Raytheon Technologies reported a decline in military business sales in the third quarter of 2022 in the company's earnings call this morning, a problem largely attributed to supply chain woes that are expected to last into 2024.
The lower military sales impacted Raytheon subsidiaries Collins Aerospace and Pratt & Whitney as well as the company’s space and missile defense divisions, according to a presentation accompanying the earnings call. However, boosted by strong commercial sales, the company raised the lower end of its 2022 projected earnings from between $4.60 to $4.80 per share to $4.70 to $4.80.
Collins and Pratt reported military sales were down 6% and 2% respectively, according to the earnings presentation, whereas the space and missile defense divisions recorded lower adjusted sales of 3% and 6%.
For Pratt specifically, the company said that the fewer military business sales were due to a lower-than-expected production volume of F135 engines, which was “partially offset” through a higher volume of sustainment for the engine that serves as the powerplant for the F-35, Raytheon Vice President of Investor Relations Jennifer Reed said on the call.
Pointing to recent contracts such as a $1 billion deal with the Air Force to design the Hypersonic Attack Cruise Missile, the company reported a strong backlog but noted continued pressures on its supply chain that caused a slump in sales.
“We came into the year expecting about a billion-and-a-half dollars of cost growth between compensation and what we saw on the supply chain and energy prices,” Raytheon Chairman and Chief Executive Officer Greg Hayes said on the call.
That number turned out to be $2 billion, Hayes said, and coupled with rising energy prices, continued inflation and Russia’s invasion of Ukraine, the company’s “headwind” turned out to be closer to $700 million.
Parts and labor shortages both contributed to the supply chain logjam, Hayes said, which caused the company to miss its goal of 80% of kits filled and ready for assembly. “We’re not going to get there,” Hayes said, adding that the company would be “lucky” to hit a kit fill rate of 70% by year’s end.
On the commercial side, executives said some elements of the supply chain are beginning to stabilize. However, on the military side, uncertainty is expected to stretch beyond next year.
“Some things like rocket motors, we literally do not see a recovery path there” until the first half of 2024, Hayes said.
“This is not a not a short-term fix,” he added. “We’re fully prepared that next year is going to be kind of hand-to-mouth on the supply chain.”