Northrop Grumman Corp (NOC) — Q4 2018 Earnings Call Transcript

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 web page 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 31, we adopted the mark-to-market method of accounting for our pension and other postretirement 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 the supplemental measure is useful as it depicts our results before the nonoperational impacts of pension and other postretirement benefit actuarial gains and losses, and is consistent with how management measures underlying performance, determines incentive compensation and provides guidance. Table 1 in the earnings release reconciles non-GAAP operating measures to our GAAP results, and Schedule 6 of the earnings release provides 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.

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 through 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 cost 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 those 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 from 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 1.2x. 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, retire 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 the 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 multifunction 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 F-35 sales will grow at 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 and 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 multiyear contract for the E-2D program. Our first multiyear for 30 planes is progressing toward completion. With the success of the first multiyear production contract, the Navy requested a new multiyear proposal for up to 40 aircraft over five years, including additional aircraft for Japan. We're also in discussions with Boeing on a fourth multiyear proposal for the F/A-18 program. The fiscal year 2019 plan 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 are 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 ID/IQ contract for LAIRCM, our large fixed-wing infrared countermeasures system. Under the ID/IQ, the Air Force may issue task or delivery orders for system and support up to the ceiling amount with work under the contracts 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, MS recently competed for and won the unified platform effort supporting U.S. Cyber Command. We will develop, build, and deliver the core underlying war-fighting capabilities enabling integrated offensive and defensive cyber operations for U.S. 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, 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 Evolvable 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 coming 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 have been consolidated into a single new business area called Global Services. Global Services includes working 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, missiles, 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 shut down and now are operating under a continuing resolution until February 15. While we have not yet seen a significant financial impact, this could change if there is another shutdown or 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 cap 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 a 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 provide strong results, and we're 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.

Thanks, Kathy, and good afternoon, everyone. I want to thank our team for this year's strong performance. Today, I will take a few minutes to discuss our 2018 results and provide more detail on our guidance for 2019. As I review 2018, please remember that prior periods have been adjusted for new accounting standards related to revenue recognition and pension cost presentation that were adopted at the beginning of 2018. We also made adjustments for our previously announced mark-to-market pension accounting change. Looking at sector results, Aerospace Systems sales increased by 6% for the quarter. In 2018, sales rose to over $13 billion, marking an 8% growth. Although restricted activities and the F-35 program of Manned Aircraft contributed significantly to the year-over-year increase, all three business areas within AS, including Manned Aircraft, Autonomous Systems, and Space, saw higher revenues compared to the previous year. It's worth noting that AS's revenue has grown by about 30% since 2015, and the team has excelled in maintaining strong performance amid this rapid growth. AS operating income rose by 12% in the fourth quarter and 9% for the full year, driven by sales growth and better performance in Manned Aircraft and Autonomous Systems. We achieved a solid 10.8% margin rate for the year, primarily due to Manned Aircraft and Autonomous Systems program performance. For 2019, we anticipate AS to continue growing at a mid-single-digit rate, reaching the high $13 billion range, with growth expected in all three business areas and an operating margin rate in the mid- to high 10% range. At Innovation Systems, fourth-quarter sales rose by 7% based on pro forma comparisons, driven by higher volume at Flight and Defense Systems. For the entire year, sales increased by 17%, with growth across all three business areas and a more than 20% increase in international sales. In 2019, we project IS sales to reach the high $5 billion range, with U.S. sales growth approaching 10%, though this will be partially offset by a decline in international sales, expected to drop by about 20% as some shorter cycle programs from 2018 taper off. However, we foresee strong international growth after 2019, as it remains a crucial part of our IS growth strategy. We expect IS's margin rate in 2019 to be in the mid-10% range. Turning to Mission Systems, fourth-quarter and full-year sales rose by 2%, largely due to growth in Sensors and Processing programs. Fourth-quarter volume in Sensors and Processing increased by 8%, supported by higher volumes in communications, F-35, and restricted programs. For the year, we saw about a 9% growth in Sensors and Processing, reflecting increased volumes from restricted programs, communications, F-35, and electro-optical infrared self-protection programs. However, these gains were somewhat offset by the ramp-down of a restricted ISR program and reduced volume from a JRDC program. Sensors and Processing makes up about half of Mission Systems' sales. In the fourth quarter, operating income for Mission Systems increased by 17%, with the operating margin rate rising by 170 basis points to 13.1%, fueled by higher volume and enhanced performance in Cyber and ISR, and Advanced Capabilities. For the full year, operating income rose by 5%, and the operating margin rate reached 13%. For 2019, we expect Mission Systems' sales to grow at a mid-single-digit rate to the low to mid-$12 billion range, maintaining a robust operating margin rate of around 13%. Technology Services experienced a decline of 8% in both fourth-quarter and full-year 2018 sales, primarily due to the ramp-down of several discussed programs, particularly JRDC and KC-10. This decline was partially mitigated by growth in other programs like SEMA. Technology Services fourth-quarter operating income surged by 62% to $115 million, achieving a 10.8% margin rate, mainly due to the impacts from contract closeouts in a state IT outsourcing program. For 2018, operating income decreased by 1% due to lower volume but was partially offset by an improved margin rate, which increased to 10.3% mainly influenced by the noted contract closeout impacts. Looking ahead to 2019, we expect Technology Services sales to be in the low $4 billion range, with an operating margin rate of mid- to high 9%. Overall, we anticipate total sales of approximately $34 billion in 2019, with a segment operating margin rate in the low to mid-11% range. Our total operating margin rate is projected to be in the mid- to high 10% range, considering a net benefit from the FAS/CAS pension adjustment and unallocated corporate expenses. Unallocated corporate expenses in 2019 are expected to reflect noncash intangible asset amortization and PP&E step-up depreciation. Our assumptions for 2019 FAS are based on a 4.31% discount rate and an 8% expected long-term rate of return on planned assets, excluding any mark-to-market impact. We anticipate an effective tax rate of mid-17% for 2019, and our adjusted earnings per share guidance is set between $18.50 to $19. The calculations bridge our 2018 adjusted EPS of $21.33 to the 2019 target, accounting for factors such as increased operating income, reduced CAS recovery, and anticipated higher unallocated corporate expenses. Cash flows were strong at the end of 2018, with cash from operations exceeding $4 billion after accounting for significant pension contributions and capital expenditures. For 2019, we expect cash from operations between $3.8 billion and $4.2 billion, with free cash flow projected to be between $2.6 billion and $3 billion. We plan for share purchases of about $750 million and intend to retire approximately $500 million in debt. Looking forward, we anticipate that capital expenditures will decline incrementally. Based on these insights, we expect to create substantial value through growth, performance, and robust cash generation. Now, I think we are ready for Q&A. Steve?

Thanks, Ken. Natalia, can you open the line?

Kathy, a question on your comments. You said that in the Manned Aerospace area, the 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 likely to start to accelerate again from 2020? And is there any change in the margin profile as well?

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 is consistent with what we would typically see in a program that's executing well and has completed its critical design review. Beyond that, I really can't comment any more on what we expect, either in future years or about the performance of the program.

Okay. Can I try something else instead, then?

Yes.

Okay. You mentioned Innovation Systems at the export side of things are seeing some strong growth this year, stepping down again 2019 and going back up again. I was wondering if you could give a bit more clarity on what exactly are those products or services that are moving around.

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 then 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.

Can you provide some insights into the cash flow trends and what you expect free cash flow to look like? Additionally, investors seem to anticipate that growth will eventually pick up beyond its current rate, considering the programs in place. How should we approach this expectation? If you could share any perspectives on this, it would be appreciated.

So Ron, it's Ken here. Maybe I'll take it in reverse order. In terms of the growth profile, I would say that yes, 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 that deals with this ever-increasing view of threat from peer, 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 developments. This early development growth we're seeing out of the NDS and 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 perturbate your production lines or 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 the length of '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 of other things, including 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 would look like. We're probably not going to put a number on it beyond 2019 at this point.

Can we discuss margins and leverage related to AS and what factors are influencing them? How should we consider this for 2019 and beyond?

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 sectors taking on some additional early phase development opportunities is 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 rates 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.

I want to revisit the topic of your goal to grow faster than your end market over multiple years. Based on what you've shared so far, it's unclear where this will lead. It didn't occur in 2018, and the 5% organic growth in 2019 doesn't seem compelling. From what I can see, influenced by authority steering and spending patterns of some of your peers, it doesn't appear to be happening in 2019 either. The expectation of mid-single-digit growth for 2020 seems based on insights about spending and projections from other companies. It looks like we might be looking at a three-year period where your aim to exceed the end market might not materialize. I understand there are transitory factors, but I don't believe those will be relevant in 2020. From our perspective, investors are consistently questioning what is specifically meant by the end market, the discrepancies compared to it, and why your projections aren't aligning with actual results.

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 talk about long-term, our business cycles, particularly with AS and, to a lesser extent, IS and MS, tend to be beyond 3 to 5 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 5-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 the NDS. We are seeing new programs come into the portfolio. They start relatively small, and so they are not moving the needle with the same rate as some of our large programs that we have talked about. But they do create the platform then for growth to 3 to 5 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, an alignment with the investment account.

Yes, it seems like there is a high degree of confidence in maintaining substantial visibility for the current growth rate, potentially extending beyond five years, rather than experiencing a sudden change in pace at some point.

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's 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 that create that foundation for our view that we're 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.

And Noah, 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 of 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 our restricted ISR program has grown 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, flatten and start to grow in '20. So I think, overall, we feel pretty good about it. I think you're right, there's a real nice long-term trajectory here. And I would just think about it a little bit in that bigger sense in terms of how restructure was doing as well as we talked about the international business at IS, that as a part of that big 17% revenue growth that's going to have a little pause here in 2019.

Just one quick one, and then we're off of revenue. Just talk about a simplifying assumption, Kathy. 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 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 that wouldn't be the case?

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.

I 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 pieces there, sort of what's enabling you to get to kind of the 5% to 6% that you're forecasting.

Thanks for the question, Seth. I would say, yes, if you think about it, we've got F-35 in there at, as we 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 nice growth 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 other 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.

And then, maybe just a follow-up real quick. Does F-35 flatten out in '20? And then, you've resumed growth in Manned Restricted?

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 reach 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 only among that we would expect to see our fair share of sustainment revenue over the life of that program.

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, either M&A or in particular, portfolio shaping that you're thinking about in 2019 and beyond.

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, health care, 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 a 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 NTS 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 through good performance, not just in '19, but in beyond.

I wanted 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 and some of those numbers, Ken, that you provided earlier?

Sure. I wouldn't want to call anything at 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, or 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 on to the downslope of our CapEx profile while we're 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'd 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.

Could you provide the total company sales or earnings mix attributed to missile defense after the operational alignment? Additionally, what growth rate do you anticipate over the next few years under a base case scenario, and what about in the best case scenario, given your insights on current opportunities?

I don’t have that specific number right now. We will post an updated company overview on our Investor Relations site this afternoon after the call. Matt will include detailed information categorized by sector, division, and major products. We expect to see strong growth in missile defense, particularly in MS and IS. IBCS is also expected to grow nicely, both in the U.S. and internationally. Kathy, do you have anything to add on that?

Yes. Hunter, I'd just take you back to the missile defense review and the capabilities that are outlined in there from a space layers and support, tracking and targeting, to the missile capabilities needed and different weapons 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 being required to support in the full defense mission.

I was hoping, maybe, Ken, you can talk 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 anticipate it. But the margin is flat year-on-year, given kind of the integration, the synergies, I would imagine if flowing to 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?

Sure, I'll hit on that this first question and 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 into the 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 they're costs, operating or revenue synergies, also will be realized by the other sectors. So you got to look at kind of the 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's been leading that for us the last year or so.

And yes, Myles, I'm very pleased with where we are on integration, both the cultural integration that's occurring as well as the integration of our operation. As Ken noted, we are on track for the cost synergies that we defined going into '19 and expect to largely have recognized 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 fitting 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 just seven months in, I couldn't be more delighted with where we are in the integration process.

And Kathy, I apologize. One other comment I should make on IS margin is their mix is trending a little bit higher towards development work as they're also seeing some volume come out of the National Security Strategy, particularly in the national security space business as well as hypersonics. This slightly lowers the margin rate, but it certainly positions them well for future production.

I wanted to follow up on IS and the working capital opportunity there. Ken, you mentioned that in 2020, there was a potential tailwind for free cash flow from working capital. Could you explain how you perceive that working capital opportunity at IS? Is it as significant as it seems based on the company's previous performance?

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 it 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 the industry, and we expect them to continue to be successful in that regard.

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

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 to our national defense. So thank you all for joining our call today.