Raytheon Technologies Corp.\u2019s stock tumbled 10% Tuesday, its worst day in more than three years, after the aerospace and defense company said it needs to remove certain Pratt & Whitney jet engines from service for inspection.<\/p>\n
The stock The engine business has determined that a rare contamination in powdered metal used to make certain engine parts will require accelerated fleet inspection, the company said, calling it an issue that \u201chas recently come to light.\u201d<\/p>\n Related: <\/strong>Here are the U.S. airlines most likely to take a hit from Raytheon\u2019s jet-engine problem<\/p>\n While the issue does not affect engines currently being produced, a \u201csignificant\u201d portion of the PW1100G-JM engine fleet, which powers the Airbus \u201cThe business is working to minimize operational impacts and support its customers,\u201d Raytheon said. <\/p>\n On the company\u2019s earnings call, Chief Executive Greg Hayes said the company understands the issue and has begun to address it.<\/p>\n \u201cThat said, clearly this will have an impact on Pratt & Whitney and our customers,\u201d he said, according to a FactSet transcript.<\/p>\n Chris Calio, chief operating officer, said the issue is that the powdered metal used to produce certain engine parts may reduce the life of those parts. The metal has been used in Pratt\u2019s products for decades, but the company has determined that the contamination was present in rare instances in metal produced from roughly the fourth quarter of 2015 into the third quarter of 2021. <\/p>\n Beyond the initial 200 engines to be removed, Pratt is expecting that about 1,000 additional PW1100 engines will be removed for enhanced inspection. <\/p>\n Some were already on track to be sent for regular shop visits in 2023 and 2024. <\/p>\n \u201cAnd so the incremental impact to the fleet is still under evaluation,\u201d Calio said.\u00a0\u201cCapability to perform the accelerated inspections, which are focused on the high-pressure turbine disks, is already in place, and Pratt is developing plans to optimize\u00a0shop-visit capacity within its network to complete these inspections as quickly and efficiently as possible.\u201d<\/p>\n The next step will be to publish a service bulletin describing the inspections, and the Federal Aviation Administration will likely follow with an airworthiness directive. <\/p>\n The issue dominated analysts\u2019 questions, which were tougher than is conventional on earnings calls.<\/p>\n \u201cWhen you look at the litany of issues that have happened here with this engine, everything from hot section issues, manufacturing issues, do you have a cultural issue\u00a0in\u00a0your engineering workforce?\u201d asked Bank of America analyst Ronald Epstein. <\/p>\n \u201cAre people not talking to each other? And I mean, it also begs the question, how could you guys possibly not know about this at Paris when you did this major investor event?\u201d he asked, referring to last month\u2019s Paris Air Show. \u00a0<\/p>\n Calio said it was a manufacturing-quality issue that was first uncovered in 2020 when there was an incident with a V2500 turbine disk that turned out to be the result of a rare contamination in the metal. The company immediately inspected the entire V2500 fleet and reviewed the powdered-metal process, among other safety measures.<\/p>\n \u201cSo I would say, look, we\u2019re on top of it,\u201d Calio said. \u201cWe\u2019ve got this. It\u2019s going to be expensive. We\u2019re going to make the airlines whole as a result of the disruption\u00a0we\u2019re going to cause them and I think, you know, we\u2019re going to work ourselves through it. It\u2019s not an existential threat to RTX. It\u2019s not an existential\u00a0threat to Pratt. It is a problem\u00a0and we have them every day and we\u2019ll solve it.\u201d <\/p>\n Raytheon \u201cGiven that RTX hosted an investor event at the Paris Air Show only last month, we had expected this to be a surprise free set of results,\u201d analyst Robert Stallard from Vertical Research Partners wrote in a note to clients.<\/p>\n \u201cSo this fresh issue with the GTF engine, on top of the existing [maintenance, repair and overhaul] issues, is another blow that the stock could do without,\u201d he wrote in an early note.<\/p>\n In a later update, Stallard said the stock move shows \u201csome investors are clearly throwing in the towel on RTX.\u201d<\/p>\n However, that reaction may be overdone, even if it\u2019s understandable, he added.<\/p>\n \u201cNew engine families do have reliability issues, whilst the aero supply chain problems are well known\u2014the fact that this latest issue is all internal arguably makes it worse, but at least it has been spotted and should be addressed over the next year or so,\u201d he wrote.<\/p>\n For investors, the uncertainty is not knowing exactly the scale of the cash hit, as management are unable for now to quantify the full impact. <\/p>\n Vertical Research is sticking with its buy rating on Raytheon\u2019s stock for now.<\/p>\n Raytheon had net income of $1.327 billion, or 90 cents a share, for the quarter, up from $1.304 billion, or 88 cents a share, in the year-earlier period. Adjusted per-share earnings came to $1.29, ahead of the $1.18 FactSet consensus. <\/p>\n Sales rose to $18.315 billion from $16.314 billion, also ahead of the $17.683 billion FactSet consensus. <\/p>\n By segment, sales at Collins Aerospace rose 17% to $5.85 billion, while sales at Pratt & Whitney rose 15% to $5.701 billion. Raytheon Intelligence & Space sales rose 2% to $3.655 billion, and Missiles & Defense sales rose 12% to $4 billion. <\/p>\n The company said it now expects full-year cash flow of about $4.3 billion, down from about $4.8 billion. It expects adjusted EPS of $4.95 to $5.05, compared with prior guidance of $4.90 to $5.05. <\/p>\n Sales are expected to range from $73 billion to $74 billion, up from prior guidance of $72 billion to $73 billion. <\/p>\n
\n RTX,
\n
\n ended at its lowest since Oct. 17, when it closed at $84.47. It suffered its biggest one-day percentage decline since March 18, 2020, when it fell 14.5%, and was the worst performer in the S&P 500 index
\n SPX,
\n
\n AIR,
\n
\n A320neo family of narrow-body airliners, will need to be removed and inspected in the next 9 to 12 months, including about 200 accelerated removals due by mid-September. U.S.-listed shares of Airbus
\n EADSF,
\n
\n fell 2.5%. <\/p>\n
\n RTX,
\n
\n acquired Pratt & Whitney as part of its merger-of-equals transaction with the former United Technologies Corp. in 2020. The company recently announced that it will change its name to RTX Corp. on July 28. <\/p>\n