RTX Corp (RTX) Q4 2025 earnings review
Top-Line Boom, Bottom-Line Squeeze
RTX delivered a massive revenue beat with 14% organic growth in Q4, driven by surging defense demand and commercial engine deliveries. However, this volume strength did not translate efficiently to earnings. Adjusted EPS grew only 1% YoY ($1.55 vs $1.54), weighed down by margin compression at Collins and Pratt & Whitney due to tariffs, mix shifts, and higher corporate expenses. While the record $268B backlog and $7.9B full-year free cash flow are bullish signals, the inability to leverage double-digit sales growth into profit growth is a near-term friction point.
🐂 Bull Case
Free Cash Flow exploded to $3.2B in Q4 (up 549% YoY), bringing the full year to $7.9B. Management guided for further acceleration to ~$8.5B in 2026, confirming the company has moved past the peak cash drag of the GTF powder metal issues.
Raytheon is finally firing on all cylinders. Segment profit jumped 22% in Q4 with margins expanding 140bps. With a record backlog of $268B (Defense portion $107B) and products like Patriot and GEM-T in high demand, the long-awaited conversion of backlog to profit is happening.
🐻 Bear Case
Pratt & Whitney sales surged 25%, but operating profit only grew 8%, resulting in a 130bps margin contraction. When sales grow 3x faster than profits, it indicates negative operating leverage—driven here by tariffs, higher SG&A, and mix shifts.
Collins Aerospace, typically the steady profit engine, saw margins contract 20bps to 15.8% despite sales growth. Management explicitly cited 'higher tariffs across the business' as a drag, a headwind that isn't disappearing in 2026.
⚖️ Verdict: ⚪
Neutral. The commercial and defense demand signals are undeniable (14% organic growth is stellar for an industrial giant). However, the poor profit conversion in Q4 (1% EPS growth) and margin erosion in 2/3 segments suggest execution and macro costs are eating up the upside. 2026 guidance implies a return to balance, but the Q4 'profitless growth' is a watch item.
Key Themes
Tariff Toll on Margins
Tariffs have moved from a theoretical risk to a tangible drag on results. Both Collins and Pratt & Whitney cited 'higher tariffs across the business' as primary reasons for margin compression in Q4. Collins margins dropped to 15.8% (from 16.0%) and Pratt to 8.2% (from 9.5%), preventing the company from capitalizing on volume gains.
Raytheon Segment Breakout
Raytheon was the star performer, reversing previous struggles. While other segments saw margin compression, Raytheon expanded margins by 140bps to 11.6% and grew profit 22%. Driven by volume on Patriot, GEM-T, and NASAMS, this segment is successfully converting the massive global defense demand into profitable revenue.
Commercial Aftermarket Strength
The high-margin aftermarket business remains robust. Pratt & Whitney commercial aftermarket sales grew 21% (driven by GTF volume and heavier work scopes), and Collins aftermarket grew 13%. This recurring revenue stream is critical for offsetting the lower margins associated with the surge in OE (Original Equipment) deliveries.
Record Cash Flow Generation
RTX generated $3.2B in Free Cash Flow in Q4 alone, a massive acceleration from $492M in the prior year. FY25 FCF reached $7.9B, exceeding the $7.0-7.5B guidance range. This signals that the worst of the GTF powder metal inventory build and compensation payments may be in the rearview mirror.
Pratt & Whitney Negative Leverage
Pratt grew sales 25% (massive volume) but operating profit only 8%. The drivers were a 28% surge in Commercial OE (usually lower margin/loss-leading) and higher SG&A. While filling the fleet with engines is good for long-term service revenue, the immediate impact is a painful 130bps margin contraction to 8.2%.
Corporate Expense Drag
Unallocated corporate expenses spiked to $132M in Q4 from just $4M a year ago. Along with a higher tax rate (23.9% vs 21.9%), this non-operational drag was a key reason why 12% sales growth evaporated into just 1% EPS growth.
Other KPIs
Stable/Growing. Up from $251B in Q3 and $218B a year ago. Defense backlog alone is $107B. This represents nearly 3 years of revenue coverage, providing immense visibility.
Accelerating. Driven by higher volume and favorable mix in large commercial engines. This indicates airframers (Airbus) are taking deliveries at a high rate, despite broader industry supply chain constraints.
Paused. The company prioritized debt repayment and dividends in Q4. Capital allocation remains focused on balance sheet strength following the GTF manufacturing issues.
Guidance
Decelerating. Implies organic growth of 5-6%, down from the 11% achieved in FY25. This normalization reflects the law of large numbers after a recovery year and potential caution on supply chain/production rates.
Accelerating vs Q4, Decelerating vs FY25. Implies ~5-8% growth YoY. While better than the 1% growth seen in Q4 25, it trails the 10% EPS growth delivered in FY25. It suggests margin expansion will remain difficult.
Accelerating. Up from $7.9B in FY25. Shows strong conversion of net income and suggests confidence in working capital efficiency despite the growing sales base.
Key Questions
Tariff Mitigation Timeline
Margins at Collins and Pratt contracted this quarter specifically due to tariffs. Are these costs permanent structural headwinds, or do you have pricing mechanisms kicking in during 2026 to offset them fully?
Pratt & Whitney Profit Conversion
Pratt sales grew 25% but profit only 8%. With OE volume expected to remain high in 2026, when should investors expect operating leverage to turn positive again? Is the mix shift to OE a multi-year margin drag?
Corporate Expense Spike
Corporate expenses and unallocated items jumped from nearly zero ($4M) a year ago to $132M this quarter. What drove this anomaly, and is this the new run-rate for 2026?