So those won’t come into effect here in our Q1 also. And so that’s kind of what we look at when we look at Q1. The other piece of my prepared remarks was really talking about, I mean we do anticipate it being lower than €“ lower sequentially than our Q4. And so that’s kind of the ballpark that we’re thinking about.
Matt Akers: Okay, that’s all.
Operator: The next question is from David Strauss with Barclays. Your line is open.
David Strauss: Thanks, good afternoon.
Chip Blankenship: Good afternoon, Dave.
Mark Hartman: Good afternoon, Dave.
David Strauss: The €“ so the $60 million in variable incentive comp, can you €“ Mark, can you just level set what was that number the last time you paid it in full in 2019?
Mark Hartman: Yes. It was in that same general ballpark.
David Strauss: Okay. And then on cash flow, you had a fair amount of working capital headwind this year €“ a pretty big headwind this year. It doesn’t look like in the guidance for free cash flow, you’re assuming any sort of working cap €“ it looks like working capital is fairly neutral. Is that right?
Mark Hartman: Yes. That would be fair. Now there are some pieces that are going on underneath the working capital overall. One, with the sales growth that we are anticipating for the year, obviously, that will have an effect on the receivables balance as we go throughout the year. We are anticipating some improvement in inventory, but also with some of the timing of payments to our suppliers and where €“ the timing within the year and kind of where our payables balance was at year-end, that would offset some of that inventory improvement that we see. And so really, it’s €“ those three factors generally are kind of what’s driving some of the working capital that we have. The other one that I do want to point out for everyone is with the current U.S. legislation around the ability to deduct the R&D expenses for U.S. tax purposes.
And this isn’t just a Woodward thing. This is for everyone. We will have higher tax cash payments in this year than we had in prior years because we have to, in essence, capitalize that R&D cost for tax purposes, and you can only deduct it over a four-year time frame. So that also has a headwind in our free cash flow for 2023.
David Strauss: How much is that, Mark? R&D piece?
Mark Hartman: We spent $120 million-ish this year on R&D. And so you think about a U.S. tax rate 25%-ish and you’re only getting a quarter of that. So it’s going to be $30 million, somewhere in that ballpark.
David Strauss: Okay. Thank you very much.
Mark Hartman: You’re welcome.
Operator: The next question is from Rob Spingarn with Melius Research. Your line is open.
Rob Spingarn: Hi good afternoon.
Mark Hartman: Good afternoon, Rob.
Rob Spingarn: Mark, going back to this price realization of 5% in 2023, aside from the higher incentive comp, what’s the cost inflation that you’re anticipating in 2023? Does it match the price? Or is it worse or better?
Mark Hartman: Yes. So the price realization we’re assuming and obviously, the inflation effect that we had in 2022 was pretty significant, both on material and labor. We’re not anticipating that inflation goes away in 2023. But we are anticipating that price realization would more than offset some of the material and labor inflation that we’re seeing. So it should be a tailwind to us.
Rob Spingarn: Okay. And then going back to Pete’s question, just the decrease €“ from $55 million to $40 million on the delayed shipments, if you will. It sounds like you could recover all of that in 2023, if that kind of quarterly progress holds up. Is that fair?
Chip Blankenship: We’re not counting on reducing all of our past dues to zero in the fiscal year 2023. We’re focused on making progress, but that would be overly optimistic in my opinion.
