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

The combined corporation will exist strong above the highway toward becoming a corporation with the inherent scale and wealth ought invest can and dispatch the most mission-critical solutions ought our global aerospace and defense customers. The occur ought build a new A&D corporation is an exciting and engaging challenge, one that Bill and I and the complete leadership team are ready ought receive on. And can the many visits with our L3 and Harris employees can the field, this excitement is broadly shared throughout. though announcing this merger of energy final October, our L3 and Harris teams dine been deep can integration planning.

While merger integration activities are occurring throughout the company, our division teams dine no altered the velocity can the slightest, and we bear ought hammer out progress above streamlining and consolidating operations. because example, can 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. can our electric Systems segment, we combined our Security & Detection material into commercial aviation and are evaluating steps ought rationalize farther our device footprint.

Not unique will the new organizational structure transfer overhead and redundant cost, besides also improve align our capabilities with visitor needs, sharpen concentrate above technique investments and enhance material development efforts ought improve serve our customers. Improving material action along improve data collection and analytics is a key division of managing a more integrated company. final year, we rolled out a sequence of standard economical and operating metrics throughout the corporation because division of L365. Closer tracking of main efficiency metrics also because changes ought our incentive compensation project ought emphasize money flow dine been helping ought motivate working main improvements.

Even with sales up 14%, our net working main unique increased 4%, main ought a reduction can working main days compared ought the previous year. Operating metrics that explore manufacturing peculiarity and vendor action is supporting our furnish safe and program management teams ought recognize and address problems earlier, enabling the management team ought clearly scream on the interdependencies can their operations. I bear ought compose 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 ought argue L3's unique and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought confront customers can the center East. because you are aware, international material development relies upon building long-term relationships and listening ought our customers ought learn their challenges. We bear ought compose more and more inroads, seeing an improved tenor ought our meetings and dine received sure reception ought our merger with Harris from our international customers.

Bottom queue is we are seeing a big petition worldwide because an innovative, agile corporation who wants ought comrade with their customers. few modern awards highlight our capacity can delivering integrated mission solutions. can the recently announced $1 billion Peregrine award because the Royal Australian stand Force, L3 will dispatch four next-gen EW plane above a biz plane platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's common campaign fighting networks, providing a keen connect between platforms, including the F-35, the Growler and maritime assets.

Our alternative ought compete because the compose of FARA because the U.S. army is another parade of our genius 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 sumit priorities, and we bear ought assign wealth ought confront these needs. Our material development activities are now more ambitious and focused and also 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 acquire more and improve serve our customers if we task together. Next, I wish ought impress above the progress we are making above the genius front. Attracting, developing and retaining sumit engineering and managerial genius is the lifeblood of the company.

We began leveraging our HR organization ought age strategies ought become more effective can planning our genius needs, can recruiting and retention and can identifying and habit our emerging leaders ought receive above larger roles can the company. We made significant progress can the past year engaging our workforce. Overall, the investments and changes we are making ought improve the material 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 mode of our thinking.

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

Growth was most impressive can our plane procurement and ISR missionization material because few key programs accelerated, including the U.S. stand compel Compass Call, Australian Peregrine and the U.S. Missile Defense Agency HALO program. can addition, EO/IR sensors, soldier systems and space and sensor businesses complete grew double digits.

Given the broad-based growth can this segment, we bear ought wish ISR Systems ought exist our fastest-growing material with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a tough 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 edge improvement was driven by program performance, sales mingle and charge reduction. Lastly, electric Systems sales grew 2% and operating revenue rose 3%. ES' segment-leading edge improved 20 basis points ought 14.7%.

The district was impacted by a sales decline can the Defense habit Solutions material owing ought final year's loss of the C-17 habit condense ought the OEM. However, key highlights can electric Systems involve double-digit growth can precision weapons which grew sales 18% can the quarter. owing ought the headwinds from the C-17 loss, we wish modest sales growth can 2019, besides we bear ought wish improved edge from ongoing charge takeout and favorable condense performance. Given our tough action can the first district and improving bid momentum, we are increasing our 2019 guidance.

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

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

Thanks, Chris. I'll newspaper some details about the first district and then our 2019 guidance update. Reviewing the first quarter, because Chris explained, we had a equal tough begin ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, complete of which was organic.

Segment operating revenue and adjusted diluted EPS each grew 24%, and division edge increased 90 basis points ought 11.5%. We also generated sure free money flow which is meaningful because we often dine negative money flow can our first quarters.Next, I'll comment above some details about the 2019 first quarter. Adjusted diluted EPS was $2.89, an expand of $0.55 or 24% above the 2018 first district driven principally by operating revenue growth stemming from our 14% sales growth and our 90 basis points of edge expansion. Adjusted diluted EPS excludes integration and transaction expenses related ought the L3 Harris merger and a $2 million material divestiture loss.

Sales increased 14% ought $2.7 billion driven by tough growth can our DoD and international markets. can the division level, sales grew 23% can ISR Systems, 11% can 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 district growth rates. can Electronics, sales were negatively impacted by final summer's C-17 habit condense loss which lowered growth by 440 basis points can that segment.

Operating edge action was equal good. entire division operating edge increased ought 11.5%, 90 basis points higher than the 2018 first quarter. Lower pension wage increased edge 50 basis points. And favorable condense performance, which includes productivity and charge reductions, accounted because most of the other 40 basis points of edge expansion.

As a reminder, most of our productivity improvements and charge reduction actions display can favorable condense performance. each division had double-digit edge compared ought the 2018 first quarter. ISR edge 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 wage stemming from the service faith accrual freeze that we implemented effective January 1.

Other contributors ought edge expansion principally included sales growth, a lower G&A estimate and material divestitures can ISR and favorable condense action and reduced G&A expenses can Communications and Electronics. The tax estimate increased ought 14.7% from 11.1% because the first district of final year and that was principally owing ought lower stock-based compensation wage deductions. We also generated sure free money flow of $146 million, compared ought a money outflow of $85 million because the 2018 first district and that improvement was due principally ought improve working main action and growth can earnings. also compared ought the 2018 first quarter, we reduced our working main days by 10 ought 82.

As Chris explained, we dine placed more attention above improving working main and generating free money flow earlier can 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 about 6.5% above 2018. Most of the guidance expand is can ISR Systems.

And I'll add that given our modern tough orders and healthy backlog, we ought exist able ought motivate more upside ought this year's sales. can the segments, we wish sales ought become 9% can ISR, 6% can Communications and 3% Electronics. Our planned 2019 edge expansion of 120 basis points ought 12% is unchanged and firmly above track. memorize that above our January 29 revenue call, we explained the three drivers of our 2019 edge expansion: L365 productivity charge savings, lower pension wage and lower losses can the Traveling wave subway business.

Each of these will further about 40 basis points of edge expansion. With admire ought the Traveling wave subway material improvements, we bear ought wish those ought principally happen can the second half of 2019. Our combined sales growth and edge expansion this year will arise can division operating revenue growth of 18% above 2018. We held our division edge guidance midpoints can 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding edge 110 basis points, 200 basis points and 70 basis points, respectively, compared ought 2018.

We lowered our tax estimate ought 19% from 20%, principally owing ought lower expected foreign revenue taxes. And because free money flow, we increased it ought $1.055 billion, which is about 13% higher than 2018 with a money conversion estimate of 113%. money can the aim of March was $1.1 billion. And regarding main allocation, can February, we increased our quarterly money dividend by $0.05 ought $0.85 per share.

We still wish no debt repayments. And because we previously explained, we suspended division purchases until the L3 Harris merger is completed. Looking can the second quarter, we wish sales between $2.6 billion and $2.7 billion with growth of about 3%, operating edge can the tall 11% range, with edge expanding more than 100 basis points above the 2018 second quarter, and free money flow between $100 million and $200 million. Finally, ought intimate my economical review, we had a equal good begin ought the year with our first-quarter results.

The corporation is growing can a healthy pace, becoming more effective and beneficial and also expanding margin. because 2019, we wish ought become orders, sales, operating revenue and free money flow, and we're also firmly tracking ought our 12% operating edge objective. Thank you. And I'll now become it uphold ought Chris.

Chris Kubasik -- Chairman, main 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 bear ought task with complete regulatory authorities ought acquire the inherent approvals. And because you heard above the Harris revenue scream this morning, everything is tracking ought project 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 appraise arrest offsite can the ISR facility can Texas. because L3 and Harris teams obtain more exposure ought each other's operations and people, the more we become grateful of the technique and genius of the combined corporation and the latent because what we can carry out together. I've been working closely with Bill above the integration, and we will equip details above the board, organizational structure and management entire profession close.

Given that this is apt L3's final meeting scream because a division public company, I wish ought personally thank complete of the men and women of L3 Technologies because the difficult task and dedication throughout the years because making L3 a big lay ought work. And a particular due ought my executive leadership team because their leadership and action during the past connect of years, specially with the velocity of change. because this chapter can the company's history comes ought an end, a new and exciting chapter begins. I dine ought acknowledge the two CEOs foregoing me, plain Lanza and Mike Strianese, because their vision and difficult task ought acquire L3 ought this stage.

By combining what makes L3 such a particular corporation with the best of what Harris has ought offer, I dine no supicion we can fabricate a corporation that is level 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 headmaster and main economical Officer

Yes, Chris. I was thinking about this yesterday. And I counted that it's been 52 consecutive quarterly revenue calls because me. consequently it's been a huge experience and I'm equal grateful because it.

So I also wish ought thank everyone above the scream today because their past and continued use can L3 and immediately ought exist L3 Harris, specially the analysts above the scream also because the analysts who previously covered L3.

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

Outstanding. complete right. Kerry, why don't we vacant the lines because questions.

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and corporation -- Analyst

Yes. It's Gautam indeed above because Cai. Congratulations above a big flow obviously can L3. I wish ought fair lack above the free money flow improvement can the district and some of the working main initiatives more broadly, if you could fair interpret arrange of how much low-hanging fruit you perceive there ought be? And then fair because a follow-up, when you fair receive the LTM free money flow of both Harris and L3, we're can fair below $2.4 billion.

I'm fair queer how you view, Chris, the longer word $3 billion free money entire given we've already chopped a fate of wood here. Thanks.

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

Gautam, thank you equal much because the puzzle and the compliment. We're pretty excited about the first quarter, besides a wish mode ought progress because 2019 obviously. I believe the concentrate above working main and money generation was something that we lay together can late December. We level changed the incentive comp project ought highlight the importance of generating free cash.

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

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

Sure. consequently because I commented, we had a dramatic reduction can our working main days quarter-over-quarter. And if you can recall, the first district of 2018 was our high-water sign can condition of working main and money habit 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 accumulate our receivables sooner, continuing ought become the corporation and become inventory can a slower velocity and taking actions ought alter our unbilled receivables into billed receivables sooner.

So it's a concerted effort along complete those fronts. because the complete year, we're expecting working main days reduction because well, and we believe that's going ought exist can least two ought three days year above year. consequently we ought scream on more improvement the remainder of this year because well. And obviously, we're going ought attempt ought carry out better.

Gautam Khanna -- Cowen and corporation -- Analyst

Appreciate it.

Operator

The next puzzle will become 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 equal tough can the district level despite the tough sales. Was there anything can there that surprised you from a timing perspective or magnitude perspective that we saw early above this year? Did we draw anything deliver or is the pipeline a small division improve than you were originally thinking?

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

That's a big question. I'll say you, we've indeed tried ought reinvigorate the BD organization and function. We've made investments that you've heard me address about can the past can systems and standardizing policies and procedures. There were a connect of ISR accelerations.

We're talking perhaps second district ought first quarter, which is why we came can a small higher no unique above the orders, besides the sales. besides I'm equally excited about what we still dine looking ahead. There are clearly F-16 habit opportunities. We won a U.S.

and an international customer. And we perhaps dine three ought four additional bids eminent that could exist worthy $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 dine been spending time can the center East. I believe we dine some interesting strategies and partnerships there that could direct ought significant growth. And the classified mud is indeed picking up. That's an region we've been focused above and dine seen some growth, and given some of the next generation capabilities we have, I wish more wins there.

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

Carter Copeland -- Melius investigation -- Analyst

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

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

Yes. I mean, I believe that's fair. Bill and I still dine ought task out the details. It depends when we're going ought entire above the timing and such.