Kathy Warden: Very insightful question as always, Cai. So when you look back to 2015, when we did B-21, we certainly have changed our view on bidding of contracts where did not have a mature design. It’s a point of bid and yet we committed to fixed price options into the future. And we have, to my knowledge, not done that again. And we have passed on some high-profile programs as a result of the risk balance that the customer put forward in the RFP not meeting our standards. We have programs like Halo, which we have certainly learned some additional lessons and are applying those as we move forward. And you note on some very recent bids, we have taken a different approach in looking at firm fixed price, where we’ve either declined a bit if the customer chose to go fixed price or we’ve offered a price — in the case of SDA Tranche 2 that we thought was fair and reasonable and the customer decided not to further negotiate with us.
These are things that are going to happen and we’re going to remain disciplined. We have plenty of opportunity in this company to grow. We have a strong pipeline of opportunities we’re pursuing. And a strong pipeline of opportunities that we believe have the right risk/reward balance with industry.
Cai Von Rumohr: Thanks so much. Feel better.
Kathy Warden: Thank you too.
Operator: Thank you. One moment for questions. Our next question comes from Gavin Parsons with UBS. You may proceed.
Gavin Parsons: Thanks, good morning.
Kathy Warden: Good morning.
Gavin Parsons: Maybe just following on Ron’s question. Does the B-21 charge contemplate current conditions as they are? Does it have some consideration for future uncertainty in macro or supply chain?
Kathy Warden: With all of our EACs, B-21 included, we do our best based on what we know today to project conditions out into the future. Now with that said, that’s difficult to do longer-term that period of performance is. So in this case, we’re looking out over greater than 5 years. So as we get into those out years, that’s a bit more speculative, but we do incorporate our expectations for changes in everything from material labor pricing to productivity and learning.
Gavin Parsons: Okay. Understood. And Dave, you mentioned the IRS appeal process. Any way to put a range around the possible cash impact on that?
David Keffer: No, I’d refer you to our tax disclosures for more than enough detail on all of those fronts. It’s tough to put a range around those things. We’re looking forward to getting through processes, as you know, from those disclosures, we have a lot of open years that have yet to be resolved and looking forward to working with the IRS to come to reasonable resolutions there, and we’ll update you on any book or tax differences from current reserves as we get there.
Operator: Thank you. One moment for questions. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed.
Scott Deuschle: Hey good morning.
Kathy Warden: Good morning.
Scott Deuschle: Dave, can you give us a sense for the proportion of supplier costs across the 5 LRIP lots that have now been fixed versus what’s still open to negotiation?
David Keffer: Sure. As we noted a few moments ago, we’re now at a majority of the supplier costs that have been fully negotiated across the LRIP phase. And we’re in various stages of negotiation with suppliers for the remainder. So that’s one area where we have learn more and progressed in our process compared to where we were a year ago or even a quarter ago.
Scott Deuschle: Okay. Great. And then just as a follow-up, where does the commercial inventory come from in the space business? And is that EBIT headwind mostly gone now? Or is there any more of that left to come in 2024? Thank you.
David Keffer: Sure. Thanks for the question. We had offsetting effects in 2024 and 2023, rather, including Q4 in the commercial elements of the space business. As you know, those are much smaller than and kind of tangential to the core national security space business that we have. In the case of those commercial inventory write-downs, those were related to newer investments in product lines to address burgeoning market opportunity in both the government and commercial elements of the space market. We did see some modest write-downs in various quarters in 2023 associated with those. Those are the types of things you occasionally go through as you make such new investments. So again, not core to the current or future growth story of the space business.
Operator: Thank you. One moment for questions. Our next question comes from Ken Herbert with RBC Capital Markets. You may proceed.
Kenneth Herbert: Yes, thank you good morning. Maybe, Kathy, at a high level, I wanted to follow up on your comments earlier regarding sort of the key margin drivers you outlined last year. Specifically more on the cost and productivity efforts and maybe on the mix side, are you seeing incrementally more opportunity now as we think about 2024? And how should we think about sort of the absolute opportunity on those now into this year versus perhaps how much more of a benefit we see in 2025 and beyond.
Kathy Warden: Thanks, Ken. We laid out 3 drivers, the first of which being stabilization in macroeconomics, and we are certainly seeing that in 2024, which is why we see our margin rates this year in line with last with some opportunity for improvement as we go throughout the year. We layer on top of that cost and productivity actions that we are taking in the company, and that will provide some tailwinds in 2024 growing tailwinds into 2025. And the mix shift really is a bit of a longer-term proposition for us. We’ve talked about that being a shift from cost type to fixed price, where we expect 2023 was really our high watermark for cost type, but a very gradual shift in that mix to fixed price with more of it coming in the latter half of this decade.
