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Northrop Grumman Corp  (NYSE:NOC)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 12:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to Northrop Grumman's Fourth Quarter and Year End 2018 Conference Call. Today's call is being recorded. My name is Natalia and I will be your operator today.

At this time, all participants are in listen-only mode. (Operator Instructions) I would now like to turn the call over to your host, Mr. Steve Movius, Treasurer and Vice President, Investor Relations. Mr. Movius, please proceed.

Stephen C. Movius -- Corporate Vice President and Treasurer and Vice President Investor Relations

Thanks, Natalia. And welcome to Northrop Grumman's fourth quarter and full year 2018 conference call. We will refer to a PowerPoint presentation that is posted to our IR webpage during Ken Bedingfield's remarks. Later today, we plan to post an updated corporate overview to the investor relations webpage. Before we start, please understand that matters discussed on today's call including guidance, expectations, and current thinking on revenue, earnings and cash trends constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws.

Forward-looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Matters discussed on today's call will include non-GAAP financial measures that are reconciled in our earnings release and supplemental PowerPoint presentation.

Specifically, as of December 31st, we adopted the mark-to-market method of accounting for our pension and other post-retirement benefits. For consistency and comparability of our results and 2019 guidance, our references to adjusted net earnings and adjusted earnings per share on today's call will refer to earnings and EPS adjusted for the mark-to-market impact. These are non-GAAP measures. We define mark-to-market adjusted net earnings as net earnings excluding the impact of mark-to-market expense or benefit and its tax-related impacts.

We believe this supplemental measure is useful as it depicts our results before the non-operational impacts of pension and other post-retirement benefit actuarial gains and losses and is consistent with how management measures underlying performance, determines incentive compensation and provides guidance.

Table one in the earnings release reconciles non-GAAP operating measures to our GAAP results and Schedule 6 of the earnings release provides a recast historical information for years 2016 and 2017, and quarterly recast information for 2018 for the mark-to-market method of accounting.

On the call today are Kathy Warden, our CEO and President; and Ken Bedingfield, our CFO. At this time, I'd like to turn the call over to Kathy.

Kathy J. Warden -- Chief Executive Officer and President

Thank you, Steve, and hello everyone. Thanks for joining us today. In addition to reviewing our results and highlighting some of this year's important operational achievements, I'll discuss our outlook for 2019 and also provide some color on how we're currently thinking about trends into 2020.

First, I'll thank our Northrop Grumman team for their continued focus on performance and growth. The efforts of our employees enable us to continue delivering excellent outcomes for our customers and shareholders. 2018 was another strong year for our Company. This year's Capstone achievement was the completion of the Orbital ATK acquisition in June and the stand up of Innovation Systems as our fourth sector. The transaction was immediately accretive to earnings and I'm very pleased to report that as we continue to successfully integrate IS, we are on target for costs and operational synergies and trending favorably on revenue synergies.

The addition of Innovation Systems along with the organic growth at Aerospace Systems and Mission Systems drove a 24% increase in fourth quarter sales and a 16% increase for the year. I would also note that 2018 International sales increased to $4.4 billion or 15% of total sales, reflecting growth at all four of our sectors.

Our strong sales growth in both periods coupled with segment operating margin rate expansion drove a 43% increase in segment operating income to more than $925 million in the fourth quarter and a 19% increase for the full year. In addition to the contribution for IS, operating income increased at all three legacy Northrop Grumman sectors in the fourth quarter and segment operating margin rate increased to 11.4% for the quarter and 11.5% for the full year.

Adjusted earnings per share for the quarter increased to $4.93 per share and 2018 adjusted earnings increased by more than 50%.

New awards in 2018 were robust at more than $32 billion. Book-to-bill at Mission Systems was particularly strong at 1.2 times. We ended 2018 with a total backlog of $53.5 billion, which reflects $8.2 billion in backlog at Innovation Systems. We also had strong cash generation. Before discretionary pension contributions, 2018 cash from operations increased by $1.1 billion to more than $4 billion and free cash flow before discretionary pension contributions increased to approximately $2.8 billion.

Our strong cash generation enabled us to continue investing for profitable growth, managing the balance sheet and returning cash to our shareholders. We continue to invest in CapEx, retired legacy Orbital ATK and Northrop Grumman debt and made voluntary contributions to our pension plans. Through share repurchases and dividends, we distributed $2.1 billion to shareholders or approximately 80% of free cash flow. These distributions reflect two increases to our quarterly dividend totaling 20% and share repurchases of $1.3 billion. The $1 billion accelerated share repurchase that we announced in November was completed in early January. The ASR retired 3.84 million shares at an average price of approximately $260 per share.

Now turning to operational highlights. I'll start with the F-35 program. All four of our sectors participate in this program either through production or sustainment.

In 2018, F-35 revenue across the Company totaled nearly $3 billion, approaching 10% of sales with a vast majority of that coming from AS and MS. At Aerospace, F-35 revenue increased 25% in 2018.

We achieved a 1.5-day production interval and we delivered 121 units which was 47 more than in 2017. At Mission Systems, we delivered 125 multi-function radar arrays, 830 DAS sensors and approximately 4,400 CNI modules which represented an increase in year-over-year F-35 sales at MS of approximately 10%.

At the Company level, we expect the F-35 sales will grow in a mid-to high-single digit rate in 2019. A key highlight at Aerospace was higher revenue for restricted activities in Manned Aircraft, which drove top line growth in both periods. We expect 2019 revenue from a restricted program in Manned Aircraft to be roughly equal with 2018. This revenue profile is consistent with that of a major defense development program post critical design review that is executing successfully.

Regarding other areas of growth at AS, we are in discussions with the Navy on a second multi-year contract for the E-2D program. Our first multi-year for 30 planes is progressing toward completion. With the success of the first multi-year production contract, the Navy requested a new multi-year proposal for up to 40 aircraft over five years, including additional aircraft for Japan.

We're also in discussions with Boeing on a fourth multi-year proposal for the F/A-18 program. The fiscal year since planned now has the program of record extended through FY '23 for a total of 110 additional aircraft. And at Mission Systems, in addition to the F-35 achievements, we also continue to ramp up production on the SABR radar program.

The SABR team has now secured orders to date, totaling 441 systems. 73 Systems have been delivered through 2018. The F-16 Air National Guard Upgrade Program is progressing on schedule. Initial production deliveries will begin in March of 2019 in preparation for initial operational capability shortly thereafter.

With additional SMS awards, we're solidifying SABR's position as the leading airborne active electronically scanned array fire control radar for international customers. Also at MS, the Air Force awarded us a $3.6 billion IDIQ contract for LAIRCM, our large fixed-wing infrared countermeasures system. Under the IDIQ, the Air Force may issue task or delivery orders for system and support up to the sealing amount with work under the contract set to conclude in 2025.

And in our rotary aircraft countermeasure business, the Army plans to field over 1,500 CIRCM systems to support training and deployment on helicopters and fixed-wing aircraft around the world. CIRCM offers significant size, weight and power advantages in comparison to traditional systems. The program is progressing toward operational testing and full-rate production. Mission Systems is currently performing on LRIPs 1 and 2. With respect to cyber and that's recently competed for N1, the unified platform effort supporting US Cyber Command. We will develop, build and deliver the core underlying war fighting capabilities enabling integrated offenses and defensive cyber operations for US Cyber Command.

At Innovation Systems in the fourth quarter, we successfully performed a ground firing test of the abort motor for NASA's Orion spacecraft Launch Abort System. The completion of this milestone brings Orion one step closer to its first flight and enabling humans to explore the Moon, Mars and other deep space destinations. In late 2018, we received one of three OTAs to compete for the development of the OmegA rocket for the ultimate down select to two providers for the Evolved Expendable Launch Vehicle Program. The first phase of this program is to develop launch solutions in order to have at least two domestic launch service providers that meet national security space requirements.

At Technology Services, we received a number of important competitive awards in 2018. We received a $200 million award for the -- from the Social Security Administration where we are expanding our long-term support under the ITSSC program. Our Australia business also received approximately $200 million of new awards and we started new work on several strategic activities supporting Northrop Grumman products through their full life cycle.

We've taken numerous steps to position TS for the future. And as we look to ensure we are maximizing operational efficiencies and continuing to posture for growth, two TS business areas; Advanced Defense Services and System Modernization and Services, has been consolidated into a single new business area called Global Services. Global Services includes work in software sustainment, development, modernization, secured networking, cloud and IT infrastructure, training systems and cyber operations.

As we look across our portfolio, in the context of the country's evolving national security needs, we remain very well positioned. With our R&D and capital expenditure investments as well as the addition of Innovation Systems, our portfolio has the Advanced Technologies, products and services necessary to support missions highlighted in the national security strategy and the national defense strategy.

We are also well aligned with the framework outlined in the recently released missile defense review. Our unique capabilities in space, missile, counter hypersonics and cyber, and our emphasis on agility allows us to support our nation's evolving national security missions. Now, let me briefly address the partial government shutdown and the FY '20 budget outlook. We are encouraged that many federal agencies including the Department of Defense started fiscal year 2019 with budgets in place.

However, other important customers, including NASA and the Department of Homeland Security were shutdown and now are operating under a continuing resolution until February 15th. While we have not yet seen a significant financial impact, this could change if there is another shutdown of long-term continuing resolution. While the FY '20 budget request has not yet been finalized, we are encouraged by the focus on modernization and the prioritization of the capabilities outlined in the national defense strategy, including our nation's nuclear recapitalization.

However, unless Congress and the President agree on a budget deal, the spending caps established by the Budget Control Act will return for fiscal years 2020 and 2021. While we anticipate a deal will once again be reached, the caps could significantly reduce spending for defense and non-defense activities.

So turning to 2019 guidance. We expect double-digit sales growth in 2019 to approximately $34 billion, while maintaining strong segment operating margins, reflecting mid single-digit organic growth along with the full year of Innovation Systems. Assuming continued strong support for national security spending and the capabilities outlined in the national defense strategy, we currently expect mid-single digit sales growth to continue in 2020.

Our team is incentivized to drive strong results and we are confident that we can achieve the consistent top line growth, strong margin performance and robust cash flows that should enable value creating capital allocation and solid double-digit adjusted EPS growth from our 2019 guide to 2020. I'll now turn the call over to Ken for a more detailed discussion of our financial results, guidance and trends. Ken?

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Thanks, Kathy. And good afternoon, everyone. I also want to thank our team for this year's strong performance.

Today, I'll spend a few minutes on 2018 results and also discuss our 2019 guidance in more detail. As I review 2018, I'd remind you that prior periods are recast for the adoption of the accounting standard updates for revenue recognition and the pension cost presentation, both adopted at the beginning of 2018. We also recast for our previously announced mark-to-market pension accounting change.

Turning to sector results. Aerospace Systems sales were up 6% for the quarter. 2018 sales grew to more than $13 billion, up 8%. While restricted activities and the F-35 program at Manned Aircraft drove a substantial amount of the year-over-year increase, all three AS business areas, Manned Aircraft, Autonomous Systems and Space, posted higher year-over-year revenue.

I would note that the top line at AS has grown about (ph) 30% since 2015 and that the team has done a great job of maintaining strong performance while managing rapid growth. AS operating income increased by 12% in the fourth quarter and 9% for the full year, driven by sales growth and improved performance for Manned Aircraft and Autonomous Systems.

For the full year, we achieved a strong 10.8% margin rate, again principally driven by Manned Aircraft and Autonomous Systems program performance. For 2019, we expect AS to grow at the top line at a mid-single digit rate to the high $13 billion range. Our top line guidance calls for continued growth in all three business areas.

We expect a mid to high 10% operating margin rate at AS in 2019. At Innovation Systems based on pro forma sales comparisons, fourth quarter sales rose 7% due to higher volume at flight and defense systems. For the year, sales increased 17% driven by growth in all three business areas including a more than 20% increase in international sales. For 2019, we expect IS sales to increase to the highest $5 billion range.

Growth in 2019 US sales is expected to approach 10%, but it will be partially offset by lower International sales. 2019 International sales are expected to decline by about 20% as a couple of shorter cycle programs that ramped up in 2018 are now winding down.

However, we expect solid international growth beyond 2019 as it remains a key part of our IS growth plans. We expect 2019 margin rate at IS will be in the mid-10% range. Turning to Mission Systems, fourth quarter and full year sales rose 2%, primarily driven by growth in Sensors and Processing programs. Sensors and Processing fourth quarter volume was up 8% due to higher volume on communications, F-35 and restricted programs.

For the year, Sensors and Processing growth of approximately 9% reflects higher volume for restricted, communications, F-35 and electro-optical/infrared self-protection programs. As we've discussed throughout 2018, these gains were partially offset by the ramp down of a restricted ISR program and lower volume on the JRDC program. I would point out that Sensors and Processing represents about half of MS Sales. Mission Systems fourth quarter operating income rose 17% and operating margin rate increased 170 basis points to 13.1%.

Higher volume at Sensors and Processing and improved performance at Cyber and ISR and advanced capabilities drove the strong performance. For the full year, operating income rose 5% and operating margin rate increased to 13%, reflecting higher volume at Sensors and Processing and improved performance in Cyber and ISR and Sensors and Processing programs.

For 2019, we expect Mission Systems top line to grow at a mid-single digit rate to the low to mid-$12 billion range with continued strong operating margin rate of approximately 13%. We expect top line growth from all three business areas in 2019. Technology Services fourth quarter and full year 2018 sales, both declined 8%, due to ramp downs in several programs we've previously discussed, primarily JRDC and KC-10 in both periods. Lower revenue for these programs is being partially offset by growth in other programs such as SEMA.

Technology Services fourth quarter operating income increased 62% to $115 million or 10.8% margin rate, principally due to contract closeout impacts of a state IT outsourcing program. For 2018, operating income decreased 1% due to lower volume, partially offset by a higher margin rate which increased to 10.3%, largely as a result of a noted contract closeout impacts.

For 2019, we expect Technology Services sales will be in the low $4 billion range with a mid to high 9% operating margin rate. As we roll all that up, we expect sales of approximately $34 billion with a segment operating margin rate in the low to mid 11% range. We expect our total operating margin rate will be in the mid to high 10% range, reflecting the operating portion of the net FAS/CAS pension adjustment of about a $400 million benefit and unallocated corporate expense of approximately $636 million.

2019 unallocated corporate expense reflects non-cash intangible asset amortization and PP&E step-up depreciation of $386 million and $250 million of other estimated unallocated items, of which, approximately $50 million is related to the ongoing integration of Innovation Systems. On pension, our 2019 FAS assumptions are based on our 4.31% discount rate and then 8% expected long-term rate of return on planned assets, and exclude any mark-to-market impact.

Slides 5 and 6 in our PowerPoint deck summarize our pension estimates for years 2019 through 2021. And Slide 7 summarizes 2019 sensitivities to changes and assumptions. I'd also note that our guidance contemplates interest expense of approximately $590 million. 2018 other income included about six months of interest income on over $10 billion of cash, as well as a couple of non-recurring gains. So I'd caution you about modeling a similar result for 2019 other income.

We expect an effective tax rate of mid-17% in 2019 and our mark-to-market adjusted earnings per share guidance of $18.50 to $19.00 is based on approximately 170 million weighted average shares outstanding.

On Slide 9, we've provided a bridge from 2018 adjusted EPS of $21.33 to our 2019 adjusted EPS guidance of $18.50 to $19.00. For 2019, we expect higher segment operating income of about $1.70 to $1.90 per share due to profitable growth at legacy Northrop Grumman sectors and a full year of Innovation Systems. Lower CAS recovery reduces EPS by about $1.00 and lower FAS benefit reduces EPS by about another $1.00. I would note that the lower CAS recovery is an example of our relentless focus on structural affordability and sustainable competitiveness as our team is working all aspects of pension, asset and liability management.

It's important to note that the reduction in CAS recovery also resulted in a $1 for $1 reduction in our required funding which is less than $750 million in total over the next three-year period, as you can see on Slide 6 in the charts. To continue with the bridge and get off my pension tangent, we also expect higher 2019 unallocated corporate expense will reduce EPS by about $1.70. This includes the 2018 benefit of the sizable cost claim settlement and a full year of 2019 amortization of purchased intangibles and PP&E step-up depreciation.

Looking at taxes, the increase in our 2019 tax rate to mid 17% versus 13% -- 13.7% in 2018 is an impact of about $0.70. The lower 2018 tax rate reflected prior year and other benefits. That should help you bridge EPS from 2018 to 2019.

Regarding cash, as is our typical pattern, we had a strong finish to 2018. Before $280 million of pre-tax discretionary pension contributions, cash from operations was a little more than $4 billion and after CapEx of about $1.25 billion, our free cash flow totaled nearly $2.8 billion. In 2019, we expect cash from operations of $3.8 billion to $4.2 billion and after capital expenditures of approximately $1.2 billion, we expect free cash flow will range between $2.6 billion and $3 billion.

I'll remind you that 2018 cash flows benefited from the seasonality of IS cash, which are heavily weighted to the second half of the year. For 2019, we are planning share repurchases of approximately $750 million assuming current market conditions and we intend to retire about $500 million in debt. Our capital expenditures peaked in 2018 and given what we see now should begin declining incrementally to about 2.5% of sales in 2021. Based on all of these factors, this business should be a strong generator of free cash flow into 2020 and beyond. I'd also note that the vast majority of cash will be generated by our operations. Given our current assumptions, we expect CAS recoveries of $770 million, $850 million and $1.1 billion in 2019, '20 and '21 respectively.

For example, at the midpoint of guidance, 2019 after-tax net pension recovery defined as CAS less funding is about 15% of cash from operations. This cash profile is shown on Slide 10. Our required funding is approximately $90 million in '19, $220 million in '20 and $410 million in 2021. And while required contributions will likely increase after 2021, they are not expected to exceed CAS. So as Kathy said, we expect to continue strong value creation through a combination of growth, performance and robust cash generation, as well as thoughtful capital allocation.

I think we're ready for Q&A, Steve?

Stephen C. Movius -- Corporate Vice President and Treasurer and Vice President Investor Relations

Thanks, Ken. In the interest of time, I would request each of our participants to lend themselves to a single question. Natalie, will you open the line.

Questions and Answers:

Operator

(Operator Instructions) Your first question is from the line of Rob Stallard with Vertical.

Rob Stallard -- Vertical Research -- Analyst

Thanks so much and good afternoon.

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Hey, Rob.

Kathy J. Warden -- Chief Executive Officer and President

Hi, Rob.

Rob Stallard -- Vertical Research -- Analyst

First of all, Kathy, a question on your comments. You said in the Manned Aerospace area, the restricted programs -- a restricted program was expected to level off this year. Can you give us some idea of how this area is expected to progress beyond 2019? Are revenues ready to start to accelerate again from 2020 and is there any change in the margin profile as well? Thank you.

Kathy J. Warden -- Chief Executive Officer and President

Rob, I appreciate the question. I'm limited in what I can say about the program to which I'm referring. But I did want to provide all of you some insight into how it factors into our current year guidance 2019, and so my comments were that we see sales leveling off and that, that is consistent with what we would typically see in a program that's executing well and is completed its critical design review. Beyond that, I really can't comment anymore on what we expect either in future years or about the performance of the program.

Rob Stallard -- Vertical Research -- Analyst

Okay. Can I try something else instead then?

Kathy J. Warden -- Chief Executive Officer and President

Yes.

Rob Stallard -- Vertical Research -- Analyst

Okay. You mentioned in Innovation Systems that the export side of things had seen some strong growth this year is dipping down again in 2019 and going back up again. I was wondering if you can give more clarity on what exactly those products or services are that are moving around? Thank you.

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Rob, I would just say that we had some strong growth in 2018, largely on the defense systems side of the business related to some munitions and other weapons programs and those ramped up in 2018 and are starting to ramp down here in early 2019, largely just driven by timing of the orders and when the deliveries were made, and we do expect that we'll see continued strong growth out into 2020 and beyond. So just timing, but good programs and good opportunities as we look forward.

Rob Stallard -- Vertical Research -- Analyst

Okay. Thanks, Ken.

Operator

Your next question is from the line of Ron Epstein with Bank of America Merrill Lynch.

Ronald J. Epstein -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. You gave us a little bit of color just on trends, on revenue and EPS into 2020. Can you speak to like the cash flow trend as we think about that, what kind of -- what you would expect free cash flow to do and then there is an expectation, I think among investors, that at some point, you will see growth accelerate above where it is given the programs you are on. How should we think about that and that's, I guess, that's probably reckon out your question, but at least if you could give us some flavor on that?

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

So Rob (ph) it's Ken here. Maybe I'll take it in reverse order. In terms of the growth profile, I would say that, yeah, we're very happy about how we're positioned. I would say very closely aligned with the national defense strategy, national security strategy, missile defense review and other areas of focus for our country as it deals with these ever increasing view of threat from peer and near-peer countries.

And we do expect that that will drive a nice growth profile as we look out past '19 and past 2020. At this point, I wouldn't want to put a number on it, a lot of moving parts between here and there. And I would say that ours is a long-cycle business and it takes time to generate revenue out of some of these awards and move some of these early development. This early development growth we're seeing out of the NDS in other areas and turning those into ultimate production. And you want to take your time, you want to get it done right, you don't want to put a break to your production lines, to your factories, just to try to drive volume for a short period of time.

So we take a measured long-term approach to it and we're quite satisfied with the profile we see. From an EPS perspective, again, we do see strong growth, Kathy mentioned what we saw going from '19 to '20 and from a cash perspective, obviously, the longer you go out, the harder it is to predict from a cash basis. But we do think that this is a strong cash generating business that we ought to be able to generate, turn our earnings into cash as we think about our working capital just as maybe one example. We see working capital in 2019 probably growing with sales, and then in 2020, we see potentially some opportunity to reduce some working capital as we have some programs that we invested in in the past that should start to generate a better cash profile. And then I mentioned a couple other things, including a relatively low level of CAS funding and a declining amount of CapEx in dollars as well as in a percentage of sales. And I would just encourage you to take that information and use it to model what you think our cash will look like.

We're probably not going to put a number on it beyond 2019 at this point.

Ronald J. Epstein -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

Your next question is from the line of Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hey, good morning -- good afternoon. In terms of --

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Hey, Sheila.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi, on AS, can we talk about margins and leverage a little bit coming in late -- what mix factors are driving it and how do we think about it in '19 and beyond?

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

For AS, from a margin perspective, Sheila, I would say we're quite happy with how that team has been performing, they've taken on a lot of early phase development work. And they've maintained strong margin rates throughout.

As we look at 2019 guidance for margin and maybe looking out beyond as well, I would say, we're guiding '19 kind of in the range of where we were in 2018. And the biggest drivers of margin obviously are mix and performance. So if that team continues to perform and we're able to continue to burn down risk and realize opportunities on some of our programs, we could see some additional upside as we look out from a margin rate perspective.

I would just point out that AS sector is taking on some additional early phase development opportunities, it's not just the one program that people tend to think about. And so, that will continue to certainly provide a generation of growth for future production, but also probably keep margin rate somewhat range bound to where we see it today, of course, with the risk and opportunity management providing some level of upside as I mentioned earlier.

Sheila Kahyaoglu -- Jefferies -- Analyst

Great. Thank you.

Operator

Your next question is from the line of Noah Poponak with Goldman Sachs.

Noah Poponak -- Goldman Sachs -- Analyst

Hello, everyone.

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Hey, Noah.

Noah Poponak -- Goldman Sachs -- Analyst

So I want to come back to this topic of your target or commitment to outgrow your end market on a multi-year basis. And I don't know where you will go given what you've said so far here. But it didn't happen in 2018, 2019 up -- call it up 5 organically, isn't quite based on what it looks like authorities doing, translating the outlays based on what some of your peers are doing, it's not really definitively happening in '19.

The comment of mid-single digit in 2020 sort of again based on, but what it looks like outlays are going to do and what some other companies are saying. It kind of looks like a three-year window here of that comment of outgrowing your end market actually not really happening. And I know you have the transitory -- you could call it transitory TS stuff in there for part of that time, I don't think you have that in 2020. And so, from where we sit, we just constantly get the question from investors, what are they -- what specifically do they mean by the end market? What specifically is the variance do to end market? And why isn't it happening in real time as you are projecting that for your business?

Kathy J. Warden -- Chief Executive Officer and President

Noah, I'll start and Ken can add in as well. When we look at the growth trajectory of our business, we do look at it over the long term and we have -- you talked about long-term, our business cycles, particularly with AS and to a lesser extent IS and MS tend to be beyond three to five years. And so when we win a large program, it takes time for us to ramp up to a normalized state of revenue generation for development and then that tends to plateau a bit before we get into the production phase where there's another ramp process that goes on. And what you've seen from us over the last couple of years is some significant ramps associated with taking on new work. Those when we talk about long term, we're really talking about five plus years. And so, in any given year, you may not see a year-to-year transition at the equal rate of growth as you did in the past. And so, that's what we mean when we talk about long-term.

Now let me talk about where we are in the alignment with India. We are seeing new programs come into the portfolio. They start relatively small. And so they are not moving the needle at the same rate as some of our large programs that we have talked about. But they do create the platform then for growth two, three to five years out. And so that's what we wanted to give you a sense of in terms of not just talking about 2019 guidance, but the trends that we see into 2020 and over time, you will see those develop into more material programs that represent the growth that we've been talking about on a long-term basis in alignment with the investment accounts.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. But it sounds like --

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Oh, go ahead, Noah.

Noah Poponak -- Goldman Sachs -- Analyst

Sorry, go ahead -- yeah, I mean, just it sounds like it's a high -- maybe a very high degree of confidence in duration, that you can see with substantial visibility, maybe even beyond five years down the road that you are sustaining the current growth rate versus a big step function at some point in the pace.

Kathy J. Warden -- Chief Executive Officer and President

When you have long cycle programs, you tend to look at them over a decadal view rather than a given annual view. And so yes, that is what we're talking about. And of course, there is uncertainty that comes with that in terms of the commitment to those programs over the long term which is why we don't tend to guide more than a given year. However, we have seen good alignment in the national defense strategy to the programs that we are talking about, they create that foundation for our view that we are well aligned and the threat environment is really what drives our confidence that we have the portfolio that lines up well, not just for today, but into the future.

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

And now, I would just add, I think, your comment is on point, you certainly want to think about your production rate and production lines and how much you might have to invest to drive that capacity sooner rather than over the next couple year period. I would just point out that if you think about it, AS has been growing significantly, right? 30% since 2015, nice growth in 2018, obviously IS had a great growth rate in 2018.

MS, if you exclude some of their headwinds from JRDC and a restricted ISR program was growing about 6% in 2018, we're looking at probably 6% in 2019. And TS, we expect, will be in the low $4 billion range in '19 and then flat and start to grow in '20. So I think overall, we feel pretty good about it. I think you're right, there is a real nice long-term trajectory here and I would just think about a little bit in that bigger sense in terms of how each sector is doing as well as we talked about the international business at IS that was a part of that big 17% revenue growth, that's going to have a little pause here in 2019.

Noah Poponak -- Goldman Sachs -- Analyst

Thanks so much.

Operator

Your next question is from the line of Carter Copeland with Melius.

Carter Copeland -- Melius Research -- Analyst

Hey, good afternoon, everyone.

Kathy J. Warden -- Chief Executive Officer and President

Hi, Carter.

Carter Copeland -- Melius Research -- Analyst

Just one quick one to move off revenue. Just talk about simplifying assumption, Kathy. The -- just looking at the Q4 commentary, you didn't call out any big risk retirements of significance in AS but obviously you went through the the B-21 critical design review successfully. Is it safe for us to assume that your performance was approximately in line with what you had assumed or is there any reason to think that wouldn't be the case?

Kathy J. Warden -- Chief Executive Officer and President

That would be a fair assessment, Carter. When we think about programs and our booking rates, we take into consideration what we know about performance and so we tend to incentivize the team not to have large variation and when they are performing well, there is very little volatility in our booking rate position based on performance.

Carter Copeland -- Melius Research -- Analyst

Okay. That's what I had already assumed, I just wanted to make sure there wasn't something missing. All right, I'll stick to one, thank you.

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Thanks, Carter.

Operator

Your next question is from the line of Seth Seifman with JPMorgan.

Seth Seifman -- JPMorgan. -- Analyst

Thanks very much and good morning. Wanted to talk about Aerospace Systems for a moment and just you mentioned some of the components in terms of F-35, I think, you said mid to high single. And then if Manned restricted is not growing, I would think that kind of takes the whole segment down further. And so, if you think about the other piece, is there sort of what's -- what's enabling you to get to kind of the 5% to 6% that you're forecasting?

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Thanks for the question, Seth. I would say, yeah, if you think about it, we've got F-35 in there that as you mentioned, mid to high single digit. We certainly see growth opportunities across the portfolio of Autonomous Systems, growth in the space division, particularly in the area of restricted space, addressing some of the new requirements like resiliency and other things. So largely a nice growth across across the portfolio at AS. Some new development work that I mentioned addressing some of the areas of the national defense strategy and then continued growth in some of the production programs. I think E-2D has nice growth in 2019 and beyond Triton is in production and we see that progressing nicely on a growth profile. And so, I think, it's pretty diverse across the portfolio there.

Seth Seifman -- JPMorgan. -- Analyst

And then maybe just a follow-up real quick. Does the F-35 flatten out in '20 and then you resume growth in Manned restricted?

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

My thought on F-35 is we should continue to see growth in 2020, probably more in the mid-single digit range and that growth should continue, ultimately production will level out and as prices continue to decrease, you would see production reached a peak, but the sustainment volume at that point should start to fill in that gap and we would expect to see a pretty sustained amount of revenue on the F-35 as we look forward. We do expect that given our position on the program, whether it's at AS or at MS across the various electronic systems that it -- is OEM on that we would expect to see our fair share of sustainment revenue over the life of that program.

Seth Seifman -- JPMorgan. -- Analyst

Thank you.

Operator

Your next question is from the line of Peter Arment with Baird.

Peter Arment -- Baird -- Analyst

Good afternoon, Kathy, Ken.

Kathy J. Warden -- Chief Executive Officer and President

Good afternoon.

Peter Arment -- Baird -- Analyst

Kathy, you mentioned some consolidation efforts on TS, maybe you could just give us some further your thoughts around whether you see other consolidation opportunities within TS, any either M&A or in particular portfolio shaping that you're thinking about in 2019 and beyond? Thanks.

Kathy J. Warden -- Chief Executive Officer and President

Thanks, Peter. So in TS, I mentioned the consolidation of two businesses into one global services and that is intended to create a more competitive integrated services portfolio that focuses on high-end services for IT as well as analytics and operations in the areas of cyber, healthcare and intelligence and that business has really, as it's come together, been able to lay out a platform for transitioning to growth after just executing a strategy to get out of lower-end services and IT outsourcing.

And so I'm proud of what the team has accomplished there, we now have that segment positioned to begin growing and competitive set of capabilities and offerings that we can bring to the market. So my intention this year is to enable that team to grow. We of course, have in TS already been growing in the Logistics and Modernization piece of the business and we expect that growth to continue both domestically and internationally. And so the two pieces of the business are both aligned for good performance not just in '19 but -- and beyond.

Stephen C. Movius -- Corporate Vice President and Treasurer and Vice President Investor Relations

Natalia, go ahead with the next question.

Operator

Your next question is from the line of Rajeev Lalwani with Morgan Stanley.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Hi Kathy, hi Ken.

Kathy J. Warden -- Chief Executive Officer and President

Hi Rajeev.

Rajeev Lalwani -- Morgan Stanley -- Analyst

I want you to just help me reconcile the comment earlier about an expectation for revenues to start accelerating more materially, but at the same time, having CapEx start to decelerate pretty materially, is that just Northrop going through some sort of harvesting process around spending that's been occurring or is there something else going on? And then how would something like GBSD come into play if you were to win that and the implications for the spending side in some of those numbers, Ken, that you provided earlier?

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Sure. I wouldn't want to call anything of what we're doing as harvesting. I guess what I would say is that in my view, we saw the ability to grow this business and we saw the investment it was going to take to position ourselves for that growth and to drive the programs and to drive the performance that we're seeing today. And given those investments that we made, we are able to grow the business off of that investment, our facilities, we've invested in production lines, engineering tools, all those things that it takes to grow the business. So we've invested to get to the trajectory that we see. That's why we're starting to get onto the down slope of our CapEx profile while we are continuing to see a nice solid growth profile. And with respect to GBSD, we will see potentially some additional CapEx driven by a GBSD win, but I expect that will be post 2021 before we would see that CapEx profile. And then as we continue to grow the business, I don't see it largely perturbating our ability to fit within the out-year profile that I talked about from a CapEx perspective, could be a blip for a year or two , but I don't see it largely perturbating our long-term thoughts on that front.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Your next question is from the line of Hunter Keay with Wolfe Research.

Hunter Keay -- Wolfe Research -- Analyst

Hi, thank you. Good afternoon. Curious if you could give us the total Company sales or earnings mix that you say -- that you would say comes from missile defense post-away. And what's the growth rate you might expect to generate over the next few years in a base case. And also best case scenario knowing what you know about current opportunities and once you expect? Thanks.

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

So,Hunter, I guess I don't have that particular number in front of me. We are going to post an updated Company overview deck to our Investor Relations site this afternoon, after the call. And that will have a fair amount of detail in it on mix by sector, by division, by major products and things like that. So I think we do see a nice growth profile from missile defense perspective, much of it, I would say at MS and IS certainly, IBCS is one that we see having a nice growth, both U.S. and internationally. Kathy, I don't know if you want to add any more on that side of it?

Kathy J. Warden -- Chief Executive Officer and President

Yes, Hunter, I'd just take you back to the Missile Defense review and the capabilities that are outlined in there from a space layer to support tracking and targeting to the missile capabilities needed and different weapon classes, the counter hypersonics capabilities required, all of those capabilities are ones that we contribute to through every sector in our Company, but as Ken said, most prominently through IS and MS. And so we look at our portfolio through the lens of capabilities and you'll see that in the Company overview, but you'd have to take pieces from every part of the Company and assemble them as they would line up against what's been required to support the missile defense mission.

Hunter Keay -- Wolfe Research -- Analyst

Thank you.

Operator

Your next question is from the line of Myles Walton with UBS.

Myles Walton -- UBS -- Analyst

Thanks, good afternoon.

Kathy J. Warden -- Chief Executive Officer and President

Good afternoon.

Myles Walton -- UBS -- Analyst

I was hoping, maybe Ken, you can talk a bit -- a little bit about the IS margins year-on-year you're looking for flat I think, obviously the sales came in stronger in '18 than you would otherwise have anticipated. But the margins flat year-on-year given the kind of the integration, the synergies, I would imagine influence of the business. Can you just talk about that and also, Kathy, are you still on track for the $150 million of synergy run rate in 2020? Thanks.

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Sure I'll hit that. And this first question, turn it over to Kathy. I would say that look our guide for IS is kind of consistent with where they were for the full year of 2018. We're just six months in integration here. We've forecasted some of those integration costs at the corporate line. But some of those could certainly hit the sector. So we're thinking through where those costs are going to flow through. And some of the synergy benefits whether there are costs, operating or revenue synergies, also will be realized by the other sectors. So you got to look at kind of a bigger picture as all of the sectors will realize some of the integration benefits. And I'll let Kathy comment on the integration process as she has been leading that for us for the last year or so.

Kathy J. Warden -- Chief Executive Officer and President

And yes, Miles, I'm very pleased with where we are on integration, both the cultural integration that's occurring as well as the integration of our operations. As Ken noted, we are on track for the cost synergies that we defined going into '19 and expect to largely have recognize those in early 2020. We are also above our expectations of where we thought we'd be at this point in both identifying revenue synergies and bidding work together that could result in revenue synergy for not just IS, but the other sectors as well.

As I look at the process that we took, where we are leveraging the best of both cultures and processes into Northrop Grumman, the team has really stepped up and responded, we've been able to continue to perform exceptionally well as you see now in our 2018 results, while also doing the back office integration that's so necessary to being able to operate as one company. And so it's just seven months in, I couldn't be more delighted with where we are in the integration process.

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

And Kathy, I apologize, one other comment I should make on IS margin is, their mix is trending a little bit higher toward development work, as they're also seeing some volume come out of the national security strategy, particularly in their national space -- national security space business as well as hypersonics. So that drives the margin rate down just a touch, but certainly positions them well for new future production.

Stephen C. Movius -- Corporate Vice President and Treasurer and Vice President Investor Relations

Hey, Natalia, one more question, please.

Operator

Your final question is from the line of David Strauss with Barclays.

David Strauss -- Barclays -- Analyst

Thanks for fitting me in. Wanted to follow up on that -- on IS and actually about the working capital opportunity there. Ken I know you mentioned kind of 2020 a tailwind, potential tailwind for free cash flow from working capital. Can you just talk about how you view that working capital opportunity at IS? is it as large as it would appear based on when the Company was on its own?

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

No, as I think about the working capital, I would say that as an industry, we've been building some working capital as we've seen. Some of the cash terms structurally in the DFARS work a little bit against us in particular on some of the longer cycle production programs where deliveries aren't made for, in some cases, years down the road. And we carry a fair amount of working capital until we get to liquidate upon delivery and DD-250 of those products. I would say that legacy Orbital ATK or NGIS saw similar increases in working capital based on that trend, but also they have some structural areas where they had invested in programs like A350 and in the CRS program. And some of those will start to have a better cash profile as we look at 2020. They also had agreed to make some investments that should start to ramp down here in 2019. And we expect that, that will also have a bit of a benefit on cash as we look at 2020 and beyond. So we're working at both on our side and on the NGIS side. And I think that, our team is probably one of the best managers of working capital in industry. And we expect them to continue to be successful in that regard.

Stephen C. Movius -- Corporate Vice President and Treasurer and Vice President Investor Relations

At this point in time, Kathy, I'd like to turn the call over to you for some final remarks.

Kathy J. Warden -- Chief Executive Officer and President

Thanks, Steve. I'll conclude today's call by once again thanking our team for another outstanding year of performance for our customers and our shareholders. I'm just honored to be leading such a talented and dedicated team of men and women at an important time for our Company and our national defense. So thank you all for joining our call today.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Duration: 61 minutes

Call participants:

Stephen C. Movius -- Corporate Vice President and Treasurer and Vice President Investor Relations

Kathy J. Warden -- Chief Executive Officer and President

Kenneth L. Bedingfield -- Corporate Vice President and Chief Financial Officer

Rob Stallard -- Vertical Research -- Analyst

Ronald J. Epstein -- Bank of America Merrill Lynch -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

Carter Copeland -- Melius Research -- Analyst

Seth Seifman -- JPMorgan. -- Analyst

Peter Arment -- Baird -- Analyst

Rajeev Lalwani -- Morgan Stanley -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Myles Walton -- UBS -- Analyst

David Strauss -- Barclays -- Analyst

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