Q4 2019 Earnings Call
Anytime during the call you require assistance. Please press star zero and an operator, we'll be happy to assist you I would now like to turn the call over to your host Mr., Tottered Treasurer, and Vice President Investor Relations Mr. aren't please proceed.
I think your Jeanne and good morning, everyone welcome Northrop Grumman's fourth quarter and full year 2019 conference call.
We will refer to Powerpoint slides that are posted on our website. This morning.
Before we start matters discussed on todays call, including 2020 guidance and be on reflect the company's judgment based on information available at the time of this call.
Constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities Law.
Forward looking statements involve risks and uncertainties, which I noted in today's press release and or at the 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. Our GAAP results reflect the market Mark to market method of accounting for pension and other post retirement benefits for consistency and compare ability of our result in 2020 guidance our references to adjust.
Net earnings and adjusted earnings per share on today's call will refer to earnings and EPS adjusted for Mark to market back.
These are non-GAAP measures. Our earnings release contains a reconciliation of these non-GAAP operating measures to our GAAP results.
On today's call or Kathy Warden Art, Chairman, CEO , and President and Ken Bedingfield, our CFO at this time I'd like to turn the call over Kathy Kathy. Thank you Todd Good morning, everyone. Thanks for joining US today, we had a strong fourth quarter in good finish to the year I want to think the Northrop Grumman team for their continued focus on perform.
<unk> innovation and agility, it's the dedication of our employees to these priorities that enables us to meet the commitments, we make to our shareholders and our customers.
Turning to our result, we met our guidance for segment owe him and exceeded our adjusted EPS and cash guidance.
Our new business capture drove a 21% backlog increase in 2019, providing a strong foundation for future growth.
2019 sales grew 12% to 33.8 billion benefiting from a full year and innovation system as well as continued growth in aerospace systems and mission systems.
Full year sales reflect double digit growth on the F 35 program and growth in restricted activities at all four sectors.
Restricted work accounted for more than a quarter of 2019 sales a double digit increase over 2018.
ER segment margin rate for the year increased to 11.6%.
Drawn program performance and cost synergies more than offset margin pressure from early phase development work.
Adjusted earnings per share also exceeded guidance at $21.21 for the year.
Turning to cash I want to congratulate the team on a very strong year.
Fourth quarter cash from operations totaled $2.5 billion and free cash flow was approximately 2 billion.
For the full year cash from operations increased to $4.3 billion and free cash flow with more than 3 billion exceeding the top of our guidance range.
Strong cash and that'll enable effective capital deployment.
We invested 1.3 billion in our businesses through capital expenditures strengthens our balance sheet. My retirement 500 million of debt and returned 1.6 billion to shareholders through dividends and share repurchases.
We increased our quarterly dividends by 10% last may and reduced our weighted average share count by approximately 3%.
This is capture was a key highlights of 2019 performance.
None awards totaled more than $45 billion for 1.3 time sales and we delivered double digit backlog growth at all four sectors.
At the macro level defense spending continues to be a national priority. This fiscal year 2020 investment counts are up 3% to $251 billion.
This increase shows the emphasis being placed on modernization and called for international Defense strategy.
The development of capabilities to counter pure adversaries continues to be a priority.
Our customers are increasingly focused on rapidly evolving multi domain peer threats in areas like space Hypersonics and missile defense.
Our growing share of restricted work demonstrates that our customers are turning to Northrop Grumman for these capabilities.
In 2019 restricted awards totaled nearly $11 billion with approximately 7 million for restricted state.
In addition to restricted awards, we received several multibillion dollar awards for large legacy franchise programs like F 30, fives and Etwo D.
We also received awards to transition development program like Triton, Gator, IBCM and Kirk toward full rate production.
We're also pursuing in winning early phase development work. It is the seed corn for the next generation a franchise program.
A good example is Oregon E R. A high speed long range missiles, which we expect to be our global customers air to ground weapon of choice to the seat modern air Defense system.
We also won a large competitive award to supply new targets in countermeasures to test the ballistic missile defense system.
And we expect a solid year for award in 2020.
On January 1st of this year, we began operating in a new sector structure to further align our unique capabilities in space missile counter hypersonics cyber and stuff.
It's the next logical step after the acquisition of orbital 80, K to enable capture of revenue synergy and drives profitable growth.
In the new structure, we're bringing together and integrating the relevant capabilities to solve many of the nation's toughest problems.
We also introduced our new defining possible brand to reinforce the value, we're providing through performing agility and innovation.
Discovery and innovation are at the heart of what we do we show our customers would as possible and then deliver through performance framework and culture, it's balance agility and affordability with the quality and safety.
We're investing in innovative concepts and technologies that align with the priorities of our customers.
I'm pleased with the progress, we're making and I'm sure for example of demonstrations we completed in the fourth quarter each of which offers innovation to support our customers vision for future operation.
First as we work closely with the department on the joint all domain command and control effort, we are leveraging our experience with the Army's IBCM.
We recently conducted a successful test using air and ground based sensors against multiple fast moving airborne targets.
We are using agile development methods to integrate sensors and the sectors to rapidly is more precisely address new complex threats.
Second we participated in the first advanced battery management systems demonstration using fees for multiple domains to find track and destroy cruise missiles.
Here, we integrated the communication suite necessary to connect the F 22, any F 35 platform, enabling this integrated battle management solution.
The third example is our development integration of World record 150 kilowatt class high energy laser weapons system onboard the U.S.S. Portland.
The laser system is undergoing final verification testing before deploying later this year at which time the Navy will gain I see experience with directed energy system and support the future fleet operation.
And lastly, we successfully flight test in a rapid prototype conventionally configured hypersonic round launched ballistic missile in response to an urgent capability request from Deo D.
The launch vehicle now highly aggressive eight months design integration and launch schedule achieving flawless flight result.
These accomplishments are the results of our investments to address our customers emerging requirements with the agility they require.
These investments are solid 2019 financial results and successful business capture provide a strong foundation for continued growth and sustained performance.
Our 2020 guidance calls for sales to grow to between 35.3 and $35.8 billion with a segment operating margin rate of 11.3% to 11.5%.
We expect 2020, adjusted EPS will range between $22.75 and $23.15.
After capital spending of approximately 1.35 billion, we expect free cash flow of 3.15 to 3.4 or $5 billion.
2020 guidance contemplates that we were selected for the next phase of the GBSD program in accordance with the Air Force's current acquisition timeline, which calls for an award in August .
We submitted our proposal in December and we're in active discussions with the Air force as they work through the source selection process.
We are continuing to perform well on the technology maturation and risk reduction phase of the contract and together with our nationwide team, we are investing in technology and facilities necessary to be ready for day one M.D.
We anticipate the M.D. faces this multibillion dollar decades long recapitalization of the nation's I cbms. It since capability would be accretive to 2020 sale and slightly dilutive to olin rate as well as free cash flow due to higher capital expenditures.
Can you think detailed guidance for the sectors, but I wanted to provide some context around 2020 sector performance.
First.
Sector guidance under the new structure is consistent with the trends we've been talking about in our businesses.
We expect stay system will be our fastest growing sector.
In 2020 in addition to GBSD, we have large opportunities in phase three architecture, Hypersonics intermediate reached ballistic missile and national Safe watch and civil space, We are well aligned for now says arguments program.
For Aeronautics system, we're resident technology and integration expertise in critical domain like cells and autonomy to support growth over the long term.
On an apples to apples basis, the businesses comprising aeronautics root backlog, 24% in 2019, which provides a solid foundation for sustained growth.
For mission systems competitors opportunities in airborne and ground based radar system read opportunity for enhanced growth.
In addition mission systems advanced capabilities and domain expertise, our key competitive differentiators that we leveraged across the entire company as we pursue new business.
Mission systems, we continue to have attracted top line growth coupled with strong margin rate.
And for defense system over the long term key growth drivers include high speed weaponry programs like ours, <unk>, our and our C. In cross domains see two program.
We expect stable to growing revenue from legacy technology services businesses as their focus on the defense and intelligence market continued to generate results.
So in summary, we had strong performance in 2019, and we expect continued topline growth and sustained performance in 2020 and beyond. We also expect continued strong cash generation that will support our capital deployment strategy and create value for shareholders and customers.
I'll turn the call over 10 now for a more detailed discussion of our financial results guidance and trends can.
Thanks, Cathy and good morning, everyone [noise].
I also want to congratulate the pay him on strong performance this year.
I'll spend a few minutes on 2019 results and discuss our 2020 guidance in more detail.
We will be providing guidance and our new sector structure with some broad year over year trend information.
Our first quarter earnings release in April will include a schedule that recast prior period results for comparison.
Referring to slides five and 600 Powerpoint deck alternative sector results.
Aerospace systems sales rose, 10% for the quarter and 6% for the year largely due to higher levels of restricted activity.
In addition.
Sales were higher in both periods for all three business areas.
Restricted activities F 35 production increases and higher eat through the volume where the growth drivers at manned aircraft.
Next Gen OPI, our activities where growth driver at space.
Autonomous systems reflect higher volume across several progel programs, including global Hawk and training.
Hey, Es operating income increased by 9% in the quarter and 2% for the full year.
Fourth quarter operating margin rate was comparable to last year.
2019 operating margin rate of 10.3% reflects lower net favorable you see adjustments related to several programs nearing completion.
Turning to innovation systems fourth quarter sales rose, 9% and full year sales increased 10% on a pro forma basis.
Sales were higher at all three business areas for both periods.
In space. This was driven by higher volume for National Security satellite systems that flight systems fourth quarter growth reflects higher volume on propulsion systems and full year results reflect increased volume on aerostructures and launch vehicles.
Higher volume on tactical missiles, and sub systems, including GML Rs and our new Oregon VR program drove higher defense sales in both periods.
Fourth quarter operating income increased 20% due to improved performance at flight systems and space systems.
For the full year operating income totaled 671 million.
Or 11% margin rate, which exceeded our guidance.
Turning to mission systems fourth quarter, and full year sales rose, 6% and 5% respectively.
Like I asked an I.S. all three business areas within mission systems had higher sales in both periods.
At advanced capabilities higher volume for restricted activities and marine systems drove growth in both periods.
The fourth quarter also benefited from higher volume on Poland, I Vcs as that program ramps up.
Growth at Cyberknife, Saar was driven by higher volume for space unrestricted programs.
And if sensors and processing fourth quarter growth reflects higher volume for airborne radar programs.
For the full year sensors and processing sales growth is being driven by higher volume for airborne radars and new restricted programs.
[noise] mission systems fourth quarter operating income rose, 13% and operating margin rate increased 90 basis points to 14%.
For the full year operating income rose, 8% and operating margin rate increased 40 basis points to 13.4% exceeding our guidance.
Mission systems margin rate reflects improved performance on advanced capabilities, and sensors and processing programs as well as a $20 million gain on sale of property.
Technology services fourth quarter and full year 2019 sales were 4% lower as expected.
Fourth quarter 2018 sales included an approximately 30 million dollar favorable ssi adjustment for completion of an IP outsourcing contract.
The 2019 year over year revenue comparison was negatively impacted by this adjustment.
And completion of the J RDC and KC 10 programs, partially offset by growth in other programs.
[music].
Technology services fourth quarter operating income declined 8% and operating margin rate was 10.4%.
Again, the quarter over quarter comparison reflects a favorable Q4 2018 impact of items related to the close out of the state I T outsourcing contract.
For 2019 operating income increased 3% and operating margin rates increased 80 basis points to 11.1% exceeding our high 10% guidance.
At the total company level 2019 segment operating income increased 13% to $3.9 billion and segment operating margin rate was 11.6% versus our mid at 11% guidance.
Total operating income was approximately $4 billion with an operating margin rate of 11.7%.
This was largely due do unallocated corporate expense, which came in lower than we expected due to an $89 million benefit for resolution of a cost claim accounting matter, which was not contemplated in our guidance.
A couple of comments on our mark to market adjustment, our discount rate declined 92 basis points to 3.39%, which drove a 4 billion dollar increase in our pension liability.
We also changed our assumptions to reflect updated society of actuaries mortality data as well as an updated evaluation of our plan population.
This increase our pension liability by 800 million.
These increases were partially offset by plan asset returns that exceeded assumptions increasing assets by approximately 3 billion.
So that's how we get to the $1.8 billion pretax expense.
Our cast prepayment credits as approximately $1.6 billion as of January Onest of this year.
Turning to cash as is our typical pattern, we had a strong fourth quarter for the for the year cash from operations was approximately 4.3 billion.
And after capital expenditures of about one of the quarter billion, our free cash flow grew 18% to more than $3 billion exceeding our guidance.
Now looking ahead to 2020, I'll mention that our new sector and reporting structure is laid out on slide 11 of the Powerpoint deck.
I refer you to a discussion of sector guidance on slide 12.
At Aeronautics systems, we expect solid mid single digit sales growth to the mid to high $11 billion range with a low to mid 10% margin rate stable versus 2019.
About half of the 2020 sales growth is expected from a restricted program and manned aircraft and we also expect mid single digit growth on the F 35 program.
For defense systems, we expect sales to be comparable to 2019 in the mid $7 billion range.
As Lake City transition offset growth in other areas of the business.
We expect an operating margin rate in the mid 10% range up slightly from 29 team.
At the new mission systems sector, we expect solid mid single digit sales growth to the high $9 billion range with a low 14% margin rate.
Sales growth is supported by F 35 activities and production ramps in Gator, Kirk Sabre as well as restricted development work.
The 2020 margin rate expectation at MFS is down slightly due to the $20 million gain on property sale in 2019.
And the changing mix that reflects a growing percentage of development work.
[noise] AD space systems, we expect low double digit sales growth to the low $8 billion range with a low to mid 10% margin rate.
This represents continued strong margin rate performance I would note that space system sales.
And margin rate guidance contemplate more early phase development work, including GBSD, which is expected to be accretive the sales, but slightly dilutive to the margin rate of the existing portfolio.
Our sector guidance rolls up to 2020 sales of $35.3 billion to $35.8 billion and I would note that under the new structure, we expect intersegment eliminations to decline to about 1.8 billion.
I would point out the first quarter 2020 sales are expected to be a bit less than 25% of full year sales as mission systems and space systems revenue as weighted towards the second half of the year.
We expect segment operating margin rate of 11.3% to 11.5%.
We expect 2020 total operating margin rate will range between 10.8 and 11%.
Reflecting.
390 million for the operating portion.
The net fast Cas pension benefit.
And unallocated corporate expense of approximately 565 million.
Which includes 315 million noncash intangible asset amortization and PPD step up depreciation.
And $250 million of other estimated unallocated items.
Moving to pension.
Slide 13 provides our 2020 pension assumptions these assumptions exclude any 2020 mark to market impact.
Slide 14 summarizes our pension estimates for years 20 through 2022, and slide 15 summarizes sensitivity to changes to our 2020 assumptions.
Our guidance assumes $500 million of interest expense de Minimis interest income at an effective tax rate of approximately 16.5%.
I'll remind you that our 2019 reported effective tax rate reflected the mark to market expense. So please don't use that as a baseline as you think about our 2020 effective tax rate.
Based on all that we expect adjusted earnings per share will increase to a range of $22.75.
To $23.15 or about 8% growth at the midpoint.
EPS growth reflects higher sales and higher segment operating margin operating income.
As well as pension benefit.
Partially offset by higher corporate unallocated expense and the higher tax rate.
I'd also note EPS guidance is based on 100 168 million weighted average shares outstanding.
A reduction from 2019 of about 1%.
For 2020 after capital expenditures of approximately 1.35 billion.
We expect free cash flow will range between 3.15, and 3.4 or $5 billion for about 9% growth at the midpoint.
Capex includes the required early capital investment for GBSD.
And we expect the cash flows will continue to be heavily weighted to the second half of the year.
I'll also mentioned that our cash continues to be driven significantly by operations with net pension.
Defined as cash as less funding expected to be about 11% at the midpoint of implied 2020 cash from operations.
Our capital deployment strategy continues to call for investing in our businesses strengthening the balance sheet and returning cash to shareholders through share repurchases and a competitive dividend.
In addition, we do have $1 billion of debt maturing this fall, which we are currently planning to retire.
In summary, 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 and a Todd.
Hi routinely please open the lines acuity.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your Touchtone phone again press Star one to ask a question. If your question has been answered or if you wish to exit the question Q press the pound key to exit the Q Press Star zero at any time for operator assistance. Your first question comes from the line.
That seifman with JP Morgan.
Okay. Thanks, very much good morning.
So just wanted to ask maybe one question Ken about about working capital like very strong performance in the quarter and whether you expect working capital to grow.
To grow.
In 2020, and it looks like it was maybe even down a hair in 2019.
And whether you think you can keep it flat or not and then secondly, you mentioned the $1.6 billion has credit and it looks like over the next three years that pretty much gets eaten up and so should we assume in the out years beyond your forecast that causes contributions are roughly in line.
Sure. Thanks, Seth I'll start with the working capital question, and then had to pension.
I'd say from a working capital perspective, we did have better than expected performance in 2019, we've been really focused on working capital and trying to maximize.
The benefit there and we did.
I see that.
That performance exceeded our expectations in 2019. So we're pleased about that as we look at our ability to generate cash.
In 2020, we're certainly looking at kind of the growth of the company the strong margin profile delivering.
The ability to convert that margin and the cash as the primary driver of the cash flow growth.
But certainly managing working capital as efficiently as possible little bit will be a part of that as well.
So I think that from a working capital perspective, it's.
It's something where it's not going to be headwind.
We don't necessarily expect the continued tailwinds that we had in 2019, but as we look at 2020, I think thats strong growth and converting our margins in the cash is probably the biggest driver of cash and.
Again strong portfolio team in 2018, and we look forward to maximizing again in 2020.
From a pension perspective.
You're correct that the the current assumptions on pension.
Would result in the prepayment credit getting burned down in 2022 and that would therefore resolved in has and.
Funding being pretty similar as we look beyond 2022.
And I would just comment that as we look at the pension assumptions, we've laid out for 2021 and 22, we've got [noise].
Hey scenario, where generally the cash.
Net net net pension cash or cash less funding.
As you know relatively.
Box I would say, there's not a lot.
A lot worse, they can get you'll notice that in 2022 Kaz is about 100 5000 60 greater than.
Funding that would say that as we look at you know our performance.
This kind of in a box on the opportunity side, if we can outperform or other assumptions change then we have the ability to drive down that 22 funding that.
As required under the current assumptions.
Your next question comes from the line of Ronald Epstein with Bank of America.
Yes.
[music].
Yes.
Sure.
Uh huh.
Operator.
In line with Ron been static.
The line has been cleared for next question will come from the line of Shia Sheila Tyler with Jefferies.
Thank you very much Kathy you mentioned restricted.
The restricted portfolio is about a quarter the business grew double digits in 2019, so you're clearly taking share how do how long do you think that's sustainable and what our parts of the business that are maybe underperforming your expectations and do they expect to pick up.
Thanks, Sheila I did mention restricted being a key growth area. Both in our sales in 2019 as well as the awards that we received with $11 billion of awards in $7 billion not coming in restricted space. So we clearly still see safina growth driver for us into the future and.
We also had noted in our third quarter call that we had received $1.3 billion in awards and Hypersonics, we continue to see that as a growth area for the business as well and I mentioned in my comments today, a demonstration we conducted in the fourth quarter in hypersonic business as well so.
Those are a couple of the areas that I would note is key growth drivers going forward in our restricted portfolio as I look across the business.
We clearly have headwinds as we exit the Lake City contract. This year. We have noted that's about 300 million of headwind in 2020, we basically now have exited the small.
Caliber ammo business.
So that's a headwind that will largely be behind us as we get past 2020, and so as we look at Aeronautics mission systems and space, we see strong growth expected in each of those sectors Aeronautics admission in the mid to high.
Single digit basin, the low double digits, it's defense system, where we have this lake city headwinds that we see more of a stable growth profile, but really not looking at any part of the portfolio is underperforming with those headwind.
The exception in small caliber and no.
Great. Thank you.
Your next question comes from the line of the Peter Arment with Baird.
Yes, good morning, Cathy Chan.
Hey, Kathy just kind of going back to the legacy innovation systems.
And then I know, it's now obviously space, but we've been tracking that kind of the synergy number that you would laid out previously and then also the revenue synergy I think was.
Something that recently wasn't.
A number that got quoted but maybe just talk about some of the opportunities you're seeing there and how thats progressing thanks.
We'll do think Peter.
So in cost synergy I noted in my comments that we exceeded our cost synergy target in 2019 and that helped us to generate higher than expected segment operating margin.
So that area.
Commitment.
Is certainly one where we feel we did what we said we were going to do and even had some opportunity to over perform in driving cost out of the business and that not only generates near term margin, but it also helps us to position the business more competitively to win in the future, which gets to the part of your question around revenue synergy we have.
I've been realizing revenue synergy ahead of the estimates we had in the by plan for the orderly Teekay business and we see that continuing as we look out into the future I had noted previously that space and missiles or the two areas, we where we are seeing the greatest synergy and I gave a few examples.
In each including are going to yard, which I talked about again today and the opportunity that we see they're not just domestically, but also internationally, we still see those two areas season missiles being the ones that will be the key drivers of revenue synergy.
Yeah.
Your next question comes from the line of Robert Stallard with vertical research.
Thanks, so much good morning.
Whenever up.
Ken a quick question for you on capital deployment.
I want to do you intend to pay off for the kids billion dollars of deck. Later this year I was hoping you could work.
Through the thank you on that closely with interest rates being very low you've already got a strong balance sheet.
I didnt make sense to keep the debt refinance the debt and perhaps returning more cash to shareholders.
Sure, Let me, let me walk through that and.
As we look at 2020 and our capital deployment plans, we continue to think about it and the same.
Where we have historically and that is invest in the business.
Which we're doing in 2020, including.
What we expect to invest in GBSD as Kathee talked about [noise].
Certainly.
Paying a competitive dividend.
And then also managing the balance sheet and share repurchase and we've got.
And amount of repurchase that we're planning for 2020 and.
With that behind us.
No. We we've got the cash to pay off the debt.
We look forward, there's more debt that's coming due and we'll certainly evaluate whether or not we continue to de lever through are paying off debt, where we just de lever through growing our EBITDA.
And I wouldn't necessarily assume that because we're paying off the 2020 that that means that we're going to continue to pay off more debt. We've got optionality and obviously, we'll we'll continue to evaluate what the best use of the cash is.
As we look at all those options capital deployment, but we're in a good position of with our strong cash flow being able to deploy all of those avenues of capital deployment.
Your next question comes from the line of David Strauss with Barclays.
Thanks, Good morning.
Good morning data mining a one to ask about a capex a it sounds like GBS these adding a bit too that the this year, maybe 50 basis points as a percent of sales I mean, you previously talked about capex stepping down in and 21 to like to an app persona sales how does.
How does GBSD kind of impact that Kim thanks.
I'm sure let me, let me start on that one [noise].
You know from a Capex perspective, we were at 3.7 around 3.7% of revenue and 2019, we had talked about the profile that we were expecting as we were looking forward into 20 and 21.
For 2020, we have updated our outlook to include.
GBSD, that's for Capex as well as revenue certainly at the high end of the guide.
And that was not included in the numbers that we've talked about last fall.
So with GBSD now included we're looking at Capex of about 1.35 billion for 2020.
And probably 1.35 billion for 2021, and then kind of continuing to decrease as a percentage of sales beyond that.
And I'm, maybe would also just note that.
As we look at 2020, we do have the Capex and for GBSD and only a maybe $250 million or so of sales given the award are expected to come in August .
Your next question comes from the line of Roberts been gone with credit Suisse.
Hi, good morning.
Kathy this once I thought I'd ask you about open architecture, which I think you've discussed in the past, but was wondering if you might walk through how your positioning Northrop to benefit from D. These increased emphasis on that design paradigm and do you think you can leverage that to drive market share gains missions.
Systems over the long term.
Thanks for the question I'm glad that you picked up on that because we have been talking about it for a while particularly as we discuss what we have done on IBCM says the program, but I've also talked about not being more of an architecture and we're now beginning to demonstrate that to the department of defense.
As we participated in demos in the fourth quarter at least two of them.
The one I noted around IB FIA for joint all domain command and control as well as the one that we did to connect up 22 in F 35.
In communications to enable the Battle command system. So as we think about what the future hole the ability to have an architecture that rapidly integrate both sensors and the sector and allows the departments to tie these systems that.
Has been built in more of its stove fashion to communicate into share information will be critical so their vision for future operation and we are able to rapidly do this because we had been working for in these open architectures for a number of years and we have ready to go solution that an April .
Duration that capability.
Your next question comes from the line of Jon Raviv with Citi.
Hi, Good morning, everyone I'm, just thinking about GBSD being a mean the major change I think from the Threeq you outlook in the fall and you could talk on the Tilden sales and flat margin Gvhd is less than one person themselves with certain ones is now down.
In 2020 can you just sort of put all those pieces together for us and sort of add a little more color as to what's going on with 2020 versus what you said in the fall and then really what's the opportunity to accelerate on something like GBSD.
Going forward. Thank you.
Sure John Let me, let me start on that one.
I would say that [noise].
As we look at 2020.
Based on the the guide that we've laid out you call it 45% to 6% or so growth given the range and again that does include GBSD.
Proceeding as expected.
In the August timeframe.
From a margin perspective.
I would say that as we think about it.
In the new sector structure again.
Aeronautics would be relatively comparable to.
2019.
Space systems will be down a little bit some of that is GBSD and some of that is just other mix changes as it continues to win new business and take on.
Additional development work and as we've talked about.
Low double digit growth rate there at space systems.
At M.S., we did have the property gain in 2019.
So we see that is having a little bit of an impact on margins that that M.S.. We mentioned that would result in a little bit of.
Margin reduction into 2020 on a comparative basis.
And then at the New Defense systems, we are projecting that margin will be slightly up and as that business performs well. So you know look we always incentivize the team too.
Perform and to outperform our peers and we look forward to 2020, where the team will hopefully continue to suffer the challenge of the seeing them do and and drive the best margin outcome that we can get too.
And John I believe the second part of your question was around the possibility of acceleration of award on GBSD. So let me just comment briefly on that.
You know the air Force's made it clear that GBSD needs to be in fielding in 2029 and that the time.
To do so is short and it's essential that we get started on critical requirement.
So we've been investing in the people in facilities that we need to ensure that our team is ready to start upon award and that we could support efforts for an accelerated word schedule. If they are able to do so.
Your next question comes from the line of Cai von Rumohr with Cowen.
Terrific. Thank you very much so could you update us on your strategy and Hypersonics I think at one point you talked about focusing predominantly on propulsion are you also going for major portion the systems integration role and then maybe update us on the outlook for Caldolor high for.
Thanks. Thanks.
Yes.
In Hypersonics, we do have a dual path strategy. The first being to supports all of the crimes propulsion and we've talked openly about the relationship that we have with those Lockheed and Raytheon in that regard. We also are a system integrator and the demonstration that I mentioned in.
My comments earlier in the call was an example of where we were the integrator for demonstrator. So we do see Airseal following both how.
We want to be a good provider to the prime in propulsion and that means making investments that support multiple technology pads, but at the same time, we do have the capability ourselves to prime efforts and the an integrator for certain types of system.
I also will talk briefly the counter hypersonic and there we see really are expertise in space and the capabilities that we haven't safina key enabler to the future hypersonic counter hypersonics missions that and we have looked at the base business that we're assembling and.
View ourselves as does the capable prime and payload provider in that space. So again, a similar strategy that we can be both in merchant supplier to other primes with payload of importance in that space, but also the ability to integrate systems and provide and capability ourselves.
Your next question comes from the line of Doug Harned with Bernstein.
Thank you good morning.
And I'd like.
If I go back a few years and look at autonomous systems.
My understanding was that a big advantage and Northrop Grumman had was on its common operating systems that they could be applied to multiple programs play in many different classes of view Avi.
Today It appears that the dominant autonomous programs is still really built off of hail system Global Hawk variants Triton.
So.
Is there a broader platform for growth for the talent in this systems that were yet to see because either they are in early stage development or their restricted whereas the or should we think of this is still likely to grow off of these large health systems in the future.
So we certainly do see growth opportunity inhale system I would also 0.2 examples of where we're working in the medium altitude space programs like fire Scout and then we have.
Also areas of new technology developments that will allow us to scale the system down even further but I would suggest that the high altitude that you hear a speak about in the context of surveillance is the best.
Coverage they can be provided and so it's quite economical for these high altitude system at least in surveillance mission.
Fly in high range. So it all depends on the mission requirements and that's what drives the system design, but we do have system architectures that allow us to scale as submission requires.
Your next question comes from the line up Ron Epstein with Bank of America.
Good morning, hopefully disconnections little better [noise].
That is better.
Great cool. Thanks, So so cap is just.
A big picture question for that you've been in the role now for.
Well, a little over a year and Richard Center, but I'll.
Where that Northrop Grumman is now.
Does it where you want it.
And if it's not what are what are some of the challenges is no for you over the next couple of years.
Well thanks for the question Ron I appreciate the opportunity to talk about both my macro assessment and outlook I am pleased with where we are one of my priorities when I stepped into the role was to Orient the team toward several high growth campaigns and align our investments there we of course Marie.
Recently have align the organization to execute that strategy and as I look to the evidence of success I'd point to the backlog growth that we saw in 2019 I would also say that being ahead on our revenue synergy projections came from a lot of hard work from the team on a successful orbital eight teekay enough.
Gration, but also very rapidly integrating them into our strategy for the mission campaigns in the growth that we see there.
I also focused the team on performance and agility and there we continue to perform well on our program even as we take on a number of new development efforts and scale production, which are difficult challenges that they come with the opportunity of long term sustained growth as well as strong operating margin and.
I'm pleased with what the team is doing there because it's laying the foundation not only for our near term future, but our long term future. We realized the cost synergy from a successful orbital 80, K integration and again well that's generating some short term margin enhancement really the opportunity there is that were more competitive.
Over the long term with a better rate and just overall I feel that weve over the last year enhanced our competitiveness the demonstrations that I talked about we're very rapidly put together as a result is making smart technology investment understanding the missions that would be needed by our customer.
Under the National Defense strategy and rapidly align our portfolio to bring forward technologies that meet those needs. So overall I feel good about where we aren't I think we're deploying our capital in a way that not only invest in the business return a lot of to cash we're generating to shareholders and positions us well for future Optionality.
Your next question comes from the line of Myles Walton with DBS.
Thanks, Good morning.
Two questions really to margins. The first is on the R&D looks like it was a couple hundred million dollars or 25% just curious what that looks like for 2020 in which business absorbed that and then on EA sees it looks particularly low but the margins actually we're we're pretty in line. Despite that low you see contribution. So I'm curious did you change that book.
Congrats underlying on a systematic basis similar to kind of what you did in 2015 to reduce some of the volatility. Thanks.
[noise] miles, let me take the those questions at least to start from an R&D perspective, the biggest impact of the additional R&D was the full year of LNG is.
You'll remember we closed that acquisition in June of 2018, So we only had a little more than six months of their R&D and certainly is a strong investor in technology and R&D too.
To drive that future growth.
So that's the biggest impact I would say that this is a company thats always invested in R&D and certainly as we look at our.
Gross here and our ability to grow over the long term I think you know the fact that we continue to invest in R&D through the downturn.
As one of US one of the strengths that that drives us today, and we will continue to do that so.
Nothing to put a number on it for 2020, but continued strong investment in the technology that will drive the growth of Cathy's them, then talking about as certainly.
[noise], where we're thinking about it.
From your question on that you guys see perspectives I would just say that.
Look a lot of the EA C.
Adjustments are about timing and as we think about 2019 and strong margin performance.
Some of that did come out of some of the more mature programs.
Where we.
Have a bit of a stronger baseline margin rate rather than seeing it come through a adjusted or EA see adjustments.
And that's really how we think about the business is what the programs can deliver another programs can perform rather than a FDIC adjustment. So as we look at 2020.
And the programs in the sectors, we see continued strong performance and Thats how we.
Generate.
That segment margin rate that we talked about in our guidance.
And my oldest out that as we look at net fee adjustments in recent years.
We had a high watermark in 2018 with over half a billion of net favorable adjustments. This year at 480, so very strong and so I look at our program performance and just one indicator as that is our net yields the adjustments and feel that we've been doing quite well over the last couple of years.
Your next question comes on the line of Hunter came with Wolfe Research.
Thank you good morning, everybody.
All right.
Morning, Parakeets talk about E. Two for a minute I just give us an update on where you are in terms of total program size in margins and then can you talk about gross in the program as you portion it out between domestic and international opportunities through both new potential customers and upgrades. Thank you.
Absolutely so as we look at the program both domestically and internationally, we see growth we are delivering a more easy to these two the navy. We also have to Japan orders that we booked in 2019, which will be deliveries over the next several years I'll ask Ken to give you some more of the specific.
Next on the financials, both revenue and margin rate expectation.
On or I would I'd, just say that as we look at our awards and backlog in 2019 80 contributed over $5 billion.
Of awards as we look at both the.
Maybe as well as Japan orders and it's a solid contributor to revenue as well.
Around one of that billion and sales and strong margins.
So really a solid program for us and one that we see as contributing nicely to our growth that aeronautics in 2020 as well.
[noise]. Your next question comes from the line of Noah Poponak with Goldman Sachs.
Hey, good morning, everyone.
Good morning.
So.
You know a lot of things below the topline matter profits and returns on capital matter, obviously, but when we speak to investors. There's there's still just a lot of focus on the top line because of you know there seems to be a differentiation in the programs move on and what what you've put in the backlog and so you know.
We kind of here here two camps. One is yes, they have the programs, but it's very diversified and there's always moving pieces. So they're just going to grow top line, 5% forever and the second campus no you have to be patient and.
All of the large new wins start to ramp 2021, and beyond and the growth rate is going to reaccelerate significantly and so can you speak to which of those it is and endos, 5%. The 5% for 2020 does that meet the criteria of outpacing your end market or.
Does that definition that you've provided in the past mean something much faster.
So.
Let me take a crack it yet in two ways first as we think about outpacing the market. The investment accounts in the 2020 budgets are up 3% and we're projecting a 5% growth. So if you looked in the near term you could suggest that this out its outgrowing, but as you and I. Both know it takes a while for back.
Plug in these long cycle businesses to manifest in sales and so that goes to the premise that it does take a while the these awards that we booked in 2019 will come into sales over a multiyear period, and therefore is de risking growth in the out years and creating.
Opportunity for acceleration of growth.
At the.
The answer your question a little more explicitly in our portfolio, we have opportunities like GBSD, which will if awarded to create a.
Sizable ramp over the next several years those have the opportunity to create an outsized growth.
For our portfolio. We also have talked about space and we see space is one of the fastest growing elements of the budget, but those awards are not yet manifesting themselves in sales than we have other awards that we anticipate this year depending on how successful we are not also creates opportunity for out.
This growth.
So I think the scenario that you paint is one where there absolutely is opportunity for us to continue over the long term to outgrow the budget growth, but the out requires us to continue to win business executed successfully just like any other organization.
And you will make the assumptions as to the confidence that you have that will do not operator, we have time for one more question. Our final question will come from the line of Carter Copeland with Melius.
Just made it and thanks everybody.
Hi.
Hi, Kathy question on the bookings I I'm not sure I heard it correctly, but it sounded like you said 7 billion of the 11 billion were restricted space and if.
That's in the legacy restricted space organization that would be a very large a very large book to bill. So I wondered if that was.
Broad based or if there was anything chunky in there that we should consider as you know transformational in terms of how you think about the growth rate I just any any color you can provide there would be appreciated.
<unk>.
Yes, I did say that if the 11 billion in restricted award 7 billion was in phase and that spanned the three sectors in the 2019 structure that operated in space. So aerospace system mission systems and innovation systems, all contributed to that 7 billion dollar.
As awards that I mentioned as we look forward in the new operating structure all of those businesses will be together in space system.
Well I turn the color to CASM closing remarks.
Very good well. Thank you everyone for joining us on today's call I want to conclude by reiterating my thanks to the team for an outstanding 2019, we're positioned well as we start the year in 2020 with the backlog growth that we've experienced the strong perform.
And our commitment to continued thoughtful capital deployment. It allows us to grow this business for the long term for our shareholders. So thank you all for being with US today, we look forward to talking to you after our first quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
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