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

The combined corporation will exist well above the pavement toward becoming a corporation with the inherent scale and property ought invest at and send the most mission-critical solutions ought our global aerospace and defense customers. The occur ought perpendicular a new A&D corporation is an exciting and engaging challenge, one that Bill and I and the full leadership team are ready ought confess 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 might final October, our L3 and Harris teams get been deep at integration planning.

While merger integration activities are occurring throughout the company, our fraction teams get no altered the rate at the slightest, and we stand ought hammer out further above streamlining and consolidating operations. because 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 business into commercial aviation and are evaluating steps ought rationalize farther our installation footprint.

Not virgin will the new organizational structure touch overhead and redundant cost, besides also improve align our capabilities with passenger needs, sharpen concentrate above technique investments and enhance business development efforts ought improve serve our customers. Improving business rule across improve information collection and analytics is a key isolate of managing a more integrated company. final year, we rolled out a progression of criterion economical and operating metrics throughout the corporation because isolate of L365. Closer tracking of main efficiency metrics also because changes ought our incentive compensation project ought emphasize money river get been helping ought motivate working main improvements.

Even with sales up 14%, our net working main virgin increased 4%, main ought a reduction at working main days compared ought the foregoing year. Operating metrics that follow manufacturing quality and vendor rule is supporting our furnish bind and program management teams ought identify and salute problems earlier, enabling the management team ought clearly weep on the interdependencies at their operations. I stand ought create passenger war a priority because the company, because myself and the full leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military ought argue L3's sole and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought satisfy customers at the center East. because you are aware, international business development relies upon dwelling long-term relationships and listening ought our customers ought comprehend their challenges. We stand ought create more and more inroads, seeing an improved tenor ought our meetings and get received sure reception ought our merger with Harris from our international customers.

Bottom queue is we are seeing a large ask worldwide because an innovative, agile corporation who wants ought comrade with their customers. little modern awards highlight our capability at delivering integrated mission solutions. at the recently announced $1 billion Peregrine harmony because the Royal Australian air Force, L3 will send four next-gen EW aeroplane above a biz aircraft platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's common campaign fighting networks, providing a critical connect between platforms, including the F-35, the Growler and maritime assets.

Our alternative ought compete because the create of FARA because the U.S. troops is another parade of our ability ought hire customers with disruptive technique and ought comrade above an significant platform, integrating different communications and mission systems. Many of our capabilities align with the Army's peak priorities, and we stand ought distribute property ought satisfy these needs. Our business development activities are now more ambitious and focused and also improve integrated with order and proposal, engineering and R&D functions.

I weep on many more instances of collaboration across divisions because we assassinate upon our strategy. Leadership throughout the corporation is buying into the thought that we can obtain more and improve serve our customers if we vocation together. Next, I expectation ought impress above the further we are making above the genius front. Attracting, developing and retaining peak engineering and managerial genius is the lifeblood of the company.

We began leveraging our HR organization ought age strategies ought grow more effective at planning our genius needs, at recruiting and retention and at identifying and usage our emerging leaders ought confess above larger roles at the company. We made significant further at the past year engaging our workforce. Overall, the investments and changes we are making ought improve the business are beginning ought generate tangible benefits ought growth and margin. Our employees are increasingly embracing the change and the fabric of integration, collaboration and innovation is becoming woven deeper into the method of our thinking.

Now let's become ought a periodical of our fraction performance. Our robust quarterly rule was led by the ISR Systems fraction which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating earnings increased 40%, generating a verge of 10.4%, up 120 base points from the foregoing period.

Growth was most impressive at our aeroplane procurement and ISR missionization business 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 universe and sensor businesses full grew double digits.

Given the broad-based growth at this segment, we stand ought expectation ISR Systems ought exist our fastest-growing business with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a robust 1.19. Operating earnings 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 communication and ground-based SATCOM system shipments. Operating verge improvement was driven by program performance, sales mixture and fare reduction. Lastly, electrical Systems sales grew 2% and operating earnings rose 3%. ES' segment-leading verge improved 20 base points ought 14.7%.

The zone was impacted by a sales decline at the Defense usage Solutions business because of final year's loss of the C-17 usage jam ought the OEM. However, key highlights at electrical Systems contain double-digit growth at precision weapons which grew sales 18% at the quarter. because of the headwinds from the C-17 loss, we expectation modest sales growth at 2019, besides we stand ought expectation improved verge from ongoing fare takeout and favorable jam performance. Given our robust rule at the first zone and improving order momentum, we are increasing our 2019 guidance.

Now I will become it above ought Ralph ought periodical our financials and supply details of our updated guidance.

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

Thanks, Chris. I'll periodical some details around the first zone and then our 2019 guidance update. Reviewing the first quarter, because Chris explained, we had a too robust commence ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, full of which was organic.

Segment operating earnings and adjusted diluted EPS each grew 24%, and fraction verge increased 90 base points ought 11.5%. We also generated sure release money river which is meaningful because we always get negative money river at our first quarters.Next, I'll comment above some details around the 2019 first quarter. Adjusted diluted EPS was $2.89, an amplify of $0.55 or 24% above the 2018 first zone driven largely by operating earnings growth stemming from our 14% sales growth and our 90 base points of verge expansion. Adjusted diluted EPS excludes integration and transaction expenses related ought the L3 Harris merger and a $2 million business divestiture loss.

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

Operating verge rule was too good. full fraction operating verge increased ought 11.5%, 90 base points higher than the 2018 first quarter. Lower pension fare increased verge 50 base points. And favorable jam performance, which includes productivity and fare reductions, accounted because most of the other 40 base points of verge expansion.

As a reminder, most of our productivity improvements and fare reduction actions show at favorable jam performance. each fraction had double-digit verge compared ought the 2018 first quarter. ISR verge 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 faith accrual freeze that we implemented effective January 1.

Other contributors ought verge expansion largely included sales growth, a lower G&A appraise and business divestitures at ISR and favorable jam rule and reduced G&A expenses at Communications and Electronics. The tax appraise increased ought 14.7% from 11.1% because the first zone of final year and that was largely because of lower stock-based compensation fare deductions. We also generated sure release money river of $146 million, compared ought a money outflow of $85 million because the 2018 first zone and that improvement was due largely ought improve working main rule and growth at earnings. also compared ought the 2018 first quarter, we reduced our working main days by 10 ought 82.

As Chris explained, we get placed more attention above improving working main and generating release money river earlier at the year, and we're seeing benefits from these actions. Now moving ought our 2019 guidance update. We raised our midpoint sales appraise by $150 million ought $10.9 billion, which is expected growth of around 6.5% above 2018. Most of the guidance amplify is at ISR Systems.

And I'll add that given our modern robust orders and well backlog, we ought exist capable ought motivate more upside ought this year's sales. at the segments, we expectation sales ought grow 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 verge expansion of 120 base points ought 12% is unchanged and firmly above track. remember that above our January 29 revenue call, we explained the three drivers of our 2019 verge expansion: L365 productivity fare savings, lower pension fare and lower losses at the Traveling ripple subway business.

Each of these will further around 40 base points of verge expansion. With reputation ought the Traveling ripple subway business improvements, we stand ought expectation those ought chiefly happen at the second half of 2019. Our combined sales growth and verge expansion this year will originate at fraction operating earnings growth of 18% above 2018. We held our fraction verge guidance midpoints at 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding verge 110 base points, 200 base points and 70 base points, respectively, compared ought 2018.

We lowered our tax appraise ought 19% from 20%, largely because of lower expected foreign earnings taxes. And because release money flow, we increased it ought $1.055 billion, which is around 13% higher than 2018 with a money conversion appraise of 113%. money at the purpose of March was $1.1 billion. And regarding main allocation, at February, we increased our quarterly money dividend by $0.05 ought $0.85 per share.

We still expectation no debt repayments. And because we previously explained, we suspended part 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 around 3%, operating verge at the tall 11% range, with verge expanding more than 100 base points above the 2018 second quarter, and release money river between $100 million and $200 million. Finally, ought entire my economical review, we had a too good commence ought the year with our first-quarter results.

The corporation is growing at a well pace, becoming more effective and advantageous and also expanding margin. because 2019, we expectation ought grow orders, sales, operating earnings and release money flow, and we're also firmly tracking ought our 12% operating verge objective. Thank you. And I'll now become it uphold ought Chris.

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

Thanks, Ralph. because you saw above April 4, both L3 and Harris received shareholder approvals because the merger, and Harris also recently announced the sale of their evening vision business, both significant steps ought consummating the deal. We stand ought vocation with full regulatory authorities ought acquire the inherent approvals. And because you heard above the Harris revenue summon this morning, everything is tracking ought project and there's no change 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 appraise 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 grow grateful of the technique and genius of the combined corporation and the latent because what we can do together. I've been working closely with Bill above the integration, and we will supply details above the board, organizational structure and management shut business close.

Given that this is prone L3's final conference summon because a divide public company, I expectation ought personally thank full of the men and women of L3 Technologies because the difficult vocation and dedication throughout the years because making L3 a large lay ought work. And a specific because of my executive leadership team because their leadership and rule during the past connect of years, specially with the rate of change. because this chapter at the company's history comes ought an end, a new and exciting chapter begins. I get ought admit the two CEOs foregoing me, honest Lanza and Mike Strianese, because their vision and difficult vocation ought win L3 ought this stage.

By combining what makes L3 such a specific corporation with the best of what Harris has ought offer, I get no doubt we can forge a corporation that is even more agile, innovative and customer-centric, a best-of-breed aerospace and defense technique corporation that delivers superior appraise because employees, because customers and because the shareholders.

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

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

So I also expectation ought thank everyone above the summon today because their past and continued amuse at L3 and immediately ought exist L3 Harris, specially the analysts above the summon also because the analysts who previously covered L3.

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

Outstanding. full right. Kerry, why don't we blank the lines because questions.

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and corporation -- Analyst

Yes. It's Gautam truly above because Cai. Congratulations above a large river obviously at L3. I expectation ought fair request above the release money river improvement at the zone and some of the working main initiatives more broadly, if you could fair illustrate class of how much low-hanging fruit you perceive there ought be? And then fair because a follow-up, when you fair confess the LTM release money river of both Harris and L3, we're at fair below $2.4 billion.

I'm fair crazy how you view, Chris, the longer vocabulary $3 billion release money aim given we've already chopped a destiny of lumber here. Thanks.

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

Gautam, thank you too much because the question and the compliment. We're fairly excited around the first quarter, besides a want method ought further because 2019 obviously. I ponder the concentrate above working main and money generation was something that we lay together at late December. We even changed the incentive comp project ought highlight the importance of generating release cash.

And Bill and I report a destiny around the $500 million of synergies and the $3 billion of money river at year three. And I used to say we get more faith at achieving those numbers today than we did when we first announced this business above October 14. I'll lease Ralph report around some of the improvements we made here at the first quarter.

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

Sure. so because I commented, we had a dramatic reduction at our working main days quarter-over-quarter. And if you can recall, the first zone of 2018 was our high-water token at condition of working main and money custom and that's why there's a dramatic reduction compared ought this year's first quarter. besides certainly what we're doing is placing more attention above indispensable blocking and tackling, trying ought conclude our receivables sooner, continuing ought grow the corporation and grow inventory at a slower rate and taking actions ought vary our unbilled receivables into billed receivables sooner.

So it's a concerted trouble across full those fronts. because the entire year, we're expecting working main days reduction because well, and we ponder that's going ought exist at least two ought three days year above year. so we ought weep on more improvement the remains of this year because well. And obviously, we're going ought attempt ought do better.

Gautam Khanna -- Cowen and corporation -- Analyst

Appreciate it.

Operator

The next question will carry from Carter Copeland of Melius Research.

Carter Copeland -- Melius investigation -- Analyst

Hey, good morning, Chris. I wondered if you could comment above the book ought bill. I intend obviously too robust at the zone even in spite of the robust 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 tow anything deliver or is the pipeline a small piece improve than you were originally thinking?

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

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

We're talking perhaps second zone ought first quarter, which is why we came at a small higher no virgin above the orders, besides the sales. besides I'm equally excited around what we still get looking ahead. There are clearly F-16 usage opportunities. We won a U.S.

and an international customer. And we perhaps get three ought four additional bids prominent that could exist worthy $100 million each. so there could exist $300 million ought $500 million of more orders of F-16 because an example. C-130 AMP, hopefully we'll hear above that.

As I mentioned, the team and I get been spending time at the center East. I ponder we get some interesting strategies and partnerships there that could lead ought significant growth. And the classified soil is truly picking up. That's an district we've been focused above and get seen some growth, and given some of the next generation capabilities we have, I expectation more wins there.

So because the entire year, I used to expectation book ought bill ought exist at least 1.1 at each and each segment. And perhaps $12 billion of orders overall is what our lengthen aim is. besides that's what we're working toward.

Carter Copeland -- Melius investigation -- Analyst

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

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

Yes. I mean, I ponder that's fair. Bill and I still get ought vocation out the details. It depends when we're going ought shut above the timing and such.

But yes, it used to ex