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

The combined company will exist noise above the road toward becoming a company with the inherent scale and estate ought invest can and send the most mission-critical solutions ought our global aerospace and defense customers. The opportunity ought construct a new A&D company is an exciting and engaging challenge, one that Bill and I and the entire leadership team are ready ought acknowledge on. And can the many visits with our L3 and Harris employees can the field, this excitement is broadly shared throughout. during announcing this merger of energy last 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 last ought hammer out further above streamlining and consolidating operations. although 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 electrical Systems segment, we combined our Security & Detection bargain into commercial aviation and are evaluating steps ought rationalize farther our installation footprint.

Not unique will the new organizational structure shift overhead and redundant cost, besides also improve align our capabilities with guest needs, sharpen concentrate above technique investments and heighten bargain development efforts ought improve serve our customers. Improving bargain deed across improve data collection and analytics is a key divide of managing a more integrated company. last year, we rolled out a sequence of criterion econmic and operating metrics throughout the company although divide of L365. Closer tracking of chief efficiency metrics also although changes ought our incentive compensation scheme ought emphasize money flow dine been helping ought motivate working chief improvements.

Even with sales up 14%, our net working chief unique increased 4%, major ought a reduction can working chief days compared ought the foregoing year. Operating metrics that explore manufacturing characteristic and vendor deed is supporting our furnish tie and program management teams ought recognize and hail problems earlier, enabling the management team ought clearly howl on the interdependencies can their operations. I last ought invent guest campaign a priority although the company, although myself and the entire leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military ought controversy L3's unique and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought satisfy customers can the center East. although you are aware, international bargain development relies upon dwelling long-term relationships and listening ought our customers ought learn their challenges. We last ought invent 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 row is we are seeing a big demand worldwide although an innovative, agile company who wants ought colleague with their customers. few offer awards highlight our ability can delivering integrated mission solutions. can the recently announced $1 billion Peregrine confer although the Royal Australian attitude Force, L3 will send four next-gen EW aircraft above a biz aircraft platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's mutual campaign fighting networks, providing a sharp attach amid platforms, including the F-35, the Growler and maritime assets.

Our alternative ought compete although the invent of FARA although the U.S. army is another parade of our ability ought hire 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 climax priorities, and we last ought divide estate ought satisfy these needs. Our bargain development activities are now more ambitious and focused and also improve integrated with bid and proposal, engineering and R&D functions.

I howl on many more instances of collaboration across divisions although we slaughter upon our strategy. Leadership throughout the company is buying into the conception that we can obtain more and improve serve our customers if we vocation together. Next, I desire ought affect above the further we are making above the capability front. Attracting, developing and retaining climax engineering and managerial capability is the lifeblood of the company.

We began leveraging our HR organization ought ripen strategies ought cost more effective can planning our capability needs, can recruiting and retention and can identifying and habit our emerging leaders ought acknowledge above larger roles can the company. We made important further can the past year engaging our workforce. Overall, the investments and changes we are making ought improve the bargain are beginning ought generate tangible benefits ought growth and margin. Our employees are increasingly embracing the vary and the fabric of integration, collaboration and innovation is becoming woven deeper into the fashion of our thinking.

Now let's cost ought a periodical of our division performance. Our well quarterly deed was led by the ISR Systems division which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating earnings increased 40%, generating a edge of 10.4%, up 120 basis points from the foregoing period.

Growth was most impressive can our aircraft procurement and ISR missionization bargain although few key programs accelerated, including the U.S. attitude 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 total grew double digits.

Given the broad-based growth can this segment, we last ought wish ISR Systems ought exist our fastest-growing bargain with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a well 1.19. Operating earnings 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 mix and fare reduction. Lastly, electrical Systems sales grew 2% and operating earnings rose 3%. ES' segment-leading edge improved 20 basis points ought 14.7%.

The area was impacted by a sales refuse can the Defense habit Solutions bargain due ought last year's loss of the C-17 habit treaty ought the OEM. However, key highlights can electrical Systems contain double-digit growth can precision weapons which grew sales 18% can the quarter. due ought the headwinds from the C-17 loss, we wish modest sales growth can 2019, besides we last ought wish improved edge from ongoing fare takeout and favorable treaty performance. Given our well deed can the first area and improving bid momentum, we are increasing our 2019 guidance.

Now I will cost it can ought Ralph ought periodical our financials and equip details of our updated guidance.

Ralph D'Ambrosio -- Senior Vice principal and major econmic Officer

Thanks, Chris. I'll periodical some details nearly the first area and then our 2019 guidance update. Reviewing the first quarter, although Chris explained, we had a identical well commence ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, total of which was organic.

Segment operating earnings and adjusted diluted EPS each grew 24%, and division edge increased 90 basis points ought 11.5%. We also generated sure liberate money flow which is meaningful during we always dine negative money flow can 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% can the 2018 first area driven mainly by operating earnings 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 bargain divestiture loss.

Sales increased 14% ought $2.7 billion driven by well 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 although ISR and Communications included some favorable quarterly timing items which will lower their second area growth rates. can Electronics, sales were negatively impacted by last summer's C-17 habit treaty loss which lowered growth by 440 basis points can that segment.

Operating edge deed was identical good. entire division operating edge increased ought 11.5%, 90 basis points higher than the 2018 first quarter. Lower pension revenue increased edge 50 basis points. And favorable treaty performance, which includes productivity and fare reductions, accounted although most of the other 40 basis points of edge expansion.

As a reminder, most of our productivity improvements and fare reduction actions display can favorable treaty 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 revenue stemming from the service confidence accrual freeze that we implemented effective January 1.

Other contributors ought edge expansion mainly included sales growth, a lower G&A worth and bargain divestitures can ISR and favorable treaty deed and reduced G&A expenses can Communications and Electronics. The impose worth increased ought 14.7% from 11.1% although the first area of last year and that was mainly due ought lower stock-based compensation revenue deductions. We also generated sure liberate money flow of $146 million, compared ought a money outflow of $85 million although the 2018 first area and that improvement was due mainly ought improve working chief deed and growth can earnings. also compared ought the 2018 first quarter, we reduced our working chief days by 10 ought 82.

As Chris explained, we dine placed more attention above improving working chief and generating liberate 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 worth by $150 million ought $10.9 billion, which is expected growth of nearly 6.5% can 2018. Most of the guidance expand is can ISR Systems.

And I'll add that given our offer well orders and robust backlog, we ought exist capable 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. remember that above our January 29 earnings call, we explained the three drivers of our 2019 edge expansion: L365 productivity fare savings, lower pension revenue and lower losses can the Traveling wave subway business.

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

We lowered our impose worth ought 19% from 20%, mainly due ought lower expected foreign earnings taxes. And although liberate money flow, we increased it ought $1.055 billion, which is nearly 13% higher than 2018 with a money conversion worth of 113%. money can the goal of March was $1.1 billion. And regarding chief allocation, can February, we increased our quarterly money dividend by $0.05 ought $0.85 per share.

We calm wish no debt repayments. And although we previously explained, we suspended portion purchases until the L3 Harris merger is completed. Looking can the second quarter, we wish sales amid $2.6 billion and $2.7 billion with growth of nearly 3%, operating edge can the high 11% range, with edge expanding more than 100 basis points can the 2018 second quarter, and liberate money flow amid $100 million and $200 million. Finally, ought entire my econmic review, we had a identical good commence ought the year with our first-quarter results.

The company is growing can a robust pace, becoming more effective and advantageous and also expanding margin. although 2019, we wish ought become orders, sales, operating earnings and liberate money flow, and we're also firmly tracking ought our 12% operating edge objective. Thank you. And I'll now cost it aid ought Chris.

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

Thanks, Ralph. although you saw above April 4, both L3 and Harris received shareholder approvals although the merger, and Harris also recently announced the sale of their evening eyesight business, both important steps ought consummating the deal. We last ought vocation with total regulatory authorities ought acquire the inherent approvals. And although you heard above the Harris earnings summon this morning, everything is tracking ought scheme and there's no vary ought 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 worth arrest offsite can the ISR facility can Texas. although L3 and Harris teams acquire more exposure ought each other's operations and people, the more we cost grateful of the technique and capability of the combined company and the latent although what we can discharge together. I've been working closely with Bill above the integration, and we will equip details above the board, organizational structure and management shut bargain close.

Given that this is apt L3's last council summon although a divide public company, I desire ought personally thank total of the men and women of L3 Technologies although the difficult vocation and dedication throughout the years although making L3 a big lay ought work. And a specific because of my executive leadership team although their leadership and deed during the past mix of years, specially with the velocity of change. although this chapter can the company's history comes ought an end, a new and exciting chapter begins. I dine ought admit the two CEOs preceding me, plain Lanza and Mike Strianese, although their eyesight and difficult vocation ought acquire L3 ought this stage.

By combining what makes L3 such a specific company with the best of what Harris has ought offer, I dine no supicion 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 worth although employees, although customers and although the shareholders.

Ralph D'Ambrosio -- Senior Vice principal and major econmic Officer

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

So I also desire ought thank everyone above the summon today although their past and continued advantage can L3 and immediately ought exist L3 Harris, specially the analysts above the summon also although the analysts who previously covered L3.

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

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

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and company -- Analyst

Yes. It's Gautam really above although Cai. Congratulations above a big flow obviously can L3. I desire ought impartial demand above the liberate money flow improvement can the area and some of the working chief initiatives more broadly, if you could impartial illustrate kind of how much low-hanging fruit you perceive there ought be? And then impartial although a follow-up, when you impartial acknowledge the LTM liberate money flow of both Harris and L3, we're can impartial beneath $2.4 billion.

I'm impartial strange how you view, Chris, the longer term $3 billion liberate money goal given we've already chopped a fate of lumber here. Thanks.

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

Gautam, thank you identical much although the question and the compliment. We're pretty excited nearly the first quarter, besides a desire fashion ought proceed although 2019 obviously. I reckon the concentrate above working chief and money generation was something that we lay together can late December. We flat changed the incentive comp scheme ought highlight the importance of generating liberate cash.

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

Ralph D'Ambrosio -- Senior Vice principal and major econmic Officer

Sure. hence although I commented, we had a dramatic reduction can our working chief days quarter-over-quarter. And if you can recall, the first area of 2018 was our high-water sign can condition of working chief and money habit and that's why there's a dramatic reduction compared ought this year's first quarter. besides of grade what we're doing is placing more attention above theorem blocking and tackling, trying ought infer our receivables sooner, continuing ought become the company and become inventory can a slower velocity and taking actions ought vary our unbilled receivables into billed receivables sooner.

So it's a concerted endeavour across total those fronts. although the entire year, we're expecting working chief days reduction although well, and we reckon that's going ought exist can least two ought three days year can year. hence we ought howl on more improvement the remainder of this year although well. And obviously, we're going ought attempt ought discharge better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next question will cost 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 identical well can the area flat despite the well 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 pull anything send or is the pipeline a little sheet improve than you were originally thinking?

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

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

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

and an international customer. And we maybe dine three ought four additional bids famous that could exist worth $100 million each. hence there could exist $300 million ought $500 million of more orders of F-16 although 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 reckon we dine some interesting strategies and partnerships there that could guide ought important growth. And the classified clay is indeed picking up. That's an district 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 although the total year, I used to desire book ought bill ought exist can least 1.1 can each and each segment. And maybe $12 billion of orders overall is what our extend aim is. besides that's what we're working toward.

Carter Copeland -- Melius investigation -- Analyst

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

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

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

But yes, it use