L3 Technologies, Inc. (LLL) Q1 2019 Earnings Call Transcript

The combined company will exist sturdy above the motorway toward becoming a company with the inherent scale and goods ought invest at and send the most mission-critical solutions ought our global aerospace and defense customers. The happen ought prove a new A&D company is an exciting and engaging challenge, one that Bill and I and the sum leadership team are ready ought identify on. And at the many visits with our L3 and Harris employees at the field, this excitement is broadly shared throughout. because announcing this merger of energy final October, our L3 and Harris teams gorge been deep at integration planning.

While merger integration activities are occurring throughout the company, our piece teams gorge no altered the speed at the slightest, and we flourish ought hammer out affect at above streamlining and consolidating operations. though example, at our Communications and Networked Systems segment, we consolidated from five sectors ought three. And within the integrated maritime systems sector, we are going from 14 divisions ought seven. at our electrical Systems segment, we combined our Security & Detection issue into commercial aviation and are evaluating steps ought rationalize farther our instrument footprint.

Not only will the new organizational structure inspire overhead and redundant cost, except also improve align our capabilities with passenger needs, sharpen concentrate above technique investments and enhance issue development efforts ought improve serve our customers. Improving issue operation across improve data collection and analytics is a key separate of managing a more integrated company. final year, we rolled out a sequence of standard economical and operating metrics throughout the company because separate of L365. Closer tracking of foremost efficiency metrics also because changes ought our incentive compensation plot ought emphasize coin run gorge been helping ought motivate working foremost improvements.

Even with sales up 14%, our net working foremost only increased 4%, headmaster ought a reduction at working foremost days compared ought the prior year. Operating metrics that chase manufacturing wealth and vendor operation is supporting our furnish fasten and program management teams ought identify and greet problems earlier, enabling the management team ought clearly growl on the interdependencies at their operations. I flourish ought compose passenger combat a priority though the company, though myself and the sum leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military ought argue L3's only and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought face customers at the center East. because you are aware, international issue development relies upon dwelling long-term relationships and listening ought our customers ought know their challenges. We flourish ought compose more and more inroads, seeing an improved tenor ought our meetings and gorge received certain reception ought our merger with Harris from our international customers.

Bottom rank is we are seeing a large plead worldwide though an innovative, agile company who wants ought join with their customers. little contemporary awards highlight our talent at delivering integrated mission solutions. at the recently announced $1 billion Peregrine harmony though the Royal Australian air Force, L3 will send four next-gen EW aeroplane above a biz plane platform. This includes a base communications infrastructure that will integrate with the Commonwealth's common battle fighting networks, providing a keen join among platforms, including the F-35, the Growler and maritime assets.

Our choice ought compete though the compose of FARA though the U.S. army is another parade of our talent ought hire customers with disruptive technique and ought join above an significant platform, integrating various communications and mission systems. Many of our capabilities align with the Army's climax priorities, and we flourish ought divide goods ought face these needs. Our issue development activities are now more ambitious and focused and also improve integrated with bid and proposal, engineering and R&D functions.

I growl on many more instances of collaboration across divisions because we massacre upon our strategy. Leadership throughout the company is buying into the conception that we can become more and improve serve our customers if we work together. Next, I wish ought affect above the affect at we are making above the capacity front. Attracting, developing and retaining climax engineering and managerial capacity is the lifeblood of the company.

We began leveraging our HR organization ought ripen strategies ought convert more effective at planning our capacity needs, at recruiting and retention and at identifying and exercise our emerging leaders ought identify above larger roles at the company. We made significant affect at on the past year engaging our workforce. Overall, the investments and changes we are making ought improve the issue are beginning ought generate tangible benefits ought growth and margin. Our employees are increasingly embracing the convert and the fabric of integration, collaboration and innovation is becoming woven deeper into the means of our thinking.

Now let's become ought a magazine of our piece performance. Our well quarterly operation was led by the ISR Systems piece which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating allowance increased 40%, generating a edge of 10.4%, up 120 base points from the prior period.

Growth was most impressive at our aeroplane procurement and ISR missionization issue because little key programs accelerated, including the U.S. air compel Compass Call, Australian Peregrine and the U.S. Missile Defense Agency HALO program. at addition, EO/IR sensors, soldier systems and space and sensor businesses coarse grew double digits.

Given the broad-based growth at this segment, we flourish ought want ISR Systems ought exist our fastest-growing issue with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a well 1.19. Operating allowance rose 31% and margins improved 160 base points ought 10.7%.

Sales growth was led by the broadband sector which rose 15% driven by higher UAV traffic and ground-based SATCOM system shipments. Operating edge improvement was driven by program performance, sales mix and charge reduction. Lastly, electrical Systems sales grew 2% and operating allowance rose 3%. ES' segment-leading edge improved 20 base points ought 14.7%.

The piece was impacted by a sales refuse at the Defense exercise Solutions issue due ought final year's loss of the C-17 exercise harmony ought the OEM. However, key highlights at electrical Systems involve double-digit growth at precision weapons which grew sales 18% at the quarter. due ought the headwinds from the C-17 loss, we want modest sales growth at 2019, except we flourish ought want improved edge from ongoing charge takeout and favorable harmony performance. Given our well operation at the first piece and improving bid momentum, we are increasing our 2019 guidance.

Now I will become it at ought Ralph ought magazine our financials and furnish details of our updated guidance.

Ralph D'Ambrosio -- Senior Vice headmaster and headmaster economical Officer

Thanks, Chris. I'll magazine some details nearly the first piece and then our 2019 guidance update. Reviewing the first quarter, because Chris explained, we had a identical well quit ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, coarse of which was organic.

Segment operating allowance and adjusted diluted EPS each grew 24%, and piece edge increased 90 base points ought 11.5%. We also generated certain free coin run which is meaningful though we always gorge negative coin run at our first quarters.Next, I'll comment above some details nearly the 2019 first quarter. Adjusted diluted EPS was $2.89, an enlarge of $0.55 or 24% at the 2018 first piece driven greatly by operating allowance growth stemming from our 14% sales growth and our 90 base points of edge expansion. Adjusted diluted EPS excludes integration and transaction expenses related ought the L3 Harris merger and a $2 million issue divestiture loss.

Sales increased 14% ought $2.7 billion driven by well growth at our DoD and international markets. at the piece level, sales grew 23% at ISR Systems, 11% at Communications and Networked Systems and 2% Electronics. The growth rates though ISR and Communications included some favorable quarterly timing items which will lower their second piece growth rates. at Electronics, sales were negatively impacted by final summer's C-17 exercise harmony loss which lowered growth by 440 base points at that segment.

Operating edge operation was identical good. coarse piece operating edge increased ought 11.5%, 90 base points higher than the 2018 first quarter. Lower pension fare increased edge 50 base points. And favorable harmony performance, which includes productivity and charge reductions, accounted though most of the other 40 base points of edge expansion.

As a reminder, most of our productivity improvements and charge reduction actions exhibit at favorable harmony performance. each piece had double-digit edge compared ought the 2018 first quarter. ISR edge increased 120 base points ought 10.4%, Communications increased 160 base points ought 10.7% and Electronics increased 20 base points ought 14.7%. Operating margins benefited from lower pension fare stemming from the service guarantee accrual freeze that we implemented effective January 1.

Other contributors ought edge expansion greatly included sales growth, a lower G&A estimate and issue divestitures at ISR and favorable harmony operation and reduced G&A expenses at Communications and Electronics. The tax estimate increased ought 14.7% from 11.1% though the first piece of final year and that was greatly due ought lower stock-based compensation fare deductions. We also generated certain free coin run of $146 million, compared ought a coin outflow of $85 million though the 2018 first piece and that improvement was due greatly ought improve working foremost operation and growth at earnings. also compared ought the 2018 first quarter, we reduced our working foremost days by 10 ought 82.

As Chris explained, we gorge placed more attention above improving working foremost and generating free coin run earlier at the year, and we're seeing benefits from these actions. Now moving ought our 2019 guidance update. We raised our midpoint sales tax by $150 million ought $10.9 billion, which is expected growth of nearly 6.5% at 2018. Most of the guidance enlarge is at ISR Systems.

And I'll add that given our contemporary well orders and well backlog, we ought exist able ought motivate more upside ought this year's sales. at the segments, we want sales ought convert 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 edge expansion of 120 base points ought 12% is unchanged and firmly above track. recolect that above our January 29 salary call, we explained the three drivers of our 2019 edge expansion: L365 productivity charge savings, lower pension fare and lower losses at the Traveling ripple underground business.

Each of these will advance nearly 40 base points of edge expansion. With fame ought the Traveling ripple underground issue improvements, we flourish ought want those ought mainly happen at the second half of 2019. Our combined sales growth and edge expansion this year will arise at piece operating allowance growth of 18% at 2018. We held our piece edge guidance midpoints at 11.2% though ISR, 11.1% though Communications and 14.4% though Electronics with the segments expanding edge 110 base points, 200 base points and 70 base points, respectively, compared ought 2018.

We lowered our tax estimate ought 19% from 20%, greatly due ought lower expected foreign allowance taxes. And though free coin flow, we increased it ought $1.055 billion, which is nearly 13% higher than 2018 with a coin conversion estimate of 113%. coin at the aim of March was $1.1 billion. And regarding foremost allocation, at February, we increased our quarterly coin dividend by $0.05 ought $0.85 per share.

We however want no debt repayments. And because we previously explained, we suspended piece purchases until the L3 Harris merger is completed. Looking at the second quarter, we want sales among $2.6 billion and $2.7 billion with growth of nearly 3%, operating edge at the high 11% range, with edge expanding more than 100 base points at the 2018 second quarter, and free coin run among $100 million and $200 million. Finally, ought full my economical review, we had a identical good quit ought the year with our first-quarter results.

The company is growing at a well pace, becoming more effective and advantageous and also expanding margin. though 2019, we want ought convert orders, sales, operating allowance and free coin flow, and we're also firmly tracking ought our 12% operating edge objective. Thank you. And I'll now become it back ought Chris.

Chris Kubasik -- Chairman, headmaster Executive Officer, and President

Thanks, Ralph. because you saw above April 4, both L3 and Harris received shareholder approvals though the merger, and Harris also recently announced the sale of their evening vision business, both significant steps ought consummating the deal. We flourish ought work with coarse regulatory authorities ought earn the inherent approvals. And because you heard above the Harris salary summon this morning, everything is tracking ought plot and there's no convert ought our expected midyear merger close.

The 50-plus members of the common integration team are working diligently and integration planning is going well. The integration management office recently held a tax arrest offsite at the ISR facility at Texas. because L3 and Harris teams win more exposure ought each other's operations and people, the more we convert grateful of the technique and capacity of the combined company and the latent though what we can do together. I've been working closely with Bill above the integration, and we will furnish details above the board, organizational structure and management near business close.

Given that this is apt L3's final assembly summon because a divide public company, I wish ought personally thank coarse of the men and women of L3 Technologies though the difficult work and dedication throughout the years though making L3 a large put ought work. And a especial because of my executive leadership team though their leadership and operation during the past connect of years, especially with the speed of change. because this chapter at the company's history comes ought an end, a new and exciting chapter begins. I gorge ought identify the two CEOs previous me, frank Lanza and Mike Strianese, though their vision and difficult work ought acquire L3 ought this stage.

By combining what makes L3 such a especial company with the best of what Harris has ought offer, I gorge no doubt we can compose a company that is flat more agile, innovative and customer-centric, a best-of-breed aerospace and defense technique company that delivers superior tax though employees, though customers and though the shareholders.

Ralph D'Ambrosio -- Senior Vice headmaster and headmaster economical Officer

Yes, Chris. I was thinking nearly this yesterday. And I counted that it's been 52 consecutive quarterly salary calls though me. consequently it's been a vast experience and I'm identical grateful though it.

So I also wish ought thank everyone above the summon today though their past and continued advantage at L3 and directly ought exist L3 Harris, especially the analysts above the summon also because the analysts who previously covered L3.

Chris Kubasik -- Chairman, headmaster Executive Officer, and President

Outstanding. coarse right. Kerry, why don't we vacant the lines though questions.

Questions & Answers:

Operator

[Operator instructions] The first issue will become from Cai Von Rumohr of Cowen and Company.

Gautam Khanna -- Cowen and company -- Analyst

Yes. It's Gautam truly above though Cai. Congratulations above a large run obviously at L3. I wish ought impartial plead above the free coin run improvement at the piece and some of the working foremost initiatives more broadly, if you could impartial interpret class of how much low-hanging fruit you perceive there ought be? And then impartial because a follow-up, when you impartial identify the LTM free coin run of both Harris and L3, we're at impartial beneath $2.4 billion.

I'm impartial funny how you view, Chris, the longer word $3 billion free coin purpose given we've already chopped a fate of wood here. Thanks.

Chris Kubasik -- Chairman, headmaster Executive Officer, and President

Gautam, thank you identical much though the issue and the compliment. We're pretty excited nearly the first quarter, except a want means ought affect at though 2019 obviously. I study the concentrate above working foremost and coin generation was something that we lay together at late December. We flat changed the incentive comp plot ought highlight the importance of generating free cash.

And Bill and I oration a fate nearly the $500 million of synergies and the $3 billion of coin run at year three. And I used to tell we gorge more guarantee at achieving those numbers today than we did when we first announced this business above October 14. I'll allow Ralph oration nearly some of the improvements we made here at the first quarter.

Ralph D'Ambrosio -- Senior Vice headmaster and headmaster economical Officer

Sure. consequently because I commented, we had a dramatic reduction at our working foremost days quarter-over-quarter. And if you can recall, the first piece of 2018 was our high-water symbol at condition of working foremost and coin practice and that's why there's a dramatic reduction compared ought this year's first quarter. except certainly what we're doing is placing more attention above basic blocking and tackling, trying ought infer our receivables sooner, continuing ought convert the company and convert inventory at a slower speed and taking actions ought convert our unbilled receivables into billed receivables sooner.

So it's a concerted effort across coarse those fronts. though the sum year, we're expecting working foremost days reduction because well, and we study that's going ought exist at least two ought three days year at year. consequently we ought growl on more improvement the remainder of this year because well. And obviously, we're going ought attempt ought do better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next issue will become from Carter Copeland of Melius Research.

Carter Copeland -- Melius research -- Analyst

Hey, good morning, Chris. I wondered if you could comment above the book ought bill. I intend obviously identical well at the piece flat despite the well sales. Was there anything at there that surprised you from a timing perspective or magnitude perspective that we saw early above this year? Did we drag anything deliver or is the pipeline a moment bit improve than you were originally thinking?

Chris Kubasik -- Chairman, headmaster Executive Officer, and President

That's a large question. I'll state you, we've indeed tried ought reinvigorate the BD organization and function. We've made investments that you've heard me oration nearly at the past at systems and standardizing policies and procedures. There were a connect of ISR accelerations.

We're talking maybe second piece ought first quarter, which is why we came at a moment higher no only above the orders, except the sales. except I'm equally excited nearly what we however gorge looking ahead. There are clearly F-16 exercise opportunities. We won a U.S.

and an international customer. And we maybe gorge three ought four additional bids prominent that could exist worth $100 million each. consequently there could exist $300 million ought $500 million of more orders of F-16 because an example. C-130 AMP, hopefully we'll listen above that.

As I mentioned, the team and I gorge been spending time at the center East. I study we gorge some interesting strategies and partnerships there that could guide ought significant growth. And the classified soil is indeed picking up. That's an region we've been focused above and gorge seen some growth, and given some of the next generation capabilities we have, I want more wins there.

So though the full year, I used to wish book ought bill ought exist at least 1.1 at each and each segment. And maybe $12 billion of orders overall is what our lengthen aim is. except that's what we're working toward.

Carter Copeland -- Melius research -- Analyst

Great, that's great. Thanks. And impartial a fast clarification above the org structure and leadership announcements you said near ought close. ought we guess that's impartial an 8-K disclosure identical near, implication impartial ago your intended close?

Chris Kubasik -- Chairman, headmaster Executive Officer, and President

Yes. I mean, I study that's fair. Bill and I however gorge ought work out the details. It depends when we're going ought near above the timing and such.

But yes, it used to exist a math at that normal time frame. We'll do what makes sensation though coarse the nation involved, inside and external. consequently I'll exist seeing Bill next week and we'll flourish ought work above a plan. except I study both he said and I said we're ahead of the inside plot that we've laid out above a fate