Operator: Good day, and welcome to the RTX Q3 2026 Earnings Conference Call. My name is Latif, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Chris Calio, Chairman and Chief Executive Officer, Neil Mitchill, Chief Financial Officer, and Nathan Ware, Vice President of Investor Relations. This call is being webcast live on the internet, and there is a presentation available for download from RTX website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding acquisition, accounting adjustments, and net non-recurring and/or significant items often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risk and uncertainties.
Operator: RTX SEC filings including its forms 8-K, 10-Q, and 10-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. To ask a question, you will need to press star one one on your telephone. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Calio.
Chris Calio: Thank you. Good morning, everyone. Our continued execution and operational focus enabled us to deliver another very strong quarter of results across RTX. On the top line, adjusted sales were $25 billion, up 12% organically, with double-digit growth across commercial OE, commercial aftermarket, and defense. Adjusted EPS of $2.26 was up $0.56, or 33% year-over-year, including $0.25 from IEEPA cost recovery. Free cash flow was again strong at $2.1 billion. So overall, we are very pleased with the continued momentum in our operational performance across the company in Q3. We also continue to see robust global demand for our products and services and are very well positioned to meet our growing customer needs across commercial aerospace and defense. RTX ended Q3 with another record backlog of $340 billion, up 36% year-over-year and 18% sequentially.
Chris Calio: On the defense side, we booked nearly $59 billion of awards with a book to bill of 4.57, driven by approximately $23 billion for Tomahawk and over $14 billion for AMRAAM, as we converted those framework agreements into multi-year production contracts at Raytheon. Earlier this month, we also signed multi-year contracts for SM-6 and SM-3 IB. We are very pleased with our collaboration with the Department of War on these contracts, which reinforce the need for our highly capable and proven systems, and they will be a significant revenue driver for Raytheon over the next decade. Neil will provide some more details in a few minutes. On the commercial side, we received over $22 billion of new orders in the quarter, representing over 60% year-over-year growth across both OE and aftermarket.
Chris Calio: Most notably, Pratt announced significant GTF engine orders and commitments, including British Airways' selection of the GTF to power up to 63 aircraft, adding another new GTF operator to its expanding fleet. So far this year, we've received over 800 GTF orders and commitments and have a backlog of over 8,000 engines. Commercial orders at Collins were up over 20% year-over-year, driven by the growing installed base and breadth of its content offerings. Another strong quarter of awards across the company. Let me shift to the current operating environment as we look to close out the year. In commercial aerospace, we continue to see positive trends with increasing OE production rates on key platforms, which is growing our installed base. For example, Collins' commercial installed base and Pratt's narrowbody powered fleet have grown mid-single digits year-over-year.
Chris Calio: In Q3, commercial aftermarket also remained resilient with 16% organic growth despite global RPKs declining slightly year-over-year. Our MRO demand continued to be strong and engine retirements were in line with our expectations. Additionally, we continue to see strength across business aviation with global business jet departures up year to date. As a reminder, about 60% of the Pratt Canada fleet has not yet seen a first shop visit. On the defense side, we remain exceptionally well-positioned to meet growing demand given our proven capabilities, regional partnerships, and ability to produce at scale. In the US, we're encouraged by the broad support for defense spending, including the need to expand munitions depth and integrated air and missile defense capabilities. Our ongoing discussions with the Department of War give us further confidence that our key programs will remain funding priorities.
Chris Calio: Internationally, demand is also rising with defense budgets expected to grow across the European, Asia Pacific, and MENA regions next year, including significant spending by Germany, Poland, and Japan. Across these regions, we have partnerships with local companies and suppliers that help support the production of key systems, including Patriot, GEM-T, Standard Missile, Coyote, and military engines. In Europe, for example, we have over 130 different suppliers that support our production work in that region. While the US government is currently operating under a continuing resolution, our record backlog provides clear visibility to our sales expectations in Q4 and throughout next year, so our focus remains squarely on execution. Overall, based on our performance to date, we're again raising our full-year outlook for adjusted sales, EPS, and free cash flow.
Chris Calio: Neil will take you through the details of Q3 and our updated outlook in a few minutes. But first, let me provide an update on our strategic priorities on slide 4. I'll start with operational execution. We continue to leverage our core operating system to drive output and productivity across the company. At Pratt, we're making progress across key GTF initiatives. On the GTF fleet management plan, the financial and technical outlook remains on track. PW1100 MRO output was up over 35% year-over-year in the quarter and is up over 30% year to date. Sequentially, AOGs were relatively stable as this MRO output largely offset the expected engine removals from the seasonally high utilization of the fleet during the summer months. We continue to expect AOG reductions in Q4.
Chris Calio: We're also pleased that the first GTF Advantage-powered aircraft was delivered to United Airlines and entered into service earlier this month. As a reminder, the Advantage will double the time on wing performance, and we expect the production ramp to continue next year. We're also progressing certification of the Hot Section+ upgrade package that will bring 90% to 95% of the Advantage time on wing benefit back to the installed base. We will start incorporating this package into MRO visits early next year. Shifting to Collins, we're advancing structural cost actions to support further margin expansion. This includes consolidating operations, increasing manufacturing hours at best cost locations, and reducing overhead layers. Enabled by these actions, Collins has delivered double-digit organic sales growth this year while reducing indirect labor headcount.
Chris Calio: At Raytheon, we're increasing munitions output as we improve material flow across the supply chain and drive productivity in our operations. Year to date, output across our critical munitions is up over 90% year-over-year, with material receipts at Raytheon up double digits over the same period. Across RTX, we're also deploying AI and digital tools to improve speed and decision-making in our operations. For example, through a recent acquisition, Pratt is integrating AI-powered engine inspection software to accelerate borescope analytics. Already in use on legacy programs, this capability is being implemented across our MRO networks and has reduced overall inspection time by more than 30% where it's been deployed. Next is innovation and future growth. In Q3, we invested $2.8 billion in company and customer-funded research and development and CapEx to advance our technology roadmap and expand capacity.
Chris Calio: On the technology front, we're innovating to meet our customers' evolving needs. We're continuing to develop products with AI and machine learning capabilities. For example, Collins is leveraging AI in certain products to assist air traffic controllers in making faster and smarter decisions. Raytheon has sensors deployed in the field that are using AI to identify objects and classify threats. Also in the quarter, Collins completed altitude testing of its next-generation enhanced power and cooling system, known as EPACS. EPACS delivers a significant increase in cooling capacity across critical aircraft systems and is being offered to support technology upgrades on the F-35. It can also be used on other future defense and commercial aircraft platforms. Raytheon is progressing its composable weapon strategy to address the evolving needs of our customers.
Chris Calio: This construct uses proven technologies from across our product portfolio as building blocks to develop new solutions that we can field at a faster scale. For example, we're developing a new effector where we're taking the rocket motor and steering control from one production program and combining it with a seeker from another program to cost-effectively meet a specific mission requirement on an accelerated timeline. On the capacity front, we continue to invest to support higher output levels. In the quarter, Raytheon completed a $50 million expansion of its manufacturing facility in Forest, Mississippi. This investment will support production ramps for the next-generation jammer program and other radar systems. In connection with the munitions contracts that I mentioned earlier, we're making incremental investments in our supply chain and operations to ramp capacity and support significantly higher production rates.
Chris Calio: On the commercial side, Collins announced a new partnership with Etihad Engineering to expand MRO services in the Middle East. This agreement will double Collins' footprint for nacelle services in the region and support growing A350 and 787 fleets. Pratt announced an expansion of precision parts manufacturing in Poland. This investment will increase capacity of complex component assembly for both commercial and military engines, including the GTF and F135. We are pleased to see that our disciplined focus on our strategic priorities is delivering operational improvement and new capabilities for our customers. Finally, I want to acknowledge the leadership update we announced last month. As you saw, Shane Eddy has decided to retire from the company after more than 40 years in the aerospace and defense industry. Shane has been a great partner and teammate, and I want to thank him for his leadership at Pratt.
Chris Calio: We are fortunate to have a very strong bench and are excited that Jill Albertelli is taking over as the President of Pratt & Whitney. Jill is currently the President of Military Engines and brings over three decades of experience across Pratt. Okay. With that, I will hand it over to Neil to take you through the Q3 results and our updated outlook in more detail. Neil?
Neil Mitchill: All right. Thanks, Chris. I am on slide 5. In Q3, adjusted sales of $25 billion were up 11% year over year on an adjusted basis and 12% organically. This strong top-line organic growth was driven by all three channels, with commercial OE up 10%, commercial aftermarket up 16%, and defense up 10%. Adjusted segment operating profit of $3.9 billion was up 39% year over year, driven by drop-through on higher sales volume across the company, improved productivity at Raytheon, and IEEPA cost recovery. Segment margins expanded 310 basis points year over year, including the benefit of approximately 160 basis points from IEEPA. Adjusted earnings per share of $2.26 was up 33% from the prior year, driven by about $0.43 of operational segment profit growth and approximately $0.25 of IEEPA recovery.
Neil Mitchill: This growth more than offset roughly $0.12 of below-the-line items, primarily from an expected higher tax rate and lower pension income. On a GAAP basis, earnings per share from continuing operations was $1.89 and included $0.26 of acquisition accounting adjustments and $0.11 of restructuring and all other non-recurring items. Free cash flow in the quarter was $2.1 billion and included approximately $165 million of powder metal-related compensation and approximately $300 million of IEEPA recovery. As Chris mentioned, we converted four munition framework agreements into undefinitized contracts. Over the next several years, Raytheon will be focused on ramping the supply chain, our operations, and capacity to meet the associated production requirements. As a reminder, these contracts include a funding approach that will essentially preserve upfront free cash flow.
Neil Mitchill: We'll be making CapEx and other investments on these contracts over the next 2 to 3 years, and we'll recognize revenue as costs are charged to the programs. Therefore, we expect to see sales and profit contributions over the next several years as we capacitize and then ramp to achieve full-rate production over the multiyear terms of each contract. Over time, these contracts have the potential to support margin expansion at Raytheon as we scale production. Overall, we delivered strong financial performance across RTX, and we're pleased with the significant growth in our backlog. Let's turn to slide 6, and I'll take you through our updated outlook for the full year. Given our performance to date, as well as the IEEPA recovery, we are increasing our full-year outlook.
Neil Mitchill: On the top line, we're raising our full-year adjusted sales outlook by $2 billion on the low end and $1.5 billion on the high end to a new range of $97 billion to $97.5 billion, up from our prior range of $95 billion to $96 billion. The sales increase is driven by continued defense performance, commercial OE strength at Collins, and higher GTF aftermarket volume at Pratt. This translates to full-year RTX organic sales growth of between 10% and 11%, up from our prior range of between 8% and 9%. By channel, we now expect commercial OE sales to grow high single digits, which is at the higher end of our prior expectation of mid to high single digits, driven by the production ramp at Collins.
Neil Mitchill: Within commercial aftermarket, we now expect sales to grow low double digits to low teens across the company, which is up from our prior expectation of low double digits, driven by higher GTF aftermarket volume. For defense sales, we now expect low double-digit growth up from our prior range of high single digits, primarily driven by the performance at Raytheon. On the bottom line, we are increasing our outlook for adjusted earnings per share by $0.55 on the low end and $0.50 on the high end. We now see adjusted EPS of between $7.65 and $7.75 for the full year, up from our prior range of $7.10 to $7.25. At the midpoint of our updated outlook, this increase is primarily driven by approximately $0.28 of performance across the company and approximately $0.25 of IEEPA recovery.
Neil Mitchill: We've included the updated outlook for the associated below-the-line items in the appendix of our webcast. Finally, we now expect free cash flow to be between $9 billion and $9.2 billion for the full year, up from our prior range of $8.5 billion to $8.75 billion, driven primarily by IEEPA recovery. As we look beyond this year, based on the fundamentals of our company, our record backlog position, and operating momentum, we expect another year of top and bottom-line growth, improving operational margins, and strong free cash flow generation. As we do every year, we'll be back on our Q4 call in January with our detailed outlook for 2027. With that, I'll hand it over to Nathan to take you through the segments in more detail. Nathan?
Nathan Ware: Thanks, Neil. Starting with Collins on slide 7, sales were $8.4 billion in the quarter, up 10% on an adjusted basis and 12% organically, driven by strength across all channels. Excluding divestitures, commercial OE sales were up 23%, driven by higher volume on narrowbody and widebody platforms. Commercial aftermarket sales were up 9%, driven by an 18% increase in mods and upgrades, a 12% increase in provisioning, and a 7% increase in parts and repair. Defense sales were up 7% versus the prior year, driven by higher volume across multiple programs. Adjusted operating profit of $1.8 billion was up $594 million versus the prior year, driven by drop-through on higher commercial volume, commercial mix, and approximately $250 million of IEEPA recovery. In the quarter, Collins expanded margins by 560 basis points year over year, including the benefit of structural cost actions and 300 basis points of IEEPA recovery.
Nathan Ware: Turning to Collins' full-year outlook, based on year-to-date commercial OE performance, we now expect sales to grow high single digits on an adjusted basis versus our prior range of mid to high single digits. Organically, we now expect low double-digit growth versus our prior range of high single digits to low double digits. With respect to operating profit, we now expect growth between $925 and $975 million versus 2025, up from our prior expectation of between $550 and $625 million, driven by the drop-through on increased sales volume, ongoing structural cost reduction initiatives, and approximately $250 million of IEEPA recovery. Shifting to Pratt & Whitney on slide 8, sales of $9.2 billion were up 10% on an adjusted and organic basis, driven by strength in commercial aftermarket. Commercial OE sales were down 5%, driven by large commercial engine mix.
Nathan Ware: Commercial aftermarket sales were up 21%, driven by higher MRO volume, primarily GTF. In military engines, sales were up 2%, driven by higher volume across multiple programs, partially offset by the prior year benefit from F135 contract award timing. Adjusted operating profit of $968 million was up $217 million versus the prior year, driven by drop-through on higher commercial aftermarket volume and approximately $160 million of IEEPA recovery. This was partially offset by large commercial OE engine mix, commercial aftermarket mix, and higher SG&A expense. In the quarter, Pratt's margins of 10.5% included 170 basis points of IEEPA recovery. Turning to Pratt's full-year outlook, we continue to expect sales to grow high single digits on both an adjusted and organic basis, most likely towards the top half of this range, given the strength in commercial aftermarket.
Nathan Ware: With respect to operating profit, we now expect growth between $475 and $525 million versus 2025, up from our prior expectation of between $275 and $350 million, driven by the drop-through on increased sales volume and approximately $170 million of IEEPA recovery. Turning to Raytheon on slide 9, sales of $8 billion in the quarter were up 14% on both an adjusted and organic basis, driven by higher volume on naval programs and land and air defense systems, including Patriot, Standard Missile, and Tomahawk. Adjusted operating profit of $1.1 billion was up $275 million versus the prior year, driven by improved productivity, higher volume, and favorable mix, including Patriot programs. Net productivity improved $104 million year over year and included approximately $85 million of benefits in the quarter associated with an international contract modification and a favorable adjustment related to an offset obligation.
Nathan Ware: In the quarter, Raytheon expanded margins by 190 basis points year over year. Bookings in the quarter were $52.3 billion, resulting in a book-to-bill of 6.54 and a backlog of $130 billion. On a rolling 12-month basis, Raytheon's book-to-bill is 2.9. In addition to the munitions contracts that Chris mentioned earlier, other key awards in the quarter included $3.1 billion to provide training systems for the British Army, $3 billion of classified awards, and $1.8 billion for SPY-6 production. Turning to Raytheon's full-year outlook, we now expect sales to grow low teens on both an adjusted and organic basis. This is up from our prior range of high single digits to low double digits due to the strength Neil mentioned.
Nathan Ware: We now expect operating profit to grow between $800 million and $850 million versus 2025, up from our prior expectation of between $575 million and $650 million, driven by the drop through on increased sales volume, improved productivity, and favorable program mix. With that, I'll hand it back over to Chris for some closing remarks.
Chris Calio: Okay. Thanks, Nathan. We delivered another strong quarter of results and are confident in our updated full-year outlook, reflecting the continued execution across the company. I want to thank all of our employees for their dedication to our mission. RTX is exceptionally well-positioned across commercial aerospace and defense with our leading franchises, growing installed base, and record backlog. We remain focused on executing on our commitments, investing in the right technologies and capacity, and leveraging our breadth and scale to drive top and bottom-line growth this year and beyond. With that, let's open it up for questions.
Operator: In the interest of time and to allow for broader participation, you are asked to limit yourself to one question. To ask a question, you will need to press star one one on your telephone. Our first question comes from the line of Sheila Kahyaoglu of Jefferies. Your question please, Sheila.
Sheila Kahyaoglu: Sure. Good morning, Chris, Neil, and Nathan.
Chris Calio: Good morning, Sheila.
Sheila Kahyaoglu: Morning, guys. Quarter up 14% organically, margins 14% was a standout as well. Obviously, some one-timers in that margin number, but as we think about where you are today and the continuous margin improvement, can you talk about specifically Raytheon and where we are on the missiles and munitions ramp, as there are a number of additional UCAs in hand now? How do you think about the volume and margin opportunity as that begins to feather in in 2026 and thereafter?
Chris Calio: Yeah. Thanks, Sheila. As you noted, we are pretty pleased with Raytheon's organic sales growth here in the quarter, and even more so with the execution that underpinned it. Output across our critical munitions was up over 90%, and we are seeing output growth across other critical munitions programs as well. Very happy with the operational performance the team is showing to ramp given the needs that are out there in the market. With respect to the conversion of the framework agreements to the UCAs, again, a lot of hard work went into that, a lot of collaboration with the Department of War. That is all in about $70 billion in combined value. That provides Raytheon almost a decade of demand visibility. Obviously critical not only for us but for our supply chain, as we seek to take these rates up anywhere from 2 to 4x. These are binding contracts.
Chris Calio: They've got robust terms, including price, delivery schedules, and the like. Now we've shifted into the execution phase, lining up the supply chain, putting up POs for tooling and test equipment, all the things we need to do to make that rate. We've also been working really closely with the department on all the actions necessary to accelerate the production. Streamlining test requirements, improving producibility where we can, addressing obsolescence, qualifying new suppliers. in 2025 alone, Raytheon added 150 new suppliers. We've got to get that supply base as strong as we possibly can. Right now, it's about just removing any and all bottlenecks so we can get to these higher rates. In terms of how this sort of feathers in, we're going to execute these contracts over the next, say, seven to 10 years.
Chris Calio: As Neil noted up front, we're going to account for these like other defense programs. Revenue will be on a cost-to-cost basis. As we scale production and continue to drive the efficiencies given the volumes here and given the visibility we've given the supply chain, we think these contracts have the potential to support margin expansion at Raytheon above and beyond where they are today.
Sheila Kahyaoglu: Thank you so much.
Operator: Thank you. Our next question comes from the line of Peter Arment of Baird. Please go ahead, Peter.
Peter Arment: Hey, thanks. Morning, Chris and Neil. Nice results.
Chris Calio: Morning.
Neil Mitchill: Thank you, Chris.
Peter Arment: Hey, probably a question for both of you, but Chris, thinking about supporting all this growth tied to the framework deals and the aero ramp. How are you thinking about cash conversion? You had a strong raise for 2026. Any puts and takes that we should be thinking about going forward from here, just regarding either framework CapEx or advances. Any color here would be helpful. Thanks.
Chris Calio: Yeah. I will start and certainly ask Neil to pile in as well, Peter. Again, if you just look at the fundamentals of this business, they are pretty strong. Robust demand, large installed base. Again, we think this supports our business being able to generate that 90% to 100% of free cash flow to adjusted net income. We have been pretty consistent in saying that. There will be investments associated with the UCAs and the demand that we are seeing, but they incorporate a collaborative funding approach to help with some of the upfront free cash flow. Again, for us right now, it is all about focusing on meeting this demand. We have got a $340 billion backlog.
Chris Calio: Got to make sure that we have got the supply chain where it needs to be and the capacity, not only in our own shops, but again, with some of these key suppliers. That is where the focus is going to be.
Neil Mitchill: Chris, maybe I will add a couple of thoughts on some of the things that we have incurred in 2026 and how they might play out as we start to turn the corner and look at 2027. Not going to give a 2027 outlook today for free cash flow, but as I sit back and think about the underpinning of the drivers, the first thing is we have obviously been tailing down on the powdered metal payments, so expect that to be probably about a $500 million tailwind as we head into 2027. You heard us talk this morning about the IEEPA refunds. We had about $300 million in cash come in in Q3. There is another $50 million that will come in in Q4, and then that will be largely behind us. So that will turn into a bit of a headwind.
Neil Mitchill: I am thinking there is probably about $100 million of pension headwind as well. All of that sort of nets to about zero. You step back and you think about the underlying drivers of the business. Chris just talked about how the frameworks will play out, largely a cash neutral event as we head into 2027. Then it comes down to segment operating profit growth, which we are expecting to see. We are going to have operational expansion of the margins. Excluding the benefit that we just talked about from IEEPA, we will still grow our margins, and we are going to keep an eye on the need for probably a little bit higher working capital as we continue to support strong levels of organic sales growth. You saw we took our guidance up today, added 2 points of organic growth this year.
Neil Mitchill: We have seen some working capital draw, still seeing increased turns on inventory and working capital, but, as we kind of position ourselves for the continued growth in delivering this $340 billion of backlog, I could see a little bit of headwind there. All in all, expect cash flow to be up next year. Really well-positioned, about 70% of the way to our 2026 goal so far, and still some work to do here in Q4, but feel good about where we sit today. Thank you.
Peter Arment: Appreciate the color. Thanks, guys.
Neil Mitchill: You bet.
Operator: Thank you. Our next question comes from the line of Rob Stallard of Vertical Research. Please go ahead, Rob.
Rob Stallard: Thanks so much. Good morning.
Chris Calio: Hey. Morning, Rob.
Rob Stallard: Chris, it's probably one for you. Obviously, the airlines are struggling with the higher cost of fuel at the moment. We've seen some of them pulling down their flight activity plans for Q4. I was wondering if you're seeing any change in behavior from your airline customers as a result of these challenges they're going through.
Chris Calio: Yeah. Thanks, Rob. You're right. We're closely engaging with the airlines and doing bottoms-up sort of fleet planning and understanding kind of where their head is in 2027, the impact of the cost headwinds that you just mentioned. Looking obviously at the consumer and the consumer health. But what we've seen is what you saw in our numbers here in Q3, which has been resilient demand and a resilient consumer. I mean, we had 16% organic growth in commercial aftermarket in Q3. Our GTF PW1100G output was up significantly, 35% year over year, and that demand's going to continue into next year and grow. Content has continued to be strong on the V2500. As you heard Nathan say up front, Collins had continued organic growth across all three channels with mods and upgrades and provisioning both up double digits.
Chris Calio: We're also seeing, again, retirements that have been relatively low and in line with our expectations. So as we sit here today, Rob, demand has continued to be resilient. We think it's durable. Again, we're going to watch all the other things that everyone else is watching as we're kind of heading into 2027 on jet fuel and the other cost headwinds. But if you just step back for a minute and just kind of let your mind linger past some of these near-term issues, I mean, there are really strong fundamentals that underpin our aftermarket growth. I mean, there's the out-of-warranty flight hours, there's pricing, there's a growing installed base. So we feel very good medium long term about our commercial aftermarket positioning.
Rob Stallard: That's great. Thanks, Chris.
Operator: Thank you. Our next question comes from the line of Kristine Liwag of Morgan Stanley. Your line is open, Christine.
Kristine Liwag: Hey, good morning, everyone. Neil, you had talked about, with the munition contract that you've received, with that $770 billion in multi-year contracts, you're seeing production rates increasing 2x to 4x over time. But these are just from the contracts that have converted into firm orders. You've also got multiple framework agreements that have yet to convert to orders. When we think about the opportunity set that's ahead, including what you already got, how should we think about the cadence of revenue and earnings contribution on an annual basis? When does this start to peak? Is this really more of an acceleration in 2028 and beyond? Could we see some of this in 2027? I know you don't want to give 2027 guidance yet, but just help us understand how we should think about the cadence of revenue and growth.
Neil Mitchill: Sure. Thank you for the question, Christine. Good morning. Obviously, there are a few variables here, the most important of which is how the defense budgets play out in the coming months. Nonetheless, we're very confident in the demand and need for these important munitions. As you pointed out, we got two of the frameworks converted to undefinitized contracts in Q3. We had two more that came here in Q4, so those will be included in our Q4 bookings. We booked a little bit of revenue on this here in 2026, and we certainly do expect some of that to ramp up in 2027 as we begin to facilitize. I think importantly, before I even get further on that, we got this enormous backlog to deliver.
Neil Mitchill: As I look at Raytheon's 2027 and beyond outlook, it shows very strong top-line growth opportunity in its base backlog, then you put this on top of it as well. We won't get into the specifics, as you pointed out today, but certainly I see this as starting to ramp over the next 2 years in earnest, and really continuing through 2030, when we get into full rate production for the suite of munitions that we'll be providing.
Kristine Liwag: Great. Thank you.
Neil Mitchill: Thanks.
Chris Calio: You're welcome.
Operator: Our next question comes from the line of Myles Walton of Wolfe Research. Please go ahead, Myles.
Myles Walton: Thanks. Good morning.
Neil Mitchill: Good morning, Myles.
Myles Walton: Looking at the margin performance of Collins, excluding IEEPA, you are nicely ahead of 18%. The implied Q4 margins come back down to or below where you were in the H1. I am curious, you talked about the cost savings initiatives having impact. How sustainable are those and maybe what should we be thinking of?
Neil Mitchill: Miles?
Chris Calio: We lost you there, Myles, but from what we did hear, you were asking-
Neil Mitchill: We'll guess the question.
Chris Calio: Yeah, we'll guess the question. We'll reframe the question as we like it.
Neil Mitchill: No, we heard the question on Collins.
Chris Calio: There you go. There you go. Go ahead. We hear you now.
Myles Walton: Great. I was just looking at the margin performance at Collins. Excluding IEEPA, you were nicely above 18% in the quarter. It looks like Q4 margin implied you drop back to mid 16. I am just curious, was there anything special about the quarter, which is interesting because you had very high OE rates, and then maybe make a comment of the opportunity for expansion into 2027 that, Neil, I think you alluded to expansion across the business.
Neil Mitchill: Well, obviously, we are really pleased with where Collins' operational margins were in Q3, and there really was nothing I would call out that was particularly unusual about Q3. It is good to see the traction that they are getting. Everything we have been talking about for the last 5 years, frankly, about higher OE production, getting good absorption, the aftermarket drop through, the increased content on the installed base is coming to fruition, and we got good defense performance as well at really good margins. Q3 was strong and very clean. As we walk to Q4, you are right. We see a little bit of pullback on the margins. What I will tell you there is there is a couple things. First, obviously, we will not have the IEEPA refunds repeat for Collins. That is all behind us here in Q3.
Neil Mitchill: We are investing in that business. It is really important for us to make sure that we are prepared for next generation technology, and so we will see a little bit higher research and development in Q4, as we usually do, but it is ramping a bit. We are also increasing our digital spend there. That is a key element of the transformation that Collins is going through in terms of their reducing complexity, automating back office functions, et cetera. So that comes into play here in Q4. We do see a little bit higher OE volume in Q4, probably gives us about 40 basis points of margin headwind and a few other timing items. But fundamentally, the Collins margins remain really strong, and we expect the operational margins to continue to expand into 2027. We will talk more about that obviously in January.
Chris Calio: Maybe just, Myles, to hit on one part of your question on sort of the sustainability on the structural cost reduction. I would tell you, and Collins would tell you, that we are in the relatively early stages of that, and we have continued to see some really good progress there. You heard Neil talk about some of those initiatives. It is consolidating operations, increasing cost at best cost locations, really attacking the overhead layers. You saw sort of the indirect headcount reduction that we referenced in our remarks. These actions are going to continue to compound over time and provide some nice tailwind to Collins margins.
Myles Walton: Thanks.
Operator: Thank you.
Neil Mitchill: You're welcome.
Operator: Our next question comes from the line of Ron Epstein of Bank of America. Please go ahead, Ron.
Ron Epstein: Hey. Good morning, guys.
Neil Mitchill: Morning, Ron.
Ron Epstein: Maybe just a quick follow on here to a couple of questions that were asked. On the UCAs, if they are not definitized. How are you hope they will be, right? Political winds change and all that sort of stuff. How are you guys protected? Can you talk about that a little bit?
Chris Calio: Yes, absolutely, Ron. I will not get into the detailed terms. What I will say is that we are protected if there are changes in the budgetary environment and changes in volumes. That was a critical part of our discussions. We want to move out quickly and get to these rates. The department understood that. It was also cognizant of the fact that things could change in this budget environment, and that we have got the protections we need to feel good about moving out on these investments. I will say, though, Ron, even with the sort of the budget risk that sort of sits out there, I do believe that our critical munitions will be prioritized. No matter how the machinations ultimately shake out between, is there going to be a reconciliation? What is in the base?
Chris Calio: I think these UCAs are a testament to how critical these munitions programs are, and they will continue to be prioritized as we go through the budget process. Again, feel confident that we will see these go through. We are protected on the downside just in case.
Ron Epstein: If I may, when we were walking around AUSA, one thing came up pretty much in every meeting we did. Nobody can get printed circuit boards, and people were having problems getting capacitors and resistors and this and that. As you think about these ramps and just real fundamental components that are in short supply, some of it largely because of what is going on in the AI build-out, how are you guys thinking about that? Because you got this big sucking sound coming from a whole other side of industrials that is absorbing a lot of parts that you guys would normally use.
Chris Calio: Yeah, absolutely, Ron. You are hitting on the single biggest enabling factor in getting to these enhanced rates, the 2x to 4x that I mentioned before. It is absolutely going to take a change in how we do things with our supply chain. You heard me mention up front some of the things we are doing differently in collaboration with the department in terms of streamlining test requirements, things that sit, generally speaking, within the department's purview. How do we be more efficient in how we do testing? How do we look at our requirements and really interrogate them to make sure that everything is absolutely necessary? Then how do we work with them to bring additional suppliers into the defense industrial base? I mean, you are right, there are certain pieces that we are competing with other industries. You mentioned the AI build-out.
Chris Calio: I mean, keep in mind, we are looking for a little bit different things than some of those folks, but working with the government to make sure that the folks that are producing the things that we need are prioritizing us, and we are not going to be left behind by virtue of AI build-out or other things. I would put critical minerals in that same category. These are things that are going to be important for both the commercial and defense, and we have been working those for a long time. The department has helped there as well in terms of helping us secure long-term supply, to make sure that we have got what we need for 2027 and beyond. I will just tell you that the supply chain focus is acute and is where we are putting a lot of our energy, focus, and investment.
Ron Epstein: Great. Thank you.
Operator: Thank you. Our next question comes from the line of Seth Seifman of J.P. Morgan. Your line is open, Seth.
Seth Seifman: Yeah. Thanks very much, and morning, everyone.
Chris Calio: Morning, Seth.
Seth Seifman: Chris, I wanted to ask, when you think about the NDAA this year and the right to repair provisions that are in there, and you guys have the big defense portfolio, not just in Raytheon, but also in Pratt & Whitney and Collins. How do you think about the potential impact of that on the company?
Chris Calio: Yeah. Thanks, Seth. I won't speculate too much right now, as I know that legislative process is ongoing, and as you noted, the 2027 budget isn't final. Again, we want to be supportive of our customers and their sustainment needs, but we're also going to need the kinds of protections around IP and protections around the investments that we've made, and to make sure that we can balance those needs and the life cycle ownership needs of the customer. Again, I think ultimately, we'll get to the right place on this, and we'll see how it shakes out.
Seth Seifman: Okay. Very good. Thank you.
Operator: Thank you. Our next question comes from the line of Scott Deuschle of Deutsche Bank. Your line is open, Scott.
Scott Deuschle: Hi, good morning. Neil, can you characterize where Pratt & Whitney's free cash flow conversion is today relative to its after-tax earnings? How you expect that to trend over the next few years? Thank you.
Neil Mitchill: Good morning, Scott. Thank you. Yeah, listen, as I look at Pratt, first of all, it's generating substantial cash flow in 2026. It has been every year since the trough of COVID, so it's a very productive and cash flow positive entity. Keep in mind, about half of it is commercial engines, a quarter of it is military, a quarter of it is Pratt Canada. What's great about as we look forward, as you all know, we've made substantial investments in expanding our MRO capacity, getting our facilities put together for assembly of GTF engines. We expect that to continue as we continue to increase our volumes.
Neil Mitchill: On the GTF aftermarket, we've been doing a number of overhauls that are pay at shop visit, and those full interval shop visits are coming due here this year and into the next several years, and each of those shop visits brings with it cash payments. So Pratt will be a tailwind to RTX's free cash flow over the next three years. I'm not going to put a number on it today, but you've heard the kind of growth rates we've demonstrated over the last two years in the MRO output. We expect strong, call it low double-digit increases in shop visits as we go into 2027 and beyond. With that will come the cash flow that we expect to return the investment on the GTF.
Scott Deuschle: Can you say what percent of GTF shop visits are pay at overhaul?
Neil Mitchill: We have talked about the contracting landscape before, and about 80% of the contracts for the GTF program are under a long-term contract. I would say, the vast majority of them are a pay at shop visit contract. The good news is, as you have looked at the results of RTX and Pratt, a key part of that over the last few years, we have generated substantial free cash flow. We have, at the same time, made substantial investments in overhauls over the last few years. The contract asset has grown at Pratt, but over the next three to five years, we will start to see that come down and generate tailwinds for the business.
Scott Deuschle: Thank you.
Neil Mitchill: Thank you.
Operator: Thank you. Our next question comes from the line of John Godyn of Citigroup. Please go ahead, John.
John Godyn: Hey, guys. Thanks for taking my question. I was hoping we could just stay on Pratt for a bit and maybe revisit margins. Obviously, modeling Pratt margins has a lot of moving parts. You had the IEEPA. I am just curious how you guys self-assess performance recently, and when we look out to a world where aftermarket trends stay strong as you described, AOGs are declining, how should we think about the shape of a margin breakout eventually? Any additional color would be helpful.
Chris Calio: I will start, John, and then I will ask Neil to chime in. Look, when you think about Pratt and Pratt's margin expansion and performance, it does center around the GTF. You heard us talk earlier today about the MRO performance on the 1100 up 37% year over year. Turnaround time has come down, and that is with heavier shop visits. So, really strong performance from an MRO perspective, which will help drive AOGs down here in the Q4. Then it is really shifting to the GTF Advantage and HS+. Those are going to be the two main thrusts behind margin expansion in our large commercial engine business. GTFA is in production today. As you know, we talked about its EIS with United earlier, so we are very pleased about that. We are taking a disciplined approach to that production cut-over.
Chris Calio: This configuration will get cut in over a period of several years to manage the risk. There is a large proportion of the bill of material that is common, but there is some that is unique. We want to make sure those are up at the right rates as we cut that in. Then on Hot Section Plus, which as you know is effectively the derivative of the GTF Advantage, you get 90% to 95% of the durability benefits in a kit. We are working with Airbus and regulators to finalize certification, and we anticipate it is going to be installed into MRO early next year. We also expect that cut-in to be more aggressive and faster than the one I just described on the GTF Advantage.
Chris Calio: So again, it is really going to come down to continuing on the MRO output on GTF and then the cut-over on GTF Advantage and then the cut-over on HS+ and our GTF shop visits.
Neil Mitchill: Chris, the only thing I would add maybe to just put some numbers around what we are talking about here. We have talked about Pratt being entitled to low- to mid-teens margins over the longer term. When I look at the performance of the business and the mix of installs and spare engines, the growing GTF aftermarket, the continued steady V2500 shop visit outlook that we have for the next several years, all of those things contribute to margin growth year over year through the next five years. It is going to be a gradual growth. Importantly, as I just talked about a few minutes ago, it will come with significant cash flow tailwind as well, as we convert these shop visits to paying shop visits. The formula for margin expansion is in place.
Neil Mitchill: We have got good traction on the aftermarket, on the pricing, and I think that the team is focused on the right things at Pratt & Whitney to drive that growth over the next several years.
John Godyn: Thanks a lot, guys.
Neil Mitchill: You are welcome.
Operator: Thank you. Our next question comes from the line of Scott Mikus of Melius. Your line is open, Scott.
Scott Mikus: Chris, the company is generating a lot of free cash flow, and there is some sensitivity around stock buybacks for defense contractors. Earlier this year, we saw Northrop file to have its consent decree related to Orbital ATK acquisition either waived or modified. If the administration allows that to go through, would you look at acquiring a solid rocket motor supplier to help you with the ramp on missiles?
Chris Calio: Yeah, thanks. Appreciate it, Scott. Again, I think when we look at our supply chain, we are looking at all our possible constraints. We see constraints, as I mentioned earlier, in castings, and we are investing in our own Asheville facility there. We see constraints in rocket motors, as you noted. I talked earlier about critical minerals. We are always looking at whether or not we deploy capital to bring additional sources of supply in terms of qualifying new suppliers. We are also always looking at places to deploy capital to bring certain suppliers in-house if we feel like it is a major bottleneck. On rocket motors, in particular, I will tell you, we are expanding the supply base and entering into partnerships with other solid rocket motor suppliers, because I think that is just an area that you are never going to have enough suppliers there.
Chris Calio: I think the demand is going to be incredibly high, and we need to continue to spread that risk across a number of suppliers, which is why you have seen some of our announcements that we have made in terms of our partnerships with other rocket motor suppliers. Again, just stepping back, we are always looking at ways to shore up our supply chain. No immediate plans on rocket motors. Again, that is more of a partnership strategy, but always looking for ways to strengthen the base.
Scott Mikus: Got it. Thank you.
Operator: Our next question comes from the line of Matt Akers of BNP Paribas. Your line is open, Matt. Matt, please make sure your line is open. If you are on a speaker phone, lift your handset. We will go to the next question, which comes from the line of Gautam Khanna.
Gautam Khanna: Gautam.
Operator: Of TD Cowen. Gautam, your line is open.
Gautam Khanna: Yeah, good morning, guys. Was wondering if you could characterize Raytheon's foreign backlog, given all the orders on the US side this quarter. Also, if you could talk a little bit about, do the missile framework agreements, because they are for mature programs, do the profit rates on those approximate that of the foreign backlog? Should we view it as a substantial mixed tailwind over time? Thank you.
Chris Calio: Look, on the last part of your question, Gautam, as I said earlier, as we continue to move into the production phase and we start to see the efficiencies come from the higher volumes and from our supply base, again, we think that these can support margin expansion at Raytheon. On the international side, again, continues to be a very strong portion of the Raytheon backlog. Our international bookings at Raytheon are up 2.5 times year to date on a year-over-year basis. So that international demand continues to be very strong. Again, I know there's been some overhang regarding questions on the budget and the like, but our international customers continue to have really strong demand for our product, whether that be Europe, MENA, Asia Pacific. So the demand internationally continues to be exceptionally robust.
Neil Mitchill: Just to put a finer point, sorry if I missed it, Chris, 37% of the total backlog is international. It's 52% if you exclude the munitions contracts, Tomahawk and AMRAAM, that we added. So, still very substantial. We booked $9 billion worth of international orders at Raytheon during Q3. A little overshadowed by the size of Tomahawk and AMRAAM, but still really strong bookings, and we expect some more here in Q4. So just a little extra color there.
Gautam Khanna: Thank you.
Neil Mitchill: You're welcome.
Operator: Thank you. The last question comes from the line of Ken Herbert of RBC Capital Markets. Please go ahead, Ken.
Ken Herbert: Yeah. Good morning. Thanks for squeezing me in. As you look at the strong aftermarket growth in Pratt, you've obviously talked a lot about the GTF strength. How much of that growth was GTF, and can you give us any more update on what you're seeing on PW4V25 and maybe Pratt Canada aftermarket in the quarter?
Neil Mitchill: Yeah. Thanks, Ken. Listen, the majority of that growth came from the GTF aftermarket. We're still seeing really solid content on the V2500. Q3 was lifted a little bit by particularly strong content on the V program. So a little bit of growth there as well. We see that actually slowing down in Q4, just on the mix of the inductions and the engines going through the shop. As I said in the last call, we expected about 800 shop visits for 2026. We are right on track to that rate through the end of Q3, and we see no change to that outlook in Q4. Frankly, I think we see that number of shop visit inductions pretty flat and consistent year-over-year with, again, increasing content on the V.
Neil Mitchill: As we look at where we are today and the top line growth at Pratt, a lot of that's being driven off of our GTF program, which over time will far outweigh the structured decline in the V2500 powered aircraft.
Ken Herbert: Great. Thank you.
Neil Mitchill: You are welcome.
Operator: Thank you. With that, I will now turn the call back over to Nathan Ware.
Nathan Ware: All right. Thank you, Latif. That concludes today's call. As always, the investor relations team will be available for follow-up questions. Thank you all for joining us, and have a good day.
Chris Calio: Take care, everybody.
Operator: This now concludes today's conference. You may now disconnect.
