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Northrop Grumman Corp (NOC) Q1 2019 Earnings Call Transcript

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Northrop Grumman Corp  (NYSE: NOC)
Q1 2019 Earnings Call
April 24, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Northrop Grumman's First Quarter 2019 Conference Call. Today's call is being recorded. My name is Shelby, and I'll be your operator today. At this time, all participants are in listen-only mode. (Operator Instructions)

I would now like to turn the call over to your host, Mr. Steve Movius, Treasurer and Vice-President, Investor Relations. Mr. Movius, please proceed.

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

Thanks, Shelby, and welcome to Northrop Grumman's first quarter 2019 conference call.

Before we start, please understand that matters discussed on today's call constitute forward-looking statements pursuant to Safe Harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, which are noted in today's press release and our SEC filings. These risks and uncertainties may cause actual Company results to differ materially.

Matters discussed on today's call will include non-GAAP financial measures that are reconciled in our earnings release and supplemental PowerPoint presentation. I'd also note a couple of additions to the earnings release, Schedule 4 provides backlog trend information by sector, and Schedule 5 provides supplemental per share information to help the quarter-over-quarter comparison of pension and purchased intangible impacts.

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

Kathy Warden -- Chief Executive Officer, Director

Thank you, Steve, and hello, everyone. Thanks for joining us today. First quarter results represent a good start to the year as the Northrop Grumman team continues to deliver excellent outcomes for our customers and our shareholders, I want to thank our employees for their relentless focus on performance, agility and profitable growth.

Top-line growth, strong segment performance, as well as continued effective capital deployment, drove a 6% increase in first quarter earnings per share. As a result of first quarter performance and our full year expectations, we are affirming sales guidance of approximately $34 billion and raising our 2019 EPS guidance.

First quarter sales grew 22%, reflecting the addition of Innovation Systems and a 7% top-line growth at Aerospace Systems. Strong performance at all four sectors generated a 27% increase in segment operating income and a 50 basis point increase in our segment margin rate. The strong margin rates at all four sectors also reflect the cost synergies we are achieving through the Orbital ATK integration, which is benefiting all the sectors.

The realignment of the TS business areas continued to improve their cost structure and competitiveness as reflected in this quarter's margin rate and our TS guidance increase for the full year.

As is our typical quarterly pattern, we were a user of cash in the first quarter. We continue to expect 2019 free cash flow of $2.6 billion to $3 billion. Regarding capital deployment, our strategy continues to call for value creation through thoughtful allocation across our priorities of investing in our business, managing the balance sheet and distributing cash to shareholders through a competitive dividend and share repurchases.

Looking ahead, we're on a solid growth trajectory, supported by first quarter net awards of $12.3 billion, or about 1.5 times book-to-bill ratio. Total backlog increased 7% to $57.3 billion, reflecting 16% growth at Mission Systems and 6% increase at Aerospace Systems. Total backlog is up 35% when compared to March 31st, 2018. That comparison reflects an increase of more than 30% at Mission Systems and 11% at Aerospace Systems.

At Aerospace Systems, Q1 net awards totaled $5.4 billion. In space, we received a $3.2 billion restricted award, in manned aircraft, we finalized the $740 million contract for the US Navy and Kuwaiti F/A-18s, and we were awarded $535 million for the F-35. And shortly after the end of the quarter, we signed a multi-billion dollar production contract for 24 US Navy E-2D Advanced Hawkeyes. The new multi-year contract includes an option for Japan's purchase of nine additional in E-2Ds. Japan has also approved the additional E-2Ds in their long-term budget and we expect that we will be under contract by the end of 2019.

At Innovation Systems, the Navy awarded us a sole source $323 million EMD contract for AARGM-ER, an extended range version of our current missile. AARGM-ER will initially be fielded on F/A-18 Super Hornets and Growlers. It will also be the first supersonic long range missile to be integrated onto the F-35 and it is expected to be the strike weapon of choice for both the Navy and the Air Force.

The President's FY-2020 budget includes the request for the Air Force variant of AARGM-ER and it's called the Stand-In-Attack Weapon. AARGM-ER is an early example of revenue synergy. Innovation Systems leads the effort with two of our other sectors contributing to the program. It draws from the full breadth of our technologies and capabilities for delivering high-speed missile systems and demonstrates our ability to work seamlessly across the Company to provide needed capabilities to our customers. We expect follow on production after EMD will be in the multi-billion dollar range.

We are currently performing on a number of other high-speed and hypersonic missile programs at the prime contractor and subcontractor levels, which are contributing to highest backlog and sales growth.

Turning to Mission Systems, net awards totaled $5 billion in the quarter. In airborne radar, MS was awarded a contract to equip five UK Wedgetail airborne early warning and control platform with our MESA radar. The UK joins a number of other international customers in selecting the MESA radar for this capability. In command and control, MS received a $633 million FMS award to supply our IBCS battle management system for Phase-1 of Poland's next-generation air and missile defense. This award aligns Poland with the US Army in utilizing IBCS's Any Sensor, Any Shooter capability for next-generation air and missile defense. We continue to invest in expanding IBCS's addressable market. For example, during the quarter, we and MBDA funded the successful demonstration of IBCS's functionality with a non-US missile system by integrating MBDA's CAMM family of missile. We did so quickly and at a fraction of traditional missile defense system cost.

MS was also awarded $117 million to develop the next-generation radar threat warning sensor to protect Navy rotary aircraft. This sensor counters a new generation of highly mobile anti-aircraft weapons and has the potential for international sales.

During the quarter, our GATOR program achieved initial operating capability and it's now transitioning into service. We are currently negotiating a full rate production contract with the Marine Corps, which we expect will be finalized in the near future. And at TS, we were awarded $52 million for KC-30 sustainment in Australia and $44 million for our battlefield airborne communications node. Companywide, these awards position us for accelerating growth and will be executed over the coming years.

Across the sectors, on F-35, we are nearing completion of negotiations for center fuselage units, radars, CNI, DAS, aerostructures and other equipment for the lots covering the next several hundred aircraft. We continue to aggressively drive affordability on this program, while maintaining strong program performance.

Now, I'd like to spend a few minutes on a major area of opportunity for us, space. With the addition of Innovations Systems, our space portfolio is in excess of $7 billion in annual revenue. Our capabilities address end-to-end mission needs, including launch, satellites, payloads, ground systems, and command and control. We are designing and manufacturing systems vital to our national security and continually pushing the boundaries of science and exploration.

We are taking commercial applications and technology in creating cost effective and reliable solutions for our government partners using agile processes. We established a resiliency and rapid prototyping space business unit to augment and sharpen our focus on emerging customer opportunities in the new space war fighting domain. A notable outcome from this unit is the R3D2, an experimental satellite for DARPA, which launched from a commercial launch pad in New Zealand in late March. R3D2 demonstrated a new type of deployable antenna for smaller aircraft.

This landmark program went from concept to orbit in 20 months. This successful demonstrations will lend support to developing additional smaller, faster to launch and lower cost capabilities that can optimize the new commercial market for small, inexpensive launch vehicles by both the DOD and commercial users. We're extremely proud of this effort and I want to congratulate the entire team on its success.

I also want to recognize the Innovation Systems team for last week's successful on-schedule and on-budget Antares rocket launch of our Cygnus spacecraft. Cygnus delivered 7,600 pounds of scientific equipment and supplies to the International Space Station. This is our 11th launch under the first commercial resupply contract and we look forward to continued successful missions under our follow-on contract.

The President's FY-2020 budget includes increased investments in space, missile defense, nuclear deterrence, artificial intelligence and hypersonic. There is strong bipartisan support for these increased investments to support the national security strategy, the national defense strategy, as well as the framework outlined in the missile defense review. I'm confident that we have the advanced technologies, products and services necessary to support our nation's most critical security missions, which are well funded in this President's budget.

As CEO I am focused on sharpening our operational efficiency and agility, so that we capture and successfully execute the programs that our portfolio enables. I'm very pleased at how the team is responding. Our ability to engage with and quickly address our customers' rapidly evolving needs with affordable and innovative solutions is critical to achieving our growth potential, creating value for our shareholders and supporting global security and human advancement with our customers.

So, now, I'll turn the call over to Ken for a more detailed discussion of our financial results and guidance. Ken?

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Thanks, Kathy, and good afternoon, everyone. I also want to thank our team for solid first quarter results. I'd note that our presentation includes an EPS bridge from first quarter 2018 to first quarter 2019, a bridge to our updated 2019 EPS guidance, as well as a slide highlighting backlog trends. As you can see from the bridge on slide six, approximately $0.15 to $0.25 of the EPS increase is driven by a strong first quarter operational performance and full year expectations, with the remaining $0.15 primarily reflecting lower expected interest expense.

Let's turn to the sectors. Aerospace Systems sales rose 7%, reflecting higher volume in all three business areas. Operating income increased 12% and margin rate increased 50 basis points to 10.9%. Manned aircraft and autonomous systems programs were the primary drivers of higher sales and operating income, as well as margin rate expansion. Restricted F-35 and E-2D programs drove higher manned aircraft volume. Higher autonomous sales reflect higher volume across several programs, including Triton, as that program moves toward full-rate production. We continue to expect AS sales to increase to the high $13 billion range with a mid-to-high 10% operating margin rate, no change to prior guidance.

At Innovation Systems, based on pro forma sales comparisons, first quarter sales rose 10% due to higher volume in all three business areas, as we see the benefits of revenue synergy begin to kick in. In space, higher volume on national security satellite systems drove the increase. Defense Systems had higher volume in tactical missiles, including the AARGM program, as well as higher volume for precision munitions and armaments.

And at Flight Systems, higher sales reflect increased volume on launch vehicles, principally Ground-based Midcourse Defense, as well as higher volume on aerospace structures. IS operating income was $167 million and operating margin rate was strong at 11.6%. First quarter margin rate reflects favorable outcomes on certain commercial contract negotiations. We had expected these items later in the year and we're pleased they concluded in the first quarter.

We continue to expect IS sales to increase to the high $5 billion range, with margin rate in the mid-10% range, no change to prior guidance.

Turning to Mission Systems, first quarter sales were comparable to last year's first quarter, operating income increased 3% and operating margin rate expanded 40 basis points to 13.3%. First quarter MS sales reflect the headwind of approximately $100 million from JRDC and a restricted space program. Revenues from these two programs are now largely behind us.

The first quarter results (Technical Difficulty) we are just beginning to accelerate on a long-term growth trajectory at Mission Systems. This positions MS well for the remainder of 2019 and in 2020, as volume ramps on airborne and space restricted programs, F-35 and IBCS for Poland, just to name a few. We continue to expect MS revenue to grow to the low-to-mid $12 billion range, with a margin rate of approximately 13%, no change to prior guidance.

Technology Services sales and operating profit declined in the quarter, reflecting completion of the VITA IT outsourcing program, the KC-10 sustainment program and JRDC. The headwind from these three programs was about $125 million in the first quarter. Looking ahead, we expect TS sales will stabilize as these headwinds diminish and we continue to expect TS sales in the low $4 billion range. First quarter performance, we are raising guidance for TS operating margin rate to approximately 10% versus prior guidance of mid-to-high 9%.

As we roll all that up, we continue to expect 2019 sales of approximately $34 billion, with a low to mid-11% segment operating margin rate, no change to prior guidance. Guidance for total operating margin rate is also unchanged at mid-to-high 10%. We are reducing our interest expense guidance to approximately $560 million from our previous guidance of approximately $590 million, largely reflecting a revision in our capitalized interest estimate.

We are increasing our mark-to-market earnings per share guidance to $18.90 to $19.30. I should say to a range of $18.90 to $19.30, based on approximately 170 million weighted average shares outstanding.

Turning to cash, first quarter cash flow was impacted by an ERP system conversion to a single instance of SAP, covering the majority of our businesses. My congratulations to the team for achieving this significant operational efficiency milestone. Although successfully completed, the conversion delayed billings and cash receipts of approximately $350 million. We expect full recovery of billings and cash collections in the second quarter. First quarter cash use also increased due to the addition of Innovation Systems, which drove $250 million of cash use in the quarter. This seasonal pattern mirrors the rest of the Company.

We continue to expect strong cash flow in 2019, with no change to full year guidance $3.8 billion to $4.2 billion, cash from operations, and $2.6 billion to $3 billion of free cash flow after capital expenditures of approximately $1.2 billion. We continue to plan share repurchases of approximately $750 million this year, assuming current market conditions. And as previously discussed, we intend to retire about $500 million in debt in the third quarter.

In summary, we expect to continue strong value creation through a combination of continued growth, strong program and financial performance, and robust cash generation, reflecting our growing business, normalization of CapEx and capture of working capital opportunities.

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

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

Thanks, Ken. In the interest of time, I request each analysts to limit themselves to a single question. Shelbey, please open the line for Q&A.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Rob Spingarn of Credit Suisse.

Rob Spingarn -- Credit Suisse -- Analyst

Good afternoon.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Hey, Rob.

Rob Spingarn -- Credit Suisse -- Analyst

Hey, Ken, I guess the elephant in the room here is the sales growth, primarily at TS but at MS too. So I wanted to ask about the recoveries for both of those. It sounds like from the bookings and your comments just before, that maybe MS starts growing here in the second quarter, but I wanted to check on that, see if that's correct. And then, with TS, and given that the book-to-bill was below 1 there, can you really see growth in 2020, as I think you said last time? And how do you think about that sector strategically, would you say that the first quarter was below your expectations?

Kathy Warden -- Chief Executive Officer, Director

So, Rob. Thanks for the question and I'll start and then ask Ken to provide more details on the financials. And let me start with the second part of your question first, in terms of the positioning at Technology Services. From a portfolio shaping perspective and the program losses that we've experienced, which we've been talking about for a while, first Wes was indicating those and then more recently me, we certainly saw that those were quite impactful this quarter. A tough Q1 compared to 2018, as we had multiple programs that have rolled off over the last year, including, but not limited to, KC-10, JRDC and VITA, which we've talked about quite a bit.

So what we have been doing with that business is really repositioning it for growth and you're seeing the impact of some of those changes that we made late last year, including the consolidation into two segments. This is positioning the business better for competitiveness in the marketplace and also margin rate performance and they delivered that this quarter. So we're going to continue (Technical Difficulty) better profile from TS as those programs roll off, several of them in this first quarter, and look toward a return to growth for TS late this year.

In terms of Mission Systems, you hit the nail on the head. We've seen strong backlog improvement at MS, 30% year-over-year for MS, and they are positioned for accelerating growth. They too had two program headwinds that end in the first quarter of this year, and then, largely those headwinds are behind us and I expect MS to return to a healthy growth rate in the second quarter. Ken, anything you'd like to add?

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

I would just say that from a details perspective, TS -- we were certainly hoping for a bit of a different outcome in the first quarter. We did certainly understand that there was the headwinds that existed and that represented about 11% headwind for the quarter. So if you think of without those note items, TS would have been down about 4% and we were hoping for less than that. So we'll certainly continue to work hard there to generate the awards that will position them for 2020 and beyond.

And at MS, I think I would just say, I would reiterate, strong backlog. Whether you look at from last year's first quarter or even from year-end, backlog is up 16%. We did have some timing of material receipts that I mentioned, which had some impact and I think we feel awfully darn good about how MS is positioned right now.

Rob Spingarn -- Credit Suisse -- Analyst

Thank you, both.

Operator

Your next question comes from Jon Raviv of Citi.

Jon Raviv -- Citi -- Analyst

Thank you. Is the implied -- when you talk about growth going forward, would you say the implied exit growth rate this year is sustainable? I mean, at least some thing gets accelerate in 2020 and to what extent really can you do that? And then really amid that growth acceleration, how should we think about margins from the mid-high 10% this year, since margin is usually mix driven, do you see a path to accelerating growth while also expanding margin? Thank you.

Kathy Warden -- Chief Executive Officer, Director

So thanks, John. At the macro level. I certainly see the opportunity for accelerated growth and we've pointed to backlog a couple of times, but let me also talk about other things that we've done in the business, because I think it's important context. We talked earlier in the year about having added an element of our incentive compensation to focus on segment operating margin growth with the full impact that our team will be incentivized to capture profitable sales. We're also winning programs that represent revenue synergy from the IS acquisition. I talked to AARGM-ER this time. In the last call I'd talked about some of the opportunities in space. And we've started to make some structural changes to better position us for capturing growth. I talked about the TS consolidation and earlier in this call, I mentioned the creation of the space resiliency and rapid prototyping unit. All of these activities in combination, are positioning us to continue with growth and accelerated over the coming year.

So, absolutely, see that it's possible. And expansion of margins, also, you saw in the results of this quarter, some margin expansion. We are taking the cost synergies that are created through the integration of Orbital ATK and those are benefiting all sectors and you're seeing that in the results, not just solid program performance, which also continues, but the addition of these overhead reductions that are benefiting the sectors.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

And I think what I would add to that Kathy is, if I think about the acceleration or the implied exit growth part of the question, I would say, we do feel pretty confident about that. And I guess there are a couple of drivers there. One would be, we are a long-cycle business and it takes some time for budgets to turn into outlays, and then outlays to turn into our sales. And we certainly try to be careful and thoughtful in terms of how we generate those sales such that we are as efficient as possible and don't (inaudible) production lines for short-term growth. And then I would also say that where we are aligned within how the budget is positioning going forward today and dealing with the threats that are identified in the national security strategy, national defense strategy, missile defense review, we feel good about our capabilities and technology alignment to the mission needs that our customer will face. So I would say, we do feel good about the long-term growth that we've talked about, 2019, 2020 and beyond.

And then, on the margin expansion, I would say that a couple of things. I think we have the opportunity for margin expansion. There are a few things that we need to think about in that regard. Number one, we have been, I think, effectively managing our cost structure and that continues, that's a benefit. We also have strong growing production programs. I mentioned Triton getting ready to move into full rate production, that's a benefit, and then, we also have a growing set of international opportunities, which should generate nice margins. Going the other way, we have some margin rate pressure in terms of continued growth in development programs, both in national security space, in hypersonics, as Kathy mentioned. So that could put a little bit of pressure on the margins. And if there were a big win like GBSD, as we've talked about before, that could have some impact as well. But we do certainly feel confident about maintaining strong margin rate and having a nice set of growing margin dollars consistent with what we see on the top-line.

Jon Raviv -- Citi -- Analyst

Thank you.

Operator

Your next question comes from George Shapiro of Shapiro Research.

George Shapiro -- Shapiro Research -- Analyst

Yes. Good afternoon. Could you tell us how much F-35 revenues grew in the quarter? And then, also, will this be one of the best quarters of the year because if we take your high-end of your guide at $19.30, $5.06 million is obviously more than 25% of the year or are you just providing conservative guidance?

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

On the first question, George, I don't remember the precise F-35 sales growth number for the quarter, but I will say that, as, I believe our largest program in the range of 9% to 10% of sales, we do see F-35 growth at all four of the sectors: AS with the center fuselage; MS radar, CNI and other equipment; and then IS with aerostructures; and TS with sustainment. And for the year, I think we see that growing across the Company at a rate of high single-digit growth.

And then, with respect to your question on EPS, I would say that, look, we continue to try to burn down risks as we work through the year and realize opportunities such that we can find ways to look at where we could ultimately get to an EPS. In terms of first quarter, I would say that we had solid operational results in terms of margin rate, and we look at that as giving us the opportunity to perform a bit better in our range, segment margin and total margin range that we previously talked about. And then, we had the reduction in the interest expense. So, Q1 is a solid quarter, a good EPS number. We'll continue again to try to find those risks to burn down.

And I guess the only other thing I'd remind you of is that, Q4 does tend to be heavier quarter for corporate unallocated, and so that could drive a little bit more cost into fourth quarter than we normally see in the first three. So I would say that's the way to think about it, George.

George Shapiro -- Shapiro Research -- Analyst

Okay. Thanks.

Operator

Your next question comes from Carter Copeland of Melius Research.

Carter Copeland -- Melius Research -- Analyst

Hi. Hood afternoon, everyone.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Hi.

Carter Copeland -- Melius Research -- Analyst

Kathy, this maybe some what of a too nuanced of a question, but I'm somewhat intrigued about the insertion of the word agility into your prepared remarks and the press release. I went back and looked at that in terms of general performance statement over the last couple of years and that's not a word that comes up. And so it strikes me as a particular point of emphasis and I wondered if you might elaborate a little bit on what that means for all the simultaneous efforts you've outlined in the previous answer to the question?

Kathy Warden -- Chief Executive Officer, Director

Yes. Thank you. I would like to talk about agility in a couple of contexts. First, our ability to rapidly identify new solutions to help our customers and you've heard me talk about that and how important it is to the profitable growth in our Company and also realizing the revenue synergy with the acquisition of Orbital ATK. And I'm quite pleased to see the team responding in the way that they are, to very rapidly put together components of our portfolio and meet customer needs. I also talk about agility in the speed at which we are able to work with our customers. Today, I gave the example of our 3D2 and the fact that we were able to get something from concept on orbit in space in 20 months.

So when we think about the way we deliver we're also implying agility to our operations. And this helps us to be more competitive in the marketplace, but it also aligns to what our customers are talking about in a need to address the threats at the speed of relevance. So if the threat is advancing, speed of capability to mission is absolutely essential. And Northrop Grumman is well positioned to do that with the components of our portfolio and with our operations, we're just continuing to streamline those operations so that we can move even more quickly.

Carter Copeland -- Melius Research -- Analyst

How do you benchmark that?

Kathy Warden -- Chief Executive Officer, Director

The way I benchmark it is against the performance expectations that our customer have. So if a customer believes that it should take a certain amount of time to get a capability fielded, if we can beat that, we're going to have a competitive differentiation. I benchmark it internally in terms of our own processes and looking at the cost at which we deliver those services, but also the speed at which we deliver those services.

Carter Copeland -- Melius Research -- Analyst

Great. Thank you.

Operator

Your next question comes from David Strauss with Barclays.

David Strauss -- Barclays -- Analyst

Thanks. Good afternoon.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Hi, David.

David Strauss -- Barclays -- Analyst

The 25% to 30% of the portfolio that's restricted, could you talk about how that grew in the first quarter?

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

I'm not sure, I've got that number off the top my head, David, in terms of first quarter growth. What I will say is that, a few things, one, we do believe that the restricted portfolio is particularly well aligned to our customers' needs in terms of what they are focused on today and those threats. And we do expect that for 2019, and for the long run, we believe that the restricted portfolio will likely grow faster than the unrestricted portfolio. And I would say, we expect that at the macro-customer level, as well as at the Northrop Grumman level.

And can't say a lot about it, but it is a strong portfolio that will likely turn into continued opportunities, both from a customer relationship perspective, as well as the potential to accelerate what happens in those programs to future phases, be it AMD to production or whatever it may be. And so, we feel really good about the portfolio. And maybe just to point out a couple of things, for Q1 and Steve can certainly follow up later on with the number, but we did talk about growth at Innovation Systems in national security space, most of which would be restricted and certainly, growth at Aerospace Systems, where we talked about restricted. And then, also comments at Mission Systems, with respect to a few areas, where they will see restricted growth in the next three quarters of the year and into 2020.

David Strauss -- Barclays -- Analyst

Okay. And then, you highlighted the backlog growth at Mission Systems. Kathy, I think you previously talked about mid-single digit top-line growth in 2020. Would you expect MS to lead that growth among the three businesses, or four -- sorry business segments?

Kathy Warden -- Chief Executive Officer, Director

As we look to the remainder of this year, MS will be a strong contributor to the growth in the Company.

David Strauss -- Barclays -- Analyst

Okay. Thank you very much.

Kathy Warden -- Chief Executive Officer, Director

Yeah.

Operator

Your next question comes from Sheila Kahyaoglu of Jefferies.

Sheila Kahyaoglu -- Jefferies -- Analyst

Good afternoon, Kathy and Ken. Thank you. Just on that -- I guess, on MS, you were awarded IBCS for Poland in the quarter. How do we think about the ability to leverage some of these programs to both grow the international business, and just when we can think about other franchise opportunity?

Kathy Warden -- Chief Executive Officer, Director

Yes. I see good opportunity, particularly in the Mission Systems portfolio. And I noted a few of them today. You mentioned IBCS Poland and I talked about also the work we did with MBDA to demonstrate the ability to integrate an international missile with our missile defense system. I also see exportability for GATOR. We talked about a new sensor that we're developing that has international applicability in MS as well. So across the board, we have had a strong export business in Mission Systems and I see that potential continuing to grow. And we also have global operations, in particularly, Europe and Australia that are continuing to grow across the portfolio, but particularly with opportunity in Mission Systems as well.

Sheila Kahyaoglu -- Jefferies -- Analyst

Great. Thanks.

Operator

Your next question comes from Seth Seifman of JPMorgan.

Seth Seifman -- JPMorgan -- Analyst

Thanks very much. And good afternoon.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Hi, Seth.

Seth Seifman -- JPMorgan -- Analyst

Hi. So, Ken, I wonder if you could tell us, I mean, historically you guys were a pretty good performer on working capital. I know things move around quarter-to-quarter. So this quarter is an anomaly, but now that we've got Innovation Systems in there, what's -- let's say, at year-end period, what's the appropriate level of working capital for the business? I don't know if you can size it as a percentage of sales or any way that you're comfortable.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Sure. Yeah. As I mentioned in our prepared remarks, we do think that there are working capital opportunities in front of us as we look at 2019. We probably see more opportunity from a working capital perspective, quite frankly in 2020. I think as we grow the business in '19, we see the ability to either grow working capital at a similar rate or potentially slightly less, but we do see some opportunity to liquidate some working capital in 2020. And I would say that, NGIS had a little different working capital structure than we did. Some of that is is structural, say, NASA, CRS. Those payment terms are going to be what they're going to be. There's opportunity to burn some down, some other programs and then, we'll just continue to diligently work day-to-day to make sure that we get the right payment terms for the type of work that we are performing and the contracts that we're signing and just continue to stay focused on that. And then, also, we need to continue to work with our customer and make sure that their payment terms are appropriate again for the type of contract and the type of work. And we would like to see opportunity on that side as we continue to work with them for, again, appropriate industrywide payment terms.

Seth Seifman -- JPMorgan -- Analyst

Great. Thank you.

Operator

Your next question comes from Hunter Keay of Wolfe Research.

Hunter Keay -- Wolfe Research -- Analyst

Thank you. Hi, everybody. I think you talked about this $1 billion submarine subsystems award. Is that really to Columbia-class? I'm sorry. And can you remind me of your total exposure -- Company's exposure to shipbuilding and how you expect that to trend over the next few years? Thanks.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Sure. I wouldn't be able to comment on specifically the class of submarine, but what I would say is that we did reach an agreement in the quarter for about $1.3 billion, some of that had been previously recorded as long-lead to provide a number of units for propulsion and turbine generators in support of the US Navy submarine production and we do expect that to be delivered over a number of years. In terms of the overall exposure to shipbuilding, I would probably frame that in the range of mid-to-high single digits in terms of sales, maybe a bit more like mid single digits.

Hunter Keay -- Wolfe Research -- Analyst

And you expect that to stay roughly there over the next say five to 10 years?

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

I don't expect. Based on what we do in that area, we don't tend to see a lot of volatility. I think there is an opportunity for growth as you think about the Columbia-class, as you asked about. There are some other areas where we provide capability for surface ships, electronic equipment and things like that on surface ships, as well as some some seaborne radar capability and maybe some opportunity for growth, but probably not one of the fastest growing areas in the Company.

Hunter Keay -- Wolfe Research -- Analyst

I see. Thank you, Ken.

Operator

Your next question comes from Robert Stallard of Vertical Research.

Robert Stallard -- Vertical Research -- Analyst

Thanks so much. Good afternoon.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Hey, Rob.

Robert Stallard -- Vertical Research -- Analyst

Ken, a quick question for you on cash. Is there any way you can fix this seasonality that you see in this cash, make it a little bit level loaded throughout the year?

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

We're working on it, Rob, I would say. There are some, I'd call them, structural timing of certain payments and receipts that we see, that make that a little bit of a challenge. There are just certain outflows that occur early in the year and we have always tended to have a strong fourth quarter, and we're always working hard to pull more cash from next year into this year, that means you got to do it all over again. But we're looking at strategies. I don't see us ever getting to a point where we're at level, but we can certainly be significantly better than we were this year. We had a couple of notable challenges, as I mentioned, this year. And we can do better, but I wouldn't expect us to be kind of ratable across the year.

Robert Stallard -- Vertical Research -- Analyst

Okay. Thanks so much.

Operator

Your next question comes from Ron Epstein of Bank of America-Merrill Lynch.

Ron Epstein -- Bank of America Merrill Lynch -- Analyst

Hi. Good afternoon, guys.

Kathy Warden -- Chief Executive Officer, Director

Hi, Ron.

Robert Stallard -- Vertical Research -- Analyst

Kathy, as we think about the next couple of quarters, can you give us a little, maybe insight baseball on what programs we should be keeping an eye on maybe? So, what are the shorter-term opportunities that could as outsiders, we should be keeping on eye on that you guys could potentially win?

Kathy Warden -- Chief Executive Officer, Director

So, Ron, as is usually the case, a good bit of the work we continue to pursue and even what we talked about winning in this first quarter, is restricted. So while I can't point to specific opportunities, we are seeing growth in hypersonics and the programs that we have already won, we will continue to have opportunities for increased scope. We have national security space, which is a number of restricted programs, some of which we booked in this first quarter and we referenced in today's call, others that are pending awards later in the year.

We also have opportunities that are more public. Clearly, the launch services agreement that we are under today and working with the Air Force to compete for the downselect to be one of two launch services providers for national security launches. And then, we have GBSD which we are competing for and we expect the RFPM later this year that will be awarded next year, are just a handful of areas that I would suggest that you monitor with us.

Ron Epstein -- Bank of America Merrill Lynch -- Analyst

Okay. Great. And then maybe a follow-on related. When you think about the budget request from the administration and maybe where we are through the process, the Armed Services Committee, House Armed Services Committee coming back with response, how do you feel about that budget relative to how you're positioned?

Kathy Warden -- Chief Executive Officer, Director

I feel very positive about our alignment to the budget even after we look at the Congressional mark process that is going to (inaudible), we have strong alignment to the threats and being able to address areas that are certainly of note. We've talked about a number of them today hypersonics, artificial intelligence, the continual progression of sensors that can detect advanced threats which impact both our Mission Systems business, our continuing growth in the weapons and high-speed missiles area. I talked about AARGM-ER today and I see a strong alignment to the capability that will be needed in the future and both the Navy and the Air Force have expressed interest in that missile as a missile of choice.

So as I look at how those programs are supported in this budget, I see very strong alignment around the areas that we've been investing in and position our portfolio to fulfill and the budget. And the budget is very much based on the national defense strategy and that strategy is enduring and expect it to continue to be the view of both parties, that we need to align to that strategy and ensure that we're dealing with the threats of particularly China and Russia.

Ron Epstein -- Bank of America Merrill Lynch -- Analyst

Okay. Great. Thank you.

Operator

Your next question comes from Rajeev Lalwani of Morgan Stanley.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Hi, Kathy. Hi, Kenneth.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Hi, Rajeev.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Two quick ones, if I may. One, just what's the latest on GBSD and how you're feeling about it as time has evolved and you've digested IS? And then unrelated to that, but coming back to something you said earlier on the missile defense side, can you talk about Patriot and your involvement in the sense-off and the potential opportunity on the radar, that's a potential here on the domestic side?

Kathy Warden -- Chief Executive Officer, Director

Sure. I'll actually start with the latter. And as you might guess, there isn't a lot that I'm going to say about an active competition other than the fact that we are participating in the sense-off. And so we're looking forward to offerings of competitive solution that meets the requirements.

Shifting to GBSD, we have been working with the government as you know on the risk reduction contract, TMMR, that is going well. We have received drafts of the RFP for the next phase of GBST and so we are in earnest working our proposal. There's nothing in the draft RFPs that have been a surprise to us. And we continue to work to put in place a very competitive offering for the Air Force and expect that proposal to go in later this year. And as I noted in the earlier comments to be awarded next year.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Thank you.

Operator

Your next question comes from Peter Arment of Baird.

Peter Arment -- Baird -- Analyst

Yes. Thanks. Good afternoon, Kathy, Ken. Kathy, maybe you could just give us a couple of comments or metrics if you can on the Innovation Systems integration process? Where are you today, and are you on track for the goals that you set up when the deal was achieved? Thanks.

Kathy Warden -- Chief Executive Officer, Director

Yes. The integration continues to progress exceptionally well. I'm proud of how that team is performing. We had set cost synergy targets to reach $150 million run rate by the end of 2019, going into 2020. We are on track to achieve that. And as I said, some of the performance improvement that we've seen across the sectors, even in this first quarter, are a result of those cost synergies starting to be reflected in the sectors. We also are starting to see revenue synergy realized. And when we first laid out the business case behind the deal, we did not anticipate seeing revenue synergy quite as quickly. So both in space and missiles, we've been pleased at how quickly those have progressed.

And then, also, when we laid out the deal with all of you, talked about operational synergies and these are areas like facilities overlap that we have within the portfolio, that we have an opportunity now to rationalize with the addition of Orbital ATK and we are making good headway on those operational synergies as well. Again, even faster than I had anticipated, we've been able to identify some opportunities and realize those this year. So, all-in-all, feel very positive about the performance of the business, as well as the integration process that we're executing.

Peter Arment -- Baird -- Analyst

Great. Thank you.

Operator

Your next question comes from Myles Walton of UBS.

Myles Walton -- UBS -- Analyst

Hi. Good afternoon. Kathy, I was looking at the changes of incentive metrics on new leaders come in and you mentioned one of those with the insertion of segment operating margin growth. And I guess there was a little bit at de-emphasis on the weighting of margin rates, and I think Ken touched on that. But the other incentives you added was RONA and I'm curious, the last time this was in the mix was prior to the spin off of shipbuilding and was probably a pretty good indication of how the Company was thinking about relative asset returns. So I'm curious, when you included this new metric, what exactly are you trying to motivate and incent with the addition of this particular one?

Kathy Warden -- Chief Executive Officer, Director

So, let me start, and then, I'll have Ken add a little bit of color on the measure itself. And what we are looking to do is incentivize the top team and I should note that this metric has been in place for most of our leadership as part of our incentive plan. We added it for the top leadership team as the component of the long-term incentive. And we are working to drive performance in the elements of the business that leadership can control in terms of both returns, but also managing the assets of the business. And we focus more on the operating assets of the business, so that we aren't penalizing the team for areas like goodwill and the issues that come with making an acquisition as we just did. And I'll let Ken detail that a little bit more for you.

But really it is getting the team focused on the operations of the business. I also added another element of our non-financial goals on operational efficiency and that is meant to streamline our processes, speed decision making, so that we're able to operate more efficiently and effectively inside the Corporation and that goes back to the comments I was making in response to Carter questions about agility.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Yes. Just a couple comments I would add there, Myles. We essentially focus our incentives around growth from a profitable growth perspective, not just growth for growth sake, which is why we like the segment margin dollars as a growth metric. We also have cash generation as a significant measure in both our annual and long-term plan. And then, with respect to your question on sort of RONA in the old days, I think what you maybe remembering in the old days was an economic value add metric. We actually have had RONA for some period of time and then two years ago, we moved from RONA to what we call operating RONA. And think of operating RONA as essentially a return on working capital. And we didn't want to try to dilute our ability to create value through managing the balance sheet by including things in there like goodwill and intangible assets, and those things that are more challenging for the team to manage obviously on a day-by-day basis. So we essentially created a metric that is return to working capital and we call that operating RONA.

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

We have time for one more question.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Sorry, Myles.

Myles Walton -- UBS -- Analyst

No worries.

Kathy Warden -- Chief Executive Officer, Director

Thanks. Myles.

Operator

Your next question comes from Cai Von Rumohr of Cowen and Company.

Cai Von Rumohr -- Cowen and Company -- Analyst

Yes. Thanks so much. So, Kathy, on the fourth quarter call, you talked about B-21 being flattish this year and yet it looks like it was up in the first quarter. Has anything changed there? And secondly, revenue growth is a key issue. What backlog growth should we see in the remainder of the year to tell us this is going to happen in the future? Thanks.

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Let me start on that Cai. And then Kathy can add some commentary. I would say that looking at Q1, we did see some higher volume on restricted programs within manned aircraft and I wouldn't want to comment beyond that as to what that might be. In terms of the B-21 program, I would say that's been one of our fastest growing programs for the last few years, and we continue to think that the profile we talked about for the full year 2019 is appropriate.

In terms of awards, I would say that, Kathy mentioned a multi-billion dollar, multi-year award on E-2D that got in April. We're certainly expecting another significant award as we look forward on working with Lockheed on F-35 and that would be across a number of sectors. And then, Kathy mentioned an option for nine aircraft on E-2D for Japan. We do think that is likely to come later in the year and then also we did highlight a significant restricted award in the quarter. And we're looking at some continued restricted awards in the balance of the year.

So, I think there is a really solid story here, not just the first quarter, but as we look forward into 2019. And I'll just remind you that we are a long-cycle business and in particular, multi-year awards will turn themselves into sales over longer period of times, but we're gaining confidence in our ability to continue to grow as we look forward.

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

At this time, I would like to turn the call over to Kathy for final comments.

Kathy Warden -- Chief Executive Officer, Director

Thanks, Steve. I will end the call again by thanking the Northrop Grumman team for their outstanding performance and commitment to deliver growth and provide long-term value for our customers and shareholders. And I want to thank everyone for joining us on today's call. That concludes the call. I'll speak to you in July.

Operator

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

Duration: 59 minutes

Call participants:

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

Kathy Warden -- Chief Executive Officer, Director

Kenneth Bedingfield -- Chief Financial Officer, Corporate Vice President

Rob Spingarn -- Credit Suisse -- Analyst

Jon Raviv -- Citi -- Analyst

George Shapiro -- Shapiro Research -- Analyst

Carter Copeland -- Melius Research -- Analyst

David Strauss -- Barclays -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Seth Seifman -- JPMorgan -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Robert Stallard -- Vertical Research -- Analyst

Ron Epstein -- Bank of America Merrill Lynch -- Analyst

Rajeev Lalwani -- Morgan Stanley -- Analyst

Peter Arment -- Baird -- Analyst

Myles Walton -- UBS -- Analyst

Cai Von Rumohr -- Cowen and Company -- Analyst

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