Why did reported GAAP EPS fall so sharply in 2023 while adjusted EPS grew?

The full-year GAAP EPS decline of 36% to $2.23 was driven mainly by a net pre-tax charge of about $2.9 billion related to the Pratt & Whitney powder metal matter, which reduced reported sales by $5.4 billion and was partly offset by a $2.5 billion reduction in cost of sales. Management excludes these and other non-recurring items, along with acquisition accounting adjustments and restructuring, to arrive at adjusted EPS of $5.06, which rose 6%.

What does the lower 2020-2025 long-term target mean for investors?

RTX reduced its adjusted sales growth target for 2020-2025 to 5.5%-6.0% from 6.0%-7.0%, and its adjusted segment margin expansion target to 500-550 bps from 550-650 bps. This signals more modest expected growth and profitability gains over the period, though the company reaffirmed its $7.5 billion 2025 free cash flow commitment and its $36-$37 billion capital return plan.

How strong is RTX's cash generation and capital return program?

FY2023 operating cash flow from continuing operations was $7.9 billion and free cash flow was $5.5 billion, ahead of expectations. The company repurchased $12.9 billion of shares in 2023 and has returned over $29 billion to shareowners since the merger, progressing toward its $36-$37 billion target through 2025.

What are the main risks highlighted in the release?

The most significant risk is the GTF powder metal matter, which requires accelerated engine removals and inspections and could affect costs, customer negotiations, and timing. Other risks include U.S. government defense spending and budget dynamics, fixed-price contract performance, supply chain and inflation pressures, and rising interest expense after debt issuance increased long-term debt to $42.4 billion.

What drove the segment performance in the fourth quarter?

Collins Aerospace grew reported sales 14% and operating profit 34%, driven by commercial aftermarket strength. Pratt & Whitney sales rose 14% on higher aftermarket and OE volume, with operating profit up 25%. Raytheon sales grew 3%, with operating profit up 14%, supported by higher volume on advanced technology and air power programs.

RTX 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed January 23, 2024. Cited figures are marked; the original filing is the authoritative source.

RTX Corporation's Form 8-K (furnished under Item 2.02) attaches its January 23, 2024 press release reporting fourth quarter and full-year 2023 results and providing 2024 guidance.

Fourth-quarter reported sales rose 10% to $19.9 billion^a, with adjusted sales of $19.8 billion. GAAP EPS from continuing operations was $1.05, while adjusted EPS was $1.29, up 2%. Operating cash flow was $4.7 billion and free cash flow was $3.9 billion.

Backlog ended the year at a record $196 billion^b, including $118 billion of commercial and $78 billion of defense. Full-year reported results were weighed down by the Pratt & Whitney powder metal matter: reported sales were $68.9 billion (up 3%), GAAP EPS fell 36% to $2.23, and the company took a roughly $2.9 billion net pre-tax charge. Excluding these items, adjusted sales grew 11% to $74.3 billion and adjusted EPS rose 6% to $5.06.

Management guided to 2024 sales of $78.0 to $79.0 billion^c, adjusted EPS of $5.25 to $5.40, and free cash flow of about $5.7 billion. RTX also lowered its 2020-2025 adjusted sales growth target to 5.5%-6.0% from 6.0%-7.0%, and its adjusted segment margin expansion target to 500-550 basis points from 550-650.

It reaffirmed the $7.5 billion^d 2025 free cash flow commitment and the $36-$37 billion capital return plan through 2025, with $29 billion already returned since the merger. Investors should weigh the strong backlog and cash generation against the GTF powder metal remediation, the reduced long-term targets, and the rise in interest expense and debt, which increased to $42.4 billion of long-term debt from $30.7 billion.

02—Key points

Key Highlights

Q4 2023 reported sales of $19.9B (+10% YoY); adjusted sales of $19.8B (+10%), with about $0.1B of benefit from a customer settlement.
Q4 adjusted EPS of $1.29 (+2%); GAAP EPS from continuing operations of $1.05 (+9%).
Record backlog of $196B at year-end, including $118B commercial aerospace and $78B defense.
FY2023 reported EPS fell 36% to $2.23 due to the Pratt & Whitney powder metal charge, while adjusted EPS rose 6% to $5.06.
2024 guidance: sales of $78.0-$79.0B, adjusted EPS of $5.25-$5.40, and free cash flow of about $5.7B.
Lowered 2020-2025 adjusted sales growth target to 5.5%-6.0% (from 6.0%-7.0%) and margin expansion target to 500-550 bps (from 550-650 bps); reaffirmed $7.5B 2025 FCF commitment.
Repurchased $12.9B of shares in FY2023 (including a $10B accelerated share repurchase), while long-term debt rose to $42.4B from $30.7B.

03—Questions

Frequently Asked Questions

Why did reported GAAP EPS fall so sharply in 2023 while adjusted EPS grew?
The full-year GAAP EPS decline of 36% to $2.23 was driven mainly by a net pre-tax charge of about $2.9 billion related to the Pratt & Whitney powder metal matter, which reduced reported sales by $5.4 billion and was partly offset by a $2.5 billion reduction in cost of sales. Management excludes these and other non-recurring items, along with acquisition accounting adjustments and restructuring, to arrive at adjusted EPS of $5.06, which rose 6%.
What does the lower 2020-2025 long-term target mean for investors?
RTX reduced its adjusted sales growth target for 2020-2025 to 5.5%-6.0% from 6.0%-7.0%, and its adjusted segment margin expansion target to 500-550 bps from 550-650 bps. This signals more modest expected growth and profitability gains over the period, though the company reaffirmed its $7.5 billion 2025 free cash flow commitment and its $36-$37 billion capital return plan.
How strong is RTX's cash generation and capital return program?
FY2023 operating cash flow from continuing operations was $7.9 billion and free cash flow was $5.5 billion, ahead of expectations. The company repurchased $12.9 billion of shares in 2023 and has returned over $29 billion to shareowners since the merger, progressing toward its $36-$37 billion target through 2025.
What are the main risks highlighted in the release?
The most significant risk is the GTF powder metal matter, which requires accelerated engine removals and inspections and could affect costs, customer negotiations, and timing. Other risks include U.S. government defense spending and budget dynamics, fixed-price contract performance, supply chain and inflation pressures, and rising interest expense after debt issuance increased long-term debt to $42.4 billion.
What drove the segment performance in the fourth quarter?
Collins Aerospace grew reported sales 14% and operating profit 34%, driven by commercial aftermarket strength. Pratt & Whitney sales rose 14% on higher aftermarket and OE volume, with operating profit up 25%. Raytheon sales grew 3%, with operating profit up 14%, supported by higher volume on advanced technology and air power programs.

04—Continue

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