Dave Farnsworth: I think Mike that we recognize and I think we said, initially when Bill and I did the last call that we saw still risk but the risk was largely first half weighted. So not – I mean frankly, we’re both expect a lot from folks. So it would have been – it wasn’t perfect for sure. From a – Bill talked about the cost growth but from a revenue standpoint, we absolutely entered in our minds with a plan that the first half would be lower and I think we talked about that. And as we were looking towards not trying to pull a bunch of costs onto the balance sheet we talked about that. And to position ourselves for growth in the second half and to get these programs done and we spent a huge amount of the capacity of the firm working towards getting these programs done.
And making sure we’re ready at the – when we get into the second half and we expect as we said some significant awards in Q2 that we’re ready to produce on those contracts as we go one of the things that was actually really strong and was good to see was on the production side of the business, which is 60-plus percent. I mean we absolutely – the team nailed it that the margins were right in line with what our expectations were. And so that gives us a really good sense of the strength we have in the back half of the year.
Bill Ballhaus: And as Dave said, we came into the year expecting that the first half will be down. The first quarter would be down. And if you just look at Slide 11 and walk top to bottom on that chart, it’s pretty understandable as to where we are versus last year. We talked for instance about the large booking that we got in the year and we only recognized a portion of it. We talked about the revenue differential and the fact that the bulk of the revenue change year-over-year is tied to our overtime contracts and we are deliberately timing material to be much more efficient and linking it to the just-in-time need of our hardware. And then when you look at the gross margin differential, we talked about the impact of the development programs and adjusting back for the impact of the development programs the gross margins were largely consistent with our expectations.
So I think that should be a pretty good indication that our results in the quarter, while they’re down year-over-year, we expected them to be down. And I think we’ve got good line of sight around those variances. And as we look forward, we can see how driving execution on these development programs is going to lead the bookings. It’s going to take variability out of our performance as we mitigate the impacts of the EACs and cost growth et cetera. And as we move hardware through the factory and time material more closely to hardware delivery, we’re going to improve dramatically the free cash flow of this business. So it may sound odd, but I think we feel pretty good about where we sit right now.
Q – Michael Ciarmoli: Got it. Thanks guys. I will keep it to just one. Thanks.
Bill Ballhaus: Okay. Thank you.
Operator: Thank you for your question. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is live.
Sheila Kahyaoglu: Hi. Good afternoon, guys. How are you?
Bill Ballhaus: Hi, Sheila.
Dave Farnsworth: Hi, Sheila.
Bill Ballhaus: Doing well.
Dave Farnsworth: Thanks. Good afternoon.
Sheila Kahyaoglu: So I just wanted to go over a few things as possible on the top line and the bookings. Maybe if you could square away, what’s happening with the top line a little bit more? I know you guys talked extensively, but are you kind of accounting for it in a different way? Does overtime revenues that are kind of what happens to how you account for it based on a material and labor way? And are you also saying that the revenue recognition left to do on the challenged programs is very small? So what part of the top line is driving the organic decline I guess I would…
Dave Farnsworth: Yeah. This is Dave, Sheila. I would not say — we’re not accounting for anything differently. It’s the same accounting obviously and we’re recognizing the material and the labor as we progress. And the one thing that’s happened to the business in the past is we brought in a bunch of that material and Bill talked about this. We brought in a bunch of material and applied labor to it early on in the process. And for lots of reasons some of those reasons were go back way in time when supply chains were completely going haywire because of COVID which is long behind us. And — but some of that practice was — would bring it in as early as possible and start progressing it and then get to a stage, it would sit on the balance sheet until it was ready to be progressed further.
And so we intentionally said, let’s not do that. We don’t need to do that. Supply chain stable enough now there’s some long lead stuff that still freaks everybody out in the industry and we all know that. But let’s make sure we’re not bringing it early. We’re not trying to progress it ahead of when it’s needed. And so that really did lead to a significant decline in the overtime revenue. We expect that we’ll still have that material and be able to progress it with the labor we need to and largely that’s going to happen in the second half and we’ll be able to bring it in. At the same time, as we get the new programs you’ll see, a bunch of the inventory we’ve got progressed too into those projects and products so that that will show up as revenue where today it does not.
But I thought one of the things that was a positive. If you look at our inventories and you look at the 10-Q, you can see that the inventories grew $26 million, but $21 million of that growth in the quarter was work in process not raw materials. So it’s activities that we’re progressing towards final product, so that we can ship it. So it’s stuff that’s making its way through the pipeline. So I don’t think Sheila, there’s been a big change other than us trying to be more just in time and trying to get ourselves in a better position from a working capital standpoint which I think is critical to the business.
Bill Ballhaus: Well, I would say that our focus on working capital really has two pieces to it that are really important. One is our focus on hardware delivery, so not just progressing hardware, but actually completing hardware, getting it out the door so that we can invoice and collect cash. Now, because we’ve recognized revenue on a number of programs that have the large unbilled balances and in many cases its most of the contract revenue, completing the hardware may have very little revenue associated with it in many cases, but it’s what we have to do in order to invoice and collect cash. So part of the dynamics that you’re seeing is us being focused on allocating factory capacity to hardware that we need to get out the door, so that we can collect cash that may have a small amount of remaining revenue to be recognized. Hopefully, that additional color is helpful.
