Q3 2019 Earnings Call
Zero and an operator, we'll be happy to assist you I would now like to turn the call over to your host Mr. Todd.
Vice President Investor Relations Mr., please forget it.
Thank you Eric.
Come to Northrop Grumman's third quarter 2019 conference call before we start matters discussed on today's call, including two dozen lucky guidance any outlook or expectations for 2020.
<unk> judgment based on information available at the time of this call.
The constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities laws.
We're looking statements involve risks and uncertainties, which are noted in today's earnings release and a recipe.
These risks and uncertainties may also cause actual company results to differ materially.
As discussed on today's call include non-GAAP financial measures that are reconciled in originally.
All information can be found in supplemental presentation posted on our Investor Relations website.
On the call today, our Kathy Wharton Arts, Chairman, CEO , and President and Ken Bedingfield, our CFO .
I'm trying to color and Kathy Kathy. Thank you Todd we're pleased to have you aboard as our vice President of Investor Relations and I also want to thank Steve Mobiuss for his many years of service in that role.
Afternoon, everyone and welcome to our third quarter 2019 earnings call I.
I want to thank the entire Northrop Grumman team for another solid quarter.
We delivered strong but capture in backlog growth higher sales at all four sectors strong earnings and healthy cash flow.
It result, supported a substantial increase in our EPS guidance as well as an increase to the lower isn't about free cash flow guidance.
And we're on track to achieve the other major elements of guidance.
Before discussing the quarter in more detail I wanted to touch on the realignment we announced in September .
Any in January we will have four operating sectors that more closely aligned with our customers priority investment areas.
Our new sectors or Aeronautics system defense system mission systems and stay system.
These changes will enable our teams to quickly identify and deliver solutions for rapidly evolving national security challenges.
The realignment is also aimed at driving continued strong execution.
<unk> profitable growth and operational efficiency.
Under the new structure Aerospace systems becomes Aeronautics system and continues under the leadership of Yonah almost.
In addition to long duration franchise manned and unmanned programs. The sector will also include the Aerostructures work currently being performed innovation system.
A new sector defense systems brings together technology services, the defense businesses innovation system and select capabilities for mission systems.
In addition to beat our global Sustainment and modernization business Defense systems include the Tactical missile you initiative, and our integrated Air and missile Defense program.
It sounds systems will focus on products and services that address evolving threat and quick turn requirement for a wide variety of national security military civil and international customers.
Chris Jones, the President of Technology services has announced his intention to retire.
I want to thank Chris for his many contributions to Northrop Grumman.
Securely for leading the effort if its mission technology services for the future.
We wish him the bad.
Mary Patricia and who currently has landed avionics before I start within missing mission systems will lead the new sector.
Mission systems remain largely intact, but with a sharpened focus on growing its leadership position in open cyber security software defined system for defense and intelligence applications.
Mark Taylor will continue to lead mission system.
The fourth and final sector based system brings together are significant based and launch capabilities from across the company into one organization.
They systems will be a robust platform to accelerate the development of innovative and affordable offerings for national security military civil commercial and international customer.
We expect space systems will be the fastest growing sector in our new structure.
Like Larson currently the president of innovations that some well we'd say system.
This realignment is the next logical step to maximize the powerful revenue synergy opportunity, we envision from our combination with orbital H.T.K.
It also further enable strong execution and our organizations agility.
Turning to financial highlights for the quarter.
Sales rose, 5% to approximately $8.5 billion and included sales growth in all four sectors.
Our year to date segment operating margin rate of 11 in a half percent is tracking to our guidance of approximately 11.5% for the year, reflecting solid operational result.
Cash from operations increased 327 million to 1.1 billion in the third quarter and free cash flow increased to 882 million.
Year to date operations it generated $1.8 billion of cash after capital expenditures of approximately 800 million year to date free cash flow increased to approximately $1 billion.
New awards remain robust and demonstrate our strong competitive position in critical national security domain.
In the third quarter, we booked more than 10 billion in New award or 1.2 times sale.
Book to Bill with above wanted innovation system mission systems and technology services.
At Aerospace systems year to date book to Bill is 1.6 times sale and backlog is up 28%.
During the third quarter, Japan exercised an option for nine additional two d. advanced Hawkeyes for approximately 1.4 billion.
This is in addition to the 3.3 billion multiyear award we booked last quarter.
I would also note that France has indicated they're interested in purchasing three each judy.
And innovation system, we booked the initial 300 million of a $1.1 billion missile Defense agency competitive for board to supply new targets in countermeasures used to test the ballistic missile defense system.
Our offering provides a new solution to the complex threats scenarios our customers.
I'd also note that I asked because that award at approximately 1.3 billion for hypersonic and counter hypersonic activities as those of crime and subcontractor.
At mission systems, we were awarded a 13 year I'd like to to cut.
Contract to produce and sustain next generation navigation system for the U.S. Air Force and international customers.
It's all sorts of ward has the potential value of $1.4 billion.
Mission systems also booked a six year 375 million dollar order to provide surveillance radars for the Navy's Triton aircraft and a 200 million dollar I've yet to award for our LIFO layer comm systems and related support.
And it technology services.
In addition to winning two large recompete T I want to competitive restricted award valued in the hundreds of millions of dollars. We're particularly pleased with this award as it demonstrates the sectors ability to win new restricted work and expand our national security services portfolio.
A good indicator of our company's portfolio alignment to the National Defense strategy is our growing share of restricted work.
Year to date restricted awards totaled $8.5 billion.
At the company level restricted work across multiple domains continues to grow as a percent of total revenue.
As of September Thirtyth total restricted backlog has grown 22% since year end.
New awards of approximately 36 billion EUR 1.4 times year to date sales.
Looking ahead, we have large opportunities across our portfolio in four sectors in all four sectors and program execution remains solid.
Turning to aerospace system.
35 production continues to ramp up.
Year to date area has delivered 100 centricity for lunch unit and we are on pace to deliver a total of 134 units in 2019 13 more than last year.
As we celebrate the thirtyth anniversary of our beaches spirit. The world's first stealth bomber, we continue to perform well on the B 21 writer our nation's next generation stealth bomber.
Last month, and then acting Secretary of the Air Force not Donovan noted that the development program is on schedule and production will occur in Palmdale, California.
At mission systems are IBCM systems successfully intercepted a cruise missile I didn't extended range with Sentinel and Patriot systems.
Light has demonstrated the value of IBCM to detect try and engage low flying threats and it just sounds well beyond the range limitation of the current Patriots system.
In August innovation systems submitted our proposal for the National Security space launch down select which is currently planned for the third quarter of 2020.
Our Omega vehicle is on track to meet the customers' requirements for a first launch in 2021 and operational launches of National security payloads in 2020 too.
On GBS team, we have assembled an exceptional nationwide industry team that is ready to meet the air Force's technical and schedule requirement.
We are successfully executing on the T. and Amar phase of the program and we look forward to so many in our proposal for the next phase of the competition.
The Air Force to think clear that our nation urgently needs to modernize the I.C.D.N. system and that it's critical that this acquisition remains on schedule.
Turning to the U.S. defense budget.
We're now working under a continuing resolution that expires on November 21st.
More often than not we begin each fiscal year under a CR and we don't expect us to caused significant disruption to our fourth quarter activity or our outlook for next year as long as there is not a prolonged CR.
Our customers need predictable funding it is not constrained by continuing resolution one that is.
This enables investment in the critical technologies, we need to stay ahead of rapidly advancing global threat.
We believe our nation's leaders will provide the necessary resources to modernize she capability.
And therefore, we are hopeful that the government will act quickly to finalize appropriation.
In closing.
Based on a solid quarter.
Strong year to date performance and our outlook for the remainder of thing here, we're again, increasing 2019 earnings per share guidance.
We now expect Mark to market area will range between $20 and Tencent and $20 and 35 so.
We are maintaining our sales guidance of approximately 34 billion and we are updating our free cash flow guidance by raising the bottom into the range by 100 million. We now expect free cash flow of $2.7 billion to $3 billion for the year.
Regarding the 2020 outlook, we will provide detailed guidance in January we expect mid single digit sales growth in 2020, which now includes the impact at the Lake City contract winding down in the latter part of the year.
We also expect segment margin rates, consistent with 2019, and strong and growing free cash flow.
So now I'll turn the call over to Ken for more detailed discussion of our financial results and guidance can.
Thanks, Cathy and good afternoon, everyone [laughter].
I also want to back a team for another solid quarter. We had actually won awards strong book to Bill and higher sales at all four sectors.
You didn't even awards support our outlook for continued topline growth.
And as Cathy said, we're tracking to our segment margin rate guidance.
Instead of such aerospace systems sales rose, 5% higher manned aircraft reflects volume increases on the Etwo D and that 35 programs.
Based sales also increased reflecting growing activity on nexgen oki IR programs.
On the system sales were also higher due to volume increases in multiple areas, including global Hawk.
I guess third quarter operating income declined to 324 million, an operating margin rate was 9.4%.
This was driven by lower net favorable you see adjustments.
Yes had fewer favorable adjustments this quarter.
Generally due to timing.
We also had negative performance adjustments onto activities the beat to defensive management system modernization program is experiencing schedule the ways. Although the upgrade has taken longer than planned installation of Dms has been completed on the first test aircraft and aircraft checkout is underway.
Yes, that's now completed most milestones on the program and are well along toward completion.
We also experienced production delays for certain commercial space components.
We have introduced new leadership and processes in this business in order to successfully complete these contracts.
In both cases, we believe our currency agencies have captured the cost to complete the required work.
Excluding these two adjustments I asked third quarter margin rate would have been in the mid and 10% range.
We continue to expect sales for the year and the high $13 billion range.
We are maintaining operating margin rate guidance of midsized, 10% with a bias toward the lower end of the range.
And immigration systems third quarter sales rose, 12% and its first full quarter comparison.
And space, we had higher volume on National Security satellite systems.
Defense systems had higher volume on precision munitions armaments and tactical missiles, including the Argo VR program.
Flight systems had increased volume on military and commercial aerospace structures.
<unk> operating income increased 2%, reflecting higher sales.
Operating margin rate for the quarter was solid at 10.4 person.
The prior year period benefited from favorable indirect performance.
The recovery of an insurance claim.
Year to date operating margin rate is 11.1%.
For the year, we continue to expect iOS sales of approximately $6 billion with a high 10% operating margin rate.
No change to prior guidance.
Turning to mission systems third quarter sales grew 4% and operating income was comparable to last year.
Landscape abilities had higher volume on brain programs cyber and I are Saar at higher volume on space unrestricted programs.
Sensors and processing had increased activity on airborne radar and electronic warfare programs, including F 35, and favor radars.
Are you starting early results. We continue to expect I must revenues have grown to the low to mid $12 billion range.
And we are raising margin rate guidance to the low 13% range.
At Technology services sales rose, 3% and operating income rose, 23% with an operating margin rate of 12.7%.
As we discussed last quarter program headwinds are moderating and we're now seeing the underlying sales growth in both tee us businesses.
Operating income benefited from a focus on cost reduction.
As well as a favorable adjustment on a sustainment program.
We continue to expect to guess sales in a low $4 billion range no change to prior guidance.
And based on strong year to date performance, we are raising guidance for Ts operating margin rate, we now expect to high 10% range versus prior guidance of low 10%.
As we roll all that up we continue to expect 2019 sales of approximately 34 billion.
With a total segment operating margin rate of approximately 11.5%.
Hello segment OEM, we continue to expect unallocated corporate expense of 225 million.
Unallocated corporate expenses typically higher in the fourth quarter and our guidance contemplates an estimate for state deferred taxes and year end accruals.
We are increasing our guidance for total operating margin rate to approximately 11%.
Largely due to updated cash pension estimates as we completed our annual demographic study.
The presentation materials. We posted this morning include updated estimates for cash.
Fast Cas pension adjustment.
Required funding for 2019 through 2021.
Our 2019 estimates do not include the Mark to market adjustment, we will be recording in the fourth quarter.
2020, and 2021 estimates are based on year to date trends and assume a discount rate of 3.31%.
12% plan asset return in 2019, and 8% plan asset returns thereafter.
Through September 30, or actual returns were about 14%.
I'd also note that our cast prepayment credit approximates $2 billion.
The demographic study increased 2019, kaz and that fast cabs adjustment by $60 million.
For 2020, and 2021, our updated assumptions increase in that fast Cas adjustments by 140, and 80 million respectively.
And over the three year period are required funding is about 100 million lower moving the taxes, our effective tax rate for the quarter was 11.6%.
Based on year to date results and our updated fourth quarter analysis.
We now expect attach rates in the low 16% range for the year.
Wrapping all that up and considering year to date results, we're increasing our mark to market adjusted earnings per share guidance to a range of $20.10 to $20.35.
Just continues to be based on approximately 170 million weighted average shares outstanding.
Free cash flow increased $352 million in the quarter.
Year to date, we've generated more than a billion dollars in free cash flow.
Based on your name results and our fourth quarter outlook.
We are raising the bottom end of the free cash flow range by 100 million.
We now expect to 2.7 to 3 billion for the year.
We continue to expects capital expenditures of approximately 1.2 billion.
As well as share repurchases of approximately 750 million.
And as planned we retired 500 million of death in the third quarter.
Beyond this year, we expect growing cash flows driven by higher sales and earnings some improvements in working capital and modest required pension funding.
Regarding capital expenditures, we continue to invest in growth opportunities as robust backlog rose continues.
We're still targeting capex at about 2.5% of sales in 2021.
In summary, we had a solid third quarter and we expect strong results for the remainder of the year.
I think we're ready for Q and I thought.
Jericho ready for questions.
Ladies and gentlemen, if you wish to ask your question. Please press star followed by one on your Touchtone telephone again press Star one to ask a question. If your question has been answered where you wish to exit the questions can you press the pound key to exit the Q.
Press Star zero at any time for operator assistance.
First question comes from Peter Arment with Baird.
And then Kathy can talk welcome.
[laughter] Kathy thanks for the.
Details on the on the realignment could you maybe give us a just your thoughts on sometimes when you do a realignment you do China bright light on something that doesn't fit is is this going to result in the portfolio shaping and just any updated thoughts on that thanks.
And thanks for the question and you're absolutely right as we did this realignment we looked in jobs that what we had in the portfolio to ensure that we were getting things aligned in a way that would create the most value for the company going forward and I'm really pleased with a structure, we're putting in place it.
This is the opportunity that we knew we had in states to bring the portfolio together in the new space sector. I'm also excited about the creation of the defense systems sector as it brings together some of our munitions and integrated air and missile defense capabilities in a tighter way along with our Sustainment strategy.
Fees, which deal with customers very quick turn requirement. So this has really been about the forward look in our company and seize those opportunities that exist.
And as we did shine a light on the whole if the portfolio there wasn't anything that didnt fit within the structure that we created but of course I continue to look at that on a regular basis and as we execute the strategies that we defined in this newer <unk> realignment will continue to assess just that question.
Your next question comes from Rob Epstein with Bank of America Merrill Lynch.
Hi, good do good afternoon, everyone. This is a kristine liwag dialing in for Ron today [noise].
Christine.
And yes, I just wanted to follow up on the V. two defensive management system modernization effort.
Or the operating issues, you're facing there related to the Rebaselining of the program and then also should we expect a lower margins in this program to continue to your B two contracts going forward or is this issue kind of a onetime thing.
So Kristine I'll start and then handed over to tend to talk about the financial implications of what we saw on B to this quarter. You know, we're managing that wasn't the contracts across the company and delivering very strong performance and sometimes contracts are re baseline as we did.
Earlier in the year on the B two program. What we saw this quarter was an adjustment there that can outlined in his comments.
Related to the performance on that program that we feel very good about where we are in completing major milestones on our way to finalize seen in executing the V. Two program is a complex to update a system that tight but we now have our arms around.
And those challenges so I'll turn it over to kinda talk a little bit more about the financial implication.
Thanks, Cathy and Christine I. Appreciate the question, let me, let me just say that.
As I mentioned in my my comments, we do believe that are you see reflects the cost that we think will be required to complete the program and as we look at.
Our portfolio and I'll just go back to Cathy's comments on portfolio of.
Many different programs and contracts across not just the aerospace sector, but across the company. We don't expect this this program as it.
We'll book essentially a lower margin.
From now until completion have any material impact on our overall segment margin rate at either I guess or in total for the company again, given the very diverse portfolio that we.
Manage on a day to day basis.
Your next question comes from Seth Seifman TP Morgan.
Hey, good morning.
Thanks.
Can you maybe if you could talk about you know you mentioned repaying some of the debt when you look out beyond this year there theres some debt coming due each of the next couple of years can you talk about the the approach that you plan to take there.
Sure so.
I would say you know as we look forward, we do have debt coming due we also have a growing EBITDA as we look at growing the business growing the top line in maintaining strong margins.
And that growing EBITDA gives us some naturally deleveraging there. So you know as we look at that I would say, we've got some optionality on on what to do and depending on the.
Value, creating opportunities we see in front of us will very much shape, what we do in terms of that.
Debt repayments strategy and we'll continue to evaluate what are the most value creating.
Uses of our capital and that'll really shape it.
Your next question comes from Sheila Keilman with Jefferies.
Thank you good afternoon, Kathleen Ken I'm sure like Kathy Kathy you made some preliminary comments on 2020 can you talk about Oh, your comments regarding margin mix and having it consistent.
Or margins being consistent can you talk about mix within the portfolio. How you see it transitioning from mature to develop and programs. If you could give some color.
So it will be giving detailed guidance in January in our new structural alignment, but my comment that apply to the company as a whole seen our segment operating margin rate stayed consistent with 2019 guidance and as we look at what's happening within.
In our segment operating margin rate, we are taking on additional development work and there is some downward pressure on margin rates as a result, but we're also having very good cost management, which is offsetting our rate and allowing us to keep those competitive weight.
Just to win new business at all so healthy segment operating margin rate and we expect that trend to continue into 2020. So it's like a duck on water while remaining consistent there's a lot happening the need to keep the margin rate consistent even as we take on additional development work.
Okay. Thank you.
Your next question comes from David Strauss with Barclays.
Thanks, Good afternoon, everyone [laughter].
Wanted to on the mid single digits sales growth guidance can you had been any potentially something something higher than that on the last call. I know you talked about Lake city, how much does leak cities with Lake City kind of the only change.
Versus what you said prior and how does that or how does that impact things in 20, and I guess in the 21 as well thanks.
Of course, as we look at our sales growth for 2020.
You know really Lake city as the biggest impact that we see versus the previous outlook that we had provided we look at Lake City is probably having about a 1% impact on what we had expected for 2020 sales and.
Certainly as we look forward, we see again after the Lake after Lake City coming out mid single sales sales growth solid margins and then again that growing cash.
So we're looking forward to performing on existing portfolio driving that growth and ER.
Turning that into margin cash.
Your next question comes from Ritchie <unk> with Morgan Stanley .
Hi, good afternoon.
Ken a question for you just coming back to the couple of comments you made on Oh gosh I appreciate the color on easing cutbacks and improving working capital can you maybe taking a step further and give us an idea of what conversion looks like.
Over the next few years <unk> and maybe in 2021 and in particular, given your comments there on capex level.
Sure as you'd let me first comment from a conversion perspective, I would just say you really need to be careful as you think about conversion for a number of reasons I mean first of all the pension impact as well as.
You know the amortization of CPI and things like that so let me really focus on kind of how we're looking at cash and and as we look forward to 2020 beyond.
We'll provide detailed guidance in January and walk you through all that I'll, just say that we've been clear that this business is going to be a strong a generator of cash as we look forward.
Now, let me just kind of walk through.
Some of the drivers there, yes as I said, we continue to expect solid sales growth.
For several years.
And that's really driven by our portfolio alignments customer needs.
And I would say as demonstrated by the strong backlog so we've been generating.
And quite frankly, we continue to expect to generate in Q4 and 2020.
And as I mentioned, we continue to expect to generate strong strong margins and convert those margins and the cash yeah.
I'm kind of ticking and I said to you do you want to see Uh huh.
Oh I can give you get a likely.
Given our confidence.
Given our confidence on our expected 2019 cash performance.
We did increase the bottom another range as Kathy mentioned, the 2.7 billion and we continue to be confident on our 2020 free cash flow growth.
So you know as we've been investing in the business to drive growth and a lot of that investment at a us where we're growing the business, 30% in three years and it is that will grow double digits in 29 team.
We you know we continue to expect about 1.2 billion on Capex, this year or about 3% to 5% of sales.
And looking at 2020, we expect capex to be in a range of three to three and 5% of sales as we trend down to the 200% range in 2021.
And I'd just say these investments continue to support our growing backlog.
And a robust set of near term opportunities across multiple domains, including restricted space.
So just moved off in Capex again pensions are well funded.
Some of the best funded plans in the industry and that offers a structural advantage in our new business captures.
Working capital as I mentioned should moderate a bit starting in 2020.
A bit more opportunity probably in the out years some of that being timing of cash received milestones and some of that continued focus on solid working capital management.
Your next question is from Doug Harned, Ed with Bernstein.
Hi, Thank you good afternoon.
On the dog I was.
I wanted to to understand a little bit better the growth trajectory and on the side and if you. If you look at the the elements of this and you have F 35, clearly, there's some restrict restricted space growth but.
On a ton of this system.
In the release, you refer to global Hawk, but but when a when we look at economists systems it looks.
Heavily biased toward health systems, and those appeal period to be somewhat episodic in nature around global Hawk, neither way G.S. Triton.
Can you talk about how we should think about this is more of a long term trajectory with autonomous platforms.
Yeah, Doug so as I think about the opportunity for unmanned systems, we've clearly seen some adoption for unmanned in applications like intelligence surveillance and reconnaissance as we look into the future. We believe unmanned systems will be utilized for more.
Sure.
And we also see the opportunity for more international sales of unmanned system as export regulations are considered and perhaps a drop to allow more of this capability to get into the hands of our allies nation.
When we think about you weigh on under over a long term trajectory. We see a continued evolution of these platforms into additional mission, we see them continuing to evolve in terms of their technical capabilities and these are the areas that we are investing in as a company.
Today, there was everything from remotely piloted to truly autonomous systems. Since you know we tend to operate on the high end of that spectrum and we believe for more missions will continue to evolve to that higher into capability as well.
Your next question comes from Myles Walton with either.
Thanks, Good afternoon.
Kevin I know that in the kept in the 10-Q, you allude to the the FCC disclosure specifically to raise the competition for GBSD I'm, just curious and your conversations with the customer.
How they may or may not view this as a as an impediment to do kind of bids being received which I guess have a December mid December is I guess the timeline for that.
Yes, thanks miles. So we did indeed receive an inquiry from the FTC and I want to know that we've been working with the FTC and the department of defense to ensure our compliance with the FTC decision in order that were that governs our ability to enter into that.
Transaction of acquiring or mentally teekay and we're going to continue to do so.
This is just a more formal inquiry that we're responding to as part of this late into a class and that's why we disclosed it in the <unk> in the Q.
With regard to the GBSD competition, we haven't seen any changes regarding the RFP process. Since the final RFP was released this summer.
As you know we has established a nationwide team and it's ready to go in meeting the air Force's technical schedule requirements for the competition. So we're looking forward to supporting and submitting our proposal in December and we've had no indications that there'll be any change to the acquisition strategy.
Point in both the department in the Air Force has made statements as recently as this week about their support for the program.
Your next question comes from Carter Copeland with Melius research.
Hey, good afternoon team.
Copied <unk> I just wanted to ask about you know more broadly program performance I mean, it says I think the only only the second quarter I can recall, a decade, where there were more than one negative performance call out and I. Just I think last one was a little more than a year ago. So I just I just wanted to make sure there's not some sort of trend here that you know what's.
Especially with the realignment you guys will have some stuff moving around and.
I Wonder as we go through that if you can just talk about your confidence level that you have that no. Other stuff may not you know emerge as you go through that process because it's got a lot of complexity and you guys are managing a lot right now so I just broadly if you could speak to program performance I'd appreciate it.
Thanks Carter.
As I look at our program performance. It continues to be very strong I'm, particularly proud with some of the large development efforts that we've undertaken as well as our ramp on major production programs that we are delivering on those very well and you've seen some public statements by our customers about how fleets they aren't with our performance on some of those so I will.
So rehash them here, but every year, we do have a small number program that will acquire negative easy adjustments based on performance out of the thousands of contracts that were managing and sometimes the timing of those adjustments causes a particular segment operating margin rate to fall below our expectations than that.
Quarter, you're referring to that this quarter with <unk>.
And a little over a year ago with mission systems, but as you've seen over time, our performance management has remained strong and where yielding good margins as a result of these.
Circumstances, being few and far between and and fairly isolated. So that was the case that you saw in asked this quarter. All also know we had positive you see adjustments that delivered above expected segment operating margins and that happened in Ts This quarter and is driving the inc.
Creep in segment operating margin guidance that both Ana and yes for the year. So performance overall is still very strong in our company and as a result, we're continuing to hold our guidance for the year on operating margin performance.
[noise] Carter, if I could just add.
I would say that in terms of the items that we called out this quarter.
We were really trying to indicate what was the trend between last year's third quarter and this years third quarter and help you understand that movement there as opposed to trying to identify the two items as having a long or impact on our.
Our performance so really it was willing to comment with respect to just the trend between Q3 18 into 319.
Your next question comes from Robert It's been Garneau with credit Suisse.
Hi, good afternoon.
I wanted to try to.
Hey, guys I wanted to turn the T.S., especially since we really won't be able to see it in the future, but it seems like under the Hood.
It's accelerating here with high single digit growth to the U.S. government double digit growth internationally.
Since the headwinds are dissipating here in Q4 could this business. Despite the you know and its old form for example, see mid to high single digit sales growth next year. If we if we thought about it its present form because I think that's going to be a little bit obscured. So I'm curious.
So Rob certainly this year, we have worked to reposition kiosks to be more competitive than some good cost management, it's Dan.
Rebuilding a stronger pipeline and I'm really proud of with the team has done there and you see in third quarter, a return to growth year over year and strong operating margin I believe that can persist and as we said, we do expect us to be a growing segment of our business in 2020 I.
I would not go with far to say high single digit I would see it more in a low to mid single digits. It is on a bit of Iran, and we still have some vito burning off through the remainder of this year. So that would be my macro outlook in all candidates accounted for any other comments he wants to.
Thank you, let me I guess, what I would say as you know just to kind of frame up to yes for the quarter and just to make sure. We're on the same page, we did see 3% growth at Ts quarter over quarter, and I think you might be referring to in the schedules in the footnotes there were some higher sales to the U.S. government.
As opposed to.
Some intersegment sales and we've been working at Ts too.
Make cheated essentially for Ti has to be the prime on certain international programs and particularly international Hale.
And some others, where they were previously a sub a asked so what's your I think are seeing somewhat there is they are priming some of those.
Programs that are some fms some through the U.S. government as well there were some fee to work where they were previously through I guess, we're now there the prime but as we look at it at a top level, 3% growth. This quarter. We look forward to the continued growth of the Ts sector in 2000.
20 has as a part of the defense systems, but broadly we would wouldn't necessarily see it in that that high single digit range that you high single digit range that you were referring to I think some of that is just movement in a different parts between inner segment and the framework.
Your next question comes from Noah Poponak with Goldman Sachs.
Hi, good afternoon, everyone.
And all afternoon.
Ken just going back to the segment margins for 2020, I think you've talked about the.
The possibility of expanding margins modestly over time here.
Because you'd mix down a bunch over the past few years and maybe it had a floor in that mixing down and in 2020, you'll be.
Hey, I still being out comping against the issue in this quarter hopefully not not repeating it.
Lake City out I think helps the margin compare.
Mission systems is your largest earnings contributor and highest margin segment and I think.
May grow the fastest next year actually would love to hear thoughts on that from from thought ones, maybe not accelerating as quickly as we thought but so it seems like there are some margin hoppers next year I might it might not appreciating how much development or classified work is still coming in or should we be thinking about flat as a floor with some upside potential.
So as we look at 2020 margins you know I would say first of all.
We think about 29 team we are.
Essentially for the full year still projecting where we expected to be for 2019 from a segment margin basis and each of the sectors is consistent to where it's been with exception of T.S., where we're looking at that increasing you had some questions about I asked and I would say you know again there are forecast.
For 19 is consistent with.
Where it is today and so I don't necessarily.
Think of that you know differently from a.
Lake City perspective, you know certainly we don't see that as having a significant impact overall on a on the portfolio and you know just kind of thinking thinking through it you know.
We're.
We will provide guidance in January when we get too.
We certainly.
We'll work in 2020 took continue to perform on our portfolio and see the ability to drive up those margin rates as we work through the year and we've tried to do.
In the past.
But we do continue to have some early phase development work in particular.
Yes has some early phase development work in the restricted space area, where in the National security space as we call it.
And.
That will be one of the drivers what you will see I think to your question about the fastest grower what I think you'll ultimately see as the space sector as the fastest grower in 2020, but again, we'll provide more detail and guidance when we get to the January call.
Your next question comes from John Ramsay with Citi.
Thank you just following up on margin question than 2020, but a big but bigger picture.
Can you can you started talking about the highest cost by being some of the pressure. There can you just identify some other areas of the business that are seeing more of that development of pressure and then on a related note. It was there something different about the development that you're doing today versus what you're doing maybe a few years ago that might be putting a little more pressure on early on rate you know, perhaps anything to do is.
Contract structures, requiring more risk upfront or anything like that thank you.
So as as we look at I don't see anything different honestly, John with respect to you know what we're doing today I mean simply when we start in the early phase of a long development program, you know where identifying the risks and therefore, we're tending to to up a lower rate as we try to.
Burned down those rests over time, so no change and you know how that's worked over the years I think the biggest change being that we're seeing more opportunities for early development growth.
And you know those are opportunities that were more than willing to take on.
And you know those will lead to those next generation production programs that will provide you know that additional opportunity for margin expansion down the road. So.
I don't see I don't see any change I mean, as I think about some of the restrictive programs.
You know they they may not be multi year awards, but many of them are multi year in periods of performance and so you know, we're just managing risk over that long term period of performance and you know again trying to free those opportunities as we look forward.
Yeah. My next question <unk>.
Macallan and company.
Thank you very much.
Maybe going back to miles Who's question, you know the F.T.C. investigation.
Do you expect it to have any impact on when the G.B.S.D. decision might be made and you know roughly when my thought b. and have you had any pressure or kind of suggestion from the customer that maybe you might consider the national.
Team proposal that Boeing is made.
Hi.
Not currently any changes to the Air Force acquisition strategy is the result of this inquiry. They do you plan to overboard.
Okay. So there is some time our proposal is due in December and so you know obviously, we will continue to continue to monitor that that right now we do not see any <unk>.
And in terms of the question about any pressure, we are not receiving any pressure to engage in a national team because they would point out that we do have a what we're calling nationwide team that included many large and small companies across the country.
Who are bringing strong capability.
Will support our T.B.S.D. bid.
You are an X. question comes from Richard soprano with Becky.
Yeah.
<unk> Catholic 10 card good afternoon, how are you.
<unk>.
So and that's 35 question with just a few parts to what if usual partly based on your opening remarks. So the the house and Senate fiscal 2021 to Mark up has an increasing the f. 30 quite quantities by 12 or 18 aircraft, depending on which version you believe and impacting I think lot 14. So.
To the best you can it's always could you tell us what's being assumed in your 2020 guide for F. 35 quantities now Kathy you mentioned no disruption to your guide from the C.R., but I wanted to know that maybe it's pressing you a little bit here is it possible that you could alter your guy depending on you know what happened.
November when to see our expires and we potentially have a budget with m-, possibly higher of 35 quantities. What do you think you've likely captured all the all likely scenarios and then finally, you've had enviable margins on the program just wanting to know if that continues with the block by thanks.
Right. So I'll start with some of your macro questions and then turn it can on the quantity specifically.
As I noted in my comments, we do not see an impact on our guide for a short term E.R.. If we were to sustain a longer term that would impact it causes to revisit our guide.
And I would include 35 quantity in that statement, we have contemplating the possible quantities.
35, changing through the appropriations process until the adequately reflected in our guide for 20 will be in our guide for 2020 because of course at that point, we've just given 2020 outlook.
The other thing that I'm note is on have 35, we continue to focus on performing and driving down the conquered and being a good partner until I keep Martin, but we also have opportunities on the program that are causing some growth for us over the next several years. One of course is increase this game at work on them.
How much of spoken to before and we're also seeing rose from the block for modernization program, we're working new development on our sensors, specifically radar com navigation identification sensors and this will yield production opportunity in the long term. So you think lots of 14 and beyond.
And we have some production growth to support additional bearing with quantities increasing between 12 and 14.
It's aren't significance drivers, they're not nearly as significant as the production quantity itself, but those are some additional opportunities that we have in both in here and the longer term on the program and I'll turn into can to add anything he like I I think your email to their coffee I would say you know, we certainly wouldn't want to go into the.
Quantity is that you've assumed.
For our 2020 I'll look at this point rich, but you know we are continuing to perform on the program a crowd of the performance that we've seen a at both really and all of the sectors, who are supporting the program supporting our customers.
And you know we have continued to to increase quantities and we'll see some continued ramp and then you know crappy kind of talked about what that longer term profile looks like so I I think that's I really captures.
We have time for one more question.
You are final question comes from toward Shapiro with two pair research.
Oh, yes.
You made a comment at Lake City would be about 1% sales in pack next year that says to me that you may still you may have lake city for half of the year, because I would've thought the total impact would have been about 2% of sales and then my second question is how long does the parent would be to con.
Track for which she took would look like a pretty sizeable.
In the corridor last.
Thanks.
Sure. Thanks, George on Lake City, you are correct. We we do have a transition from ourselves to the new provider of that.
Service and so we will be a performance on that program for at least the first half of the year 420 20.
And so we will see some volume on that and the one person I was referring to was actually the reduction that we seem to the previous outlook. We had for sales without a 1% reduction to our previous outlook relatives Lake city from a beat to perspective <unk>.
I would say that I wouldn't.
You know one a comment extensively on a period of performance other than to say that you know as I mentioned in my remarks were well along on a program or making good progress we're passing milestones and you know I would just point out to your question about you know substantial amount of.
A adjustment I would just say that you know in regards to the adjustments at aerospace systems. This quarter. Neither one of them wasn't access of $20 million again, we largely highlighted those us have an impact on the trend from our two three margin rate of 2018 to our.
Two or three margin rate of 2019, so just just a little color there for you.
My turn to call over to Cathy for final remarks. Thank you Todd one correction from my commentary that I want to make sure I convey is the total backlog not total restricted backlogs grows here today, it's 22, 2%.
So again I want to think our team for another strong quarter of financial and operate in performance, we're executing well building on our back lawn for profitable growth and strategically align to our customers highest priorities and all of this provides us an exceptional platform for sustained value creation. There were focused on delivering a solid finished.
The 2019 and a strong start to 2020 with our new organization a line that I look forward to updating you again in January and providing detailed 2020 guidance in that call. Thank you for joining our call today.
Maybe <unk> concludes today's conference call. Thank you for your participation.