Myles Walton: I did have a couple of follow-ups on the B-21, if that’s okay. And Dave, I think you alluded that the first LRIP contracts to be awarded in ’23. I’m just curious, is that sort of the triggering event or whether or not you’d know you’re in the loss or not at that point? And then Kathy, I know you said the 10-K disclosure is over the 5 LRIP lots. But I’m just curious, is it tougher at the front end of those lot profiles? Is it more promises at the back end that you’d have time to fight off inflation? Anything on those 2 fronts?
David Keffer: Sure. I’ll start on your first of those questions. The award of that first lot of LRIP will be a noteworthy event but not a triggering event of any kind from an accounting perspective. We will update our projections quarterly as we have been. We’ll continue to do so. And so at this time, we don’t believe that a loss is probable and therefore, we have not booked one. We do believe that a loss is possible, which is why we’re including it in our remarks and our 10-K disclosures. It’s something we will continue to work over time. Obviously, this is going to continue for a number of years. As Kathy has talked about, we’ll continue to do everything we can to mitigate inflationary pressures and work with our customers and our suppliers in the process. Kathy, anything you’d like to add?
Kathy Warden: Sure. So in answer to your second question, we do expect to have a better sense as the year progresses, and we’ll update disclosures as we do. And as we look at the profile, there’s nothing really notable. To your point, we have more time to work cost efficiencies in the later lots. But of course, we made some more aggressive assumptions about learning curves and the like as we would on any production program. So really nothing notable in the profile and how you might think about any potential loss in spread.
Operator: Our next question comes from Robert Stallard with Vertical Research Partners.
Robert Stallard: Dave, I’ve got a couple of cash flow questions for you. First of all, on basically cash taxes with the R&D tax legislation impact. What sort of tailwind are you expecting from this — from 2023 and onwards? And then secondly, what are your assumptions for equipment sales in that cash flow guidance for 2023 or for the whole period?
David Keffer: Sure. Thanks for those questions. The answers are pretty straightforward. As we noted, the impact on our cash taxes in 2022 from the R&D tax legislation was just under $1 billion. We would anticipate that being about 20% less per year, just under $200 million or so on average less per year. And so that is the magnitude of the annual tailwind that we’d anticipate for the next 5 years or so. Overall, cash taxes, excluding the impact of that R&D tax amortization will increase slightly over the coming years, but that’s factored into our multiyear outlook. And as for equipment sales, I appreciate the question there. We received the final payment associated with the equipment sale that we booked a couple of years ago in 2022. And so we don’t anticipate we’re having our multiyear cash flow outlook, any continued recoveries from equipment sales.
Operator: Our next question comes from the line of Cai von Rumohr with Cowen.
Unidentified Analyst: This is actually Jack on for Cai today. Just a quick question back to kind of the Section 174, Dave, I know in the past, I’m not sure if you quantified that if you could actually provide that dollar figure if you could. I know it steps down 20% each year. But looking back at your guide from last year at this time for ’24, it looks like a larger delta than an implied $700 million headwind. So just to confirm, is that incremental CapEx going higher? Or if you could just provide some color there, that would be helpful.
David Keffer: Sure. I appreciate those questions. I think you have to the air math about right on 174. It was just under $1 billion in 2022, and it will decline by just under $200 million a year on average going forward. In terms of that 2024 guide, you’re right that our CapEx expectations increased a bit given the volume of new business that we won this year that we’ll be investing in going forward. No other material changes to 2024. We do anticipate growth as we’ve seen in ’24 and then a real ramp in ’25 as CapEx begins to decline, and you have the tailwinds as well in ’25 and beyond from R&D tax, CAS pension recoveries and the underlying growth in margins in the business.
Operator: Our next question comes from Peter Arment with RW Baird.
Peter Arment: Kathy, within Aeronautics, the service mix continues to be a bigger part of the story. I guess it’s now about 22%. If you finish 22 and look, that’s up from the mid-teens the last few years. Obviously, there’s some puts and takes on why that is. But just wondering if this trend is going to continue and how you think about the impact on margins?
Kathy Warden: Yes. So we do expect the trend to continue in terms of — as assets get into service, we continue to support. But we also have assets like Global Hawk that are coming down. So I don’t see a material change in that mix as we look forward, Peter.
Operator: Our next question comes from the line of Ken Herbert with RBC Capital.
Kenneth Herbert: Kathy, in your opening comments, I think you maybe called out international opportunities, perhaps a little bit more than I can remember from recent quarters. Can you help frame maybe how much of an uptick in international opportunities could be reflected or international sales could be reflected in the ’23 guide, if that was all a part of any of the upward revision — and then as you think about beyond ’23, how meaningful is international in terms of an uptick for you? I know historically, obviously, it hasn’t been as meaningful as part of the mix of some of your peers, but maybe you can comment on that expanding opportunity set?
Kathy Warden: Yes. Thank you. So in the fourth quarter, we did see some meaningful uptick in Defense Systems, and you can see that reflected in our results, both from the areas that I outlined in this call related to ammunitions and armaments but also increased interest in IBCS, and we have the current Poland work continuing to ramp but the 10 additional countries that I’ve noticed that have expressed interest. So as we think about the near-term drivers, it’s the things that we already have in production. But as we think about the longer-term drivers is areas like IBCS future sales. And we are seeing that interest increase across the business, but most notably in ’23, I think you will see that reflected as upside opportunity in defense.
As we look at the enterprise over the next several years, we do expect our international growth rate to be double-digit, low teens compared to a U.S. growth rate that more in the norm of our mid-single digits. So as we think about international, we do expect it to grow as a percent of our portfolio in the next several years. And that’s all based on international demand growing as a result of increased spending confirmations made by our allied partners.
Operator: Our question comes from Scott Deuschle with Credit Suisse.
Scott Deuschle: Kathy, if I go back to 2018 when the group sold off quite a bit, Northrop got pretty active on buying back stock. And I think you even launched an ASR, if I recall correctly. So I’d be curious if that would still be your playbook this year if the valuation continues to come down? And whether you might lean on the balance sheet to do so just given the track record of having run a valuation-sensitive buyback program?
Kathy Warden: Yes. Well, as you note, we have used ASRs as the tool in the past. And as we indicated in the call today, we do plan to put more than 100% of our free cash flow back into the deployment to shareholders. The fact that our valuation is down, really, we don’t try to time the market per se. But we do think about that as we are kind of weighing our options for capital deployment this year, and we do have the flexibility to increase share repurchase from our original plan. So that is something we’re actively contemplating.
Operator: Our next question comes from George Shapiro with Shapiro.
