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

The combined corporation will exist strong above the street toward becoming a corporation with the inherent scale and estate 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 corporation is an exciting and engaging challenge, one that Bill and I and the total leadership team are ready ought acknowledge 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 persist October, our L3 and Harris teams eat been deep at integration planning.

While merger integration activities are occurring throughout the company, our fraction teams eat no altered the rate at the slightest, and we thrive ought hammer out proceed 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 commerce into commercial aviation and are evaluating steps ought rationalize farther our equipment footprint.

Not sole will the new organizational structure touch overhead and redundant cost, besides also better align our capabilities with guest needs, sharpen concentrate above technique investments and intensify commerce development efforts ought better serve our customers. Improving commerce deed along better information collection and analytics is a key divide of managing a more integrated company. persist year, we rolled out a sequence of measure economical and operating metrics throughout the corporation though divide of L365. Closer tracking of main efficiency metrics also though changes ought our incentive compensation design ought emphasize money flow eat been helping ought drive working main improvements.

Even with sales up 14%, our net working main sole increased 4%, main ought a reduction at working main days compared ought the prior year. Operating metrics that chase manufacturing characteristic and vendor deed is supporting our furnish tie and program management teams ought recognize and greet problems earlier, enabling the management team ought clearly visit the interdependencies at their operations. I thrive ought invent guest combat a priority though the company, though myself and the total 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 middle East. though you are aware, international commerce development relies upon protection long-term relationships and listening ought our customers ought comprehend their challenges. We thrive ought invent more and more inroads, seeing an improved tenor ought our meetings and eat received certain reception ought our merger with Harris from our international customers.

Bottom queue is we are seeing a great lack worldwide though an innovative, agile corporation who wants ought colleague with their customers. little modern awards highlight our capacity at delivering integrated mission solutions. at the recently announced $1 billion Peregrine agreement though the Royal Australian attitude Force, L3 will send four next-gen EW airplane above a biz airplane platform. This includes a base communications infrastructure that will integrate with the Commonwealth's common battle fighting networks, providing a critical mingle among platforms, including the F-35, the Growler and maritime assets.

Our preference ought contest though the compose of FARA though the U.S. troops is another parade of our competence ought employ customers with disruptive technique and ought colleague above an important platform, integrating different communications and mission systems. Many of our capabilities align with the Army's sumit priorities, and we thrive ought assign estate ought satisfy these needs. Our commerce development activities are now more ambitious and focused and also better integrated with order and proposal, engineering and R&D functions.

I visit many more instances of collaboration across divisions though we assassinate upon our strategy. Leadership throughout the corporation is buying into the conception that we can obtain more and better serve our customers if we task together. Next, I wish ought affect above the proceed we are making above 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 ripen strategies ought grow more effective at planning our ability needs, at recruiting and retention and at identifying and habit our emerging leaders ought acknowledge above larger roles at the company. We made important proceed at the past year engaging our workforce. Overall, the investments and changes we are making ought better the commerce are beginning ought generate tangible benefits ought growth and margin. Our employees are increasingly embracing the alter and the fabric of integration, collaboration and innovation is becoming woven deeper into the method of our thinking.

Now let's grow ought a publication of our fraction performance. Our strong quarterly deed was led by the ISR Systems fraction which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating salary increased 40%, generating a border of 10.4%, up 120 base points from the prior period.

Growth was most impressive at our airplane procurement and ISR missionization commerce though little key programs accelerated, including the U.S. attitude constrain 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 thrive ought wish ISR Systems ought exist our fastest-growing commerce with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a strong 1.19. Operating salary 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 border improvement was driven by program performance, sales mingle and price reduction. Lastly, electrical Systems sales grew 2% and operating salary rose 3%. ES' segment-leading border improved 20 base points ought 14.7%.

The belt was impacted by a sales decline at the Defense habit Solutions commerce due ought persist year's loss of the C-17 habit conference ought the OEM. However, key highlights at electrical Systems include double-digit growth at precision weapons which grew sales 18% at the quarter. due ought the headwinds from the C-17 loss, we wish modest sales growth at 2019, besides we thrive ought wish improved border from ongoing price takeout and favorable conference performance. Given our strong deed at the first belt and improving bid momentum, we are increasing our 2019 guidance.

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

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

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

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

Sales increased 14% ought $2.7 billion driven by strong 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 though ISR and Communications included some favorable quarterly timing items which will lower their second belt growth rates. at Electronics, sales were negatively impacted by persist summer's C-17 habit conference loss which lowered growth by 440 base points at that segment.

Operating border deed was same good. total fraction operating border increased ought 11.5%, 90 base points higher than the 2018 first quarter. Lower pension charge increased border 50 base points. And favorable conference performance, which includes productivity and price reductions, accounted though most of the other 40 base points of border expansion.

As a reminder, most of our productivity improvements and price reduction actions show at favorable conference performance. each fraction had double-digit border compared ought the 2018 first quarter. ISR border 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 charge stemming from the service confidence accrual freeze that we implemented effective January 1.

Other contributors ought border expansion greatly included sales growth, a lower G&A worth and commerce divestitures at ISR and favorable conference deed and reduced G&A expenses at Communications and Electronics. The tax worth increased ought 14.7% from 11.1% though the first belt of persist year and that was greatly due ought lower stock-based compensation charge deductions. We also generated certain free money flow of $146 million, compared ought a money outflow of $85 million though the 2018 first belt and that improvement was due greatly ought better working main deed 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 eat placed more attention above improving working main and generating free money flow earlier at the year, and we're seeing benefits from these actions. Now moving ought our 2019 guidance update. We raised our midpoint sales worth by $150 million ought $10.9 billion, which is expected growth of nearly 6.5% at 2018. Most of the guidance expand is at ISR Systems.

And I'll add that given our modern strong orders and sound backlog, we ought exist capable ought drive more upside ought this year's sales. at the segments, we wish sales ought become 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 border expansion of 120 base points ought 12% is unchanged and firmly above track. memorize that above our January 29 salary call, we explained the three drivers of our 2019 border expansion: L365 productivity price savings, lower pension charge and lower losses at the Traveling wave underground business.

Each of these will advance nearly 40 base points of border expansion. With fame ought the Traveling wave underground commerce improvements, we thrive ought wish those ought mainly chance at the second half of 2019. Our combined sales growth and border expansion this year will arise at fraction operating salary growth of 18% at 2018. We held our fraction border guidance midpoints at 11.2% though ISR, 11.1% though Communications and 14.4% though Electronics with the segments expanding border 110 base points, 200 base points and 70 base points, respectively, compared ought 2018.

We lowered our tax worth ought 19% from 20%, greatly due ought lower expected foreign salary taxes. And though free money flow, we increased it ought $1.055 billion, which is nearly 13% higher than 2018 with a money conversion worth of 113%. money at the target 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 quiet wish no debt repayments. And though we previously explained, we suspended fraction purchases until the L3 Harris merger is completed. Looking at the second quarter, we wish sales among $2.6 billion and $2.7 billion with growth of nearly 3%, operating border at the tall 11% range, with border expanding more than 100 base points at the 2018 second quarter, and free money flow among $100 million and $200 million. Finally, ought intimate my economical review, we had a same good initiate ought the year with our first-quarter results.

The corporation is growing at a sound pace, becoming more effective and advantageous and also expanding margin. though 2019, we wish ought become orders, sales, operating salary and free money flow, and we're also firmly tracking ought our 12% operating border objective. Thank you. And I'll now grow it uphold ought Chris.

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

Thanks, Ralph. though 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 important steps ought consummating the deal. We thrive ought task with total regulatory authorities ought acquire the inherent approvals. And though you heard above the Harris salary scream this morning, everything is tracking ought design and there's no alter 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 estimate arrest offsite at the ISR facility at Texas. though L3 and Harris teams obtain more exposure ought each other's operations and people, the more we grow grateful of the technique and ability of the combined corporation and the latent though what we can conduct together. I've been working closely with Bill above the integration, and we will furnish details above the board, organizational structure and management shut commerce close.

Given that this is apt L3's persist council scream though a divide public company, I wish ought personally thank total of the men and women of L3 Technologies though the difficult task and dedication throughout the years though making L3 a great put ought work. And a specific owing ought my executive leadership team though their leadership and deed during the past attach 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, honest Lanza and Mike Strianese, though their vision and difficult task ought favour L3 ought this stage.

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

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

Yes, Chris. I was thinking nearly this yesterday. And I counted that it's been 52 consecutive quarterly salary calls though me. so it's been a colossal sustain and I'm same grateful though it.

So I also wish ought thank everyone above the scream today though their past and continued employ at L3 and shortly ought exist L3 Harris, specially the analysts above the scream also though the analysts who previously covered L3.

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

Outstanding. total right. Kerry, why don't we empty the lines though questions.

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and corporation -- Analyst

Yes. It's Gautam truly above though Cai. Congratulations above a great flow obviously at L3. I wish ought fair lack above the free money flow improvement at the belt and some of the working main initiatives more broadly, if you could fair interpret category of how much low-hanging fruit you perceive there ought be? And then fair though a follow-up, when you fair acknowledge the LTM free money flow of both Harris and L3, we're at fair beneath $2.4 billion.

I'm fair funny how you view, Chris, the longer language $3 billion free money purpose given we've already chopped a destiny of timber here. Thanks.

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

Gautam, thank you same much though the puzzle and the compliment. We're fairly excited nearly the first quarter, besides a desire method ought proceed though 2019 obviously. I study the concentrate above working main and money generation was something that we put together at late December. We even changed the incentive comp design ought highlight the importance of generating free cash.

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

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

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

So it's a concerted effort across total those fronts. though the total year, we're expecting working main days reduction though well, and we study that's going ought exist at least two ought three days year at year. so we ought visit more improvement the rest of this year though well. And obviously, we're going ought attempt ought conduct better.

Gautam Khanna -- Cowen and corporation -- Analyst

Appreciate it.

Operator

The next puzzle will festival 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 same strong at the belt even despite the strong 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 draw anything send or is the pipeline a small slice better than you were originally thinking?

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

That's a great question. I'll state you, we've truly 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 attach of ISR accelerations.

We're talking possibly second belt ought first quarter, which is why we came at a small higher no sole above the orders, besides the sales. besides I'm equally excited nearly what we quiet eat looking ahead. There are clearly F-16 habit opportunities. We won a U.S.

and an international customer. And we possibly eat three ought four additional bids noted that could exist worth $100 million each. so there could exist $300 million ought $500 million of more orders of F-16 though an example. C-130 AMP, hopefully we'll hear above that.

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

So though the total year, I used to wish book ought bill ought exist at least 1.1 at each and each segment. And possibly $12 billion of orders overall is what our lengthen target 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 suppose that's fair an 8-K disclosure same near, meaning fair ago your intended close?

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

Yes. I mean, I study that's fair. Bill and I quiet eat ought task 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 general time frame. We'll conduct what makes sensation though total the nation involved, inner and external. so I'll exist seeing Bill next week and we'll thrive ought task above a plan. besides I study both he said and I said we're ahead of the inner design that we've laid out above a destiny of the different milestones we're going for.