I think given the demand signals we're seeing and the growth we'll see in sales in the fourth quarter, we see that as achievable and manageable. We are expecting some significant advances and achievement of milestones on the defense side. So when you think about net liabilities and advances on contractual, long term contracts, that's about $1.2 billion. So that's a big piece of the fourth quarter. And then the rest really is the timing of disbursements that I would call normal in the course of business here. So a lot to do but we have good line of sight to those things as we look to the closing out the year. I'm not going to get into specifics about next year or the year after other than to say, we do see free cash flow growth in 2024. And we'll come back in January and provide more of a roadmap as to how you get there. And Greg, do you want to talk about the ASR?

Sheila Kahyaoglu:

Great. Thank you.

Operator:

Thank you. Our next question comes from the line of Ronald Epstein of Bank of America.

Gregory J. Hayes :

Good morning, Ron.

Christopher Calio:

Hey, Ron, this is Chris. Yes, the incident that led to all of this was in March of 2020. And it wasn't until after we went through sort of a rigorous records review and did all of the investigation and the metallurgical analysis. Did we actually come to realize this was an incredibly rare defect. We hadn't seen it before. And then we were able to go back and trace it to 2015. But again, we didn't we didn't have that, the data in hand to make that determination until again much later into 2020. And if you just sort of step back and say, okay, once you figure that out, what would you guys do about it? Well, we made a number of systemic changes, you know, a Pratt powder metal processing facility, both manufacturing process changes and inspection techniques, we've gone through a rigorous safety risk assessment. I think you've heard us describe before, which incorporated all of the learnings from all of our inspection data into our models, right across every one of our programs. And you've seen us kind of go through those one by one as we prioritize the most impacted fleets. But again, it gets read across every single engine program that we've got. And then of course, we've responded by developing comprehensive fleet management plans that have a combination of the enhanced inspections that we've developed and the life limits on the parts. I would say maybe more broadly and unrelated to powdered -- the powdered metal situation. We've continued to leverage outside resources and expertise. We've got a product safety review committee comprised of outside industry experts and veterans that come in, look at our key engineering processes, do site visits, interview senior management and then below trying to understand culture and processes and what we can do better and they make recommendations. And we implement those. And that's something we do on a regular basis. Again, unrelated to the powdered metal, but we're not afraid to go leverage outside resources to give us another perspective.

Christopher Calio:

But we're going to continue to invest, Ron, in automation for sure, both in terms of manufacturing process, and our quality system. I'll tell you, we're also making investments in machine learning so that we can look at all of this, the thousands and thousands of inspection records and data that we've got, you know, in house to help us better identify anomalies get out ahead of issues before they, turn into something, unfortunately, that has an impact on the fleet and on our customers. So we're going to continue to invest in those areas. We've had those investments plans in place. We're going to continue to accelerate those. Again, all part of the modernization of our footprint, and how we do things better, faster, leaner.

Operator:

Thank you. Our next question comes from the line of Seth Seifman of J.P. Morgan.

Gregory J. Hayes:

Good morning.

Neil G. Mitchill:

Okay. Set. Thanks for the question. You know, we're not going to get ahead of 2024, but we do see free cash flow stepping up. We are comfortable with our $7.5 billion 2025 free cash flow target that we've talked about. And as you think about what is going to be higher interest and increased benefit from the R&D impact. Those will just about offset in 2025. And so that's why today, I feel comfortable staying with the $7.5 billion target for 2025. Of course, there's a lot of time between now and then, but those are the two moving pieces we see today.

Gregory J. Hayes:

You're welcome.

Kristine Liwag:

Hey, good morning, guys.

Kristine Liwag:

So maybe moving to a defense question, you know, the White House is requesting $106 billion (ph) in supplemental spending for a number of national security priorities, which includes over $50 billion in investment for the U.S. Defense industrial base. Looking at this request, you've got equipment for Ukraine, air and missile defense for Israel, and replenishment of stockpile for both. And this seems to fit quite nicely with the Raytheon Defense portfolio. So how much of this opportunity is addressable to the company and if the dollars are appropriated, when would be the earliest you could see this convert to revenue?

Kristine Liwag:

Thanks, Greg. And how do we think about the margin profile of these incremental opportunities? Are these new contracts margin accretive?

Neil G. Mitchill:

I think that's exactly right. These are mature programs that we've got a lot of history on. It's all about getting the supply chain ramped up to deal with the increased production that we expect.

Operator:

Thank you. Our next question comes from the line of Matt Akers of Wells Fargo.

Christopher Calio:

Thanks. That's a good question. Yes, some of that is, in fact, the recovery of the 2022 overpayments, if you will, we were able to file our tax return on a basis that assumed deductibility of these cost plus R&D contracts. What will happen though is it'll be a little bit of a headwind next year because we'll get a little bit more cash back this year in the form of making lower estimated tax payments. And then next year, we'll start to bake that into our next year's estimated tax payments and filing. So that's how that'll play out. If you kind of look at it over a multi-year period of time. It's about 40% of what we previously were deferring and amortizing. So if you kind of stretch that through 2026, that's about $1.7 billion of incremental goodness in free cash flow over that period.

Operator:

Thank you. Our next question comes from the line of Doug Harned of Bernstein & Company.

Gregory J. Hayes:

Good morning.

Christopher Calio:

Yep. Good questions, Doug. So the reason I mentioned the early, very early sort of handful of project visits and how we've done on turnaround times is honestly just to show, people that we are incredibly focused on taking minutes, hours, days out of this. And that can translate to the larger scope shop visits that we're going to face. And the organization's incredibly focused on literally every gate, within that process, including taking time out of the test cell process. But right now, Doug, those key assumptions that you just laid out the wing to wing 250 to 300, the PKOGs, those are the assumptions, those are what's baked in to the financial impact that we talked about here. And we're doing everything that we can to go, improve upon those. And as I said earlier, MRO output to us is the linchpin on that. And so I -- that's kind of where the organization's focus is, Doug, and that's where we've got to get better each and every day. To your point about, the new full life discs, yes, our plan today is to put those in, at OE first, in the first quarter of the year and then starting an MRO in the second quarter of the year at each of these shop visits, to the extent that the ramp up and the output isn't where it needs to be on those. We're not going to waste the induction slot. Doug, the engines will come in, they'll get an inspection into your point. They'll have to then come back in at a 2,800 to 3,800 cycle re-inspect, depending on the thrust of the engine, which is why it's so critical for us to continue this, ramp up in powdered metal forgings. So that when the engines leave the shop for these visits, they have got the longest time on wing, they can have and we don't see these back in our MRO shops during this period just because it'll add just more congestion.

Christopher Calio:

We're actually having those discussions, Doug. I've been part of many of them, again, customer-by-customer looking at their engines by serial number. Again, because you've got to look at the cycle times on those and bounce them off against the fleet management plan. So it is, it's a rigorous thorough process, but we're having those conversations with customers. So they understand their specific impacts. As we said back, on the September call, the lion's share of these incremental shop visits that we're going to have the 600 to 700 in that ‘23 to ‘26. But two-thirds of those are ‘23 and relatively early in 2024. That's what causes that bow wave, Doug, that peak of 650 AOGs. And I think we talked earlier about when we're going to, provide some of those service bolt-ins and the ADs that are going to follow on. So that -- those communications are happening, you’re going to see that impact early in ‘24.

Operator:

Thank you. Our next question comes from Ken Herbert of RBC Capital Markets.

Gregory J. Hayes:

Morning Ken.

Christopher Calio:

Sure, Ken. Yes. Thanks for the question. So the focus, as you might imagine, over the last several months is walking our customers through the safety risk analysis, so that they understand that and what we're doing to ensure the continued safe operation of the fleet, then understanding the fleet management plans, cyclic limits, the inspection intervals, and its impact on their specific fleets. We're going to have certain customers, Ken that are going to be more impacted than others, just by virtue of their size, their reliance on the GTF. Again, it differs by customer. Conversations, as you might imagine, they're difficult. Customers understand what we're doing from a safety risk perspective, and think we're doing the right thing, but they're certainly not happy with the net effect. And they've not been happy with the fleet health even prior to powdered metal and our output on MRO and getting them the spare assets, and the engines in our shops, that the need. And so those are obviously difficult conversations, as you might imagine, Ken, and we’re having them with each customer individually as we go through and tailor their support packages. Again, some are more impacted then others, but those conversations are ongoing, and they will continue into the early part of year once people truly understand a fleet-by-fleet customer-by-customer impact and the changes they’re going to have to make for their flights, their network and what not. So those conversation are happening will progress early into next year.

Operator:

Thank you. That does conclude the Q&A portion of our call. I would now like to turn the call back to, Greg Hayes, for closing remarks.

Operator:

This now concludes today’s conference. You may now disconnect.

Gregory Hayes:

Thank you and good morning everyone. It was another strong quarter for RTX with continued strength across all of our end markets. On the commercial aerospace side industry-wide, we saw 1,200 new orders announced around the Paris Air Show. This is the largest number of orders in the history of the air show as airlines look to secure production slots well into the next decade. Global commercial air traffic remains on track with our projections with a very robust summer travel season, driven by incredibly strong consumer demand. This dynamic is supporting strength in the aftermarket and growth across the globe with revenue passenger kilometers now tracking at about 95% of 2019 levels, and long haul international, which has lagged in the recovery is showing strong growth with passenger flight hours up 18 points year-over-year, a good indicator for increasing demand for wide body travel. Turning to defense, we’re pleased that the House defense appropriation bill fully funds many of our programs, including importantly the F-135 engine core upgrade, which is the only engine funded for the F-35 joint strike fighter. Additionally, the bill also recommends the full budget request for other key RTX programs such as LTAMDS, LRSO, hypersonics, and Standard Missile-3. Internationally, we saw the State Department approve a large sale of advanced air defense systems for Poland as it bolsters its security amid the ongoing conflict in Ukraine. This would expand our existing partnership with Poland and make Poland the first international customer for our LTAMDS system, representing a key transition for this next-generation Raytheon franchise. Before we get into details of the quarter, as you saw in our press release this morning, we are working through an issue resulting from a rare condition in powdered metal that will require Pratt & Whitney to remove some engines from service for inspection earlier than expected. I want to make just a couple of comments here at the outset. First of all, it’s important to know that we understand the issue and we have begun to address it through an inspection protocol that we already have in place. That said, clearly this will have an impact on Pratt & Whitney and our customers. Chris and Neil will provide additional color later in the call on how we’re going to address the issue as well as the operational and financial impacts. As you’d expect, we’ll dedicate all the necessary resources to manage this. Now let’s turn to Slide 2 to go through some key highlights from the quarter. Q2 was another strong quarter of strong demand in both the commercial and defense segments of our business with $25 billion of new orders. This brings our total backlog to a record $185 billion. On the commercial side, Collins continues to convert its industry-leading portfolio into solid order strength. As I mentioned, industry-wide there were about 1,200 new aircraft orders announced in Paris. The aggregate amount of Collins and Pratt content on those aircraft will be about $20 billion through the life of the programs. On the defense side across the RTX businesses, we captured $13 billion in net bookings in the quarter, driving a strong book-to-bill of 1.22, and this takes our defense backlog to $73 billion. Contributing to the backlog in the second quarter were a number of significant awards, including $2 billion at Pratt & Whitney for Lot 17 of the F-135 engines and $1.5 billion for 117 sustainment. The Raytheon segment was awarded its largest ever AMRAAM contract for $1.2 billion from the U.S. Air Force and international partners, including Ukraine. The AMRAAMs will work in concert with their existing NASAM batteries to help protect the Ukrainian people. Earlier this month, we executed the business realignment. We are now officially operating as three business units. Our team has done a tremendous job in a relatively short period of time, shifting roughly $3 billion of sales and thousands of employees across our portfolio to better meet the evolving needs of our customers. Of course, our transformation isn’t done. We will continue to develop initiatives to better leverage our scale and breadth and to enable operational excellence and a best-in-class cost structure. Finally, as many of you saw last week, we agreed to divest Collins’ actuation business to Safran. We expect this deal to close in the second half of 2024 with proceeds from the transaction about $1.8 billion. With respect to our full year outlook, we’re going to raise the top line to reflect the strength we’re seeing in our end markets. The new range will be $73 billion to $74 billion. We’re also going to bring up the bottom end of our adjusted EPS range by a nickel to $4.95 to $5.05; however, we are going to reduce our 2023 cash flow expectations by $500 million to $4.3 billion, and this is primarily to reflect the developments at Pratt & Whitney that I discussed earlier. With that, let me turn it over to Neil to walk you through our financial results in more detail. Neil?

Christopher Calio:

Okay, thanks Neil. Let me share with you what I can at this point about the Pratt matter. As you heard from Greg, Pratt previously determined that a rare condition in powdered metal used to manufacture certain engine parts may reduce the life of those parts. It’s important to note upfront that the current production of powdered metal parts is not impacted and Pratt will continue to deliver both new engines and new spare parts across all product lines. I’ll come back to that in a minute. As a result of this rare condition in powdered metal, Pratt instituted enhanced inspections to be performed at scheduled shop visits; however, based on very recent learnings from these inspections, Pratt has now determined that the timing of these shop visits needs to be accelerated. While powdered metal parts have been widely used throughout Pratt’s product lines for decades, Pratt has bounded the potentially impacted material. It has concluded that this condition was present in rare instances in powdered metal produced from approximately Q4 2015 into Q3 2021. The PW1100 engine fleet which powers the A320 Neo will experience the most significant impact due to production volumes during this period. Based on the current assessment, Pratt anticipates by mid-September that approximately 200 PW1100 engines will be removed for enhanced inspection. Beyond the initial 200 engines, Pratt also anticipates that approximately 1,000 additional PW1100 engines will need to be removed from the operating fleet for this inspection within the next 9 to 12 months, though the exact number of engines and the timing of those removals is not yet finalized. It’s important to note that some of the engines that must be removed for inspection in 2023 and 2024 are already forecasted for a regular shop visit during this time period, and so the incremental impact to the fleet is still under evaluation. Capability to perform the accelerated inspections, which are focused on the high pressure turbine discs, is already in place and Pratt is developing plans to optimize shop visit capacity within its network to complete these inspections as quickly and efficiently as possible. As I said earlier, current production of powdered metal parts is not impacted and Pratt will continue to deliver both new engines and new spare parts across all product lines. This is a result of the combination of extensive improvements that were made to our powder processing to remove possible contamination sources and the deployment of enhanced inspections for improved detection. Pratt is also analyzing any potential impact to other parts of its fleet, but the current expectation is that they will less impacted based upon existing inspections, utilization profiles and maintenance intervals. Let me take a moment to explain the timing of these developments. We proactively monitor the performance of our engines throughout their life cycle. It’s foundational to how we maintain and manage the safe operation of our fleet. We do this in a number of ways

Gregory Hayes:

Okay, thanks Neil. Just some closing thoughts before we get to the Q&A. We obviously had a very strong second quarter with $25 billion in new orders, which brings our backlog to a record $185 billion. Sales were also very strong with 13% organic revenue growth. This strength in sales and orders reflects the strength in both our commercial aero and defense markets. RPMs are on track to return to pre-COVID levels as we exit 2023, and military spending globally continues to increase in response to Russia’s aggression in Ukraine and the emerging threats in the INDOPACOM theater. Based on the continued strength in our markets, we are well positioned to deliver on our commitments for 2023 and beyond. With that, let’s open up the call for questions.

Robert Stallard:

Thanks very much, good morning.

Robert Stallard:

Let’s start with the GTF, shall we? By my count, this is the third issue you’re dealing with at the moment - you have that quality escape noted at Paris, the ongoing time-only issues in these challenging environments, and now the metal problem. Is there a root problem or cause that’s linking these issues, and are you concerned about the potential impact on Pratt’s reputation for reliability? Thank you.

Robert Stallard:

Okay, thanks Chris.

Myles Walton:

Thanks, good morning. Neil, I’m trying to understand the scaling of the $500 million lower free cash flow to the total population of engines that you’re going to be removing and inspecting. I think you said that the first 200 are encompassed in the guidance, but it wasn’t clear if that was just the segment profit guidance you were talking about. Also, obviously this is lingering into ’24 to get that whole 1,200 population, so should we think about a similar sized cash impact in ’24?

Myles Walton:

Can you clarify if the powder metal supplier is internal to you?

Myles Walton:

Thank you.

Ronald Epstein:

Yes, hey. Good morning. A question for you, Greg. Kind of getting back to Rob’s question, when you look at the litany of issues that have happened here with this engine, everything from hot section issues, manufacturing issues, do you have a cultural issue in your engineering workforce? Are people not talking to each other? I mean, it also begs the question, how could you guys possibly not know about this at Paris when you did this major investor event? Can you just give us all some insight into how people are communicating and what’s going on in your engineering workforce?

Ronald Epstein:

All right, got it.

Operator:

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

Gregory Hayes:

Yes, so it was mid to late 2021 where we changed all the processes in terms of the screening of the powdered metal to identify the contaminant, to eliminate the contaminant. Let’s be clear - this is a--these contaminants are microscopic, and unfortunately the original process, as we scaled up production for GTF, it got away from us a little bit. We fixed it, but I would tell you everything that we have shipped, or almost everything we have shipped, I should say, in the last three years, we believe is going to be just fine. That’s why we’re confident we can continue to support Airbus, continue to support customers with new deliveries, as well as with spares this year and next.

Gregory Hayes:

Thanks Peter.

Sheila Kahyaoglu:

Good morning guys, thank you very much. Just on free cash flow, can we walk through the bridge, $1.2 billion of free cash flow usage in the first half, $4.3 billion expectation for the year? How do you think about the biggest drivers on a segment level basis in working capital? What are you expectations for factoring for the year, whether it’s a benefit or a headwind, and do we think about $500 million of Pratt impact for 200 engines, is that the rate we should assume going forward in future years or is that something you guys are working through?

Sheila Kahyaoglu:

Thank you.

Operator:

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

Gregory Hayes:

Good morning Kristine.

Kristine Liwag:

For the Pratt issue, it seems like the free cash flow impact in 2024, 2025 is still a little bit unclear. How should we think about how this affects your 2025 free cash flow outlook of $9 billion, and is that still the number you’re reiterating or should we think about potential downside risk?

Gregory Hayes:

Yes, just maybe the way to think about this is we’re going to pull 200 engines back this year, a bunch of those were going to come back anyways, and then next year it’s another 1,000 and a bunch of those were already planned. Having said that, though, we know right now we’ve got 13 MRO facilities, we’re going to have to--our plan was to go to 19, we’re going to have to accelerate some of the tooling - that’s contemplated in this cash. We’re going to have to dedicate some spares to a rotable pool of engines to support some customers. Those things, again, will be behind us, I would say probably by the middle of next year in terms of the cash outflows associated with that. The big question in everybody’s mind will be, what are we going to have to do in terms of compensation to the airlines. We have contracts and special support agreements that are out there, so we’ll work through that but it’s going to take time. I guess the main point, though, is by the end of next year, this inspection program will be almost all complete and the 2025 outlook really shouldn’t be impacted, other than as Neil said, potential margin impact as some of these costs roll through the GTF support contracts. But again, we’ve got two years to work through that and we will figure that out, but in terms of the cash, really probably not a big difference as you get out to 2025.

Operator:

Thank you. Our next question comes from the line of Seth Seifman of JP Morgan.

Christopher Calio:

Hey Seth, this is Chris. When you look at RND--we’ll break it down into the pieces of the new Raytheon segment. When you look at RND, we started to see some positive momentum in particular around material growth, right - about 14% year-over-year material growth. The kit fill rates that we’ve talked about for some time that were hovering in those mid to low 50s, were up into the mid 70s, so we’re starting to see material flow which is a big part of the continued productivity story at RND. At RIS, I would say, again, less material intensive but very good material flow and kit fill rates. The issues that we’re continuing to grapple with are the fixed price development contracts that we’ve got. We’ve mentioned before, we’ve got a handful of fixed price development contracts that are technologically very complex, that we continue to work our way through. We believe we’ll make significant progress on those here in 2023 and into early 2024, but overall again seeing positive momentum on the productivity front at Raytheon.

Seth Seifman:

Thanks.

Operator:

Thank you. Our next question comes from the line of Ken Herbert with RBC Capital Markets.

Neil Mitchill:

Morning Ken.

Christopher Calio:

Hey Ken, thanks. This is Chris. I’ll start. As we kind of noted upfront, there are a number of variables that are going into the fleet impact, both this year and next

Operator:

Thank you. Our next question comes from Jason Gursky of Citi.

Christopher Calio:

Yes, thanks Jason, this is Chris. Greg mentioned upfront that we’ve had this enhanced inspection technique in place for some time and have been doing these inspections. On the V2500 in particular, we’ve had, I think Greg, you said almost 3,000 of those inspections. I will tell you that the fall-out rate from that on this part has been very, very low, and so at this particular time, Jason, we don’t believe that the HPT will be the limiting factor, if you will, in terms of the turnaround time and our ability to work through this as quickly and efficiently as possible.

Christopher Calio:

Yes, so we’re talking HPT discs, Jason, and so that particular module, you can’t necessarily do that on wing. You’ve got to take the engine off wing, you’ve got to disassemble the engine to get to that particular area. Unfortunately, based on the geometry and location of the part, you do have to remove the part to do this enhanced inspection capability, reassemble and then get it back out to the fleet. I think I mentioned before, we’re trying to turn this into, as best we can, what we would call a project visit, not a full interval shop visit, but that work is still underway. Obviously making sure the wing-to-wing turnaround time is as short as possible and doing what we need to do is an important element of understanding the fleet impact and what we need to do from a network perspective.

Christopher Calio:

Yes, so when you think about that 2024 shop visit population, we’re going to, again, take a look at the utilization on those, the cycle time on those engines, and in working with our customers making a decision, a mutual decision on is this the right candidate for a project visit or should that work scope increase to take on additional work, which will benefit the time on wing and the interval of that engine moving forward several years. That is a decision, that is a conversation that we will have once we better understand again how many of these visits are truly incremental in 2024, and then the related fleet impacts. As you know, Jason, that is a part of the equation.

Gregory Hayes:

Jason, we’re discovering something new every day here, so I think--all I would tell you is that over the next, I would say six weeks as we finalize the inspection protocols, as we finalize the turn times and work with our customers, keep in mind we’re trying to get the first 200 engines back by the middle of September, so I think by the middle of September, we’ll have a much better feel for what is involved here. We’ll have an opportunity to update everybody around that time. I think by the time we get to October, obviously we’ll know even more as we go through some of the initial inspections, so this is a learning process. We understand what it takes to inspect, we understand what it takes in terms of the inductions and the processes, and unless there is some surprise, I think we can have this pretty well bounded in terms of what the cost impact is, in terms of what the cash flow impact is, and so by the time we get to the third quarter call, obviously we’ll have a hell of a lot more knowledge than we do sitting here today.

Operator:

Thank you. Our next question comes from the line of Cai Von Rumohr of Cowen.

Christopher Calio:

Yes, so let me start maybe with the second part first, Cai. Our current assessment is that we don’t expect the same type of impact on the V2500. It has had an enhanced inspection fleet plan and management plan in place for some time, and as I noted and as Greg noted, we’ve completed a significant number of those inspections thus far and feel comfortable that this can be managed at this point within the existing shop visit forecast. As Greg noted, we’re still going through that analysis, it will take us into August to finalize that, but that’s our current expectation. Same on the other Neo applications - there are different characteristics and attributes on those engines, whether it be stress on the part, whether it be thrust, that we believe differentiates it from the 1,100, and such our current assessment is those can be managed within the existing shop visit forecast that we have for 2024. In terms of the population, Cai, you heard Greg talk about when we bounded the potentially contaminated material, we put in place the enhanced processes for powdered metal at that time and also put in the enhanced inspection techniques that we’ve talked about. Many of the engines that have come off, all of the engines that come off since that time have gone through this inspection and have been a part of what we would call this better powder processing regime. Ultimately we will inspect parts when they come in for their normal shop visit on down the line, Cai - as you know, these engines will come back for shop visits and we will inspect this, among other things during that time. What we’re talking about right now are those that we need to accelerate the shop visit for. Again, that’s based on all the variables that we talked about. We feel confident that as part of the safety management board that Pratt has, that we’ve got the right population and the right plan in place.

Gregory Hayes:

Yes Cai, it’s nice to talk about something other than GTF. Look - this AMRAAM order is an order that will be for both Germany, really for all of the NATO countries, that will also benefit Ukraine. I would tell you, that is on top of what we expect to see as relatively large order for GEM-T missiles associated with the Patriot air defense system. We have orders there from Saudi Arabia, we have orders coming from NATO. I think in the back half of the year, you’re going to see significant--we’re planning significant order intake on both AMRAAM and GEM-T, as well as of course Excalibur. Neil mentioned we’ve got the Javelin order, we had the Stinger order already - those orders will continue to grow. But I’ll tell you right now, we still have only seen $2 billion of orders associated specifically with Ukraine replenishment. We think there’s probably another $2.5 billion coming in the next 12 months associated with just the Ukraine replenishment on top of the GEM-Ts, and the GEM-Ts, again they’ll go to Germany, they’ll go to Poland, they’ll go to all 18 of those countries that are currently operating Patriot, so I think that’s a very positive sign and that’s why we’re so bullish on the defense outlook for the next couple of years.

Operator:

Thank you. Our next question comes from the line of David Strauss of Barclays.

Gregory Hayes:

Come on!

Christopher Calio:

Yes, thanks David, this is Chris. I would say all of this has been very closely coordinated with the FAA. I think you heard me upfront talk about that this will come in the form of a service bulletin that Pratt will publish, and then likely an AD that the FAA will distribute. But our safety management process, whether it be through events that happen in the field, things that we find through our continuous surveillance process or recommendations and assessment like this, are always very closely coordinated with the FAA, and then of course with the other international regulatory bodies as well. FAA of course is where we start, but we of course continue to coordinate with the FAA and those other international bodies, but bottom line, very closely coordinated with them.

Christopher Calio:

Yes, so you’re absolutely right - that’s what fall-out rate means, those that we inspect and decide need to be removed and replaced. Our experience has been that’s been very, very low. If of course we had to replace the turbine disc, then we’d factor that into the turnaround time and that will of course potentially add some time to the process. But as of now, again David, our assumption--and we’re continuing to work through that and through the month of August here, but our assumption based on everything that we’ve seen thus far is that the fall-out rate will be very low, and that’s what’s embedded in our assumptions today.

David Strauss:

Got it, thanks a lot.

Noah Poponak:

Hey, good morning everyone.

Noah Poponak:

On the powder metal, are you able to bound at this point whether you expect the free cash impact next year to be larger or smaller than this year, and then also following up on the Raytheon defense margins, can you just spend another minute on the fixed price development programs you’re citing - which ones are they, when do they move out of the development phase, and how do they play into the multi-year margin expansion you’re expecting?

Noah Poponak:

Okay, thank you.

Gregory Hayes:

Okay, thanks to everybody for listening in. Just to put all this in perspective, I think you need to keep in mind, we have very strong franchises between Collins, Raytheon and Pratt & Whitney, and the $185 billion of backlog. I know this GTF issue, this quality issue is a bit of a surprise. We have been working it for the last, I would say, 10 days or so. We will know a lot more in the next six weeks, and as that information becomes available, we will of course be sharing it with investors. But again, keep in mind this is a small piece of what is a great franchise across RTX. Having said that, Jennifer and her team are obviously going to be available the next couple of days to answer any follow-up questions that you have. Thank you all for listening, and take care. Bye bye.

Gregory Hayes :

All right. Thank you, Latif, and good morning, everyone. I trust everyone had a chance to see the press release. It was clearly a good start to the year for RTX, and demand remains strong for both our commercial aerospace and our defense businesses. And I think, importantly, we're seeing some stabilization in the supply chain. Before we get to the highlights for the quarter, let me just spend a couple of minutes on the macro environment. Starting on the commercial side. Domestic revenue passenger miles are now back to pre-pandemic levels, 2019 levels, as we exit March. This was led by a very strong rebound in China following their zero COVID policy reversal. On the international front, we have seen continued improvement in RPMs, reaching nearly 80% of 2019 levels. With strong consumer demand and record advanced bookings, we expect total global air traffic to fully recover to 2019 levels as we exit the year. On the defense side, we're very encouraged by the President's most recent fiscal year '24 budget request of $886 billion. That's up about 3%. And that's on top of last year's nearly 10% top line budget increase. The proposed budget includes broad-based support for many of our key programs, technologies and capabilities, including a request to fund multiyear munitions purchases for AMRAAM. It also prioritizes HACM, that's the Hypersonic Attack Cruise Missile, as the future long-range hypersonic missile. And perhaps most importantly for us, the budget reflects the DoD's decision to move forward with the engine core upgrade for the F135 engine, which we believe is a win for both the war fighter and the taxpayer. This program will solidify Pratt & Whitney's position on the F-35 and will provide additional thrust, range and efficiency necessary to support the needs of the war fighter well into the next decade. Looking internationally, we're also seeing strong demand for defense capabilities as our allies prioritize additional defense spending. Poland recently announced plans to spend 4% of their GDP on defense this year. That's the highest level across all of the NATO countries. And we continue to support Ukraine's ongoing needs, including the Pentagon's accelerated deployment of the Patriot missile defense system, adding another RTX capability to the Ukraine mission. Clearly, the demand environment remains strong across our end markets. And with that as a backdrop, let's turn to Slide 2 for the Q1 highlights. Importantly, we exited the quarter with a record backlog of $180 billion. This included over $20 billion of new awards from some of our key franchises in the quarter. As an example, RMD received a $1.2 billion award for Patriot for Switzerland. That marks the 18th Patriot partner nation. RIS was awarded $1.9 billion in classified awards. We also delivered solid financial performance with strong year-over-year organic sales growth of 10% and adjusted EPS of $1.22. Regarding free cash flow, we started the year slowly due to some timings of higher working capital, which Neil will talk to you about in a bit. Importantly, though, we remain confident in our full year outlook of about $4.8 billion of free cash flow. As expected, sales growth was led by commercial aerospace, with aftermarket up close to 20% and OEM shipments up close to 17% year-over-year. Additionally, in the quarter, we achieved an incremental $50 million of gross merger cost synergies, and we are quickly approaching the $1.5 billion target, with more opportunities still ahead. On the capital allocation front, we repurchased more than $560 million of our shares in the quarter. And we remain on track for $3 billion of share repurchases for 2023. And as you saw yesterday, we increased our dividend over 7% from $0.55 to $0.59 a share, in line with our commitment to return at least $20 billion to shareowners in the four years following the merger. We've done all this while continuing to invest in R&D, additional capacity, automation and the digitization of our production facilities in order to support our growing backlog. As you can see, we're extremely well positioned for growth this year and well into the future. Every day, we are furthering our integration to unlock the scale and breadth of RTX, all while driving additional technology synergies and a focus on operational performance. With that, let me turn it over to Mr. Calio to talk about the progress we're making in regards to our business realignment. And I'll be back at the end for a wrap-up and Q&A. Chris?

Neil Mitchill:

Thank you, Chris. I'm on Slide 5. As Greg noted, sales of $17.2 billion were up a strong 10% organically versus the prior year. This growth was driven by both commercial aerospace and defense, despite some of the environmental challenges we continue to face. Adjusted earnings per share of $1.22 was up 6% year-over-year, with strong segment operating profit growth of 15%, partially offset by the expected lower pension income and a higher effective tax rate. On a GAAP basis, earnings per share from continuing operations was $0.97 per share and included $0.25 of acquisition accounting adjustments, restructuring and nonrecurring items. And finally, free cash flow was an outflow of $1.4 billion in the first quarter, which is historically our lightest quarter of the year due to the timing of incentive compensation payments and seasonality in our defense businesses. In addition to these typical dynamics, the timing of sales and cash collections as well as supply chain and capacity constraints drove higher working capital in the first quarter of this year. We expect to generate positive free cash flow beginning in the second quarter as commercial deliveries accelerate and performance as well as other funding milestones are achieved. And importantly, as Greg said, we remain confident in delivering about $4.8 billion in free cash flow for the full year. So with that, let's turn to Slide 6 and get into the segment results. Beginning with Collins. Sales were $5.6 billion in the quarter, up 16% on an adjusted basis and up 17% on an organic basis, driven primarily by the continued recovery in commercial aerospace end markets, resulting in higher flight hours and higher OE production rates. By channel, commercial aftermarket sales were up 24% on an adjusted basis and 26% organically, driven by a 43% increase in provisioning and a 29% increase in parts and repair, while modifications and upgrades were up 1% organically in the quarter. Sequentially, commercial aftermarket sales were up 8%. Commercial OE sales were up 12% versus the prior year, driven by production ramps in narrow-body, business jets and widebody. And military sales were up 9% due to both higher material receipts and manufacturing throughput. Adjusted operating profit of $800 million was up $216 million from the prior year, with drop-through on higher volume and favorable mix, partially offset by higher production costs and higher SG&A expense. Looking ahead, on a full year basis, we continue to expect Collins' sales to grow low double digits and operating profit of between $750 million and $825 million increase versus 2022. Turning to Pratt & Whitney on Slide 7. Sales of $5.2 billion were up 15% on an adjusted basis and 16% on an organic basis, with sales growing across all segments. Commercial OE sales were up 27% in the quarter on higher engine deliveries within both Pratt's large commercial engine and Canada businesses. Commercial aftermarket sales were up 14% in the quarter, primarily driven by increased volume and favorable mix. And in the military business, sales were up 13%, driven by the F135 production contract award in the second quarter of last year and higher F135 sustainment volume. Adjusted operating profit of $434 million was up $126 million from the prior year, driven primarily by drop-through on higher commercial aftermarket, favorable contract matter and higher military sales, which was partially offset by conversion on higher commercial OE volume. Turning to Pratt's full year outlook. We continue to expect sales to grow low to mid-teens and operating profit growth of $200 million to $275 million versus 2022. Shifting to RI&S on Slide 8. Sales of $3.6 billion were in line with our expectations and flat versus prior year, both on an adjusted and organic basis. This was driven by lower command, control and communications programs, which was mostly offset by higher revenue from Cyber and Services programs. Adjusted operating profit in the quarter of $330 million was down $48 million versus prior year, driven primarily by lower net program efficiencies spread across several programs. RIS began the year with strong orders in the quarter of $4.3 billion, resulting in a book-to-bill of 1.34 and a backlog of over $17 billion. This brings RIS' rolling four-quarter book-to-bill to 1.09. In addition to the significant bookings Greg mentioned earlier, RIS also received a $650 million award for the next-generation jammer and a $275 million Space Development Agency award for missile tracking satellite constellation. Looking ahead, we continue to expect RI&S' full year sales to be flat with operating profit growth of $75 million to $125 million versus 2022. Turning now to Slide 9. RMD sales were $3.7 billion, up 4% on an adjusted basis and up 5% organically, primarily driven by higher sales in the Advanced Technology and Air Power programs. Adjusted operating profit of $335 million was down $52 million versus the prior year, driven by the lower -- by lower net program efficiencies and higher development program mix, partially offset by higher volume. Lower net program efficiencies included the unfavorable impact of a significant option exercise in the quarter, which had about a 100 basis point impact on the margin. Like RI&S, RMD's bookings were also very strong to start the year with $5.2 billion of bookings in the quarter, including an over $600 million SPY-6 award. This resulted in a record backlog of $35 billion and a book-to-bill of 1.43 in both the quarter as well as on a rolling four-quarter basis. And for the full year, we continue to expect RMD sales to grow low to mid-single digits with operating profit growth of between $175 million and $225 million versus 2022. With that, I'll turn it back to Greg to wrap things up.

Operator:

[Operator Instructions] The first question comes from the line of Myles Walton of Wolfe Research.

Christopher Calio :

Hey, Myles, this is Chris. Thanks for the question. Look, agree, we'd like to be seeing the margins improving at a bit of a faster rate. But there are some real positives in this business when you step back. Most of it will be the backlog. If you think about the book-to-bill over the last 12 months, it's a 1.43, which is really phenomenal, with some key wins in some potential franchise areas. As Neil noted in his remarks, we did have a contract option exercise in the first quarter. It's a good business. Let's make no mistake about that. But because of the accounting resulted in a bit of a negative impact, about 100 basis points. If you exclude that, it would put RMD at a bit over 10%, sort of in line with where we were in Q4. As you sort of look ahead to the RMD margin profile, the two principal drivers of that margin improvement are going to be material flow and flow in our factory. And of course, just absorption brought on by higher material receipts and of course, the labor that goes with it. So if you think about the factory flow, we had a 15% increase in Q4 in terms of material sheets. Another 5% here in Q1, and we're starting to see the results in the factory. You heard Greg talk prior about kit fill rates being in the 50s. The material flow that we've seen lately has brought the kit fill rate up into the low 70s. Our historical rate is in more the mid-80s. But as we continue to drive more material, you'll see more material flow in the factories, getting those kit fill rates up. And that's going to reduce the period of performance. And then again, the second one, again, is just math. With increasing material volume in labor, we're going to see better absorption of our fixed and indirect support costs. So more productivity there. So that's the margin sort of profile and story in RMD.

Neil Mitchill :

Myles, this is Neil. Yes, I expect that to accelerate as the year goes on. But I would point to the second half. As Chris said, with the kit fill rates in the 70s, as that grows into the 80s and then higher as the year progresses, you'll see the productivity, the confidence around our ability to shorten that period of performance improve. And that will show up in the EACs. The other thing I'll say is that option we had, again, as Chris said, good business. There may be another one. But again, this is really good business coming on the heels of increased customer demand. So we'll be sure to continue to talk about that. But I think the fundamentals of the backlog are strong. As we look at the margin embedded in that backlog, it's above 10%, and that gives us the confidence that, that margin expansion will come over time.

Noah Poponak :

Can we just spend a little bit more time on the Pratt margin? And I guess, what's happening with pricing in the aftermarket, maybe specifically in the engine? Just sounds like out there in the industry, given limited parts supply, limited MRO availability that pricing is maybe much better than normal. So curious what you're seeing on that front, especially things that are not on some version of a long-term agreement? And what does that mean for the Pratt margin going forward?

Neil Mitchill :

Maybe I'll just add about the margin profile of Pratt. Obviously, as we look at the rest of the year, Noah, we expect the engine deliveries to increase. Think about between 35% and 40% year-over-year. You saw 42% in the first quarter. That will obviously come with some negative engine margin headwind. I would put a number around $250 million in terms of rest of year NEM headwind that would then, coupled with the strong aftermarket that we're expecting to continue at Pratt, you'll see that margin sort of level out as the year goes on and those engine deliveries increase.

Robert Stallard :

Maybe just a follow-up actually on Noah's question with regard to Pratt. 14% aftermarket growth year-on-year in the quarter, given the aggressive price increase that Greg referred to, feels a bit low. And then secondly, on those GTF volumes, how do those compare versus Airbus' A320 ramp plan?

Christopher Calio :

Hey, Rob, this is Chris. Maybe just a comment on the OE deliveries. Greg mentioned stabilization in the supply chain. I would say on structural castings, we continue to see some improvement, and that's obviously critical for Pratt. If you think about the key constrained castings at Pratt, they are up about 30% sequentially this quarter. Now that's not to the level of flow that we need. We continue to see some manpower sort of labor challenges in that supply chain, and we're taking some actions to try to address that, whether it be offload, whether it be helping to improve yields in the manufacturing process. But we are lockstep with Airbus on their demand for the year. And we are hand-to-mouth right now given some of the constraints. But again, lockstep with the demand, and that will continue to increase as we move into the back half of the year.

Operator:

Our next question comes from the line of Matt Akers of Wells Fargo.

Neil Mitchill :

Sure. Thanks, Matt. Certainly, working capital was a drag on the quarter. I would say about -- we typically see a breakeven-ish type cash flow. We were expecting probably a slight outflow. It's obviously a little bit worse than that. About $500 million of that I would characterize as an inventory build. The silver lining here is that with the easing of the supply chain constraints, we've seen an incredible amount of inventory come in. We're also looking to balance that and make adjustments in our MRP as we look at the rest of the year, but about I'd call $500 million of the excess there associated with the inventory build, we increased our inventory $700 million. So we plan to grow our inventory and sort of a good news situation, it grew a little bit further. I fully expect that to turn the other way as we go through the rest of the year. On the contract asset side, that really was in our defense businesses. Again, the seasonality of those businesses is that we invest in the products. We ship them, and then we make milestone collections as we meet performance milestones. I expect those performance milestones to be met as we go through the rest of the year. So again, slightly higher than we had planned. We did get those billings out in early April, and they've already been collected. So I'm not concerned about that. Then the last piece we saw in terms of the first quarter was a slight increase in our receivables, probably about a couple of hundred million dollars. And frankly, that's due to the timing of sales. They came a little bit later in March. We'll collect that here in the second quarter. So as we look at the rest of the year and I think about getting from the outflow of $1.4 billion, up to our objective of 4.8 or so, here's how I would characterize that walk. The majority of that is going to come from profit that we've yet to realize. So nearly $5.5 billion, $6 billion there. We expect working capital to be flat year-over-year. So we'll have an improvement of about $2.7 billion, about half of which will come from inventory. We've got some puts and takes, a few hundred million dollars net of taxes and pension and then, of course, a little under $2 billion of capital, CapEx left to go in the year. And if you do all that math, you get to about the $4.8 billion. If you look at the fourth quarter of last year, I think we generated about $2.2 billion of cash. So I do expect it to be back ended, but turning cash positive in the second quarter, pretty consistent with what we saw last year, which was in the $750 million range and that's after absorbing about $650 million of incremental cash taxes that we'll pay here in the second quarter because of the R&D impact. So we feel confident in the full year. Obviously, a lot to do, but it's nice to have the inventory given the strength of the demand that we're all seeing here in the business.

Sheila Kahyaoglu :

Neil, since you're so good with the numbers and you keep giving us detail, I wanted to ask another one on Pratt performance. What drove the strength in the quarter of 8.3% margins versus the 6% implied for '23? And sort of what drives the lower margins for the year? And how do we think about the aftermarket drop-through given some of the prior commentary on GTF aftermarket? And how do we think about the PwC and military mix as well?

Sheila Kahyaoglu:

It’s okay. I have too many. Thank you.

Peter Arment :

Question is for Greg or Chris, maybe just focusing on RMD and just $35 billion backlog. I mean you've had some big wins. Obviously, Switzerland was a big one. But maybe if you could just talk a little bit about obviously, customer engagement is very high or probably at its highest levels ever. Maybe you could just talk about kind of the backdrop, the ability to continue to grow backlog or some of the bigger booking opportunities that are still out there?

Operator:

Our next question comes from the line of Ron Epstein of Bank of America.

Gregory Hayes :

Correct.

Gregory Hayes :

Ron, let me I'll turn it over to Chris. Obviously, Chris is intimately familiar with this having run the commercial engine business in Pratt. I would say the one bright spot is most of those contracts were eight to 10 years in length. If you think about it, they were -- this engine was introduced back in 2015. So as you think about the long-term outlook, I am very confident margins are going to improve because we'll have a chance to relook at some of those contracts. But obviously, there's a challenge today with margins because time on wing is not what we expected it to be. Reliability and durability are the two issues. And reliability is great. 99.98% dispatch reliability. Time on wing is the challenge. But again, I think as Chris explained, we've got some solutions to that, which we'll see over the next couple of years.

Ronald Epstein :

And if I may, as a follow-on to this question, same thing. My understanding is the gear is just fine. It's the other stuff that's wearing out quicker. How did that happen? Because it was -- everybody was worried about the gear, not the other stuff.

Neil Mitchill :

To your point, Greg, and Ron, you're 100% right, the gear and the fuel burn performance have been spot on in meeting expectations. Keep in mind, this was a new architecture, and we've had some learnings along the way. The only thing I'll remind you, I kind of mentioned this in my remarks, we had a similar journey on the V2500. And it took us a while to get to the levels today that people are enjoying on the V2500. Big difference, of course, has been the ramp up on the GTF has been massive ramp versus when the V went into service. So there's a little bit more, I would say, time and buffer to help manage that fleet as it was entering into service. But the playbook is there on the V. We've got to follow it on the GTF.

David Strauss :

Greg, specifically on the MAX, I think you previously commented that the expectation around Collins and the OE growth rate there was for the MAX to be in the low 30s for you all for the full year. Is that still what you're thinking even with the new issues that have developed here? And then second part of the question, just on rocket motors. Your view of the potential Aerojet acquisition by LHX and how that potentially could improve things in terms of rocket motor availability?

Operator:

Our next question comes from the line of Rob Spingarn of Melius Research.

Neil Mitchill :

Thanks for the question, Rob. I think what I would say about the growth at Collins right now is the majority of it is still coming from the narrow-body. We have started to see wide-body begin to improve. I don't have the exact number in front of me on that mix today. But as we think about the wide-body environment, those volumes are coming up. I would say, particularly seeing that in the interiors business on the OE side, as they continue to take those production levels up. And as you said, today, I think Collins is more in the -- on the OE side, probably about 30% of their OE sales relate to widebody, with about 40% from narrowbody. And then on the aftermarket side -- I'm sorry -- let me just stop there. I think that's enough for those numbers right now.

Neil Mitchill :

Volume. Clearly, volume, as we continue to ramp back up to levels that we saw pre-pandemic, are going to be the tailwind, if you will, on a per engine reduction in negative engine margin. As you'll recall, we were already producing in the high 50s rate as we kind of entered into 2020. And when you think about the headwind we saw here in the first quarter on 40% higher volume, we're getting good absorption as we continue to take up those engine volumes. I expect that to continue. We're always working productivity. We're working productivity to offset the growing costs that we're seeing, particularly on the casting side. So we're doing all of those things. But I would say what's going to drop to the bottom line is going to be driven by that higher volume and the absorption that comes from that.

Kenneth Herbert :

I wanted to stay on Collins' aerospace for a minute. The first quarter aftermarket numbers were continuing to be pretty strong. You're seeing better pricing. Is it fair to assume that there's upside to sort of the full year aftermarket expectations within Collins? Or how do we see the sort of the remainder of the year progressing with tough comps, but with still very strong fundamentals in demand?

Operator:

Our next question comes from the line of Cai von Rumohr of Cowen.

Neil Mitchill :

So let me take the first one. I think we can take it offline, Cai, and Jennifer can help you a little bit. But I think as we look at the volume uptick as we go through the rest of the year, you'll find that when you combine that with the mix of new and spare engines that our negative engine margin is stable, if not reducing a little bit. So I feel good about that. There's a number of different engine families that make that up. So we don't see any issues there in terms of cost headwinds or degradation on a per engine basis as the rest of the year goes. As you think about the aftermarket, a couple of thoughts there. I had mentioned that we were addressing and dealing with material flow and availability. Certainly, the castings are playing a part in that in terms of allocations amongst MRO and OE deliveries. But we did see price improvements in the Pratt & Whitney portfolio as we do every year, and the volume is also dropping through. The content on the shop business is also stepping up across almost all segments of Pratt & Whitney, large and the small engine business as well. So we're seeing the right momentum there. And I do expect that as we continue to see the casting improvements alleviate as the year goes on, you'll see that also drop through in the top and bottom line.

Operator:

At this time, I'd like to turn the call over to Greg Hayes for any closing remarks. Sir?

Operator:

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

Greg Hayes:

Thank you, Latif, and good morning, everyone. I hope you've all had a chance to review our press release this morning. Before we get into the highlights, I'd first like to welcome Chris Calio to the call. As you know, Chris has been our Chief Operating Officer for the last year, has been responsible for our business units as well as our operations, engineering and digital functions. Effective March 1, Chris has been elected to the position of President and Chief Operating Officer of RTX. Chris has been instrumental over this past year in driving our focus on operational excellence and delivering for our customers in a very challenging environment. So welcome, Chris. Okay. Let's go to the webcast slide for Slide 2. We'll talk about some of the highlights for 2022. I don’t need to tell anybody that 2022 was an incredibly dynamic year. And I'm pleased to say that we were able to achieve, despite facing a number of significant challenges, including transitioning out of Russia, managing record levels of inflation as well as supply chain and labor constraints. With all that as a backdrop, we still delivered $67.1 billion in sales for the full year, which was up 6% organically and adjusted EPS of $4.78, which was up 12% year-over-year. We also returned almost $6 billion of capital to shareowners, which included $2.8 billion of share repurchases. And more importantly, even with the $1.6 billion headwind from the R&D tax legislation, we generated $4.9 billion in free cash flow, which exceeded our expectations. At the same time, we continue to position the business for sustained profitable growth. In 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. Additionally, we were granted over 2,600 patents last year. This places us in the top 10 of companies in the United States for the second consecutive year. While we invested $9 billion in R&D and CapEx, this allowed us to bring new technologies to our market and drive further automation and digitization through each phase of our product lifestyle from design, through development, through manufacturing and product sustainment. Our investment in recent awards supports our mission to create a safer and more connected world, which was especially true in 2022. Our products and technologies have been instrumental in helping the people of Ukraine defend itself. From the Stinger, Javelin and Excalibur to NASAMS and now Patriot air and missile defense system, we remain in lockstep with the U.S. government to ensure we can continue to support our allies. On the commercial side of the business, we saw continued advancements on our path towards leading the future of sustainable aviation with the start of development flight testing of the GTF Advantage engine, which, as you know, further enhances the GTF's position as the leader in fuel efficiency and CO2 emissions. Importantly, we also completed the first engine test run for our regional hybrid electric flight demonstrator. This system integrates a 1-megawatt electric motor, which was developed by Collins with a highly efficient Pratt & Whitney fuel burning engine, specifically adapted for hybrid electric operations. This new engine will reduce fuel burn and CO2 emissions by 30% compared to today's most advanced regional turboprop aircraft. These types of investments along with strong demand across both the commercial and defense end markets will position us for continued growth as we head into 2023. We're particularly proud that RTX outperformed among all companies in the Russell 1000 for local U.S. job creation in 2022. RTX leads the industry in employee giving and volunteering, which is a testament to the impact our workforce has in the communities where we work and where we live. Before I turn it over to Chris, I just want to spend a minute to talk about the status of our integration and the next steps as we evolve as a pure-play aerospace and defense company. As you know, in 2020, we brought together two great companies, UTC aerospace business and Raytheon. With combined strength, scale and capabilities that makes us uniquely equipped to innovate and deliver game-changing technologies and solutions for our customers. As we approach the third anniversary of this merger, we've accomplished many of our objectives, including exceeding our original synergy commitment, and we see even more opportunities ahead. So today, we're starting the next step in our integration and evolution. Our plan is to streamline our structure to a customer-centric organization with three focus segments

Neil Mitchill:

Thank you, Chris. Let's turn to Slide 5. I'm pleased to see how we finished the year where we continue to see solid growth in organic sales, and adjusted earnings per share and robust free cash flow in the quarter. Fourth quarter sales of $18.1 billion grew 7% organically versus the prior year. This growth was primarily driven by our commercial aerospace businesses as the continued recovery in commercial air traffic more than offset the supply chain and labor challenges we saw during the year. Adjusted earnings per share of $1.27 was in line with our expectations and up 18%, led by the commercial aftermarket at Pratt & Collins, which more than offset the impact of lower productivity in our defense businesses. On a GAAP basis, earnings per share from continuing operations was $0.96 per share and included $0.31 of acquisition accounting adjustments, restructuring and nonrecurring items. It's worth noting that both GAAP and adjusted earnings per share had a tax benefit of about $0.06 associated with legal entity and operational reorganizations, which were completed during the quarter. And finally, we had free cash flow of $3.8 billion in the quarter, bringing our total cash generation for the year to $4.9 billion which exceeded our commitment as a result of stronger collections, particularly in international areas across the portfolio. With that, let's turn to Slide 6, and I'll get into the segment results. Starting with Collins. At Collins sales were $5.7 billion in the quarter, up 15% on an adjusted basis and up 16% organically, driven primarily by the continued recovery in commercial aerospace end markets. By channel, commercial aftermarket sales were up 21%, driven by a 32% increase in provisioning and a 25% increase in parts and repair, while modifications and upgrades were up 5% organically in the quarter. Sequentially, commercial aftermarket sales were up 6%. Commercial OE sales were up 20% versus prior year, driven principally by the continued strength in the narrow-body. Military sales were up 5%, driven primarily by improved material receipts, higher volume and new program awards. Adjusted operating profit of $743 million was up $274 million from the prior year as drop-through on higher commercial aftermarket volume and lower R&D expense was more than offset by higher SG&A expense. So shifting to Pratt & Whitney on Slide 7, sales of $5.7 billion were up 10% on an adjusted basis and up 11% on an organic basis, with commercial OE sales growth in large commercial engines in Pratt Canada as well as higher commercial aftermarket volume. Commercial OE sales were up 37%, driven by favorable volume and mix within Pratt's large commercial engine and Pratt Canada businesses. Commercial aftermarket sales were up 11% in the quarter with growth in both legacy large commercial and Pratt Canada shop visits. In the military business, sales were down 2%, driven by lower military legacy program aftermarket sales. Adjusted operating profit of $321 million was up $159 million from the prior year, driven primarily by drop-through on higher commercial aftermarket, which included a favorable contract adjustment that was partially offset by higher SG&A and R&D. Turning now to RI&S on Slide 8. Sales of $3.5 billion were down 8% versus prior year on an adjusted basis, driven by the divestiture of the Global Training and Services business in the fourth quarter of 2021. On an organic basis, sales were down 5% versus prior year, driven by command, control and communications, cyber training and services and sensing and effects. Adjusted operating profit in the quarter of $278 million was down $122 million versus prior year. Excluding the impact of divestitures, operating profit was down $96 million, driven primarily by unfavorable mix, lower net program efficiencies and lower volume. RIS had a $2.9 billion of bookings in the quarter, resulting in a book-to-bill of 0.92 and a backlog of $16 billion and on a full year basis, RIS' book-to-bill was 0.96. Turning now to Slide 9. R&D sales were $4.1 billion, up 6% on an adjusted basis and up 7% organically, primarily driven by higher volume in Naval Power programs including SPY-6 production, higher volume in Strategic Missile Defense, including Next Generation Interceptor development and higher volume and advanced technology programs. Adjusted operating profit of $418 million was $68 million lower than the prior year, driven by unfavorable program mix and lower net program efficiencies, partially offset by drop-through on higher volume. 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. So with that, let's turn to Slide 10 to discuss the financial outlook for the year. 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. While there are more details on the cash flow walk in the appendix, let me share a few of the moving pieces. First, we are expecting segment operating profit growth. Offsetting that will be increases in working capital, capital expenditures as well as a lower pension cost recovery. Additionally, we're expecting to buy back approximately $3 billion of RTX shares in 2023, of course, subject to market conditions. Now getting into the details around the earnings per share walk, starting at the segment level, we expect strong operating profit growth of about 20%, which results in about $0.77 of earnings per share growth at the midpoint of our outlook range. And as Chris noted earlier, this overcomes about $2 billion of material and labor inflation. And with respect to pension, although markets have improved since we spoke in October, pension will still be a substantial year-over-year headwind. Based on actual 2022 asset returns and where discount rates ended the year, that headwind will be about $0.22. Our tax rate in 2023 is expected to be approximately 18% versus the 14.4% we saw in 2022, which will result in a $0.22 headwind. This change is primarily driven by benefits recorded in 2022 that likely won't repeat in 2023. And to wrap things up, we see about $0.14 of net headwind year-over-year, primarily driven by higher interest and corporate expenses, and all of this brings us to our outlook range of $4.90 to $5.05 per share. So with that, let's go to Slide 11 for a little more detail on the segment outlooks. 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. And finally, higher intercompany activity will increase sales eliminations by about 10% year-over-year. And it's also worth noting, we've included an outlook for some of the below-the-line items and pension in the webcast appendix. So with that, let me hand it back to Greg to wrap things up.

Operator:

[Operator Instructions] The first question comes from the line of Robert Stallard of Vertical Research. Please go ahead, Robert.

Greg Hayes:

Good morning, Rob.

Robert Stallard:

Greg, just like to follow-up on your final comment there on your confidence in 2025, whether there’s confidence has been shaken anyway by this change in the R&D tax legislation but also the supply chain challenges because you basically have to double the cash flow between now and then to get to your target.

Robert Stallard:

Right. Thanks, Greg.

Operator:

Thank you. Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Your question please, Sheila.

Chris Calio:

Hey Sheila, it’s Chris. I’ll start with this one and then invite Neil and Greg to chime in. So let’s talk about supply chain for a minute. Maybe start with the positive, which was – saw some stabilization as we exited the year last year. If you look at R&D, material receipts were up 30% Q3 to Q4. 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. We’ve got the people on site, as you mentioned, and they’re responding to engineering and quality issues, giving us better visibility of what’s going on. We’re leaving bottlenecks and also finding issues earlier than perhaps we were previously giving us more time to react. We qualified some additional suppliers and negotiated additional LTAs. I think we did about 400 agreements last year with about $1.8 billion in annual spend. So again, giving our suppliers better visibility into our demand and what we’re doing. And then candidly, we’re taking some actions in our own house to better enable supply chain performance, small things like reducing the time it takes to place a PO to perhaps more complex things like engineering changes to improve the yields on some of our complex parts and ensuring we’ve got sort of a stable configuration as programs move from development into production. So those are all the things that we’re focused on continue to drive health and supply chain. But you’re right, we’re going to need it to perform to hit these numbers we’ve got here in 2023 and beyond.

Sheila Kahyaoglu:

Great. Thank you, both.

Operator:

Thank you. Our next question comes from the line of Ronald Epstein of Bank of America. Your question please, Ronald.

Greg Hayes:

Hey Ron, good morning.

Chris Calio:

Hey Ron, it’s Chris. Maybe I’ll take a crack at the sales synergy. So again, as we kind of said upfront, this is about taking the organization to the next level, right? You got a tremendous defense backlog, something like $70 billion RIS R&D. And this is really about enhancing customer alignment and coordination. We’ve had customer feedback throughout the last couple of years about the need for us to figure out how to better integrate some of our solutions, providing mission solutions to the customers, coming in with a unified narrative and an investment story. All of these things, I think, will enable us to work better and frankly, collaborate better across businesses. In large organizations like ours, you won’t be surprised to hear that sometimes there’s some friction there, and we think this will help remove some of that friction and again, provide better solutions to the customer. So thus far, the customer feedback, those that we’ve spoken to sort of see that potential and it’s up to us to execute on it. As of the portfolio, I think, again, RIS has a very strong portfolio. Book-to-bill was 0.96 not necessarily where we wanted. We had some campaigns push out of the year, but feel really strong again about the portfolio, and we’re going to continue to invest in it.

Ronald Epstein:

Got it. Right. Thank you.

Noah Poponak:

Hey, good morning, everybody.

Noah Poponak:

Good. Recognizing that there’s multiple top line inputs that are out of your control at the moment, which of the 2025 segment margin targets hold and which do not at this point? 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?

Noah Poponak:

Is it your anticipation that you’ll have a few hundred basis points of defense segment margin expansion over the next few years? And is that all cost or is that mix? Or is it not dealing with supply chain? Or how do you do that?

Noah Poponak:

Okay. Thank you.

Peter Arment:

Hey, good morning, Greg.

Peter Arment:

Greg, I want to say in RMD. You’ve just up low to mid-single digits on an organic basis. Just in the backdrop, it seems like it should be potentially better than that. Obviously, wondering if you could just kind of parse out how much is being impacted by the supply chain. And if – just when we think about all the DoD potential replenishment activity, plus you’ve got strong demand from NATO allies. Just a lot of opportunities for the space, it feels like you should be having a more potentially sustained top line growth. Maybe just your thoughts on that over the coming next couple of years. Thanks.

Peter Arment:

Appreciate the color. Thanks, Greg.

Operator:

Thank you. Our next question comes from the line of Myles Walton of Wolfe Research. Your question please, Myles.

Greg Hayes:

From a bottom line perspective, it’s going to be Collins, right? I think, again, top line, you’re going to see – what is the number, Neil, for 2023 here for Pratt?

Myles Walton:

Got it. And maybe a more detailed question on Pratt. If you can just give a little color on where GTF is in the aftermarket composition where legacy higher-margin aftermarket is in that composition? And how those two play out over the next several years? And also how the GTF aftermarket is trending versus your sort of assumptions of profitability on those long-term contracts?

Neil Mitchill:

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.

Neil Mitchill:

You’re welcome.

David Strauss:

Good morning, everyone.

David Strauss:

Greg, I guess following up on that. Could you just comment where you are on, I guess, across mainly Collins, but also touching on Pratt, where you are relative to the manufacturer stated rates, I guess, in particular on the MAX in the low 30s, A320 in the mid to high 40s and 787 around two a month. Thanks.

David Strauss:

Great. And Greg, could you just comment on the interiors business, how that’s doing? Is that – if you’re starting to see a pickup there from the widebody side? Thanks.

Operator:

Thank you. Our next question comes from the line of Cai von Rumohr of Cowen. Your question please, Cai.

Neil Mitchill:

Thanks, Cai. Good morning. Let me start on 2022 and where we ended the year. You’re right, the inventory was up. I would say most of that was at Pratt and Collins as you think about the backlog, the growth rates we just talked about on the commercial aerospace side and the supply chain issues that we’re all working to overcome. We were pretty strategic in our thinking around making sure we're bringing the materials and so that we can deliver and meet the customer commitments. You pointed out the accounts payable growth there. So not all, but a large portion of that inventory growth was sort of offset by the payables to kind of go along with that. On the advances side or the contract side, really that was driven by some – a couple of large international advances that we received in December. That contributed to our overdrive of free cash flow, which was about $500 million relative to our expectations. That will be a drag on working capital as you get into 2023. And as I look at the 2023 free cash flow, we see a little bit of headwind on the working capital, in part because of some of the advances that we got at the end of 2022. And I'd say in part because we're going to continue to be pretty strategic about making sure that we bring in parts and materials where we need them and where there's constraints and bottlenecks in the supply chain value stream right now. So on balance, we're always targeting to take that inventory balance down, but we want to be smart and make sure we have the products so we can deliver it. We will be seeing improved velocity through our factories as we go through 2023. So I'd expect the turns to improve here. But all eyes on the inventory management for sure, and then managing through the collections as we get into 2023 at our international customer sites.

Neil Mitchill:

You're welcome.

Kristine Liwag:

Hey, good morning everyone.

Kristine Liwag:

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?

Kristine Liwag:

Thanks Chris. And Greg, maybe a follow-up; you mentioned on your commentary on 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?

Chris Calio:

No. I would just support you said, Greg, that our supply chain is bringing in labor, they're starting to see more success on that front. But in some cases, like take casting, this is a pretty complex process. And there's a learning curve for folks that you bring in and take some time to come down that learning curve to get to a level of productivity that we need to see for the improvements here; but again, focused on that in the back half of 2023.

Operator:

Thank you. Our next question comes from the line of Doug Harned of Bernstein. Please go ahead, Doug.

Greg Hayes:

Doug, let me start with that, and maybe Chris will add. So as we think about the outlook, you're right to say that we see the large commercial engine – legacy commercial engine shop visits up 15% to 20%. Think about the Vs being up around 20%, and if you think about the math there, we were a little over 700 or so as we exited 2022. So that puts us in the mid-800s, kind of a range expectation for 2023, which is a level we've been at before. So as it relates to capacity, we have that level of capacity for the legacy shop visits. And it really then comes back to the conversation we've been having here for the last hour about ensuring that the supply chain is there and ready to support that level of shop visit inductions, which again, we've been planning. These expectations are in line with the numbers that Chris put out there back in May of 2021. So again, the supply chain, I think expects this level of an uptick in our shops to as well. In terms of – is there upside as you think about retirements of this aircraft, for example, it was 21 aircraft in the last year got retired that V2500 powered. So I'm not going to get ahead of ourselves. But I think that when you look at the dynamics around OE deliveries today of new aircraft, we think the V2500 still has a lot of life left in it. About a third of that fleet has yet to see its first shop visit, and so I'm cautiously optimistic that we will see that fly for a longer period of time at these elevated levels. Chris, I don't know if there's anything else you want to add to that?

Doug Harned:

And just really quick, what was the favorable contract adjustment, the size of that Pratt for the quarter?

Doug Harned:

Okay. All right. Great. Okay. Thank you.

Operator:

Thank you. Our final question will come from the line of Seth Seifman of JPMorgan. Your question please, Seth.

Chris Calio:

So I would say that I generally agree with the sentiment that you're hearing, time on wing, and we've been pretty open about this. And very open dialogue with our customers, a lot of time on wing – on newer platforms, not necessarily being where we wanted them to be when we launched the program. We have done a number of block upgrades. 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. That takes all of the lessons learned we've had on the, what I call base GTF program and some enhanced testing. And we think that that's the next generation that will get to the levels of performance and time on wing that our customers are anticipating. But even on the – what I'll call the existing fleet today, we've got upgrade plans to continue to push that time on wing higher and higher. Our customers are demanding it, and our contracts are dependent on it. So we're aligned there.

Greg Hayes:

Okay. Thanks, Seth, and thank you, everyone, for listening today. As always, Jennifer and her team are going to be available today, tomorrow, the rest of the week to answer any follow-up questions that you have. Thank you for listening, and take care, everyone.

Greg Hayes:

Thank you, Olivia, and good morning, everybody. As you can see in the press release this morning, RTX had another solid quarter of growth led by commercial aerospace and extremely strong demand for our products with over $22 billion of awards in the quarter. I think it's important to note our balanced aerospace and defense portfolio, along with operational resiliency, remain the key differentiators which enable us to deliver on our commitments despite some near-term macro challenges and uncertainties. Not sure what that noise is. I think it's also important to note we've overcome some significant headwinds in 2022 from transitioning out of Russia to record inflation and a strained supply chain. I think it's important, those are short-term issues and while we continue the day-to-day work to mitigate those challenges, we also continue to grow our $168 billion backlogs and invest in the future through over $9 billion of R&D, capital expenditures and customer-funded research and development. Those investments, coupled with strong demand for our systems across each of our businesses, positions us for significant growth runway as the near-term headwinds recede. Before we get to the results, let me just spend a few minutes discussing the trends we're seeing in some of our end markets. On the defense side, no surprises. The elevated threat environment has significantly influenced how the U.S. and our allies are thinking about their defense capabilities and readiness. And as a result, this has driven global defense budgets substantially higher, a trend we expect to continue for the foreseeable future. Just as an example, in Europe, Switzerland recently signed a $6.25 billion contract to buy 36 F-35 jets, modernizing their fleet and driving demand, of course, for our F135 engine through the end of the decade. We're also seeing significant global demand for advanced air defense systems, especially in Eastern Europe, as the Russians and Ukraine conflict, unfortunately, continues. This includes 2 of our NASAMS system, which is the short -- surface-to-air missile system that will help protect the people of Ukraine. And we expect more orders beyond those 2 to follow shortly. The heightened threat environment continues to drive strong orders. During the quarter, we saw strong domestic and international demand for our products with a number of significant defense awards, which resulted in a book-to-bill of 1.22 and a backlog that's up about $2 billion sequentially. Of particular note, our Missiles & Defense business was awarded $1 billion to develop the Hypersonic Attack Cruise Missile or HACM for the U.S. Air Force. It's a first-of-its-kind missile that leverages air breathing scramjet propulsion technology and that can travel at hypersonic speeds of Mach 5 or greater. Additionally, R&D completed the systems requirement review for the hypersonic glide phase interceptor program prototype. This is designed to protect the United States from increasing hypersonic missile threats. Both of these accomplishments demonstrate that Raytheon Technologies is a leader in the race to develop and deploy operational hypersonic and importantly, counter-hypersonic systems, a key strategic priority for the Department of Defense. RMD also was awarded about $1 billion from the U.S. Air Force, Navy and international customers for advanced AMRAAM, which is the Advanced Medium-Range Air-to-Air Missile. These missiles have been upgraded with the most sophisticated technology needed to maintain the edge over adversaries of the U.S. and our international allies. At RIS, we saw an additional $1.6 billion in classified awards in the quarter. The team was also awarded $215 million from the FAA to upgrade their wide area augmentation system to enhance safer air travel in support of the national aerospace system. At Pratt & Whitney, the team recently delivered the 1,000th F135 engine and was awarded over $800 million through the quarter -- in the quarter to continue supporting the F135, which is the safest, most capable and best value military jet engine in operation. And we're working on the F135 engine core upgrade known as the Enhanced Engine Package or EEP. This will allow the F135 to provide even more thrust, range and electrification to the aircraft. The EEP offers the most cost-effective and lowest-risk solution to enable the F-35's Block 4 upgrade. At Collins, we received a $583 million IDIQ award for the MAPS Gen II program, which maintains the integrity of positioning and timing in a GPS contested or denied environment. And it's an important award to ensure mission success within a more connected battle space. As you can see, the defense pipeline remains robust, and we expect continued order strength in the future as we continue to win key awards to successfully demonstrate our technology leadership and innovation capabilities. Moving to the commercial side. Air traffic remains strong as third quarter global revenue passenger miles reached 75% of 2019 levels. In the U.S., travelers through TSA checkpoints reached 91% of 2019 levels with Labor Day domestic traffic exceeding 2019. And we continue to see steady improvement in long-haul international traffic with wide-body hours flown up nearly 40% year-over-year. The strong demand -- the strong commercial aerospace recovery was driving demand for our commercial products and services. And we continue to innovate to deliver value for our customers. For example, just a few weeks ago, Pratt began development flight testing of the GTF Advantage engine on the A320neo aircraft in Toulouse, France. The GTF Advantage reduces fuel consumption and CO2 emissions by a total of 17% compared to the prior generation engines, extending the engine's lead as the most efficient power plant for the A320 family. Also during the quarter, Pratt completed the first flight test of the GTF-powered A321XLR or Extra Long Range, 2 significant milestones for the GTF family of engines. So even with some near-term challenges, we continue to invest in innovation for continued growth in air travel and to meet the strong defense demand. Okay. With that as a background, let's turn to Slide 2, some highlights of the quarter. In the quarter, we delivered another strong organic sales growth of 6%. Adjusted EPS was ahead of our expectations at $1.21, and free cash flow is also ahead of our expectations despite a $1.5 billion additional tax payment we made related to the RMD amortization. Sales growth was again led by strong commercial aftermarket sales that were up 24% over the prior year. However, we continue to see challenges related to supply chain and labor availability in each of our businesses. On the capital allocation front, we repurchased over $600 million of shares in the quarter, putting us at $2.4 billion year-to-date. And we remain on track to repurchase at least $2.5 billion for the year. Through the end of the third quarter, we've returned over $12 billion of capital to shareholders since the merger, and we're well on our way to -- our commitment to return at least $20 billion in the first 4 years following the merger. Before I hand it over to Neil, notwithstanding the strength in demand that we're seeing across our businesses, the industry-wide challenges we're facing remain the same. You've heard me talk about them before

Jennifer Reed:

Thanks, Neil. Starting with Collins Aerospace on Slide 4. Sales were $5.1 billion in the quarter, up 11% on an adjusted basis and up 13% organically driven primarily by the continued recovery in commercial aerospace end markets. By channel, commercial aftermarket sales were up 25% driven by a 44% increase in provisioning and a 31% increase in parts and repair, while modification and upgrades were up 3% organically in the quarter. Sequentially, commercial aftermarket sales were up 4%. Commercial OE sales were up 16% versus prior year driven principally by the strength in narrowbody. Military sales were down 6% driven primarily by lower material receipts and decreased volume. Adjusted operating profit of $630 million was up $150 million from the prior year. Drop-through on higher commercial aftermarket and OE more than offset lower volume on military programs as well as higher SG&A and R&D expense. Looking ahead, we continue to see Collins’ full year sales up low double digits. And as a result of stronger commercial aftermarket, we're bringing up the low end of Collins’ adjusted operating profit to a new range of up $750 million to $825 million from the prior range of up $700 million to $825 million versus last year. Shifting to Pratt & Whitney on Slide 5. Sales of $5.4 billion were up 14% on an adjusted basis and up 15% organically with sales growth in large commercial engines in Pratt Canada more than offsetting lower military sales. Commercial OE sales were up 26% driven by favorable mix within Pratt's large commercial engine and Pratt Canada's businesses along with higher GTF and Pratt Canada volume. Commercial aftermarket sales were up 23% in the quarter with growth in both legacy large commercial engine and Pratt Canada shop visits. Sequentially, commercial aftermarket sales were up 14%. In the military business, sales were down 2% driven primarily by lower expected F135 production volume that was partially offset by higher F135 sustainment volume. The adjusted operating profit of $318 million was up $129 million from the prior year. The drop-through on higher commercial aftermarket and favorable military and commercial OE sales mix more than offset higher SG&A and R&D expense. Looking ahead, we continue to expect Pratt sales to be up low teens. And we're increasing Pratt's adjusted operating profit to a new range of up $650 million to $700 million from our prior range of up $550 million to $650 million versus 2021, reflecting the strength of the aerospace recovery. Turning now to Slide 6. RIS sales of $3.6 billion were down 3% versus prior year on an adjusted basis driven by the divestiture of the Global Training and Services business. On an organic basis, sales were up 2% versus prior year due to higher classified sales and sensing effects that were partially offset by lower expected sales in command, control and communications, including lower sales in tactical communications programs. Adjusted operating profit in the quarter of $371 million was down $20 million versus prior year. Excluding the impact of the divestiture, operating profit was up $8 million driven primarily by favorable net program efficiencies. RIS had $3.9 billion of bookings in the quarter, resulting in a book-to-bill of 1.18 and a backlog of $17 billion. For the full year, we continue to expect RIS' book-to-bill to be greater than 1. Turning to RIS full year outlook. A result of ongoing material availability delays and the associated productivity impacts as well as anticipated cost reduction actions and award delays, we are reducing RIS sales to the low end of our prior outlook. And now expect RIS sales to be down mid-single digit from our prior outlook of down mid-single digit to down low single digits on a reported basis versus prior year. On an organic basis, we now expect RIS' sales to be down slightly versus our prior outlook of about flat. And as a result of lower sales outlook and program efficiencies, we are reducing RIS' adjusted operating profit to a new range of down $125 million to down $75 million from a prior range of down $50 million to flat versus prior year. Turning now to Slide 7. RMD sales was $3.7 billion, down 6% on an adjusted basis and down 5% organically, primarily driven by continuing delays in material availability and lower volume in land, warfare and Air Defense and Naval Power programs. This was partially offset by higher volume on strategic missile defense programs, including Next-Generation Interceptor development. Adjusted operating profit of $116 million was $74 million lower than prior year driven by unfavorable program mix and lower volume, primarily in Land Warfare and Air Defense programs as well as lower net program efficiencies resulted from continued supply chain and labor constraints. RMD's bookings in the quarter were approximately $5.4 billion, resulting in a book-to-bill of 1.5 and backlog of $32 billion. For the full year, we now expect RMD's book-to-bill to be at or better than 1.2. As a result of ongoing material availability delays and the associated productivity impacts and cost reduction actions, we now expect RMD sales to be down low single digits versus our prior outlook of up slightly versus 2021. And as a result of the lower sales outlook and lower program efficiencies, we are reducing RMD's adjusted operating profit to a new range of down $300 million to down $250 million from the prior range of down $50 million to flat versus 2021. With that, I'll turn it back to Neil.

Greg Hayes:

Okay. Thanks, Neil. So there's a lot going on, a lot of moving pieces. And I think the key takeaways that I hope people get from this is most importantly, our backlog is up $12 billion since the beginning of the year. And we're investing $9 billion this year to support the growth that's going to come over these next couple of years. The future remains absolutely bright for RTX. The 2025 commitments that we laid out a year ago may remain in sight. And we're not going to back off from any of those, be it top line, bottom line or cash. So Neil laid out 3 challenges that are out there, right, supply chain, right? It's a challenge. There's no doubt about it. We've got 13,000 suppliers. And of those 13,000, about 400 of them are a problem for us. But we've deployed teams to almost all of those suppliers to work with them on a daily basis, getting them raw material, giving them contract labor, giving them technical support, all of the things that you would expect us to be doing. On labor availability, it's a challenge. Everybody sees it, especially in the supply chain. And I think what's interesting for -- at RTX is we have hired 27,000 people in '22. That's about 3,000 a month since the beginning of the year. Our total headcount today is over 180,000. The challenge, though, is we would need about 10,000 more people. So a lot of work yet to do on labor. It's out there. It's a great place to work. And people come to RTX because of the mission. And so we have a, I think, a very good pipeline. We'll continue to hire at this rate. And again, the challenge will be in the supply chain. On inflation, we came into the year expecting about $1.5 billion of cost growth between compensation and then what we saw in the supply chain and energy prices. That $1.5 billion has turned out to be closer to $2 billion, so about $500 million of additional headwind that we didn't expect as we came into the year. You couple that with about $200 million of headwind from the cessation of activities in Russia back in February, and there's about $700 million of headwind that we came into the year that we had to overcome. The good news is we have found ways to save. We have cut costs across the business. We've got about 500 cost-reduction projects that we're currently working. And so despite that $700 million, we've been able to maintain guidance for the year just where we saw it back in January of this year. So it's been a tough year. It's going to be a tough year going forward. We know that. We recognize it. But the fact is we have the tools and the people to make it all happen. So I'll stop there, and we'll turn it back to the operator, and we'll take whatever questions you might have.

Peter Arment:

Greg, maybe if you could just, at a high level, how you're thinking about -- I know you're not giving formal 2023 guidance, but just The Street is obviously expecting across-the-board growth. Would you kind of feel that commercial aerospace will continue to recover and obviously, defense, maybe you'll finally start to convert some of these wins and actually showing some top line growth? Just maybe -- just high level how you're thinking about '23.

Neil Mitchill:

Yes. Peter, the other points I would add from a sales perspective, everything Greg said, I agree with. And we do expect to see mid- to high single-digit sales growth in 2023. So good top line growth, as Greg mentioned. I do expect most of that to come from our commercial businesses. I think even more importantly, we'll see segment operating profit growth exceed the growth rate of sales. So we do expect margin expansion as well next year. And you heard me mention the pension headwind in my prepared remarks. We'll also have to normalize for a tax rate that will be a little bit higher as we come off of a year where we do expect R&D to be repealed into next year, at least that's our current planning assumption. So more to come on that. But just a few extra points on the 2023 outlook. We'll, of course, come back in January with a much better look at what the segments are going to look like.

Noah Poponak:

Can you hear me?

Noah Poponak:

Obviously, what's happening with your defense top line is a little surprising, but it can largely be explained by industry-wide factors. I think the margins are maybe more surprising. And obviously, there's absorption from that top line impact, and we know there's inflation. But it's an industry where the margins really don't move around that quickly, and your peers aren't really seeing that much margin movement versus this kind of quarterly volatility we're seeing from you. So can you maybe just explain that a little further? And then when we look to next year, should we think about your defense segment margins being closer to the '22 level or closer to your longer-term targets?

Greg Hayes:

No, I think you pretty well covered it. I mean, the other obvious issue is international sales, which tend to be more profitable on the defense side are down comparatively. And again, some of the newer contracts have much lower margins than what we had on some of the existing -- as we transition from Patriot to LTAMDS production, you're going to see a big mix shift there or margin degradation for a couple of years until we get through the low rate initial production contracts.

Sheila Kahyaoglu:

Neil, I want to ask about comms profitability. Guidance implies that margins inflect up 200 bps in Q4 versus about a 12% rate year-to-date on margins. How do you think about the bridge and some of the drivers there as we exit the year? And maybe if you could comment on price and mix actions as well.

Sheila Kahyaoglu:

Just price and mix as we head into 2023.

Sheila Kahyaoglu:

So should we assume it's a 35%, 40% incremental margin business going forward?