What happened
RTX (RTX -0.29%), the company that until recently was known as Raytheon Technologies, beat quarterly estimates and narrowed its guidance for the full year. But investors were more focused on weak free cash flow and issues at its all-important Pratt & Whitney engine unit.
Shares of RTX fell by as much as 16% on Tuesday due to the uncertainty that came out of the release.
So what
RTX has been in transition for a few years now. Raytheon Technologies was formed by the 2020 merger of defense specialist Raytheon and the aerospace arm of the former United Technologies, with the goal of offering a wide range of defense and commercial aerospace goods including Pratt & Whitney engines and Collins interiors.
The integration has gone largely to script, but the company now faces headwinds concerning one of its most important products. RTX informed investors that Pratt & Whitney has determined that "a rare condition in powder metal" used to manufacture certain engine parts will require inspection.
The company warned that "a significant portion" of the PW1100G-JM engine fleet, which powers the popular Airbus A320neo, will require accelerated removals and inspections within the next nine to 12 months.
That will cost money, and as a result RTX lowered its free-cash-flow outlook for the year by 76% to $193 million.
Now what
The engine is a significant part of the overall expense of buying a new plane, and Pratt & Whitney is in a constant battle with rivals including General Electric to secure a place on top-selling platforms like the A320. The issue is a near-term cash drain and could be a long-term reputational risk if Pratt & Whitney is not able to resolve it quickly.
Overall, the quarter was solid but not spectacular, reflecting strong demand for munitions on the defense side and aircraft interiors on the commercial side. There's a lot of potential here, but investors are understandably taking a cautious approach until more is known about this engine issue.
