Analysis
RTX was significantly affected by the sweeping "Liberation Day" tariffs introduced in April 2025, with the company initially estimating a potential $850M pre-tax operating profit headwind for the year. The actual realized impact for FY2025 was approximately $600M, primarily reflected as a drag on free cash flow. The burden was unevenly distributed across the company's segments, with the commercial-facing businesses, Collins Aerospace and Pratt & Whitney, bearing the vast majority of the costs. In contrast, the Raytheon defense unit was largely insulated, experiencing only a "minimal" impact of roughly $13M (approximately one cent per share) due to long-standing military duty-free exemptions for U.S. government and foreign military sale contracts.
Collins Aerospace saw the most pronounced margin impact, with tariffs resulting in a 90 basis point drag on its organic margins for FY2025. Without this headwind, Collins' organic margins would have reached 17.1%. Pratt & Whitney also faced significant costs, initially estimated at over $400M for the year. Management noted that the impact was heavily back-half loaded in 2025 as higher-cost inventory liquidated through the cost of sales. The total cash flow impact was roughly 15-20% higher than the P&L impact due to the timing of duty drawback recoveries from the government.
To counter these headwinds, RTX implemented a range of mitigation strategies including aggressive pricing actions, regulatory mechanisms such as duty drawbacks and temporary imports under bond, and operational shifts to leverage different suppliers. The company was particularly successful in passing through costs in its commercial aftermarket business, where it had already been operating in a high-inflation environment.
Looking forward to FY2026, RTX expects a "tailwind" relative to the prior year, with tariff-related costs projected to be approximately $75M lower than the 2025 levels. This improvement is partly due to the evolving legal landscape; following a February 2026 Supreme Court ruling that found many of the emergency tariffs unconstitutional, the company is positioned to see reduced future exposure and potentially recover previously paid duties. Despite these challenges, the company's overall organic sales grew 11% in FY2025, as strong demand for commercial services and defense products more than offset the direct financial drag from the trade restrictions.
Data
The following table summarizes the financial impact of tariffs on RTX during FY2025 and the projected impact for FY2026.
($M, except margin impact)
| Metric | FY2025A | FY2026E |
|---|---|---|
| Total Tariff Cash Flow Impact | $600 | $525 |
| Collins Aerospace Margin Drag | 90 bps | -- |
| Raytheon Profit Impact | ~$13 | -- |
Note: FY2026E is based on management's January 2026 guidance of a $75M tailwind compared to 2025 actuals. All costs represent net impacts after mitigation.
Source: Transcript FY-2025, Transcript 1Q-2025
Financial Impact
- Cost Impact (Historic): $600M
- Cost Impact (Forward-Looking): $525M
Sources
Free cash flow for the quarter was very strong at $3.2bn, bringing our full-year free cash flow to $7.9bn... This included approximately $1bn of powder-metal-related compensation and approximately $600mn of tariff-related impacts.
From a tariff perspective, that was a 90 basis point drag [on Collins margins in 2025].
While some of the exemptions we have had in the past will continue to apply, such as the military duty-free exemption for U.S. government and foreign military sale contracts, we are also working to implement and capture additional mitigations.