RTX Corporation (RTX) FY2025 Earnings Quality Report

Grade: F — $85B Goodwill, Powder Metal Matter, DPA Compliance Monitor

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed February 6, 2026, FY ended December 31, 2025) + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP — Unqualified opinion (1 critical audit matter: revenue recognition on long-term contract estimates at completion)

One-line verdict: RTX is the $171B total asset, 185,000-employee aerospace and defense conglomerate created by the April 2020 merger of Raytheon Company and United Technologies' aerospace businesses. The scale is staggering: FY2025 revenue grew 9.7% to $88.60 billion (post-CIS divestiture), operating cash flow jumped 48% to $10.57 billion, and net income rose 41% to $6.73 billion. The Powder Metal Matter — Pratt & Whitney's PW1100 GTF engine inspection crisis first disclosed in 2023 — continues to drive "significant incremental shop visits necessary to perform inspections on PW1100 GTF engines through the end of 2026." Backlog is $268 billion (up from $218B in 2024). But the balance sheet tells the story: goodwill of $53.3B + intangibles of $31.8B = $85.2 billion, which is 131% of equity — the largest absolute dollar amount of goodwill-plus-intangibles in this screen. Cash of $7.4B covers 19% of $39.5B debt. And RTX is operating under two active Deferred Prosecution Agreements (DPA-1 and DPA-2) and an SEC Administrative Order from October 2024 with an independent compliance monitor due to take office by end of Q1 2026.

The Three Compliance Matters

From Item 1 Regulatory Matters, RTX discloses three simultaneous compliance issues:

1. DPA-1 and SEC Administrative Order (Middle East Foreign Bribery)

"As previously disclosed, on October 15, 2024, Raytheon Company entered into a deferred prosecution agreement (DPA) (DPA-1) with the DOJ and on October 16, 2024, the Company became subject to an administrative order issued by the Securities and Exchange Commission (SEC) (the SEC Administrative Order) to resolve the previously disclosed criminal and civil government investigations into payments made by Raytheon Company and its joint venture, Thales-Raytheon Systems (TRS), since 2012 in connection with certain Middle East contracts."

2. DPA-2 (Defective Pricing, False Claims Act)

"On October 16, 2024, Raytheon Company also entered into a DPA (DPA-2) and a False Claims Act (FCA) settlement agreement with the DOJ to resolve previously disclosed criminal and civil government investigations into defective pricing claims for certain legacy Raytheon Company contracts entered into between 2011 and 2013 and in 2017."

3. Independent Compliance Monitor

"A single independent compliance monitor was selected to oversee Raytheon Company's and the Company's compliance with their respective obligations under DPA-1, DPA-2, and the SEC Administrative Order, and **that monitor is expected to be in place by the end of the first quarter**."

The DPAs are 3-year deferred prosecution agreements. Per the 10-K: "in the event the DOJ, in its sole discretion, determines during the period of deferral of prosecution that Raytheon Company or the Company have violated any provision of either DPA, Raytheon Company or the Company may be subject to prosecution for any federal criminal violation, including the charges against Raytheon Company in the relevant DPA."

4. State Department Consent Agreement (ITAR Violations)

"On August 29, 2024, the Company entered into a Consent Agreement (CA) with the DOS to resolve alleged civil violations of the AECA and the ITAR. The CA, which has a three-year term, requires the Company to implement remedial compliance measures and to conduct an external audit of the Company's ITAR compliance program. The CA also requires appointment of an external independent Special Compliance Officer (SCO)."

RTX has four separate active compliance obligations plus a compliance monitor and a Special Compliance Officer. This is an extraordinary compliance burden that will occupy significant management attention and reporting bandwidth for at least three more years.

The Powder Metal Matter

The Pratt & Whitney PW1100 GTF engine issue is the single largest operational risk disclosed in the 10-K. From Item 1A:

"In 2023, Pratt & Whitney determined that a rare condition in powder metal used to manufacture certain engine parts requires accelerated inspection of the PW1100 GTF fleet, which powers the A320neo family of aircraft. This determination and corresponding fleet actions have resulted in, and are expected to continue to result in, an elevated level of aircraft on ground for the A320neo family of aircraft and significant incremental shop visits necessary to perform inspections on PW1100 GTF engines through the end of 2026."

"As a result, we have and will continue to incur significant customer support and mitigation costs and significant labor, material, and related costs. This matter has caused reputational harm and has negatively impacted, and will continue to impact, our results of operations and financial condition."

Critical disclosure: "other engine models within Pratt & Whitney's fleet contain parts manufactured with affected powder metal. The negative impacts arising from the Powder Metal Matter could increase if any other engine models are found to be materially impacted by this rare condition."

The Powder Metal Matter is expected to continue through end of 2026. This is a multi-year, multi-billion-dollar customer mitigation program. The 10-K explicitly warns the matter "could increase if any other engine models are found to be materially impacted."

Financial Performance: Scale and Recovery

From the Consolidated Statement of Operations (based on the cash flow statement reconciliation since the income statement wasn't fully extracted):

FY2023's depressed $3.38B net income reflects the original Powder Metal Matter charge — Pratt & Whitney recorded billions in customer mitigation costs in 2023. FY2025 is a recovery year as the charge has been largely absorbed and operations stabilize.

Sales to U.S. government: $33.28B in 2025 (38% of total sales) vs $32.25B in 2024 (40%) vs $31.63B in 2023 (46%). U.S. government share is declining as international sales grow.

International sales: $41.31B in 2025 (47% of total) vs $34.65B in 2024 (43%) vs $29.44B in 2023 (43%). International is the growth engine.

Backlog: $268B at December 31, 2025, up from $218B — a 23% increase. "Of the total RPO as of December 31, 2025, we expect approximately 25% will be recognized as revenue over the next 12 months."

Cash Flow: Dramatic Recovery

From the Consolidated Statement of Cash Flows:

CFFO jumped $3.4B (48%) from $7.16B to $10.57B. A meaningful portion of this was working capital: accounts payable + accrued liabilities contributed $3.42B (up from $1.51B in FY2024). This is partially timing — some of the payable build will unwind in FY2026.

FCF of $7.94B grew 75% YoY. The 2023 ratio of 2.33 CFFO/NI is inflated because the Powder Metal Matter created a large non-cash charge that flowed through net income but not cash.

CIS Divestiture: RTX sold the Cybersecurity, Intelligence and Services business in 2025, generating a $415M net gain and $1.93B of cash proceeds. The divestiture simplifies the defense portfolio.

Financing uses: FY2025 saw $3.57B in dividends, only $50M in buybacks (down from $12.87B in 2023), and $3.43B in debt repayment. RTX is deleveraging.

Bridge loan: FY2023 saw $10B in bridge loan proceeds and the same amount in repayment — likely related to a financing transaction that closed within the year.

Balance Sheet: Massive Goodwill

From the Consolidated Balance Sheet:

Goodwill of $53.3B + intangibles of $31.8B = $85.2B. This is by far the largest absolute dollar amount of acquired intangibles in this screen. The goodwill is a legacy of:

Goodwill + Intangibles = 131% of equity. Every dollar of shareholder equity is backed by $1.31 of acquisition goodwill.

Accounts receivable jumped $3.72B (+34%) — from $10.98B to $14.70B. This is a notable increase against the 9.7% revenue growth. Contract assets also grew $2.52B (+17%). Working capital is tightening across the business.

Debt fell from ~$41.3B to ~$37.9B — a $3.4B reduction. RTX is deleveraging from post-merger peak.

Cash of $7.4B vs debt of $37.9B (or $39.5B per yfinance) = 19% coverage. Still fails C4.

The 18-Point Screening

Revenue Quality

Both A1 and A2 are watch items: AR grew 34% while revenue grew 10% — a significant acceleration. This is the strongest caution signal in the screen. The delta could reflect:

The pattern is not yet a "fail" (which would require 2 consecutive years), but it will become one if FY2026 shows the same divergence.

Expense Quality

Cash Flow Quality

Balance Sheet

Acquisition Risk

Manipulation Score

Components: DSRI 1.22 (receivables intensity jumped 22% — the highest single component in this screen), GMI 0.951, AQI 0.934, SGI 1.097 (10% revenue growth), DEPI 1.033, SGAI 0.957, TATA -0.0224, LVGI 0.982.

DSRI of 1.22 is a yellow flag: receivables days are growing 22% faster than sales, which is the typical manipulation pattern signature. Combined with SGI of 1.097, the Beneish formula is flagging a "growth with working capital degradation" profile. The M-Score of -2.33 is the second-lowest in this screen (behind OTIS at -2.43), and the closest to the -2.22 threshold. Any further deterioration in AR/revenue dynamics in FY2026 could push the M-Score above the threshold.

Critical Audit Matter: Contract Estimates at Completion

PwC identified a single critical audit matter — revenue recognition on long-term contracts:

"As described in Note 1 to the consolidated financial statements, the majority of the Company's revenues of $88.6 billion for the year ended December 31, 2025, are from long-term contracts associated with the design, development, manufacture or modification of complex aerospace or defense equipment or related services… For performance obligations satisfied over time, revenue is recognized on a percentage-of-completion basis generally using costs incurred to date relative to total estimated costs at completion to measure progress."

"Due to the nature of the work required to be performed on many of the Company's performance obligations, the estimation of total revenue and cost at completion is complex, subject to many inputs and requires significant judgment by management on a contract-by-contract basis."

"The principal considerations for our determination that performing procedures relating to revenue recognition - contract estimates at completion is a critical audit matter are (i) the significant judgment by management in developing the estimates of total revenue and total costs at completion, including significant judgments and assumptions on a contract-by-contract basis, and (ii) a high degree of auditor judgment, subjectivity, and effort."

This is the standard aerospace/defense CAM, but it's particularly meaningful for RTX because:

PwC's audit effort on contract cost estimates is likely elevated given these dynamics.

Key Risks from the 10-K

1. Powder Metal Matter Expansion

The risk factors explicitly warn: "other engine models within Pratt & Whitney's fleet contain parts manufactured with affected powder metal. The negative impacts arising from the Powder Metal Matter could increase if any other engine models are found to be materially impacted by this rare condition."

This is a latent risk that could materially worsen. The existing PW1100 GTF issue is expected to require shop visits "through the end of 2026" — but if other models are found affected, the timeline and cost could extend.

2. DPA/SEC Administrative Order Compliance

Four active compliance regimes (DPA-1, DPA-2, SEC Administrative Order, State Department Consent Agreement). Any determination of breach by DOJ or SEC would vacate the Administrative Order and could result in criminal prosecution. The independent compliance monitor is due to take office "by the end of the first quarter" — meaning heightened scrutiny starting Q1 2026.

3. International Sales and Tariff Exposure

International sales of $41.3B (47% of total) expose RTX to foreign exchange, currency translation, and tariff risks. The risk factors note: "changes in trade policies, implementation of sanctions, imposition of tariffs (and counter-tariffs), and other trade measures and restrictions, foreign currency fluctuations."

4. U.S. Government Concentration

U.S. government sales of $33.3B (38% of total) — still the single largest customer. Subject to "a broad right to unilaterally terminate contracts for convenience" and all FAR/DFARS compliance.

5. Goodwill Impairment Risk

$53.3B of goodwill backed by $65.2B of equity (31,845M intangibles ~ 49% of equity). The risk factors list: "an impairment of goodwill and other intangible assets." Any adverse change to Collins Aerospace or Pratt & Whitney long-term cash flow forecasts could trigger impairment testing and potentially charges.

6. Accounts Receivable Acceleration

AR jumped 34% while revenue grew 10%. If this is due to customer payment slowing (airlines delayed, international customers delayed), it reflects demand weakness. If it's timing/billing catch-up, it should reverse. FY2026 will reveal which.

7. Supply Chain and Labor

"Our reliance on U.S. and non-U.S. suppliers and commodity markets, including cost increases and disruptions in the delivery of materials and services to RTX or our suppliers." RTX depends on hundreds of suppliers for aerospace components.

Summary

Grade: F. Two fails (C4 cash/debt, D1 goodwill/equity) plus two watches (DSO +11 days, AR 34% vs revenue 10%). The M-Score of -2.33 is close to the line — the second-closest to the manipulation threshold in this screen.

RTX delivered a strong cash flow recovery year: CFFO of $10.57B (+48%), FCF of $7.94B (+75%), and net income growth of 41%. The Powder Metal Matter charges are being absorbed and FY2025 earnings now reflect a more normalized operating picture. Backlog of $268B grew $50B — massive forward visibility.

But the quality signals warrant caution. AR grew 34% while revenue grew 10% — a 24 percentage point gap that could indicate customer payment slowing. DSO increased 11 days. DSRI of 1.22 is the highest in this screen. The M-Score at -2.33 is close to the threshold.

The compliance burden is uniquely heavy for RTX: two DPAs, an SEC Administrative Order, a State Department Consent Agreement, and an independent compliance monitor set to begin oversight by end of Q1 2026. Management attention is divided across multiple simultaneous regulatory obligations.

The key questions for investors: (1) Does the Powder Metal Matter expand to other Pratt & Whitney engine models, and if so, what is the incremental cost? (2) Can RTX collect on the $14.7B of receivables before they age further? (3) Will the compliance monitor identify any new issues that could trigger prosecution under the DPAs? The answers to these questions will determine whether FY2026 continues the recovery trajectory or reveals new risks.

**Disclaimer**: This report is based on RTX Corporation's FY2025 10-K filed with SEC EDGAR on February 6, 2026. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP (Unqualified opinion, 1 critical audit matter — revenue recognition on long-term contracts at completion estimates)

Fiscal year ended: December 31, 2025