RTX (RTX) Q1 2026 Earnings Call Transcript

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Date

April 21, 2026

Call participants

• President & Chief Executive Officer — Christopher Calio
• Chief Financial Officer — Neil Mitchill
• President, Collins Aerospace — Nathan Ware

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Takeaways

• Adjusted Sales -- $22.1 billion, representing 10% organic growth across all channels.
• Adjusted EPS -- $1.78, increasing 21% year over year, attributed to 14% segment operating profit growth.
• Free Cash Flow -- $1.3 billion, up $500 million year over year, including about $170 million in powder metal-related compensation.
• Book-to-Bill Ratio -- 1.14, with record backlog at $271 billion, up 25% year over year; commercial backlog rose 30% and defense received significant multi-segment awards.
• Framework Agreements Signed -- Raytheon secured five major U.S. Department of War agreements for key munitions, which management described as providing "firm demand signals" and representing "good long-term business" for RTX.
• Raytheon Awards -- $6.6 billion in the quarter, including $600 million for Netherlands Patriot equipment and $400 million from the U.S. Army for missile defense sensors.
• Production Investments -- Nearly $900 million of capital expenditures over three years at major U.S. sites to support capacity expansion for new agreements, with further investment planned.
• GTF Program Progress -- PW1100 AOGs declined 15% sequentially and MRO output grew 23% year over year, with GTF-powered aircraft surpassing 2,700 deliveries and over 50 million flight hours recorded.
• Automation Initiatives -- Pratt Singapore MRO achieved 100% first-pass yield using robotics, reducing assembly time by 50% and supporting an 80% two-year output increase.
• Segment Margins and Productivity -- Consolidated segment margin rose 70 basis points, with cost reductions and efficiency gains offsetting tariff headwinds; Raytheon margins expanded 150 basis points, Collins 10 basis points, and Pratt 70 basis points, each despite tariffs.
• Full-Year Outlook Revision -- Adjusted sales outlook raised to $92.5-$93.5 billion and adjusted EPS range increased to $6.70-$6.90; free cash flow outlook maintained at $8.25-$8.75 billion.
• Collins Sales and Profit -- $7.6 billion in sales (up 10% organically), operating profit up $71 million despite a 130 basis point tariff headwind; commercial OE sales rose 15%, aftermarket 7%, defense 9%.
• Pratt & Whitney Sales and Profit -- $8.2 billion in sales, 10% organic growth; aftermarket sales up 19%, military up 7%, with operating profit up $121 million despite higher operational costs.
• Raytheon Sales and Profit -- $6.9 billion sales, 9% organic growth; operating profit up $167 million, bookings of $6.6 billion, backlog $74 billion, with rolling 12-month book-to-bill of 1.48.
• Innovation Highlights -- Collins completed successful mission autonomy flight test, Raytheon demonstrated a non-kinetic Coyote effector, and a cross-company team operated a hybrid-electric propulsion demonstrator at full power.

Summary

RTX (NYSE:RTX) reported record backlog, double-digit organic revenue growth, and raised its annual adjusted sales and EPS guidance, reflecting robust demand across commercial and defense businesses and successful execution of new and legacy programs. Major government munitions contracts and significant capacity investments are expected to support elevated defense deliveries and expansion. Productivity gains, automation initiatives, and successful deployment of proprietary digital platforms are driving cost improvements and operational efficiency. Progress in core aerospace programs, including certification milestones and material supply chain ramp-up, is facilitating both original equipment and aftermarket growth across segments. New product launches and technology demonstrations signal sustained innovation capability, supporting a diversified growth outlook as end-market demand persists.

• Neil Mitchill said, "about half" of Pratt's segment comes from aftermarket, with more than 85% derived from GTF, V2500, and Pratt Canada engines, indicating resilience despite fluctuating air travel demand.
• Christopher Calio noted Coyote non-kinetic platform "can address drone swarms. It can then come back and redeployed," highlighting a solution to evolving, cost-sensitive defense needs.
• Raytheon's "effector" business now constitutes "a little bit over 40%" of segment sales, reflecting a portfolio shift toward missile systems and munitions as cited by Neil Mitchill.
• Pratt's V2500 engine retirements are anticipated at "1% to 2%," per Neil Mitchill, with 800 annual shop visits projected, supporting consistent aftermarket revenue contributions.
• Management confirmed ongoing negotiations on the framework agreements and stated, "when they are ultimately finalized, it will give the kind of long-term visibility that the supply chain will need to invest," signaling further supply chain engagement.
• RTX achieved a 22% year-over-year increase in GTF MRO output, and shop visits are becoming "heavier," per Neil Mitchill, enhancing aftermarket profit margins to "low double digits."
• Collins' interior segment posted "low teens" percentage sales growth and expects further gains as widebody production ramps, according to Neil Mitchill.
• RTX continues to pursue refunds related to "about $500 million" in IEEPA tariffs paid, but has recognized no income or change in 2026 tariff outlook at this time.

Industry glossary

• Book-to-Bill Ratio: A measure of orders received ("booked") against products shipped and billed during a period, indicating order pipeline strength relative to current sales.
• AOG (Aircraft on Ground): Industry term for aircraft unavailable for service due to maintenance, often signifying fleet health and MRO workload.
• OE (Original Equipment): Refers to products, such as aircraft engines or parts, sold for initial installation rather than replacement or overhaul.
• MRO (Maintenance, Repair, and Overhaul): Aftermarket services segment handling ongoing support, repair, or enhancement of in-service products.
• GTF (Geared Turbofan): Pratt & Whitney's advanced commercial aircraft engine platform, emphasizing efficiency and reduced emissions.
• F135: Pratt & Whitney's fighter jet engine, specifically powering the F-35 Lightning II.
• Framework Agreement: Pre-arranged, multi-year supply contract in defense, providing long-term order visibility for specific products or systems.
• Coyote: RTX's modular counter-unmanned aerial system (counter-UAS) effector for drone defense, available in kinetic and non-kinetic variants.
• LTAMDS: Lower Tier Air and Missile Defense Sensor, Raytheon's radar system for integrated air defense networks.
• GTF Advantage: Updated GTF engine version featuring redesigned components to improve durability and fuel efficiency.
• Pay-by-the-Landing: Aftermarket service contract model where customers pay per aircraft landing, aligning service costs with aircraft usage.

Full Conference Call Transcript

Christopher Calio: Thank you, and good morning, everyone. Before I get into our results, I want to acknowledge the ongoing situation in the Middle East and express our hope for a sustained resolution. Let me now shift to the quarter. We delivered very strong performance to start the year, driven by continued execution enabled by our core operating system and a consistent focus on productivity across RTX. Starting with the top line, adjusted sales were $22.1 billion, up 10% organically, with growth across all 3 channels. Adjusted EPS of $1.78 was up 21% year-over-year, driven by 14% growth in segment operating profit.

And free cash flow of $1.3 billion was a solid start to the year and up $500 million from Q1 last year. On the orders front, demand for our commercial and defense products and services remains robust. Our book-to-bill in the quarter was 1.14, and our backlog is a record $271 billion, up 25% year-over-year with strong commercial and defense awards in the quarter. On commercial, our backlog is up 30% year-over-year with strength across both OE and aftermarket. This includes some notable GTF wins, including Vietjet Air, which selected the GTF engine to power an additional 44 aircraft. And recently, Finnair announced their intention to purchase up to 46 GTF-powered Embraer [ E2 ] aircraft.

On the defense side of the business, we saw significant awards across all 3 segments, highlighting the strength of our product offerings. At Pratt, the military business was awarded over $3 billion for F135 Lot 19 production. Collins booked close to $3 billion of awards, including $1.7 billion for mission systems capabilities and $400 million for avionics equipment supporting multiple platforms. And Raytheon booked $6.6 billion of awards in the quarter, including over $600 million to supply the Netherlands with Patriot equipment and over $400 million from the U.S. Army for our lower-tier air and missile defense sensors. In addition, we're working closely with the Department of War to accelerate munitions production and are pleased with the progress to date.

As we previously announced, Raytheon signed 5 landmark framework agreements with the Department for critical munitions, including Tomahawk, AMRAAM and the Standard Missile family. These agreements are a significant step forward in the department's transformation initiative and they are vitally important for national security. Once finalized, these agreements would provide firm demand signals for RTX and our suppliers to invest in ramp production well above existing rates over the next decade. This increased production will primarily occur at sites in Tucson, Arizona; Huntsville, Alabama; and Andover, Massachusetts, where we've already invested nearly $900 million in CapEx over the last 3 years to expand capacity at these locations.

We will continue to make significant additional investments going forward to advance production capabilities and add new manufacturing lines to support these agreements. And as we said, the agreements incorporate a collaborative funding approach to preserve upfront free cash flow and they represent good long-term business for us. So a very strong start to the year. I know everyone is looking to understand how we're thinking about the end markets as we look ahead. So let me provide an update on the operating environment as we see it today. I'll start with commercial aerospace. Like all of you, we're closely monitoring global events.

While the environment is dynamic right now, the underlying demand for our OE products and aftermarket services remains durable. Commercial OE in the first quarter was in line with our expectations. We expect continued production ramps across multiple platforms throughout the remainder of the year. In Q1, we saw solid RPK growth despite the disruption in the Middle East. And aircraft retirement rates also remain below historical levels, with V2500 retirements in line with our expectations. Of course, regardless of any near-term volatility, this is a long-cycle business. We assume RPK growth will continue and the demand for new aircraft to remain strong.

So based on what we see today, we're not making any changes to our commercial outlook for the year. We'll, of course, be actively monitoring the situation. On the defense side, the current landscape clearly underscores the need for munitions depth, integrated air and missile defense technology, and more advanced capabilities to counter evolving threats, such as our Coyote counter-UAS system. As seen in the President's budget request, we expect these priority areas to see significant funding increases in the 2027 U.S. defense budget and other supplemental funding packages.

Our products across RTX are well positioned to support these needs with our battle-tested systems and munitions serving as the backbone of many U.S. and allied defense architectures, including franchise programs like Patriot, GEM-T, NASAMS, AMRAAM, Tomahawk and the F135. So given our first quarter results and the strength we're seeing in our defense business, we're raising our full year outlook for adjusted sales and EPS and maintaining our free cash flow outlook. Neil will take you through the details in a few minutes. Operationally, our focus will remain on executing our backlog, driving increased output and innovating to bring new capabilities to market.

Let me highlight on Slide 4 some of the progress we're making across RTX on these fronts, starting with our focus on operational execution. On the GTF program, the fleet management plan, including our financial and technical outlook, remains on track. PW1100 AOGs were down around 15% compared to the end of last year. We expect this downward trend to continue. As we've said before, the key enabler of this reduction is MRO output, which was 23% year-over-year on the PW1100 on top of the 35% growth we saw in Q1 of last year.

Consistent with our prior comments, we will continue to optimize the allocation of material between OE and aftermarket to ensure the health of the overall fleet and balance all of our customers' needs. On the OE front, GTF shipments were in line with our expectations for Q1, and we continue to expect mid to high single-digit delivery growth for the year. During the quarter, GTF-powered aircraft surpassed 2,700 deliveries, with Pratt powering about 45% of the A320 deliveries to date, ahead of our roughly 40% sold program share. Also of note, the GTF program achieved 10 years in service in the quarter.

The engine now has over 50 million flight hours with a backlog of about 8,000 engines, and we recently received aircraft certification of the GTF Advantage, keeping us on track for entry into service later this year. The Advantage incorporates a decade of learning that will deliver a step change in performance and time on wing for our customers. We also continue to leverage our core operating system, digital solutions and investments in automation to drive productivity and deliver on our commitments. For example, we saw further progress on munitions output at Raytheon in Q1 with total deliveries up over 40% year-over-year, building on the increased production we drove in 2025.

With respect to our automation efforts, Pratt's MRO facility in Singapore has developed industry-leading robotics that assemble high-pressure compressor rotors, delivering 100% first-pass yield and reducing assembly time by 50%. And the team is implementing further automation of assembly and engine core stacking for the low-pressure compressor. This type of investment has supported an 80% increase in output at the facility over the last 2 years, and we're actively deploying these capabilities across our MRO sites. We also remain on track to connect 60% of our annual manufacturing hours to our proprietary data and analytics platform by the end of this year. We're harnessing this data from our connected products and factories to improve the speed of decision-making and operations.

We've integrated our commercial installed base into this platform to enhance predictive fleet maintenance. For example, the wheels and brakes team at Collins is using real-time data to better understand service life and improve inventory management, resulting in cost reduction across its large portfolio of long-term pay-by-the-landing service agreements. Moving now to innovation and future growth. We're making focused investments to meet the growing end market demand. Specific to capacity, we made progress on expansion efforts across all 3 segments in the quarter. Pratt announced a $200 million investment to expand capabilities at our Columbus, Georgia facility that supports both commercial and military engine programs, including the GTF and F135.

This investment will increase output of critical parts including rotating compressor and turbine discs to support growing OE and MRO demand. Raytheon completed $115 million expansion of our Redstone Missile integration facility in Huntsville. This investment will increase the facility's munitions capacity by over 50% and support multiple systems, including the standard missile family and associated framework agreements. And Collins launched a capacity expansion effort that will support the recently awarded FAA contract for radar systems and other air traffic modernization opportunities. We also achieved significant milestones within our cross-company technology road maps in the quarter. Raytheon successfully demonstrated a non-kinetic variant of the Coyote effector during a U.S. Army test event.

This is a lower-cost counter unmanned aircraft system that can be recalled after completing its mission and redeployed for additional engagements. This innovation addresses a growing need for our customers and builds upon the battle-tested kinetic variant of Coyote in use today to defeat drone threats. In AI and autonomy, Collins completed a successful flight test of its mission autonomy software for the U.S. Air Force's Collaborative Combat Aircraft Program. This demonstration highlights the strength of Collins' open architecture autonomous software to deliver enhanced capability across various platforms. And in propulsion, our cross-company team consisting of Pratt, Collins, the RTX Research Center and RTX Ventures is making significant progress in Hybrid Electric Solutions.

In the quarter, the team successfully operated the propulsion system and battery pack for a Turboprop demonstrator at full power. This technology is expected to drive a 30% improvement in fuel efficiency for regional aircraft and combines a thermal engine from Pratt, a 1-megawatt electric motor from Collins and a 200-kilowatt battery system supported by RTX Ventures. So overall, I'm pleased with the progress we're making on the innovation front. With that, let me turn it over to Neil to walk you through the first quarter results and the outlook in some more detail. Neil?

Neil Mitchill: All right. Thanks, Chris. I'm on Slide 5. As Chris already mentioned, we had strong financial performance to start the year. In the first quarter, adjusted sales of $22.1 billion were up 9% on an adjusted basis and up 10% organically. This top line organic growth was driven by strength across all 3 channels, with commercial OE up 6%, commercial aftermarket up 14% and defense up 9%. Adjusted segment operating profit of $2.9 billion was up 14% year-over-year, driven by drop-through on higher volume, favorable defense mix and improved productivity.

Specifically on productivity in the quarter, we saw continued progress across the company on cost reduction and efficiency improvement, growing organic sales and segment profit double digits with only a 1% increase in headcount. We also drove 70 basis points of consolidated segment margin expansion in the quarter with contributions from all 3 segments, more than offsetting the year-over-year headwind from tariffs. Adjusted earnings per share of $1.78 was up 21% from prior year, driven by strong segment operating profit growth and lower interest expense. Adjusted earnings per share also benefited by about $0.08 year-over-year from a lower effective tax rate, which was principally driven by higher stock-based compensation deductions.

On a GAAP basis, earnings per share from continuing operations was $1.51 and included $0.27 of acquisition accounting adjustments. And free cash flow of $1.3 billion was a solid start to the year and included approximately $170 million of powder metal related compensation. Lastly, we paid down $500 million of debt in the quarter and are tracking to our full year deleveraging expectations as we further strengthen our balance sheet. Okay. Let's turn to Slide 6 and I'll provide a few details on our updated outlook for the full year. As Chris mentioned, based on our strong first quarter performance and expectations around continued defense strength, we are updating our full year outlook.

On the top line, we're raising our full year adjusted sales outlook by $500 million to a new range of $92.5 billion to $93.5 billion, up from our prior range of $92 billion to $93 billion, driven by the performance we saw at Raytheon in the first quarter as well as slightly lower sales eliminations for the year. We continue to expect this to translate to between 5% and 6% organic sales growth for the full year at the RTX level. Breaking this down further, we continue to expect commercial OE sales to grow mid-single digits and commercial aftermarket sales to grow high single digits for the full year.

And given the increase at Raytheon, we now expect defense sales to grow mid to high single digits for the full year, up from our prior expectation of mid-single digits. On the bottom line, we are increasing our adjusted earnings per share outlook $0.10 on both the low and high end of the range. This increase is driven by approximately $0.05 of drop-through on the higher sales at Raytheon, with the rest coming from a couple of below-the-line items, including lower interest expense. We now see adjusted EPS of between $6.70 and $6.90 for the full year, up from our prior range of $6.60 to $6.80.

On free cash flow, we remain on track to our outlook of between $8.25 billion and $8.75 billion for the full year. Okay. With that, let me hand it over to Nathan to take you through the segment results for the quarter. Nathan?

Nathan Ware: Thanks, Neil. Starting with Collins on Slide 7. Sales were $7.6 billion in the quarter, up 5% on an adjusted basis and 10% organically, driven by strength across all channels. Adjusting for divestitures, by channel, commercial OE sales were up 15% driven by higher volume on narrow-body and wide-body platforms. Commercial aftermarket sales were up 7% driven by a 15% increase in provisioning and an 8% increase in parts and repair, partially offset by a 3% decline in mods and upgrades. Recall, mods and upgrades were up 18% in Q1 2025. Defense sales were up 9% versus the prior year driven by higher volume across multiple programs.

Adjusted operating profit of $1.3 billion was up $71 million versus the prior year, driven by drop-through on higher commercial and defense volume and lower R&D expense. This was partially offset by unfavorable commercial OE mix, the impact of divestitures completed in 2025 and higher tariffs across the business. In the quarter, Collins expanded margins by 10 basis points year-over-year despite a 130 basis point headwind from tariffs. Turning to Collins' full year outlook. We continue to expect sales to grow mid-single digits on an adjusted basis and high single digits organically, with operating profit growth between $425 million and $525 million versus 2025. Shifting to Pratt & Whitney on Slide 8.

Sales of $8.2 billion were up 11% on an adjusted basis and 10% organically, driven by strength in commercial aftermarket and military. Commercial OE sales were in line with expectations and down 1%, driven by lower engine deliveries. As Chris said, we continue to expect mid to high single-digit large commercial engine delivery growth for the full year. Commercial aftermarket sales were up 19%, driven by higher volume, including heavier content in both large commercial engines and Pratt Canada. In military engines, sales were up 7%, driven by higher F135 production volume.

Adjusted operating profit of $711 million was up $121 million versus the prior year, driven by drop-through on higher commercial aftermarket and military volume, partially offset by higher operational costs, including tariffs and higher SG&A expense. In the quarter, Pratt expanded margins by 70 basis points year-over-year despite a 50 basis point headwind from tariffs. Turning to Pratt's full year outlook. We continue to expect sales to grow mid-single digits on an adjusted and organic basis, with operating profit growth between $225 million and $325 million versus 2025. Turning to Raytheon on Slide 9.

Sales of $6.9 billion in the quarter were up 10% on an adjusted basis and 9% organically, driven by higher volume on land and air defense systems, including Patriot and GEM-T, and higher volume on naval munitions programs. Adjusted operating profit of $845 million was up $167 million versus the prior year, driven by favorable program mix and higher volume in land and air defense systems, higher volume in naval programs and improved net productivity. In the quarter, Raytheon expanded margins by 150 basis points year-over-year driven by favorable mix and increased productivity. Bookings in the quarter were $6.6 billion, resulting in a book-to-bill of 0.96 and a backlog of $74 billion.

And on a rolling 12-month basis, Raytheon's book-to-bill is 1.48. In addition to the awards Chris mentioned earlier, other key awards in the quarter included over $900 million for Standard Missile and Tomahawk. Turning to Raytheon's full year outlook. We expect sales to grow high single digits on an adjusted and organic basis, up from our prior range of mid to high single digits due to the strength Neil mentioned earlier. We now expect operating profit growth between $275 million and $375 million versus 2025, up from our prior expectation of between $200 million and $300 million, driven by the drop-through on higher sales and favorable program mix.

With that, let me hand it back over to Chris for some closing remarks.

Christopher Calio: Okay. Thanks, Nathan. As we set up front, our execution and operational performance drove strong top and bottom line results in Q1, and I want to thank the entire RTX team for their continued dedication and commitment to our mission. The underlying demand for our commercial and defense products is durable, and we remain focused on executing on our commitments, investing in capacity and innovating for future growth to drive long-term shareholder value. With that, let's open it up for questions.

Operator: [Operator Instructions] The first question comes from the line of Robert Stallard of Vertical Research.

Robert Stallard: Chris, you highlighted the very strong demand you continue to see for Missile Systems in the Raytheon portfolio. I was wondering, how concerned are you about the ability of your supply chain to keep up with the demand pace you're setting? And also in relation to that, the risk with regard to rare earth?

Christopher Calio: Thanks for the question, Rob. I'll start by just saying we're really pleased with how we started the year in terms of production. As we said upfront, [ munitions ] was up over 40% year-over-year. So a very good start to the year. Now the continued ramp of production is going to require growth in supply chain output and performance, as you've noted here. Now Raytheon has had 12 consecutive quarters of material growth, which is great, and material receipts were up 13% year-over-year here in Q1.

And we're going to obviously going to keep a very close eye on a number of the things that we talk about on a consistent basis: Rocket Motors given the concentrated supply base; microelectronics, given the non-A&D demand that's out there. But if you just think longer term and the potential impact of the framework agreements, it's going to require a step change, to your point, in the supply chain. Now the framework agreements do provide some potential long-term firm demand. And that's going to provide the visibility the supply chain needs to invest in people, tooling, test equipment and capacity, which is great.

But I think longer term, the defense industrial base is going to need additional suppliers to improve the overall resiliency, and the firm demand is likely going to incentivize quality suppliers from other industries to enter the supply base, which is great, and I think we need it. And the Department of War has been partnering with a lot of those folks to provide strategic capital to give them the balance sheet strength they need to make these investments. But we're going to need all of that in order to not only meet the production ramp-up that we have in front of us now, but also the potential ramp-up that comes with the framework agreements.

On critical minerals, I would just say that we've been working on this for a while having seen this coming. And so we're covered in what I would call the near and medium term. And we're still seeking to lock up longer-term partnerships and contracts on a handful of those. And the department has actually been a really strong partner in that effort as well.

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

Peter Arment: Chris, if we could just stick on your framework comments. Just wanted to kind of double-click on sort of how you're thinking about -- I know pricing is always sensitive, but how we're thinking about the impact when you're thinking about CapEx that you've had to put in place, and then how should we think about potentially margins long term? Is there an opportunity here where the mix changes dramatically where you have more in production versus development mix? Just how you're thinking about Raytheon just given investments that you need to do [ shoring up ] supply chain, et cetera, and then pricing around some of these agreements?

Christopher Calio: Yes. Thanks, Peter. Look, given the demand coming out of the Ukraine conflict, we've been investing for a while and increasing capacity. We mentioned a number of those in our upfront comments. Think Huntsville, think Andover, think McKinney, Texas. All those investments that you need to not only expand your footprint, but tooling, test equipment and labor. So we've been on that path to meet the demand. On the framework agreements, and again, I don't want to get to too far into the details on this, Peter, only because we're still in the process of negotiations and discussions with the department on that.

But again, as I said before, when they are ultimately finalized, it will give the kind of long-term visibility that the supply chain will need to invest, which is critically important. I think the episodic nature previously of the ordering patterns made it very difficult for the supply chain to make those kinds of long-term investments and things like the framework agreements are here to sort of address that.

But here's what I will say, if you just think about the overall economics of the framework agreements, they give us an opportunity to bundle materials, they give us an opportunity to leverage economy of scale, and they give us an opportunity to really drive production efficiencies, especially given some of these are mature programs, things that are right in our wheelhouse. So we ultimately think that these are going to be very good business for us, but we're still going through the process to convert those into final agreements.

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

Myles Walton: Maybe a question again on Raytheon, maybe a little bit bigger into the -- digging into the details on the sensors and effectors. On the effector side, as a surrogate, LHX laid out this almost 20% CAGR through 2030 for the missiles business. Would that be reflective of the kind of growth you're expecting within that portfolio? And we don't hear as much on the sensor side, but you mentioned the Andover expansion. So I'm curious on the sensor side, what kind of growth you're looking for as it relates to your business at Raytheon?

Neil Mitchill: Myles, I'll start on that one for you. Let me start by giving you a little bit of perspective on the Raytheon portfolio. If we were to look at '25, '26, if you will, as a proxy for how large is the effector business within Raytheon. Think about that as accounting for a little bit over 40% of the sales of Raytheon. So to just give you some context. And sensors obviously makes up a little less than that, but a large portion of the Raytheon business as well. And I would tell you that the growth we saw in the first quarter was significantly driven by the munitions and effectors, also the sensors, Patriot in particular.

And we're seeing double-digit growth rates on those businesses in the quarter, and I expect that to continue as we go forward. Keep in mind, everything that Chris just spent a couple of questions talking about is not even in our backlog yet. So we're just talking about delivering today's backlog to both our U.S. and our international customers. On the sensor side, we see a lot of runway ahead of us there as well. We're continuing to build and deliver Patriot systems, NASAMS systems, the Coyote system. And obviously, we're ramping up our production on LTAMDS as we look forward.

So that helps give a little bit of context on the size of the business and where we see it going. Again, as we finalize those agreements, we'll be sharing more details on the specifics as they come to finality. Chris?

Christopher Calio: No. The only thing I was going to add there, Myles, is I think the underlying premise of your question is a good one, which is I think the sensors potential has been something that has perhaps been under-discussed given, obviously, the framework agreements and all the replenishment that you're going to need on the effector side. And Neil rattled off a whole bunch of pieces of that portfolio, which I think are going to be really critical priorities. But again, just think Golden Dome, think integrated air and missile defense, the sensor portfolio is going to continue to grow in importance.

And I think we're going to see the output there have to grow over the long term as well.

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

Kristine Liwag: When we look at what's happening in Iran, so there's a clear increasing need to solve for some of the cost mismatch issues for the lower-cost drones. I guess the demand signal for your existing products is very clear and the replenish of the arsenal makes sense. But can you talk about how you're thinking about the solutions you provide in these higher-volume but cheap drones, especially when we think about the future of warfare and how that could be integrated into the Golden Dome?

Christopher Calio: Yes. Thanks, Kristine. Appreciate the question. I think just to provide some high-level context here, I think we're going to continue to need the right mix of capabilities. And you're absolutely right, the Department of War has put priorities around munitions depth and replenishment, integrated air missile defense, Golden Dome, all the things that are in the Raytheon wheelhouse and very mature products and products that are in production today. Your point about counter-UAS is a good one. We talked upfront about our Coyote system, and the Coyote system has been in great demand. It's performed exceptionally well in the field. And we've just actually started to introduce a non-kinetic version of the Coyote. So it can go up.

It can perform its mission. It can address drone swarms. It can then come back and redeployed, recharged and, again, go out and prosecute another mission. So that goes to the low-cost, reusable nature of that particular platform. And we're seeing really, really strong demand both domestically and internationally. In fact, we just had an FMS case approved for Coyote for the UAE, just to show the level of international demand there. I think more broadly, you're right, there are a number of lower cost sort of platforms that are out there. I'm not sure that's where we're going to compete on a platform level.

But I do think there are going to be opportunities for us to be a platform-agnostic supplier of systems on some of these solutions, whether that be mission systems, whether that be autonomy, whether that be propulsion. So that's kind of how we see this landscape playing out. Clear demand for the high-end capabilities that are in our backlog today and that are part of the framework agreement, clear strengths in our counter-UAS capabilities, again, Coyote, and then opportunities for us to play on some of those other platforms as a supplier.

Operator: Our next question comes from the line of Mariana Perez Mora of BofA.

Mariana Perez Mora: I wanted to follow up about the tariff impact. How are we seeing the impact so far after these new metal tariffs that were recently announced, and also the Supreme Court ruling on IEEPA?

Neil Mitchill: Sure. I'll start with that one. Thanks for the question on the tariffs. Really no change today to our outlook for tariffs for the P&L for the full year. We talked about, back in January, seeing about a $75 million year-over-year tailwind as we continue to implement mitigations there. Obviously, the IEEPA tariffs court ruling have been overturned. They've been replaced with Section 122 and some other tariffs that's called Section 232. And so right now, we're sort of saying on balance, the tariff impact is about the same. That said, since the tariffs for IEEPA were put in place, we paid about $500 million associated with that kind of tariff.

Obviously, the government is in the process of starting the refund process. And as we gain more clarity into that, we too will submit requests for our refunds there. We have not recorded income associated with reversing any of the expenses that we took. We have not included that in our guidance for this year either. So more to come there, but no change to our outlook today based on any of those changes. And if it improves, you'll see it in the bottom line. But right now, we're continuing to monitor it like everyone.

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

Scott Deuschle: Chris, can you walk us through how you're thinking about the pricing strategy for [ Hot Section Plus ], which I believe is off warranty? And then do you require any additional regulatory approvals to begin providing Hot Section Plus on upcoming shop visits?

Christopher Calio: Yes. Scott, thanks for the question. Well, first and foremost, we're really pleased here to have the aircraft certification on the GTF advantage, which, as you know, is where the Hot Section Plus comes from. So that paves the way for Advantage [ entry into ] service later this year. And those GTF Advantage engines are already moving through our production lines, and so I know our customers are looking forward to the increased time on wing and fuel efficiency. And to your point, the Hot Section Plus is the -- effectively the vintage retrofit package.

Those 30 to 35 parts are going to provide almost 95% of the durability benefits of the Advantage, and they're going to get introduced into MRO a little bit later this year. So they will be introduced in MRO before likely the actual engine goes into service later this year. In terms of the pricing strategy, I mean, look, we've invested significantly in the Advantage, in all of the design and the testing and the like, and we plan to get value for that investment. Are there certain contracts that we have where it might make sense to incorporate versus others depending on where they're operating and what the environment looks like? Yes.

And we're continuing to look at where it might be the most beneficial. But our intent is to get value for the investment that we've made and the value that it's going to continue to bring customers in terms of the time on wing and the fuel efficiency, which is again becoming a more important part of the overall equation.

Scott Deuschle: Really helpful. Then Neil, can you explain how the transition to GTF Advantage will influence negative engine margin on the program? I assume there's some better pricing there, but it's not clear how that nets against presumably higher costs. If you could clarify that balance, that would be really helpful.

Neil Mitchill: Sure. Thanks, Scott. I appreciate the question here. As we look forward, I think the GTF Advantage will have a little bit more cost associated with the engine as it brings greater capability and durability. But that said, you named it, there'll be some more pricing there as well. So on balance, I don't see a lot of headwind on a per engine basis as we begin to ramp up on the GTF Advantage engine over the next several years. So as we talked about for this year, we do think there's going to be a couple of hundred million dollars of headwind on OE margins throughout the course of the year.

I'll tell you, for the first quarter, it was pretty much flat, not a major driver of the year-over-year performance at Pratt. They're doing a really nice job managing the cost of the engine. We're going to continue to see negative margins on deliveries of new engines, but obviously, the aftermarket is continuing to ramp there. Considerably, you heard Chris talk about the 22% GTF MRO output increase in the first quarter, that's driving aftermarket. The mix of those shop visits is getting heavier as well. And the margins on the aftermarket are low double digits. So we're starting to see the sequential improvement in the profile of the aftermarket at Pratt as well. So on balance, it's good business.

It's great to see the certification occur here in the first quarter, and we're looking forward to making a very disciplined cutover over the next 1.5 years or so.

Operator: Our next question comes from the line John Godyn of Citi.

John Godyn: I was hoping to revisit Raytheon and the defense trends. Clearly, a lot of opportunities there, and the guidance was raised. That said, it was a very strong start to the year. So it feels like perhaps guidance is even a bit conservative. Maybe you could just revisit the outlook a bit and the shape of the year and how you see it playing out.

Neil Mitchill: Thanks, John. I'll take that one. Yes, really pleased with the start of the year for Raytheon, seeing 9% growth on the top line. Chris talked about the material receipts, 12 consecutive quarters, 13% growth there. So we've been working, the team has been working very hard to make sure that we are prepared to deliver the backlog we have and then get ready for the future as well. With that strength, we dropped it through to our guide. We took up the top line at RTX by $500 million on the low and the high end of the range.

I'd say about $350 million of that is all attributable to the Raytheon performance largely in the first quarter and what we can see as we enter here into the second quarter. The rest of the sales increase, we see some lower eliminations at the RTX level. So together, that's about $500 million. And we're seeing good drop-through. As you can see, the margins for Raytheon were 12.2% in the first quarter. We had $32 million of year-over-year productivity improvement at Raytheon. So a really nice start to the year.

We're putting that into our guidance as well, and so that's a big driver of the $75 million increase in the range on both end of the high and low end of the range for Raytheon. So again, it's 1 quarter. We think that the business is performing quite well. We're seeing really good mix in the business. And as we continue to see that supply chain keep pace with our delivery plans, then we'll revisit that again here in July. But really pleased with the start and looking forward to continuing to see the ramp.

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

Seth Seifman: I wanted to ask about the impact of lower expected air travel growth on the aftermarket businesses at both Collins and Pratt, particularly maybe the short-cycle stuff at Collins, but if you could address it overall. We heard elsewhere this morning about the potential for a lag effect. And so thinking about is it some impact coming later this year and into '27, but it's a pretty significant hit to air travel growth this year. So maybe you could address that.

Christopher Calio: Yes. Thanks, Seth. Well, the first thing I'll say is that we're really pleased with the way we started the year in our aftermarket business with 14% growth and the demand that we saw. And you're right, we're watching all the things that you're watching and the environment and the implications around higher fuel prices, jet fuel shortages, the moves that airlines are making on capacity adjustments. If you just think about our business, I think you've got to look at it by business unit and by channel to really understand sort of some of the implications.

Now some of the initial moves that the airlines are making where they're retiring much older sort of platforms, again, a lot of our aftermarket isn't reliant on those. We don't see a lot of maintenance opportunities on some of those platforms. So those near-term moves don't see a lot of impact. If you look at Pratt, the 2 largest portions of our aftermarket are the V2500 and the GTF. As we've said before, the V2500 is still a very, very young fleet. 50% of it hasn't had a first or second shop visit. Shop visits were very strong here in the first quarter, and again, look to continue to be strong throughout the year.

And on the GTF, well, number one, it's the most fuel efficient, which right now, of course, is, I think, what people are focused on. But beyond that, you obviously know that we've got the fleet health issues that we're contending with. We've got to continue to move engines out of the parking lot into our MRO shops, and we've seen good output there, as Neil talked about. So the demand for GTF MRO is going to continue to be pretty robust. At Collins, again, you've got sort of the 3 channels: the parts and repair, the provisioning, and the mods and upgrades.

And I think where you'll start to see any potential issue would perhaps be in provisioning and mods and upgrades. Provisioning if airlines decide that they want to sort of live with lower stocking levels; and mods and upgrades if the airlines decide they want to maybe defer some of those things. Now we just haven't seen any of the impact on the demand yet, but that's kind of how we're thinking about it, and that's kind of how we're tracking it.

Neil Mitchill: Thanks, Chris. I don't have much to add there, but I'll add a couple of data points, maybe just to help people do some sensitivities as we think longer term about this. On the Pratt business, about half of their segment is aftermarket. And as Chris said, the predominance of that is coming from the GTF, the V2500, and I would throw in there Pratt Canada. So if you put those 3 together, you're over 85% of the aftermarket sales. And Pratt Canada is a very diverse business, lots of customers, 70,000 units in service, so -- and great strength really across a number of their different business channels. So just to provide a little context there.

On Collins, aftermarket there is about 40% of the total segment. And provisioning makes up -- I'm sorry, the parts and repair makes up about 2/3 of the aftermarket. So just a little bit of context to help people think about it. Again, very diverse business operating on a lot of what we would call the right platforms, a lot of newer platforms. And keep in mind, out-of-warranty flight hours continue to grow. When you think about all of the deliveries over the last 5 years, with the growth that we've seen year-over-year, we have more and more hours coming out of warranty every single year.

And so those are the aircraft that will continue to fly even in a slightly depressed environment. So as we sit here and look at '26, there's no changes to our by-channel outlooks at this point for commercial OE or aftermarket. We're watching it, but I think we're feeling like, as we look at our portfolio, pretty good line of sight to the demand.

Operator: Our next question comes from the line of Sheila Kahyaoglu of Jefferies.

Sheila Kahyaoglu: I wanted to ask about [ aerospace ] profitability, both Collins and Pratt. So first, on Collins, margins were quite healthy despite the tariff impact and OE growth mix. How would we think about 2026 guidance which suggests the rest of the year margins are flat to down slightly versus Q1, which would sort of buck the seasonal trend? So I guess how do we think about Collins puts and takes on margins? And then on Pratt, Neil, you provided a sensitivity layup for us right here. So when we think about the V2500, the PW2000 and the 4000, and if you could give us a breakout of what percentage that consists of and the retirement rates that you're assuming?

Neil Mitchill: Let me start with the Collins margins. I think you said it, Sheila, it was a really strong start to the year despite our last quarter of having to deal with the year-over-year headwind from tariffs. Collins has done a nice job. They're focused on cost. We're taking on more and more OE. And some of that mix is a headwind, frankly. So with all of that, we continue to see margin expansion. You're right, as you look at the rest of the year, the margins remain relatively steady. I think as we continue to see OE mix trend towards more wide-bodies on the growth side, we'll have a little bit of a headwind there.

It's a little bit early, as you know, to be adjusting the full year. We just talked about some of the uncertainty in the market. I think we're going to hold off for another quarter to see what second quarter looks like. But we're feeling like the Collins business is certainly on the right trajectory. If we get into the Pratt business, what I would say is the PW2000 is really not a major driver of the aftermarket. Obviously, we have a bit of a bigger portfolio on the 4000s, but we've been planning for that, I'll call it, structured decline for a number of years. And so that's not changing in our outlook here.

On the V2500 specifically, we also are well connected with our customers. It's a young fleet. As Chris said, 50% of the fleet hasn't seen a second shop visit. 15% hasn't even seen its first shop visit. So we expect those airplanes to fly. They're also very durable and perform well. So despite the higher fuel prices, I think that they're great aircraft powered by the V2500. So as we look out, we're planning, call it, 1% to 2% kind of retirements for [ the V ]. The shop visits for the first quarter were on the run rate we expect for the full year, which is about 800. So continuing to see the strength there.

Have a lot of visibility into the shop visit pipeline. Keep in mind, we're operating in a material-constrained environment, and so there's significant demand for spare parts and overhauls there. So that's what I would say as it relates to Pratt.

Operator: Our next question comes from the line of Gautam Khanna of TD Cowen.

Gautam Khanna: I was wondering if you could give us some help on how to think about AOGs on the GTF, because it's very hard from the outside to track those which were powdered metal impacted and not. So just kind of thinking about at year-end, is there some natural number we should be expecting AOGs that you can point to that would be consistent with your assumptions on MRO output and the charge provision you took a couple of years back? Just so we know that we're tracking to the -- to what you've already guided to.

Christopher Calio: I'll start. And maybe just to address kind of your final point there, like the financial and technical outlook for the powdered metal situation remains on track. And as I said upfront, Gautam, we were really pleased that AOGs came down 15% in Q1 from the end of last year. That was on the back of some very solid MRO performance in Q1. The 1100 output was up 23% year-over-year, as I said. And that was with heavier shop visits up 9 points year-over-year. And so that was enabled by heavy shop visit turnaround time improving by about 20%. So very, very good performance in the shop helping enable the reduction in those AOGs.

A couple other of good indicators as well as we think forward, 1100 inductions were up 7% sequentially from Q4 to Q1. And so we're improving that WIP in our shops to support the future growth in MRO output. And we also saw continued progress in material growth across some of the key value streams that are going to be important to MRO output. Structural castings were up 10% year-over-year, isothermal forgings were up 18% year-over-year. So again, those are all the elements that go into continuing to drive MRO output for the year, which in turn is going to continue to drive that downward trend that we talked about here that we saw in the first quarter.

I won't give sort of a point estimate as to where we're supposed to be, but I will just say, as you just look at sort of the public data around AOGs, there are some in there that have absolutely nothing to do with engines. There are a number of other factors. Maybe they're going through a mod and upgrade. Maybe they're being returned from [ use ] and they need some modifications. And so not all of those are engine related. I'll also tell you that we continue to have removals for other reasons other than powdered metal. But those are the things that were in existence previously.

And we've continued to provide upgrades to improve the durability and reliability. And so we also believe those will continue to have a positive effect as we look forward. So again, pleased with the Q1 performance. Our customers obviously want their assets back. It was a real positive shift this quarter in terms of the reduction. And given all the elements that I just talked about within MRO and those indicators, we continue to believe that downward trajectory is going to continue.

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

Scott Mikus: Chris and Neil, very good results. SpaceX is going public at a very lofty valuation and its IPO will probably create generational wealth for a lot of its employees. We've also seen Shield AI raise capital to $12 billion valuation. Anduril is looking to raise capital at a $60 billion valuation. Just how are you thinking about that in the context of retaining your best employees and engineers, so they don't join a defense tech company where they get significant upside from the equity valuation?

Christopher Calio: Yes. Thanks, Scott. I thought where you were going there is that we were undervalued. I was hoping the point you were making there. Yes, good, good. All kidding aside, again, this is something we think about a lot in terms of the defense ramp-up. With unemployment at 4.3%, how do we make sure that we can attract and retain the labor that we need, in some cases, it's classified labor, which can be even more difficult because you got to get it cleared and the like at many of our facilities. So our labor strategy is something that we are laser-focused on. Now you mentioned our engineering population.

If you look at RTX-wide, we've got roughly 180,000 people, about 1/3 of those are engineers. And they are clearly the lifeblood of the company, when you think about innovation being the bedrock of everything that we do. And so I think there's a couple of things that come into play there. Number one, we've got to continue to be competitive just from a compensation perspective, and that's something we're always looking at. And then number two, I will tell you that you walk the floors within RTX, you will see an uncommon dedication to the mission.

And I think people get really excited about the work that we do and the mission that we play to connect and protect the world, in particular, on the national security side, given how critical our products are to national security and to allies. So it's not easy, to your point, Scott, there are people that will go, take a leap to go somewhere where they see that there might be some runway with an early-stage company. But by and large, we've been pretty successful at retaining our top folks. And again, I think that comes down to the core mission that we serve.

Operator: Our next question comes from the line of Ken Herbert of RBC CM.

Kenneth Herbert: I just wanted to follow up on the March commercial engine deliveries. With the first quarter in line with plan, and obviously, still the mid to high single for the full year growth, how do we think about the cadence into the second quarter and second half of the year? And I guess within that, as a result of just the supply chain incremental risk from higher input costs and everything else, are you seeing any incremental risk on your, I guess, Pratt supply chain from suppliers around the world just as a result of the war in Iran?

Neil Mitchill: Thanks, Ken. Let me start with the supply chain piece. Right now, and as you know, we've been talking about this for a long time, Pratt has been laser-focused on ramping up critical supply chain elements: Structural castings, turbine airfoils and many other parts that go into the engine. And I think we've done a nice job there. So continue to see growth in those key elements, materials that are going to the engine. And so we're not seeing anything new crop up. Obviously, with the kind of growth rates we're talking about, because you've got to keep in mind, we're not only feeding the OEM growth rates, we're feeding the aftermarket as well, it's pretty substantial.

But nothing new to report there. As it relates to the delivery profile, as planned, we were allocating materials between MRO and original equipment in the first quarter. You saw that in the sales number and in the delivery numbers for the quarter. And as you look at the implied performance for Pratt through the rest of the year, we still expect OE to be low single-digit sales. And as you said, up mid- to high single-digit unit delivery. So we'll continue to grow the number of new engines we delivered this year, and that will kind of happen pretty ratably as we think about the rest of the year.

Now keep in mind, we had the strike last year in the second quarter. And so this year, second quarter will have an easier compare. But as we think about it, the negative engine margin will ramp up over the next several quarters as we kind of balance the mix of material between MRO and OE and drive the OE -- the AOG is down, and then continue to deliver to our end customer, Airbus.

Operator: Our last question comes from the line of David Strauss of Wells Fargo.

David Strauss: Following up there on Ken's question. Maybe could you specifically address the state of negotiations with Airbus and what they're desiring to get in terms of engines from you? And then secondly, if you can maybe just talk about the interior side of the business at Collins, where that is now in terms of being able to handle the -- what looks like a coming widebody ramp?

Christopher Calio: Yes. Thanks, David. On your first question, as Neil said, we're going to continue to see OE deliveries step up throughout the year. And when we get to the end and execute on that plan, it's going to be a record number of GTF engines that we've delivered and that delivery share is going to remain above the program share. So continue to be pleased about that. In terms of the discussions with Airbus, those are always ongoing. And we're always talking with them about what's going on industrially, what's going on from a supply chain perspective and balancing, of course, the needs of the GTF fleet health and our mutual customers.

And so those conversations will continue to go on. I will tell you that our focus is on making sure that we are investing for the growth we see both on the OE and the MRO side. On the MRO side, you heard us talk about some of those investments that we've made in Singapore that we're going to then translate into other parts of our network. We're going to be adding a forging press in our Columbus, Georgia facility. We're going to be adding a new tower for powder production at our HMI facility in New York. You heard Neil talk about the turbine airfoil ramp-up at Asheville.

These are all investments that we're making because we continue to see the demand both on the OE and MRO side. And again, the relationship with Airbus is an important one for us. It's one that we, of course, greatly value. And it's one that has spanned decades. And it will continue to span decades. And we will continue to work through our issues, as we always do, in a constructive and transparent manner. And I have no doubt that we'll ultimately get there to where we need to be on volumes going forward.

Neil Mitchill: And maybe just a comment on interiors. Had a good quarter. Sales were up double digits, so call it, low teens, if you will, in the first quarter. We're continuing to work through a couple of certification requirements on a handful of bespoke programs. But business has a good trajectory. We're expecting solid growth for the full year, and pretty good line of sight to mods and upgrades for the remainder of the year. So feeling good about that today. Thank you for the question.

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

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

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

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