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

The combined corporation will exist well at the street toward becoming a corporation with the inherent scale and property to invest at and ship the most mission-critical solutions to our global aerospace and defense customers. The happen to construct a new A&D corporation is an exciting and engaging challenge, one that Bill and I and the complete leadership team are ready to acknowledge 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 energy final October, our L3 and Harris teams dine been deep at integration planning.

While merger integration activities are occurring throughout the company, our piece teams dine no altered the velocity at the slightest, and we digest to hammer out contribute at streamlining and consolidating operations. because example, at our Communications and Networked Systems segment, we consolidated from five sectors to three. And within the integrated maritime systems sector, we are going from 14 divisions to seven. at our electrical Systems segment, we combined our Security & Detection occupation into commercial aviation and are evaluating steps to rationalize farther our instrument footprint.

Not sole will the new organizational structure shift overhead and redundant cost, calm during too improve align our capabilities with visitor needs, sharpen concentrate at technique investments and heighten occupation development efforts to improve serve our customers. Improving occupation deed along improve news collection and analytics is a key divide of managing a more integrated company. final year, we rolled out a progression of standard econmic and operating metrics throughout the corporation because divide of L365. Closer tracking of chief efficiency metrics too because changes to our incentive compensation design to emphasize money run dine been helping to motivate working chief improvements.

Even with sales up 14%, our net working chief sole increased 4%, headmaster to a reduction at working chief days compared to the foregoing year. Operating metrics that follow manufacturing characteristic and vendor deed is supporting our equip fasten and program management teams to recognize and address problems earlier, enabling the management team to clearly scream on the interdependencies at their operations. I digest to create visitor campaign a priority because the company, because myself and the complete leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military to debate L3's sole and disruptive capabilities and to highlight our technique solutions. My team and I went out again to satisfy customers at the center East. because you are aware, international occupation development relies upon house long-term relationships and listening to our customers to know their challenges. We digest to create more and more inroads, seeing an improved tenor to our meetings and dine received definite reception to our merger with Harris from our international customers.

Bottom row is we are seeing a large appeal worldwide because an innovative, agile corporation who wants to comrade with their customers. few offer awards highlight our ability at delivering integrated mission solutions. at the recently announced $1 billion Peregrine agreement because the Royal Australian stand Force, L3 will ship four next-gen EW airplane at a biz aeroplane platform. This includes a foundation communications infrastructure that will integrate with the Commonwealth's mutual war fighting networks, providing a keen link among platforms, including the F-35, the Growler and maritime assets.

Our preference to contend because the create of FARA because the U.S. troops is another parade of our ability to employ customers with disruptive technique and to comrade at an important platform, integrating different communications and mission systems. Many of our capabilities align with the Army's sumit priorities, and we digest to assign property to satisfy these needs. Our occupation development activities are now more ambitious and focused and too improve integrated with order and proposal, engineering and R&D functions.

I scream on many more instances of collaboration along divisions because we assassinate upon our strategy. Leadership throughout the corporation is buying into the concept that we can become more and improve serve our customers if we occupation together. Next, I desire to influence at the contribute we are making at the genius front. Attracting, developing and retaining sumit engineering and managerial genius is the lifeblood of the company.

We began leveraging our HR organization to age strategies to depart more effective at planning our genius needs, at recruiting and retention and at identifying and habit our emerging leaders to acknowledge at larger roles at the company. We made important contribute at the past year engaging our workforce. Overall, the investments and changes we are making to improve the occupation are beginning to generate tangible benefits to growth and margin. Our employees are increasingly embracing the change and the fabric of integration, collaboration and innovation is becoming woven deeper into the manner of our thinking.

Now let's grow to a journal of our piece performance. Our noise quarterly deed was led by the ISR Systems piece which grew funded orders 58% and sales 23%. Book to bill was 1.38. Operating wage increased 40%, generating a border of 10.4%, up 120 foundation points from the foregoing period.

Growth was most impressive at our airplane procurement and ISR missionization occupation because few key programs accelerated, including the U.S. stand 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 digest to desire ISR Systems to exist our fastest-growing occupation with improved margin. Communications and Networked Systems returned to growth with funded orders up 26% and sales up 11%. Book to bill was a noise 1.19. Operating wage rose 31% and margins improved 160 foundation points to 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 combine and price reduction. Lastly, electrical Systems sales grew 2% and operating wage rose 3%. ES' segment-leading border improved 20 foundation points to 14.7%.

The zone was impacted by a sales refuse at the Defense habit Solutions occupation due to final year's loss of the C-17 habit concord to the OEM. However, key highlights at electrical Systems contain double-digit growth at precision weapons which grew sales 18% at the quarter. due to the headwinds from the C-17 loss, we desire modest sales growth at 2019, calm during we digest to desire improved border from ongoing price takeout and favorable concord performance. Given our noise deed at the first zone and improving direction momentum, we are increasing our 2019 guidance.

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

Ralph D'Ambrosio -- Senior Vice headmaster and chief econmic Officer

Thanks, Chris. I'll journal some details about the first zone and then our 2019 guidance update. Reviewing the first quarter, because Chris explained, we had a same noise commence to the year and we exceeded our plan. Orders increased 28% and sales grew 14%, total of which was organic.

Segment operating wage and adjusted diluted EPS each grew 24%, and piece border increased 90 foundation points to 11.5%. We too generated definite release money run which is meaningful though we always dine negative money run at our first quarters.Next, I'll comment at some details about the 2019 first quarter. Adjusted diluted EPS was $2.89, an multiply of $0.55 or 24% at the 2018 first zone driven greatly by operating wage growth stemming from our 14% sales growth and our 90 foundation points of border expansion. Adjusted diluted EPS excludes integration and transaction expenses related to the L3 Harris merger and a $2 million occupation divestiture loss.

Sales increased 14% to $2.7 billion driven by noise 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 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 habit concord loss which lowered growth by 440 foundation points at that segment.

Operating border deed was same good. full piece operating border increased to 11.5%, 90 foundation points higher than the 2018 first quarter. Lower pension price increased border 50 foundation points. And favorable concord performance, which includes productivity and price reductions, accounted because most of the other 40 foundation points of border expansion.

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

Other contributors to border expansion greatly included sales growth, a lower G&A appraise and occupation divestitures at ISR and favorable concord deed and reduced G&A expenses at Communications and Electronics. The tax appraise increased to 14.7% from 11.1% because the first zone of final year and that was greatly due to lower stock-based compensation price deductions. We too generated definite release money run of $146 million, compared to a money outflow of $85 million because the 2018 first zone and that improvement was due greatly to improve working chief deed and growth at earnings. too compared to the 2018 first quarter, we reduced our working chief days by 10 to 82.

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

And I'll add that given our offer noise orders and well backlog, we to exist able to motivate more upside to this year's sales. at the segments, we desire sales to grow 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 border expansion of 120 foundation points to 12% is unchanged and firmly at track. recall that at our January 29 wage call, we explained the three drivers of our 2019 border expansion: L365 productivity price savings, lower pension price and lower losses at the Traveling ripple underground business.

Each of these will further about 40 foundation points of border expansion. With respect to the Traveling ripple underground occupation improvements, we digest to desire those to mainly happen at the second half of 2019. Our combined sales growth and border expansion this year will arise at piece operating wage growth of 18% at 2018. We held our piece border guidance midpoints at 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding border 110 foundation points, 200 foundation points and 70 foundation points, respectively, compared to 2018.

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

We calm desire no debt repayments. And because we previously explained, we suspended portion purchases until the L3 Harris merger is completed. Looking at the second quarter, we desire sales among $2.6 billion and $2.7 billion with growth of about 3%, operating border at the high 11% range, with border expanding more than 100 foundation points at the 2018 second quarter, and release money run among $100 million and $200 million. Finally, to finish my econmic review, we had a same good commence to the year with our first-quarter results.

The corporation is growing at a well pace, becoming more effective and advantageous and too expanding margin. because 2019, we desire to grow orders, sales, operating wage and release money flow, and we're too firmly tracking to our 12% operating border objective. Thank you. And I'll now grow it experience to Chris.

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

Thanks, Ralph. because you saw at April 4, both L3 and Harris received shareholder approvals because the merger, and Harris too recently announced the sale of their evening eyesight business, both important steps to consummating the deal. We digest to occupation with total regulatory authorities to amuse the inherent approvals. And because you heard at the Harris wage summon this morning, everything is tracking to design and there's no change to 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 estimate capture offsite at the ISR facility at Texas. because L3 and Harris teams become more exposure to each other's operations and people, the more we depart grateful of the technique and genius of the combined corporation and the latent because 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 terminate occupation close.

Given that this is responsible L3's final meeting summon because a divide public company, I desire to personally thank total of the men and women of L3 Technologies because the difficult occupation and dedication throughout the years because making L3 a large lay to work. And a particular because of my executive leadership team because their leadership and deed during the past connect of years, specially with the velocity of change. because this chapter at the company's history comes to an end, a new and exciting chapter begins. I dine to confess the two CEOs foregoing me, unfold Lanza and Mike Strianese, because their eyesight and difficult occupation to amuse L3 to this stage.

By combining what makes L3 such a particular corporation with the best of what Harris has to offer, I dine no doubt we can create a corporation that is level more agile, innovative and customer-centric, a best-of-breed aerospace and defense technique corporation that delivers superior estimate because employees, because customers and because the shareholders.

Ralph D'Ambrosio -- Senior Vice headmaster and chief econmic Officer

Yes, Chris. I was thinking about this yesterday. And I counted that it's been 52 consecutive quarterly wage calls because me. accordingly it's been a gigantic experience and I'm same grateful because it.

So I too desire to thank everyone at the summon today because their past and continued amuse at L3 and immediately to exist L3 Harris, specially the analysts at the summon too because the analysts who previously covered L3.

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

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

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and corporation -- Analyst

Yes. It's Gautam truly at because Cai. Congratulations at a large flow obviously at L3. I desire to impartial appeal at the release money run improvement at the zone and some of the working chief initiatives more broadly, if you could impartial illustrate class of how much low-hanging fruit you perceive there to be? And then impartial because a follow-up, when you impartial acknowledge the LTM release money run of both Harris and L3, we're at impartial beneath $2.4 billion.

I'm impartial 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, chief Executive Officer, and President

Gautam, thank you same much because the mystery and the compliment. We're pretty excited about the first quarter, calm during a expectation manner to contribute because 2019 obviously. I consider the concentrate at working chief and money generation was something that we post together at late December. We level changed the incentive comp design to highlight the importance of generating release cash.

And Bill and I address a destiny about the $500 million of synergies and the $3 billion of money run at year three. And I used to speak we dine more belief at achieving those numbers today than we did when we first announced this occupation at October 14. I'll allow Ralph address about some of the improvements we made here at the first quarter.

Ralph D'Ambrosio -- Senior Vice headmaster and chief econmic Officer

Sure. accordingly because I commented, we had a dramatic reduction at our working chief days quarter-over-quarter. And if you can recall, the first zone of 2018 was our high-water sign at condition of working chief and money custom and that's why there's a dramatic reduction compared to this year's first quarter. calm during certainly what we're doing is placing more attention at indispensable blocking and tackling, trying to accumulate our receivables sooner, continuing to grow the corporation and grow inventory at a slower velocity and taking actions to alter our unbilled receivables into billed receivables sooner.

So it's a concerted effort along total those fronts. because the complete year, we're expecting working chief days reduction because well, and we consider that's going to exist at least two to three days year at year. accordingly we to scream on more improvement the rest of this year because well. And obviously, we're going to trial to conduct better.

Gautam Khanna -- Cowen and corporation -- Analyst

Appreciate it.

Operator

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

Carter Copeland -- Melius investigation -- Analyst

Hey, good morning, Chris. I wondered if you could comment at the book to bill. I intend obviously same noise at the zone level despite the noise 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 tug anything ship or is the pipeline a small slice improve than you were originally thinking?

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

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

We're talking possibly second zone to first quarter, which is why we came at a small higher no sole at the orders, calm during the sales. calm during I'm equally excited about what we calm dine looking ahead. There are clearly F-16 habit opportunities. We won a U.S.

and an international customer. And we possibly dine three to four additional bids noted that could exist worth $100 million each. accordingly there could exist $300 million to $500 million of more orders of F-16 because an example. C-130 AMP, hopefully we'll hear at that.

As I mentioned, the team and I dine been spending time at the center East. I consider we dine some interesting strategies and partnerships there that could discharge to important growth. And the classified world is truly picking up. That's an region we've been focused at and dine seen some growth, and given some of the next generation capabilities we have, I desire more wins there.

So because the total year, I used to desire book to bill to exist at least 1.1 at each and each segment. And possibly $12 billion of orders overall is what our extend aim is. calm during that's what we're working toward.

Carter Copeland -- Melius investigation -- Analyst

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

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

Yes. I mean, I consider that's fair. Bill and I calm dine to occupation out the details. It depends when we're going to terminate at the timing and such.

But yes, it used to exist a math at that normal time frame. We'll conduct what makes sensation because total the nation involved, interior and external. accordingly I'll exist seeing Bill next week and we'll digest to occupation at a plan. calm during I consider both he said and I said we're ahead of the interior design that we've laid out at a destiny of the different milestones we're going for.