Noah Poponak: Okay. And what would be a credible protest case on FLRAA from your competition?
Scott Donnelly: I don’t think there would be one.
Noah Poponak: Okay. Thank you.
Operator: Your next question comes from the line of Ron Epstein from Bank of America.
Ron Epstein: Just a quick one. Can you help me think through this LIFO adjustment you guys are making. I mean, isn’t it sort of unfair to not include inflation in your costs?
Scott Donnelly: Yes. So Ron, that’s a good question. Look, just to make sure we understand the LIFO — so actual inflation is still in the segments. That’s very much a cash impact. It remains in the segment. The only thing we’re taking out of the segment is this LIFO provisioning, right? So by full accounting, which — again, I’m just a simple engineer Ron, but the LIFO provisioning phenomenon is that I’ve bought parts at one price. And now I have a new contract with a supplier. I have a higher price for that part. As soon as that first part shows up, the LIFO provision is basically taking the actual price I paid for those other parts and raising them up to the price of that new part. So it’s an accounting provisioning process.
It’s not an actual cost. So when I get to where that higher dollar part gets consumed by an aircraft, that’s going to be in my cost. That real inflation is in the segment. It is cash and it is in performance. It’s only that provisioning of that — the nature of this last-in, first-out accounting that is what we’re pulling out of the segment.
Ron Epstein: So I guess another way to frame the question though is if we were to look at your margins pro forma back to GAAP for 2023, what would they be if you didn’t do that adjustment?
Scott Donnelly: Well, you’ll have that full disclosure, right? You’ll see that LIFO number.
Frank Connor: You’ll see the total LIFO. But, Ron, there are no one else in our space is on LIFO. So we’re on LIFO. For accounting, you need to conform that between tax and accounting. So we derive a benefit from a tax standpoint in an inflationary environment by essentially accelerating those costs for book and tax purposes. But as Scott said, it’s not a true economic cost. And we have basically hung up about $600 million of effectively LIFO provision on our balance sheet that was profit never realized because of this accounting that is not consistent with everyone else in the space. So as inflation has accelerated here and LIFO has become a bigger number, we felt it was important to highlight that. And certainly, from a segment performance, take it out of the segment performance because it is not a true economic cost to the business.
It is essentially a function of the accounting treatment that we have, but that LIFO inflation will never turn into true economic cost in the business.
Scott Donnelly: So Ron, this has been an issue. We’ve always been on LIFO. Textron has always been on LIFO. So in a non-inflationary environment, it’s relatively small. It’s always been a bit of a drive. It’s a small number. It’s not been an issue. But with an inflationary environment, all of a sudden, you have these big non-economic bookings. Again, as Frank said, other companies — everyone else in our space, does FIFO accounting instead of LIFO accounting. So we get a lot of questions from investors about what are these differences. And so, I think taking this out make sense. And look, the reality is we don’t manage the business that way, right? I mean, when we sit down with the business, when we’re doing our plans, we’re managing, we do our operating calls that like it’s not something they control, right?
It’s not economic. And so, that’s not how we manage the businesses, right? We don’t look at that. So it makes sense to also not report that in that segment since that’s not how we manage these guys either. They don’t control that LIFO. They do control and they do get held accountable for actual real inflation on that — on those higher part counts, right? So that’s — we’re not taking anything operational out of the segment but managing it on what they control and the real financial impact.
Ron Epstein: Got it. Okay. Thank you.
Operator: Your next question comes from the line of Cai von Rumohr from Cowen.
