Jay Malave: Okay. I’ll start with the second one first on RMS margins and then come back on the F-35. On the margins for RMS, you’re right, George, we’re expecting an increase in profitability there. It’s really a twofold function of higher profit adjustments. And there are – and I think I’ve talked about this in the past, we do have some mix benefits through some delivery – program deliveries here in the fourth quarter, which will give them some lift. As far as the F-35, just really from a sales perspective in the quarter, production was down pretty substantially, really close to 20%. Development was up quite substantially and sustainment was up in the high teens. So with solid there on sustainment, that’s been strong all year long. We expect that to grow for the year around 10%.
Operator: Thank you. And our next question is from the line of Ron Epstein.
Jim Taiclet: Lois, are you still there?
Operator: Yes. One moment. We’re opening his line. I’m sorry, the next person that we will go to is David Straus from Barclays. Please go ahead.
David Strauss: Hi, good morning, everyone.
Jim Taiclet: Good morning, David.
David Strauss: Jay, I think the IRS came up with some recent updated guidance around Section 174. I want to see what your interpretation of that was, whether it’s supported your position or your peers that are taking, I think, higher levels of – or a higher associated with Section 174. And then any updated thoughts on where pension might come out for you guys next year given what appears to be much higher discount rates and weak asset returns? Thanks.
Jay Malave: Sure. Thank you, David. The first one on the R&D capitalization, the draft guidelines that came out, we view those as promising. We believe that they support our position of continuing to deduct the costs associated with cost plus contracts. And just as you remember, we treat that and view it as a cost of sale, not really as an R&D activity. The risk is really borne by the acquirer of those services. The rights are short-lived and they’re also restricted. And so we believe the draft language is, at least thus far, appears to be consistent with our approach. And so we view it positively. As far as pension, a couple of things going on with pension, I’ll go on the P&L. FAS pension will see a significant reduction next year.
We’re going to go from about $375 million of income in ’23 to about $50 million of loss in 2024. It’s a function of two things. One is the returns. And the second is essentially the expiration of benefits that we’re amortizing since – from the 2014 salary plan freeze. And so those run out, and so we’ll see a significant increase. As you know, that’s pretty much noncash, but it will affect EPS. On the cash side of it, we’ll see a little bit of a slight reduction anywhere between $25 million to $50 million reduction. But again, the biggest piece there is on FAS. From a cash contribution, we talked about anywhere between $500 million to $1 billion of contributions required starting in 2025. Right now, given where things are, we would expect that to be in the higher range, if not higher for 2025.
And if we stay where we are, it could trigger some contributions in 2024. But I will say, when you think about cash contribution to pension and what that means, we’ve got an enviable position in our balance sheet. We’ve demonstrated that we’re willing to use it. And so I wouldn’t view that higher pension contributions as limiting, otherwise limiting our ability to continue our cash deployment strategies, and that’s the key point.
Operator: The next question is from the line of Ken Herbert from RBC Capital Markets. Please go ahead.
Ken Herbert: Yes, hi. Good morning, Jay and Jim. Maybe, Jay, just to follow up on a comment you made in the prepared remarks. I think you made a comment around the buyback activity in the fourth quarter sort of dependent upon timing of the fiscal ’24 budget and whether or not there is a shutdown potentially. Can you just talk about how you’re thinking about the timing of the ’24 budget, but very specifically, if there’s any sort of shutdown, how much does that put at risk sort of the buyback activity expected in the fourth quarter? Or if it’s very short, does that not impact me? Maybe you can walk through how you’re viewing sort of the risks around that and impact on the fourth quarter cash deployment?
Jay Malave: Sure. So year-to-date, 0we’ve done $3 billion with this new guide at $6 billion, that’s $3 billion in the fourth quarter. We’re monitoring the status of the budget discussions and resolution of that. If we do find ourselves in a shutdown scenario, would cause us to take a pause in another relook at that share repurchase. And what we would probably do is just defer it, so it would be more of an issue of timing versus anything else until such time that the budget gets clarified. So history tells us, these things are fairly short-lived. We believe that we’ll be able to get through it here in the fourth quarter. If not, then it would just push probably into the first quarter and the like and really won’t see a meaningful impact there.
But again, in a shutdown scenario, you just take a look at what does that mean. It does – you can’t have new starts. It could be disrupted to programs. It could also put us in a situation where we’re doing some self-funding to keep programs on track. And to the extent that occurs, it could be a limiting factor on share repurchase.
Operator: The next question will come from the line of Sheila Kahyaoglu from Jefferies. Please go ahead. Sheila’s line did drop from the Q&A. So we’ll move to Rob Stallard, and he’s from Vertical Research. Please go ahead.
Rob Stallard: Thanks so much. Good morning.
Jim Taiclet: Good morning, Rob.
Rob Stallard: A question for Jim or Jay. On the balance sheet, you noted that you’re returning more than 100% of free cash flow to shareholders at the moment. But we do have this ongoing U.S. budget uncertainty and you’re going to put more money into the pension fund. So how sustainable do you think it is to be returning more than 100% to shareholders going forward?
