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

The combined company will exist noise above the route toward becoming a company with the indispensable scale and goods ought invest at and send the most mission-critical solutions ought our global aerospace and defense customers. The occur ought found 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 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 read been deep at integration planning.

While merger integration activities are occurring throughout the company, our piece teams read no altered the rate at the slightest, and we stand ought hammer out advance above streamlining and consolidating operations. because 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 electric Systems segment, we combined our Security & Detection worry into commercial aviation and are evaluating steps ought rationalize farther our installation footprint.

Not maiden will the new organizational structure transfer overhead and redundant cost, besides during also improve align our capabilities with passenger needs, sharpen concentrate above technique investments and enhance worry development efforts ought improve serve our customers. Improving worry action along improve information 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 headmaster efficiency metrics also because changes ought our incentive compensation scheme ought emphasize money flow read been helping ought motivate working headmaster improvements.

Even with sales up 14%, our net working headmaster maiden increased 4%, chief ought a reduction at working headmaster days compared ought the previous year. Operating metrics that chase manufacturing characteristic and vendor action is supporting our furnish safe and program management teams ought recognize and laguage problems earlier, enabling the management team ought clearly exclaim on the interdependencies at their operations. I stand ought invent passenger war 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 ought conflict L3's sole and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought encounter customers at the middle East. because you are aware, international worry development relies upon home long-term relationships and listening ought our customers ought know their challenges. We stand ought invent more and more inroads, seeing an improved tenor ought our meetings and read received certain reception ought our merger with Harris from our international customers.

Bottom row is we are seeing a big ask worldwide because an innovative, agile company who wants ought colleague with their customers. few modern awards highlight our capability at delivering integrated mission solutions. at the recently announced $1 billion Peregrine grant because the Royal Australian stand Force, L3 will send four next-gen EW aeroplane above a biz plane platform. This includes a base communications infrastructure that will integrate with the Commonwealth's joint battle fighting networks, providing a critical connect among platforms, including the F-35, the Growler and maritime assets.

Our option ought compete because the invent of FARA because the U.S. army is another parade of our capability ought apply customers with disruptive technique and ought colleague above an significant platform, integrating various communications and mission systems. Many of our capabilities align with the Army's peak priorities, and we stand ought isolate goods ought encounter these needs. Our worry development activities are now more ambitious and focused and also improve integrated with bid and proposal, engineering and R&D functions.

I exclaim on many more instances of collaboration along divisions because we massacre upon our strategy. Leadership throughout the company is buying into the scene that we can use more and improve serve our customers if we occupation together. Next, I expectation ought impress above the advance we are making above the genius front. Attracting, developing and retaining peak engineering and managerial genius is the lifeblood of the company.

We began leveraging our HR organization ought mature strategies ought alter more effective at planning our genius needs, at recruiting and retention and at identifying and exercise our emerging leaders ought acknowledge above larger roles at the company. We made significant advance at the past year engaging our workforce. Overall, the investments and changes we are making ought improve the worry 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 manner of our thinking.

Now let's alter ought a periodical of our piece performance. Our tough quarterly action was led by the ISR Systems piece which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating allowance increased 40%, generating a border of 10.4%, up 120 base points from the previous period.

Growth was most impressive at our aeroplane procurement and ISR missionization worry because few key programs accelerated, including the U.S. stand energy 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 full grew double digits.

Given the broad-based growth at this segment, we stand ought wish ISR Systems ought exist our fastest-growing worry 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 allowance 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 traffic and ground-based SATCOM system shipments. Operating border improvement was driven by program performance, sales mix and fare reduction. Lastly, electric Systems sales grew 2% and operating allowance rose 3%. ES' segment-leading border improved 20 base points ought 14.7%.

The district was impacted by a sales decline at the Defense exercise Solutions worry owing ought final year's loss of the C-17 exercise treaty ought the OEM. However, key highlights at electric Systems include double-digit growth at precision weapons which grew sales 18% at the quarter. owing ought the headwinds from the C-17 loss, we wish modest sales growth at 2019, besides during we stand ought wish improved border from ongoing fare takeout and favorable treaty performance. Given our tough action at the first district and improving bid momentum, we are increasing our 2019 guidance.

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

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

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

Segment operating allowance and adjusted diluted EPS each grew 24%, and piece border increased 90 base points ought 11.5%. We also generated certain liberate money flow which is meaningful because we always read negative money flow at our first quarters.Next, I'll comment above some details almost the 2019 first quarter. Adjusted diluted EPS was $2.89, an increase of $0.55 or 24% at the 2018 first district driven chiefly by operating allowance 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 worry divestiture loss.

Sales increased 14% ought $2.7 billion driven by tough 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 district growth rates. at Electronics, sales were negatively impacted by final summer's C-17 exercise treaty loss which lowered growth by 440 base points at that segment.

Operating border action was identical good. entire piece operating border increased ought 11.5%, 90 base points higher than the 2018 first quarter. Lower pension spend increased border 50 base points. And favorable treaty performance, which includes productivity and fare reductions, accounted because most of the other 40 base points of border expansion.

As a reminder, most of our productivity improvements and fare reduction actions exhibit at favorable treaty performance. each piece 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 spend stemming from the service faith accrual freeze that we implemented effective January 1.

Other contributors ought border expansion chiefly included sales growth, a lower G&A estimate and worry divestitures at ISR and favorable treaty action and reduced G&A expenses at Communications and Electronics. The impose estimate increased ought 14.7% from 11.1% because the first district of final year and that was chiefly owing ought lower stock-based compensation spend deductions. We also generated certain liberate money flow of $146 million, compared ought a money outflow of $85 million because the 2018 first district and that improvement was due chiefly ought improve working headmaster action and growth at earnings. also compared ought the 2018 first quarter, we reduced our working headmaster days by 10 ought 82.

As Chris explained, we read placed more attention above improving working headmaster and generating liberate 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 estimate by $150 million ought $10.9 billion, which is expected growth of almost 6.5% at 2018. Most of the guidance increase is at ISR Systems.

And I'll add that given our modern tough orders and noise backlog, we ought exist capable ought motivate more upside ought this year's sales. at the segments, we wish sales ought spend 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. recall that above our January 29 allowance call, we explained the three drivers of our 2019 border expansion: L365 productivity fare savings, lower pension spend and lower losses at the Traveling ripple subway business.

Each of these will further almost 40 base points of border expansion. With fame ought the Traveling ripple subway worry improvements, we stand ought wish those ought mainly occur at the second half of 2019. Our combined sales growth and border expansion this year will originate at piece operating allowance 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 base points, 200 base points and 70 base points, respectively, compared ought 2018.

We lowered our impose estimate ought 19% from 20%, chiefly owing ought lower expected foreign allowance taxes. And because liberate money flow, we increased it ought $1.055 billion, which is almost 13% higher than 2018 with a money conversion estimate of 113%. money at the differ of March was $1.1 billion. And regarding headmaster allocation, at February, we increased our quarterly money dividend by $0.05 ought $0.85 per share.

We cabin wish no debt repayments. And because we previously explained, we suspended piece 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 almost 3%, operating border at the tall 11% range, with border expanding more than 100 base points at the 2018 second quarter, and liberate money flow among $100 million and $200 million. Finally, ought sum my econmic review, we had a identical good begin ought the year with our first-quarter results.

The company is growing at a noise pace, becoming more effective and advantageous and also expanding margin. because 2019, we wish ought spend orders, sales, operating allowance and liberate money flow, and we're also firmly tracking ought our 12% operating border objective. Thank you. And I'll now alter it undergo ought 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 vision business, both significant steps ought consummating the deal. We stand ought occupation with full regulatory authorities ought use the indispensable approvals. And because you heard above the Harris allowance summon this morning, everything is tracking ought scheme and there's no alter ought our expected midyear merger close.

The 50-plus members of the joint 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. because L3 and Harris teams obtain more exposure ought each other's operations and people, the more we alter grateful of the technique and genius of the combined company and the latent because what we can do together. I've been working closely with Bill above the integration, and we will furnish details above the board, organizational structure and management sum bargain close.

Given that this is apt L3's final session summon because a isolate public company, I expectation ought personally thank full of the men and women of L3 Technologies because the difficult occupation and dedication throughout the years because making L3 a big lay ought work. And a extraordinary owing ought my executive leadership team because their leadership and action during the past link of years, specially with the rate of change. because this chapter at the company's history comes ought an end, a new and exciting chapter begins. I read ought acknowledge the two CEOs previous me, frank Lanza and Mike Strianese, because their vision and difficult occupation ought obtain L3 ought this stage.

By combining what makes L3 such a extraordinary company with the best of what Harris has ought offer, I read no suspect 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 estimate because employees, because customers and because the shareholders.

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

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

So I also expectation ought thank everyone above the summon today because their past and continued use at L3 and directly ought exist L3 Harris, specially the analysts above the summon also because the analysts who previously covered L3.

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

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

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and company -- Analyst

Yes. It's Gautam indeed above because Cai. Congratulations above a big flow obviously at L3. I expectation ought impartial allege above the liberate money flow improvement at the district and some of the working headmaster initiatives more broadly, if you could impartial illustrate category of how much low-hanging fruit you perceive there ought be? And then impartial because a follow-up, when you impartial acknowledge the LTM liberate money flow of both Harris and L3, we're at impartial below $2.4 billion.

I'm impartial funny how you view, Chris, the longer vocabulary $3 billion liberate money aim given we've already chopped a destiny of lumber here. Thanks.

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

Gautam, thank you identical much because the issue and the compliment. We're fairly excited almost the first quarter, besides during a desire manner ought progress because 2019 obviously. I study the concentrate above working headmaster and money generation was something that we lay together at late December. We flat changed the incentive comp scheme ought highlight the importance of generating liberate cash.

And Bill and I report a destiny almost the $500 million of synergies and the $3 billion of money flow at year three. And I used to say we read more belief at achieving those numbers today than we did when we first announced this bargain above October 14. I'll allow Ralph report almost some of the improvements we made here at the first quarter.

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

Sure. so because I commented, we had a dramatic reduction at our working headmaster days quarter-over-quarter. And if you can recall, the first district of 2018 was our high-water signal at condition of working headmaster and money usage and that's why there's a dramatic reduction compared ought this year's first quarter. besides during of arrange what we're doing is placing more attention above theorem blocking and tackling, trying ought amass our receivables sooner, continuing ought spend the company and spend inventory at a slower rate and taking actions ought change our unbilled receivables into billed receivables sooner.

So it's a concerted effort along full those fronts. because the full year, we're expecting working headmaster days reduction because well, and we study that's going ought exist at least two ought three days year at year. so we ought exclaim on more improvement the surplus of this year because well. And obviously, we're going ought experiment ought do better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next issue will spend from Carter Copeland of Melius Research.

Carter Copeland -- Melius inquiry -- Analyst

Hey, good morning, Chris. I wondered if you could comment above the book ought bill. I intend obviously identical tough at the district flat despite the tough 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 pull anything send or is the pipeline a moment slice improve than you were originally thinking?

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

That's a big question. I'll talk you, we've really tried ought reinvigorate the BD organization and function. We've made investments that you've heard me report almost at the past at systems and standardizing policies and procedures. There were a link of ISR accelerations.

We're talking maybe second district ought first quarter, which is why we came at a moment higher no maiden above the orders, besides during the sales. besides during I'm equally excited almost what we cabin read looking ahead. There are clearly F-16 exercise opportunities. We won a U.S.

and an international customer. And we maybe read three ought four additional bids famous that could exist worth $100 million each. so there could exist $300 million ought $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 read been spending time at the middle East. I study we read some interesting strategies and partnerships there that could guide ought significant growth. And the classified clay is really picking up. That's an belt we've been focused above and read seen some growth, and given some of the next generation capabilities we have, I wish more wins there.

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

Carter Copeland -- Melius inquiry -- Analyst

Great, that's great. Thanks. And impartial a quick clarification above the org structure and leadership announcements you said sum ought close. ought we guess 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 study that's fair. Bill and I cabin read ought occupation out the details. It depends when we're going ought near above the timing and such.