Operator: Your next question comes from the line of Jonathan Ho from William Blair.
Jonathan Ho: Thank you for the additional color on the challenge programs that you just provided. One thing I wanted to better understand a little bit is that you have scrutinized these trouble programs and implemented processes in the past. Can you help us understand why it took so long to sort of identify these additional issues? And maybe help us understand why this time you have more confidence that you’ve got a handle on it?
Bill Ballhaus: One thing that I’ll iterate is where we’re seeing EAC growth in the challenge programs, in general, it’s not repeat issues. So if you look across the list of programs, the 19, with the exception of the one, we had very little volatility in the quarter. Where we did see the issue on the one program represented the fact that we’re progressing the program. So we worked our way through development, that’s a positive. We worked our way through the low rate production. And as we did, we learned more about the unit economics and specifically the unit cost that informed our view of the production. So I understand the question around why it took so long, but it really has taken us progressing through the different phases of this program in particular.
And again, this one has a different profile, because it includes development, low rate production and a longer production run. On most of the development programs in general and our challenge programs, we have the opportunity to complete the development. So there may be some risk associated with completing the development. But at the end of the development, we get to the design baseline, we have an opportunity to execute on a small number of units so that we can get a good baseline for the unit economics, and in particular, the unit cost, and then we’re able to factor that into bids for production contracts that are follow-on. So in this particular case where we have development, low rate production and a longer run production associated with it, within this one program, we have the risk associated with those three phases, which is relatively unique.
So it may seem like it took us a while to get to the EAC and really understanding it. But we had to do the work and progress through development and low rate production in order to inform and update our view on the production run. So that’s really the background on that.
Jonathan Ho: Just one quick one as a follow-up. How flexible have your partners been to sort of work with you on these revised either contract terms or prepayments? Does this have an impact on your future relationships as well?
Bill Ballhaus: On payments themselves, Jonathan, could you please clarify?
Jonathan Ho: So you referenced sort of going back to renegotiate some of the contracts and then having some acceleration in terms of the payment. So I just wanted to understand if that impacts the relationships, whether your partners or end customers have been willing to work with you? Just trying to understand sort of the dynamics around those discussions.
Bill Ballhaus: Yes, thank you for clarifying the question. And this ties back to what we’ve talked about now for a couple of quarters about, in general, our more cash efficient approach to our operations. And that has a couple of comments. One is how we order material and better stage it with the timing of deliveries. And the second piece of it is the contract terms that we put in place so that we can better align progress with progress payments historically. And one of the reasons why we have a large unbilled balance is our payment terms speak to us being able to bill invoice and collect cash only once we’re complete and deliver the units. And so one of the things that we’ve done operationally is work to align our payment terms with progress payments.
And so that, I think, is the renegotiation that you’re referring to. And what I would say is, in general, it’s not a big deal because our customers, in many ways, our incentives are aligned. So when we build them, they’re able to collect cost, invoice their customers and collect cash. So our incentives are aligned. And as a result it’s typically not a difficult conversation for us to have with our customers. Anything, Dave, that you would add to that?
Dave Farnsworth: I would add to that. When you think about the relationship and you’re asking about our customers and working with our customers, I mean, a reflection of our customers’ thoughts and you know working with us, I mean, it’s reflected in the strong bookings we had that you see. These are customers who largely we have these customers have had them for a long period of time, and they’re working with us. Bill has met with several of the customers even on the areas with the challenge programs. So he’s working with those customers. And they want us to get to the answers the final activity so that we can get into production. They need these products where we have a unique capability to deliver these products and you see it reflected in our growing backlog and in our bookings that we’ve seen. As Bill said, we see some transitory kind of impacts but our customers understand that and then they’re working with us.
Bill Ballhaus: And then the other thing I’ll add, Jonathan, and this may have been part of what you’re asking as well, we did mention that we had some contract fulfillment in the quarter that resulted in a transitory impact, I think, of $5 million. In general, those discussions and what was behind the settlements had nothing to do with us trying to negotiate different payment terms, better align payments with progress payments, et cetera. They were completely different matters, specific to those contractual relationships, and not reflective of us trying to negotiate different terms with our customers. So in the event that, that was part of the question, I want to provide that color.
Operator: Your next question comes from the line of Sheila Kahyaoglu from Jefferies.
Kyle Wenclawiak: This is Kyle Wenclawiak on for Sheila. I appreciate the legwork you guys are doing around cost savings and the cash focus nowadays. But I just want to hone in on the profitability guide for this year, because it seems like the two uncertainties are kind of what you just mentioned around contract exits. So first question there is maybe how much of the backlog or revenue bridge is maybe up for negotiation? And then second part being the cost savings, it seems like a lot of that is pretty exhaustive, so maybe some color around why you didn’t hone in on a more profit shakeout this year?
Bill Ballhaus: I’ll take a stab at the two questions, and then Dave, maybe can fill in. First, on just the cost savings piece of it. As we’ve said in prior calls, I don’t think of that as a onetime activity. I think of it as an ongoing activity to drive efficiency in our organization and our structure. And I think we’ve been pretty consistent in demonstrating that that’s our focus with what we announced in Q1, the further enhancements that we rolled out in January, and we’ll continue to look at opportunities to improve our cost structure. And I think that’s a very natural thing to do in a business like ours that’s been built up through acquisitions over a period of time for us to continue to look for opportunities to better integrate the business. As far as the contract, I guess, on the first question around…
Dave Farnsworth: This is Dave, Kyle, if it’s all right. If I understood the question, it was around, of the $1.3 billion of backlog we have, how much of that backlog do we think would be — I don’t know what the right word would be, potentially renegotiated. Is that what you were driving for?
Kyle Wenclawiak: Yes, maybe how much of the backlog is maybe the lower margin work that you’d look to either exit or I mean, I guess, renegotiate?
Bill Ballhaus: I think about it very differently. That isn’t a dynamic that we’re currently thinking about or working on. I mean we feel very good about the backlog that we have in place. And again, like I said, it’s a record backlog coming off of a great bookings quarter. The risk that we see in the business really is isolated to what we consider to be about 20% of the business, that’s where we’ve seen volatility in the business. And the remaining 80% of our business has performed very predictably and we expect it to continue to perform predictably. And we’re really focused in not so much on contract renegotiations or anything like that, but it’s the execution in the 20% of our business. In particular, that includes this one common processing architecture technology that cuts across a few programs that we need to finalize the work that we have currently underway so that we can get to a design that is not just producible, which is where we are today, but producible at scale, so that we can perform very predictably and profitably and that’s our focus.
So it’s less about the $1.2 billion backlog that we have and it’s more about this one part of our business that represents 20%, and this common technology is a subset of that 20%.
