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

The combined company will be noise at the way toward becoming a company with the indispensable scale and wealth ought invest at and send the most mission-critical solutions ought our global aerospace and defense customers. The opportunity ought found a new A&D company is an exciting and engaging challenge, one that Bill and I and the complete leadership team are ready ought admit on. And at the many visits with our L3 and Harris employees at the field, this excitement is broadly shared throughout. during announcing this merger of might final October, our L3 and Harris teams eat been deep at integration planning.

While merger integration activities are occurring throughout the company, our portion teams eat no altered the rate at the slightest, and we persist ought hammer out promote at streamlining and consolidating operations. during 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 electric Systems segment, we combined our Security & Detection affair into commercial aviation and are evaluating steps ought rationalize farther our engine footprint.

Not virgin will the new organizational structure shift overhead and redundant cost, cottage during though noise better align our capabilities with customer needs, sharpen concentrate at technique investments and heighten affair development efforts ought better serve our customers. Improving affair action along better data collection and analytics is a key divide of managing a more integrated company. final year, we rolled out a sequence of standard econmic and operating metrics throughout the company though divide of L365. Closer tracking of principal efficiency metrics also though changes ought our incentive compensation plan ought emphasize coin run eat been helping ought motivate working principal improvements.

Even with sales up 14%, our net working principal virgin increased 4%, chief ought a reduction at working principal days compared ought the previous year. Operating metrics that explore manufacturing peculiarity and vendor action is supporting our equip tie and program management teams ought recognize and laguage problems earlier, enabling the management team ought clearly exclaim on the interdependencies at their operations. I persist ought invent customer war a priority during the company, during myself and the complete leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military ought dispute L3's only and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought satisfy customers at the middle East. though you are aware, international affair development relies upon refuge long-term relationships and listening ought our customers ought know their challenges. We persist ought invent more and more inroads, seeing an improved tenor ought our meetings and eat received sure reception ought our merger with Harris from our international customers.

Bottom queue is we are seeing a large plead worldwide during an innovative, agile company who wants ought unite with their customers. few contemporary awards highlight our competence at delivering integrated mission solutions. at the recently announced $1 billion Peregrine harmony during the Royal Australian air Force, L3 will send four next-gen EW jet at a biz jet platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's mutual battle fighting networks, providing a critical join between platforms, including the F-35, the Growler and maritime assets.

Our preference ought compete during the compose of FARA during the U.S. troops is another parade of our capacity ought hire customers with disruptive technique and ought unite at an significant platform, integrating different communications and mission systems. Many of our capabilities align with the Army's sumit priorities, and we persist ought assign wealth ought satisfy these needs. Our affair development activities are now more ambitious and focused and though noise better integrated with order and proposal, engineering and R&D functions.

I exclaim on many more instances of collaboration along divisions though we slaughter upon our strategy. Leadership throughout the company is buying into the thought that we can advantage more and better serve our customers if we profession together. Next, I wish ought influence at the promote we are making at the ability front. Attracting, developing and retaining sumit engineering and managerial ability is the lifeblood of the company.

We began leveraging our HR organization ought age strategies ought grow more effective at planning our ability needs, at recruiting and retention and at identifying and manners our emerging leaders ought admit at larger roles at the company. We made significant promote at the past year engaging our workforce. Overall, the investments and changes we are making ought better the affair are beginning ought generate tangible benefits ought growth and margin. Our employees are increasingly embracing the modify and the fabric of integration, collaboration and innovation is becoming woven deeper into the fashion of our thinking.

Now let's grow ought a publication of our portion performance. Our healthful quarterly action was led by the ISR Systems portion which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating revenue increased 40%, generating a border of 10.4%, up 120 basis points from the previous period.

Growth was most impressive at our jet procurement and ISR missionization affair though few 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 total grew double digits.

Given the broad-based growth at this segment, we persist ought expectation ISR Systems ought be our fastest-growing affair with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a healthful 1.19. Operating revenue rose 31% and margins improved 160 basis points ought 10.7%.

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

The region was impacted by a sales repel at the Defense manners Solutions affair due ought final year's loss of the C-17 manners understanding ought the OEM. However, key highlights at electric 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 expectation modest sales growth at 2019, cottage during we persist ought expectation improved border from ongoing revenue takeout and favorable understanding performance. Given our healthful action at the first region and improving bid momentum, we are increasing our 2019 guidance.

Now I will grow it at ought Ralph ought publication our financials and equip details of our updated guidance.

Ralph D'Ambrosio -- Senior Vice principal and principal econmic Officer

Thanks, Chris. I'll publication some details almost the first region and then our 2019 guidance update. Reviewing the first quarter, though Chris explained, we had a too healthful begin ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, total of which was organic.

Segment operating revenue and adjusted diluted EPS each grew 24%, and portion border increased 90 basis points ought 11.5%. We though noise generated sure liberate coin run which is meaningful though we always eat negative coin run at our first quarters.Next, I'll comment at some details almost the 2019 first quarter. Adjusted diluted EPS was $2.89, an enlarge of $0.55 or 24% at the 2018 first region driven chiefly by operating revenue growth stemming from our 14% sales growth and our 90 basis points of border expansion. Adjusted diluted EPS excludes integration and transaction expenses related ought the L3 Harris merger and a $2 million affair divestiture loss.

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

Operating border action was too good. complete portion operating border increased ought 11.5%, 90 basis points higher than the 2018 first quarter. Lower pension cost increased border 50 basis points. And favorable understanding performance, which includes productivity and revenue reductions, accounted during most of the other 40 basis points of border expansion.

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

Other contributors ought border expansion chiefly included sales growth, a lower G&A estimate and affair divestitures at ISR and favorable understanding action and reduced G&A expenses at Communications and Electronics. The tax estimate increased ought 14.7% from 11.1% during the first region of final year and that was chiefly due ought lower stock-based compensation cost deductions. We though noise generated sure liberate coin run of $146 million, compared ought a coin outflow of $85 million during the 2018 first region and that improvement was due chiefly ought better working principal action and growth at earnings. though noise compared ought the 2018 first quarter, we reduced our working principal days by 10 ought 82.

As Chris explained, we eat placed more attention at improving working principal and generating liberate 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 estimate by $150 million ought $10.9 billion, which is expected growth of almost 6.5% at 2018. Most of the guidance enlarge is at ISR Systems.

And I'll add that given our contemporary healthful orders and noise backlog, we ought be able ought motivate more upside ought this year's sales. at the segments, we expectation sales ought become 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 border expansion of 120 basis points ought 12% is unchanged and firmly at track. recolect that at our January 29 revenue call, we explained the three drivers of our 2019 border expansion: L365 productivity revenue savings, lower pension cost and lower losses at the Traveling wave underground business.

Each of these will further almost 40 basis points of border expansion. With fame ought the Traveling wave underground affair improvements, we persist ought expectation those ought largely occur at the second half of 2019. Our combined sales growth and border expansion this year will arise at portion operating revenue growth of 18% at 2018. We held our portion border guidance midpoints at 11.2% during ISR, 11.1% during Communications and 14.4% during Electronics with the segments expanding border 110 basis points, 200 basis points and 70 basis points, respectively, compared ought 2018.

We lowered our tax estimate ought 19% from 20%, chiefly due ought lower expected foreign revenue taxes. And during liberate coin flow, we increased it ought $1.055 billion, which is almost 13% higher than 2018 with a coin conversion estimate of 113%. coin at the goal of March was $1.1 billion. And regarding principal allocation, at February, we increased our quarterly coin dividend by $0.05 ought $0.85 per share.

We however expectation no debt repayments. And though we previously explained, we suspended fragment purchases until the L3 Harris merger is completed. Looking at the second quarter, we expectation sales between $2.6 billion and $2.7 billion with growth of almost 3%, operating border at the high 11% range, with border expanding more than 100 basis points at the 2018 second quarter, and liberate coin run between $100 million and $200 million. Finally, ought end my econmic review, we had a too good begin ought the year with our first-quarter results.

The company is growing at a noise pace, becoming more effective and advantageous and though noise expanding margin. during 2019, we expectation ought become orders, sales, operating revenue and liberate coin flow, and we're though noise firmly tracking ought our 12% operating border objective. Thank you. And I'll now grow it help ought Chris.

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

Thanks, Ralph. though you saw at April 4, both L3 and Harris received shareholder approvals during the merger, and Harris though noise recently announced the sale of their evening vision business, both significant steps ought consummating the deal. We persist ought profession with total regulatory authorities ought grow the indispensable approvals. And though you heard at the Harris revenue exclaim this morning, everything is tracking ought plan and there's no modify ought our expected midyear merger close.

The 50-plus members of the mutual integration team are working diligently and integration planning is going well. The integration management office recently held a tax catch offsite at the ISR facility at Texas. though L3 and Harris teams advantage more exposure ought each other's operations and people, the more we grow grateful of the technique and ability of the combined company and the latent during what we can conduct together. I've been working closely with Bill at the integration, and we will equip details at the board, organizational structure and management shut commerce close.

Given that this is responsible L3's final rally exclaim though a divide public company, I wish ought personally thank total of the men and women of L3 Technologies during the difficult profession and dedication throughout the years during making L3 a large lay ought work. And a specific due ought my executive leadership team during their leadership and action during the past unite of years, specially with the rate of change. though this chapter at the company's history comes ought an end, a new and exciting chapter begins. I eat ought admit the two CEOs previous me, frank Lanza and Mike Strianese, during their vision and difficult profession ought advantage L3 ought this stage.

By combining what makes L3 such a specific company with the best of what Harris has ought offer, I eat no supicion 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 during employees, during customers and during the shareholders.

Ralph D'Ambrosio -- Senior Vice principal and principal econmic Officer

Yes, Chris. I was thinking almost this yesterday. And I counted that it's been 52 consecutive quarterly revenue calls during me. hence it's been a colossal undergo and I'm too grateful during it.

So I though noise wish ought thank everyone at the exclaim today during their past and continued use at L3 and soon ought be L3 Harris, specially the analysts at the exclaim also though the analysts who previously covered L3.

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

Outstanding. total right. Kerry, why don't we vacant the lines during questions.

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and company -- Analyst

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

I'm impartial eccentric how you view, Chris, the longer vocabulary $3 billion liberate coin purpose given we've already chopped a destiny of lumber here. Thanks.

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

Gautam, thank you too much during the mystery and the compliment. We're fairly excited almost the first quarter, cottage during a expectation fashion ought promote during 2019 obviously. I ponder the concentrate at working principal and coin generation was something that we lay together at late December. We flat changed the incentive comp plan ought highlight the importance of generating liberate cash.

And Bill and I oration a destiny almost the $500 million of synergies and the $3 billion of coin run at year three. And I used to state we eat more faith at achieving those numbers today than we did when we first announced this commerce at October 14. I'll depart Ralph oration almost some of the improvements we made here at the first quarter.

Ralph D'Ambrosio -- Senior Vice principal and principal econmic Officer

Sure. hence though I commented, we had a dramatic reduction at our working principal days quarter-over-quarter. And if you can recall, the first region of 2018 was our high-water signal at condition of working principal and coin manners and that's why there's a dramatic reduction compared ought this year's first quarter. cottage during certainly what we're doing is placing more attention at basic blocking and tackling, trying ought amass our receivables sooner, continuing ought become the company and become inventory at a slower rate and taking actions ought modify our unbilled receivables into billed receivables sooner.

So it's a concerted pains along total those fronts. during the total year, we're expecting working principal days reduction though well, and we ponder that's going ought be at least two ought three days year at year. hence we ought exclaim on more improvement the remainder of this year though well. And obviously, we're going ought attempt ought conduct better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next mystery will fetch from Carter Copeland of Melius Research.

Carter Copeland -- Melius inquiry -- Analyst

Hey, good morning, Chris. I wondered if you could comment at the book ought bill. I intend obviously too healthful at the region flat in spite of the healthful sales. Was there anything at there that surprised you from a timing perspective or magnitude perspective that we saw early at this year? Did we draw anything deliver or is the pipeline a small sheet better than you were originally thinking?

Chris Kubasik -- Chairman, principal 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 almost at the past at systems and standardizing policies and procedures. There were a unite of ISR accelerations.

We're talking possibly second region ought first quarter, which is why we came at a small higher no virgin at the orders, cottage during the sales. cottage during I'm equally excited almost what we however eat looking ahead. There are clearly F-16 manners opportunities. We won a U.S.

and an international customer. And we possibly eat three ought four extra bids notorious that could be worth $100 million each. hence there could be $300 million ought $500 million of more orders of F-16 though an example. C-130 AMP, hopefully we'll hear at that.

As I mentioned, the team and I eat been spending time at the middle East. I ponder we eat some interesting strategies and partnerships there that could carry out ought significant growth. And the classified dirt is indeed picking up. That's an district we've been focused at and eat seen some growth, and given some of the next generation capabilities we have, I expectation more wins there.

So during the total year, I used to wish book ought bill ought be at least 1.1 at each and each segment. And possibly $12 billion of orders overall is what our extend deduce is. cottage during that's what we're working toward.

Carter Copeland -- Melius inquiry -- Analyst

Great, that's great. Thanks. And impartial a quick clarification at the org structure and leadership announcements you said shut ought close. ought we presume that's impartial an 8-K disclosure too near, meaning impartial ago your intended close?

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

Yes. I mean, I ponder that's fair. Bill and I however eat ought profession out the details. It depends when we're going ought near at the timing and such.

But yes, it used to be a math at that general time frame.