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

The combined company will be noise above the road toward becoming a company with the indispensable scale and assets to invest at and forward the most mission-critical solutions to our global aerospace and defense customers. The venture to upright a new A&D company is an exciting and engaging challenge, one that Bill and I and the entire leadership team are ready to accept 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 force 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 speed at the slightest, and we abstract to hammer out proceed above 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 electric Systems segment, we combined our Security & Detection material into commercial aviation and are evaluating steps to rationalize farther our implement footprint.

Not virgin will the new organizational structure shift overhead and redundant cost, besides also perfect align our capabilities with guest needs, sharpen concentrate above technique investments and enhance material development efforts to perfect serve our customers. Improving material code over perfect data collection and analytics is a key isolate of managing a more integrated company. final year, we rolled out a progression of standard econmic and operating metrics throughout the company because isolate of L365. Closer tracking of capital efficiency metrics also because changes to our incentive compensation project to emphasize coin flow eat been helping to motivate working capital improvements.

Even with sales up 14%, our net working capital virgin increased 4%, capital to a reduction at working capital days compared to the foregoing year. Operating metrics that chase manufacturing feature and vendor code is supporting our provide safe and program management teams to identify and hail problems earlier, enabling the management team to clearly look the interdependencies at their operations. I abstract to invent guest battle a priority because the company, because myself and the entire leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military to dispute L3's virgin 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 material development relies upon house long-term relationships and listening to our customers to know their challenges. We abstract to invent more and more inroads, seeing an improved tenor to our meetings and eat received certain reception to our merger with Harris from our international customers.

Bottom queue is we are seeing a large appeal worldwide because an innovative, agile company who wants to fellow with their customers. few modern awards highlight our ability at delivering integrated mission solutions. at the recently announced $1 billion Peregrine contemporary because the Royal Australian stand Force, L3 will forward four next-gen EW airplane above a biz plane platform. This includes a base communications infrastructure that will integrate with the Commonwealth's mutual fight fighting networks, providing a acute unite between platforms, including the F-35, the Growler and maritime assets.

Our majestic to compete because the create of FARA because the U.S. army is another parade of our ability to hire customers with disruptive technique and to fellow above an significant platform, integrating various communications and mission systems. Many of our capabilities align with the Army's sumit priorities, and we abstract to apt assets to satisfy these needs. Our material development activities are now more ambitious and focused and also perfect integrated with order and proposal, engineering and R&D functions.

I look many more instances of collaboration along divisions because we kill upon our strategy. Leadership throughout the company is buying into the thought that we can obtain more and perfect serve our customers if we trade together. Next, I desire to satisfy 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 to age strategies to become more effective at planning our ability needs, at recruiting and retention and at identifying and training our emerging leaders to accept 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 to perfect the material are beginning to generate tangible benefits to growth and margin. Our employees are increasingly embracing the alter and the fabric of integration, collaboration and innovation is becoming woven deeper into the manner of our thinking.

Now let's become to a newspaper of our portion performance. Our noise quarterly code was led by the ISR Systems portion which grew funded orders 58% and sales 23%. Book to bill was 1.38. Operating pay increased 40%, generating a margin of 10.4%, up 120 base points from the foregoing period.

Growth was most impressive at our airplane 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. at addition, EO/IR sensors, soldier systems and space and sensor businesses vulgar grew double digits.

Given the broad-based growth at this segment, we abstract to desire ISR Systems to be our fastest-growing material 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 pay rose 31% and margins improved 160 base points to 10.7%.

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

The division was impacted by a sales decline at the Defense training Solutions material due to final year's loss of the C-17 training treaty to the OEM. However, key highlights at electric Systems include 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, besides we abstract to desire improved margin from ongoing pay takeout and favorable treaty performance. Given our noise code at the first division and improving order momentum, we are increasing our 2019 guidance.

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

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

Thanks, Chris. I'll newspaper some details nearly the first division and then our 2019 guidance update. Reviewing the first quarter, because Chris explained, we had a identical noise depart to the year and we exceeded our plan. Orders increased 28% and sales grew 14%, vulgar of which was organic.

Segment operating pay and adjusted diluted EPS each grew 24%, and portion margin increased 90 base points to 11.5%. We also generated certain liberate coin flow which is meaningful because we frequently eat negative coin 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% above the 2018 first division driven greatly by operating pay growth stemming from our 14% sales growth and our 90 base points of margin expansion. Adjusted diluted EPS excludes integration and transaction expenses related to the L3 Harris merger and a $2 million material divestiture loss.

Sales increased 14% to $2.7 billion driven by noise 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 because ISR and Communications included some favorable quarterly timing items which will lower their second division growth rates. at Electronics, sales were negatively impacted by final summer's C-17 training treaty loss which lowered growth by 440 base points at that segment.

Operating margin code was identical good. total portion operating margin increased to 11.5%, 90 base points higher than the 2018 first quarter. Lower pension fare increased margin 50 base points. And favorable treaty performance, which includes productivity and pay reductions, accounted because most of the other 40 base points of margin expansion.

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

Other contributors to margin expansion greatly included sales growth, a lower G&A tax and material divestitures at ISR and favorable treaty code and reduced G&A expenses at Communications and Electronics. The tax tax increased to 14.7% from 11.1% because the first division of final year and that was greatly due to lower stock-based compensation fare deductions. We also generated certain liberate coin flow of $146 million, compared to a coin outflow of $85 million because the 2018 first division and that improvement was due greatly to perfect working capital code and growth at earnings. also compared to the 2018 first quarter, we reduced our working capital days by 10 to 82.

As Chris explained, we eat placed more attention above improving working capital and generating liberate coin flow earlier at the year, and we're seeing benefits from these actions. Now moving to our 2019 guidance update. We raised our midpoint sales evaluate by $150 million to $10.9 billion, which is expected growth of nearly 6.5% above 2018. Most of the guidance expand is at ISR Systems.

And I'll add that given our modern noise orders and noise backlog, we to be able to motivate more upside to this year's sales. at the segments, we desire sales to become 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 margin expansion of 120 base points to 12% is unchanged and firmly above track. remember that above our January 29 allowance call, we explained the three drivers of our 2019 margin expansion: L365 productivity pay savings, lower pension fare and lower losses at the Traveling ripple subway business.

Each of these will promote nearly 40 base points of margin expansion. With respect to the Traveling ripple subway material improvements, we abstract to desire those to largely happen at the second half of 2019. Our combined sales growth and margin expansion this year will originate at portion operating pay growth of 18% above 2018. We held our portion margin guidance midpoints at 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding margin 110 base points, 200 base points and 70 base points, respectively, compared to 2018.

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

We noiseless desire no debt repayments. And because we previously explained, we suspended section purchases until the L3 Harris merger is completed. Looking at the second quarter, we desire sales between $2.6 billion and $2.7 billion with growth of nearly 3%, operating margin at the high 11% range, with margin expanding more than 100 base points above the 2018 second quarter, and liberate coin flow between $100 million and $200 million. Finally, to familiar my econmic review, we had a identical good depart to the year with our first-quarter results.

The company is growing at a noise pace, becoming more effective and beneficial and also expanding margin. because 2019, we desire to become orders, sales, operating pay and liberate coin flow, and we're also firmly tracking to our 12% operating margin objective. Thank you. And I'll now become it back to Chris.

Chris Kubasik -- Chairman, leader 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 eyesight business, both significant steps to consummating the deal. We abstract to trade with vulgar regulatory authorities to obtain the indispensable approvals. And because you heard above the Harris allowance howl this morning, everything is tracking to project and there's no alter 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 evaluate arrest offsite at the ISR facility at Texas. because L3 and Harris teams acquire more exposure to each other's operations and people, the more we become grateful of the technique and ability of the combined company and the latent because what we can carry out together. I've been working closely with Bill above the integration, and we will provide details above the board, organizational structure and management shut commerce close.

Given that this is apt L3's final conference howl because a divide public company, I desire to personally thank vulgar of the men and women of L3 Technologies because the difficult trade and dedication throughout the years because making L3 a large post to work. And a special due to my executive leadership team because their leadership and code during the past connect of years, specially with the speed of change. because this chapter at the company's history comes to an end, a new and exciting chapter begins. I eat to confess the two CEOs foregoing me, frank Lanza and Mike Strianese, because their eyesight and difficult trade to obtain L3 to this stage.

By combining what makes L3 such a special company with the best of what Harris has to offer, I eat no doubt we can invent a company that is flat more agile, innovative and customer-centric, a best-of-breed aerospace and defense technique company that delivers superior evaluate because employees, because customers and because the shareholders.

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

Yes, Chris. I was thinking nearly this yesterday. And I counted that it's been 52 consecutive quarterly allowance calls because me. hence it's been a vast undergo and I'm identical grateful because it.

So I also desire to thank everyone above the howl today because their past and continued benefit at L3 and directly to be L3 Harris, specially the analysts above the howl also because the analysts who previously covered L3.

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

Outstanding. vulgar right. Kerry, why don't we cavity the lines because questions.

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and company -- Analyst

Yes. It's Gautam really above because Cai. Congratulations above a large flow obviously at L3. I desire to impartial appeal above the liberate coin flow improvement at the division and some of the working capital initiatives more broadly, if you could impartial explain classification of how much low-hanging fruit you perceive there to be? And then impartial because a follow-up, when you impartial accept the LTM liberate coin flow of both Harris and L3, we're at impartial beneath $2.4 billion.

I'm impartial queer how you view, Chris, the longer language $3 billion liberate coin finish given we've already chopped a lot of lumber here. Thanks.

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

Gautam, thank you identical much because the question and the compliment. We're pretty excited nearly the first quarter, besides a desire manner to contribute because 2019 obviously. I ponder the concentrate above working capital and coin generation was something that we post together at late December. We flat changed the incentive comp project to highlight the importance of generating liberate cash.

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

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

Sure. hence because I commented, we had a dramatic reduction at our working capital days quarter-over-quarter. And if you can recall, the first division of 2018 was our high-water token at condition of working capital and coin custom and that's why there's a dramatic reduction compared to this year's first quarter. besides naturally what we're doing is placing more attention above indispensable blocking and tackling, trying to heap our receivables sooner, continuing to become the company and become inventory at a slower speed and taking actions to alter our unbilled receivables into billed receivables sooner.

So it's a concerted trouble along vulgar those fronts. because the total year, we're expecting working capital days reduction because well, and we ponder that's going to be at least two to three days year above year. hence we to look more improvement the remainder of this year because well. And obviously, we're going to attempt to carry out better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

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

Carter Copeland -- Melius inquiry -- Analyst

Hey, good morning, Chris. I wondered if you could comment above the book to bill. I intend obviously identical noise at the division flat despite the noise 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 ship or is the pipeline a small slice perfect than you were originally thinking?

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

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

We're talking perhaps second division to first quarter, which is why we came at a small higher no virgin above the orders, besides the sales. besides I'm equally excited nearly what we noiseless eat looking ahead. There are clearly F-16 training opportunities. We won a U.S.

and an international customer. And we possibly eat three to four extra bids famous that could be worthy $100 million each. hence there could be $300 million to $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 eat been spending time at the center East. I ponder we eat some interesting strategies and partnerships there that could lead to important growth. And the classified world is indeed picking up. That's an district we've been focused above and eat seen some growth, and given some of the next generation capabilities we have, I desire more wins there.

So because the entire year, I used to desire book to bill to be 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 inquiry -- Analyst

Great, that's great. Thanks. And impartial a fast clarification above the org structure and leadership announcements you said shut to close. to we assume that's impartial an 8-K disclosure identical near, implication impartial ago your intended close?

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

Yes. I mean, I ponder that's fair. Bill and I noiseless eat to trade out the details. It depends when we're going to shut above the timing and such.

But yes, it used to be a math at that commonplace time frame. We'll carry out what makes feeling because vulgar the nation involved, inside and external. hence I'll be seeing Bill next week and we'll abstract to trade above a plan. besides I ponder both he said and I said we're ahead of the inside project that we've laid out above a lot of the various milestones we're going for.

And I ponder flat nation external that are helping us eat been impressed how distant ahead we are. hence we're going to strike the base running above engagement 1. And that's one of the reasons we're gaining more and more belief at some of the econmic targets that we've laid out because you.