What happened
RTX (RTX +1.33%) has quantified the financial hit from a massive recall of one of its most popular aircraft engines, and investors felt the pain along with the company, as its shares fell 16.4% in September, according to data provided by S&P Global Market Intelligence.
So what
The company, which until recently was known as Raytheon Technologies, is an aerospace conglomerate with businesses including Pratt & Whitney aircraft engines. In July, the company disclosed it had discovered a problem with one of Pratt & Whitney's mainstay designs, but at the time could not fully gauge the effect of the issue.
By mid-September, RTX was ready to detail the impact. The company said it would remove about 600 to 700 engines for inspection over the next three years, a costly endeavor that will require it to compensate airlines for downtime. The company said it would book a pre-tax operating-profit charge of at least $3 billion in the recently completed third quarter related to the issue.
RTX also cut its full-year sales outlook, and said the engine issue would likely reduce 2025 free cash flow by about $1.5 billion. The company is also analyzing the potential effect on other engine models, although it appears the problem is not widespread.
NYSE: RTX
Key Data Points
Now what
RTX faces no easy task in managing the inspections due to the complexity of aircraft engines. This problem is an embarrassing black eye for Pratt & Whitney, with financial repercussions that will take years to ripple through the company.
That said, there is every reason to believe RTX will eventually be able to fly through these headwinds. The troubled engine powers the Airbus A320neo family of jets, one of the most in-demand aircraft in the world. Although Pratt & Whitney faces competition on the A320 program, with order books overflowing there is little opportunity for customers to swap engines on future orders even if they want to.
The company's Collins Aerospace unit is also a big vendor to airlines, giving RTX strong ties to the industry.
Despite the engine issues, management said it remains committed to returning $33 billion to $35 billion to shareholders through 2025, a testament to the scale and financial strength of this company.
RTX is rightly being thorough in making sure the current engine issue is resolved, and the headwinds are likely to remain into 2024. But the company still has great potential to deliver for investors over the long haul.
