Kathy Warden: Yes. So as you note, there is a delay to IOC, the reason though for the Nunn-McCurdy breach is the cost growth. So oftentimes scheduled delays add costs to the program, that is not the primary contributor. It is, as you noted, design decisions, particularly related to the command and launch requirements that the Air Force has and that affects the deployment in the launch facilities in each of the silos. And so that is what we are working to inform the Air Force decision process on alternatives and ways to reduce those costs and procurement and yet those are Air Force cost estimates, and they include a significant amount of scope that is outside of the industry team’s execution. But nonetheless, we will help to inform those discussions if they’re ongoing during this review process.
Douglas Harned: And does the delay in the timing, does this have much effect right now on your outlook for the overall profitability of the program.
Kathy Warden: It does not, Doug, our near-term assumptions on both the ramp of the program relative to sales as well as the profitability of the program are not materially impacted.
Operator: Thank you. One moment for questions. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed.
Sheila Kahyaoglu: Good morning everyone. Thank you. Kathy or Dave, maybe if you could just talk about the free cash flow guidance that you’re sticking with the 15% CAGR. Just the drivers in terms of top line working capital, Section 174, and the impact of B-21, Dave, I think you said 60% of that over $600 million is through 2026. Is that right? And do we think about Sentinel as a positive cash contributor?
David Keffer: Sure. Thanks for the question, Sheila. I’m happy to dig into that. The strength of the free cash flow outlook we really think of as one of the highlights our report today. And so happy to dig into that in more detail. And I think you heard correctly that 60% of the charge is associated with the period through 2026 from a cash flow perspective. I think importantly, the strength of the broad base of other programs across the business is serving to offset those pressures. And that’s what we’re seeing in our ability to maintain and build confidence in our multiyear outlook including adding a strong 2026 year to that outlook that continues the double-digit growth trajectory that we expect for the next several years.
We had a great finish to 2023 for free cash flow, really strong working capital performance, and that is enabling us to build confidence in our ability to continue to perform at similar levels going forward. As a company, we’ve put a lot of focus on working capital efficiency, on capital efficiency, on driving cash returns on recent investments and that is clearly showing up in the results and the performance of all of our sectors. We’re proud of their performance on cash in Q4 and in the outlooks for 2024 and beyond. And the net effect of all of these factors is that unchanged free cash flow outlook for 2024 and 2025, along with a strong 2026. I’d highlight in terms of what drives that going forward? What’s the underlying force as you point out?
Certainly, the operations of the business growth in the top line is, first and foremost, with an opportunity for growth at the margin rate line as well that leads to really strong margin dollar volume, which will convert into cash through the strong working capital performance that we expect to continue which is essentially a stable assumption in our outlook. We’re not looking for significant additional efficiencies given just how strong we were at the end of 2023. And then as we noted earlier, there are other structural factors that should help as well with CAS pension reimbursement growing slightly over the next few years and cash tax is projected to decline over that same period. So essentially, all of those factors will lead to strong — strong free cash flow growth outlook for the next several years and beyond.
Sheila Kahyaoglu: Thank you.
Operator: Thank you. One moment for questions. Our next question comes from Seth Seifman with JPMorgan. You may proceed.
Seth Seifman: Thanks very much. And good morning. I guess a 2-part question about B-21. First was the $143 million EAC in the quarter, is that the extent of the entire anticipated loss on lot 1 and I guess, how do we think about the progression of losses on the various lots? And then second, the fact that this charge includes lots that will be in budgets in 2026 and 2027 and not come under contract for a while and not be worked on for a while. I guess how would you assess the opportunity to maybe ultimately do a little bit better than anticipated here.
David Keffer: Sure. I can start on that, Seth. I think you’ve read properly into the $143 million EAC adjustment with Lot 1 having been awarded and the other is not yet awarded, that one does take the form of an EAC adjustment. So that $143 million is the lot 1 amount we are currently projecting. And the future progression while we can’t get into much detail because that would involve a lot sizes and quantities and other classified details. Clearly, the implication is that there’s modest growth from lot 1 to future lots on average. Over time, I think you’re thinking of this the right way that our current projections would indicate an average of a couple of hundred million dollars a year of after-tax impact on our — on the cash line from B-21, and that’s, as I referred to a few minutes ago, the headwind we’ve been able to mitigate through strength in the rest of the business.
In terms of your point about opportunity to outperform that over the long-term. Clearly, it is a core focus of our team to continue to drive efficiencies in the learning curves, successful outcomes of our negotiations with suppliers. We continue to engage and partner with our customer to understand macroeconomic impacts on the program and address opportunities for funding of relief, as Kathy mentioned earlier. And so we’ll continue to address all of those opportunities. This is something we’ll update you in the rest of the Street on over time.
Operator: Thank you. One moment for questions. Our next question comes from Cai von Rumohr with TD Cowen. You may proceed.
Cai Von Rumohr: Thanks so much. Kathy best wishes to feel better.
Kathy Warden: It sounds like you need those wishes as well.
Cai Von Rumohr: So anyway, so you had the loss on the B-21 kind of it didn’t look like a loss couple of quarters ago. You’ve had your second loss on Halo. This is clearly proving to be an environment where on fixed price contract, there is more risk. Have you changed your strategy regarding how you bid and specifically with reference to Tranche 2 of the tracking satellites because you were on Tranche 1 and you were not on Tranche 2. So have you changed your strategy in terms of how you’re bidding? And are there any contracts that you bid before changing your strategy that would still have risk that we’re not aware of today?
