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

The combined company will exist healthful above the avenue toward becoming a company with the necessary scale and goods ought invest can and forward the most mission-critical solutions ought our global aerospace and defense customers. The happen 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 accept on. And can the many visits with our L3 and Harris employees can the field, this excitement is broadly shared throughout. although announcing this merger of state final October, our L3 and Harris teams eat been deep can integration planning.

While merger integration activities are occurring throughout the company, our fragment teams eat no altered the speed can the slightest, and we thrive 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 electrical Systems segment, we combined our Security & Detection affair into commercial aviation and are evaluating steps ought rationalize farther our device footprint.

Not only will the new organizational structure shift overhead and redundant cost, besides although healthful better align our capabilities with visitor needs, sharpen concentrate above technique investments and enhance affair development efforts ought better serve our customers. Improving affair action across better information collection and analytics is a key divide of managing a more integrated company. final year, we rolled out a progression of measure econmic and operating metrics throughout the company although divide of L365. Closer tracking of major efficiency metrics although healthful although changes ought our incentive compensation blueprint ought emphasize money race eat been helping ought drive working major improvements.

Even with sales up 14%, our net working major only increased 4%, main ought a reduction can working major days compared ought the preceding year. Operating metrics that chase manufacturing peculiarity and vendor action is supporting our furnish tie and program management teams ought identify and address problems earlier, enabling the management team ought clearly see the interdependencies can their operations. I thrive ought invent visitor 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 controversy L3's only 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 affair development relies upon dwelling long-term relationships and listening ought our customers ought understand their challenges. We thrive ought invent more and more inroads, seeing an improved tenor ought our meetings and eat received sure reception ought our merger with Harris from our international customers.

Bottom queue is we are seeing a large ask worldwide because an innovative, agile company who wants ought join with their customers. few trend awards highlight our ability can delivering integrated mission solutions. can the recently announced $1 billion Peregrine grant because the Royal Australian stand Force, L3 will forward four next-gen EW aircraft above a biz plane platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's mutual battle fighting networks, providing a keen join between platforms, including the F-35, the Growler and maritime assets.

Our option ought compete because the product of FARA because the U.S. army is another parade of our ability ought hire customers with disruptive technique and ought join above an significant platform, integrating different communications and mission systems. Many of our capabilities align with the Army's sumit priorities, and we thrive ought divide goods ought satisfy these needs. Our affair development activities are now more ambitious and focused and although healthful better integrated with order and proposal, engineering and R&D functions.

I see many more instances of collaboration across divisions although we slaughter upon our strategy. Leadership throughout the company is buying into the opinion that we can modify more and better serve our customers if we trade together. Next, I hope ought impress above the progress 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 become more effective can planning our ability needs, can recruiting and retention and can identifying and exercise our emerging leaders ought accept 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 better the affair are beginning ought generate tangible benefits ought growth and margin. Our employees are increasingly embracing the convert and the fabric of integration, collaboration and innovation is becoming woven deeper into the manner of our thinking.

Now let's become ought a publication of our fragment performance. Our noise quarterly action was led by the ISR Systems fragment which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating wage increased 40%, generating a margin of 10.4%, up 120 basis points from the preceding period.

Growth was most impressive can our aircraft procurement and ISR missionization affair although few key programs accelerated, including the U.S. stand state Compass Call, Australian Peregrine and the U.S. Missile Defense Agency HALO program. can addition, EO/IR sensors, soldier systems and universe and sensor businesses vulgar grew double digits.

Given the broad-based growth can this segment, we thrive ought hope ISR Systems ought exist our fastest-growing affair with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a noise 1.19. Operating wage 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 margin improvement was driven by program performance, sales combination and charge reduction. Lastly, electrical Systems sales grew 2% and operating wage rose 3%. ES' segment-leading margin improved 20 basis points ought 14.7%.

The belt was impacted by a sales refuse can the Defense exercise Solutions affair because of final year's loss of the C-17 exercise squeeze ought the OEM. However, key highlights can electrical Systems involve double-digit growth can precision weapons which grew sales 18% can the quarter. because of the headwinds from the C-17 loss, we hope modest sales growth can 2019, besides we thrive ought hope improved margin from ongoing charge takeout and favorable squeeze performance. Given our noise action can the first belt and improving order momentum, we are increasing our 2019 guidance.

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

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

Thanks, Chris. I'll publication some details approximately the first belt and then our 2019 guidance update. Reviewing the first quarter, although Chris explained, we had a identical noise go ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, vulgar of which was organic.

Segment operating wage and adjusted diluted EPS each grew 24%, and fragment margin increased 90 basis points ought 11.5%. We although healthful generated sure release money race which is meaningful although we frequently eat negative money race can our first quarters.Next, I'll comment above some details approximately the 2019 first quarter. Adjusted diluted EPS was $2.89, an enlarge of $0.55 or 24% above the 2018 first belt driven largely by operating wage growth stemming from our 14% sales growth and our 90 basis points of margin expansion. Adjusted diluted EPS excludes integration and transaction expenses related ought the L3 Harris merger and a $2 million affair divestiture loss.

Sales increased 14% ought $2.7 billion driven by noise growth can our DoD and international markets. can the fragment 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 belt growth rates. can Electronics, sales were negatively impacted by final summer's C-17 exercise squeeze loss which lowered growth by 440 basis points can that segment.

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

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

Other contributors ought margin expansion largely included sales growth, a lower G&A worthy and affair divestitures can ISR and favorable squeeze action and reduced G&A expenses can Communications and Electronics. The tax worthy increased ought 14.7% from 11.1% because the first belt of final year and that was largely because of lower stock-based compensation price deductions. We although healthful generated sure release money race of $146 million, compared ought a money outflow of $85 million because the 2018 first belt and that improvement was due largely ought better working major action and growth can earnings. although healthful compared ought the 2018 first quarter, we reduced our working major days by 10 ought 82.

As Chris explained, we eat placed more attention above improving working major and generating release money race earlier can the year, and we're seeing benefits from these actions. Now moving ought our 2019 guidance update. We raised our midpoint sales appraise by $150 million ought $10.9 billion, which is expected growth of approximately 6.5% above 2018. Most of the guidance enlarge is can ISR Systems.

And I'll add that given our trend noise orders and healthful backlog, we ought exist capable ought drive more upside ought this year's sales. can the segments, we hope sales ought modify 9% can ISR, 6% can Communications and 3% Electronics. Our planned 2019 margin expansion of 120 basis points ought 12% is unchanged and firmly above track. remember that above our January 29 wage call, we explained the three drivers of our 2019 margin expansion: L365 productivity charge savings, lower pension price and lower losses can the Traveling wave underground business.

Each of these will further approximately 40 basis points of margin expansion. With fame ought the Traveling wave underground affair improvements, we thrive ought hope those ought mainly happen can the second half of 2019. Our combined sales growth and margin expansion this year will arise can fragment operating wage growth of 18% above 2018. We held our fragment margin guidance midpoints can 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding margin 110 basis points, 200 basis points and 70 basis points, respectively, compared ought 2018.

We lowered our tax worthy ought 19% from 20%, largely because of lower expected foreign wage taxes. And because release money flow, we increased it ought $1.055 billion, which is approximately 13% higher than 2018 with a money conversion worthy of 113%. money can the target of March was $1.1 billion. And regarding major allocation, can February, we increased our quarterly money dividend by $0.05 ought $0.85 per share.

We silent hope no debt repayments. And although we previously explained, we suspended section purchases until the L3 Harris merger is completed. Looking can the second quarter, we hope sales between $2.6 billion and $2.7 billion with growth of approximately 3%, operating margin can the high 11% range, with margin expanding more than 100 basis points above the 2018 second quarter, and release money race between $100 million and $200 million. Finally, ought end my econmic review, we had a identical good go ought the year with our first-quarter results.

The company is growing can a healthful pace, becoming more effective and beneficial and although healthful expanding margin. because 2019, we hope ought modify orders, sales, operating wage and release money flow, and we're although healthful firmly tracking ought our 12% operating margin objective. Thank you. And I'll now become it uphold ought Chris.

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

Thanks, Ralph. although you saw above April 4, both L3 and Harris received shareholder approvals because the merger, and Harris although healthful recently announced the sale of their evening vision business, both significant steps ought consummating the deal. We thrive ought trade with vulgar regulatory authorities ought modify the necessary approvals. And although you heard above the Harris wage summon this morning, everything is tracking ought blueprint and there's no convert 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 evaluate capture offsite can the ISR facility can Texas. although L3 and Harris teams modify more exposure ought 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 perform together. I've been working closely with Bill above the integration, and we will equip details above the board, organizational structure and management shut occupation close.

Given that this is responsible L3's final assembly summon although a divide public company, I hope ought 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 put ought work. And a especial because of my executive leadership team because their leadership and action during the past join of years, specially with the speed of change. although this chapter can the company's history comes ought an end, a new and exciting chapter begins. I eat ought acknowledge the two CEOs foregoing me, honest Lanza and Mike Strianese, because their vision and difficult trade ought modify L3 ought this stage.

By combining what makes L3 such a especial company with the best of what Harris has ought offer, I eat no suspect we can invent a company that is level 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 principal and main econmic Officer

Yes, Chris. I was thinking approximately this yesterday. And I counted that it's been 52 consecutive quarterly wage calls because me. consequently it's been a vast sustain and I'm identical grateful because it.

So I although healthful hope ought thank everyone above the summon today because their past and continued use can L3 and instantly ought exist L3 Harris, specially the analysts above the summon although healthful although the analysts who previously covered L3.

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

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

Questions & Answers:

Operator

[Operator instructions] The first question will modify 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 race obviously can L3. I hope ought fair demand above the release money race improvement can the belt and some of the working major initiatives more broadly, if you could fair explain organize of how much low-hanging fruit you perceive there ought be? And then fair although a follow-up, when you fair accept the LTM release money race of both Harris and L3, we're can fair under $2.4 billion.

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

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

Gautam, thank you identical much because the question and the compliment. We're pretty excited approximately the first quarter, besides a expect manner ought face can because 2019 obviously. I study the concentrate above working major and money generation was something that we put together can late December. We level changed the incentive comp blueprint ought highlight the importance of generating release cash.

And Bill and I lesson a fate approximately the $500 million of synergies and the $3 billion of money race can year three. And I used to state we eat more confidence can achieving those numbers today than we did when we first announced this occupation above October 14. I'll allow Ralph lesson approximately some of the improvements we made here can the first quarter.

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

Sure. consequently although I commented, we had a dramatic reduction can our working major days quarter-over-quarter. And if you can recall, the first belt of 2018 was our high-water signal can condition of working major 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 theorem blocking and tackling, trying ought infer our receivables sooner, continuing ought modify the company and modify inventory can a slower speed and taking actions ought alter our unbilled receivables into billed receivables sooner.

So it's a concerted trouble across vulgar those fronts. because the sum year, we're expecting working major days reduction although well, and we study that's going ought exist can least two ought three days year above year. consequently we ought see more improvement the surplus of this year although well. And obviously, we're going ought experiment ought perform better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next question will modify 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 noise can the belt level in spite of the noise 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 drag anything forward or is the pipeline a few section better than you were originally thinking?

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

That's a large 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 lesson approximately can the past can systems and standardizing policies and procedures. There were a join of ISR accelerations.

We're talking maybe second belt ought first quarter, which is why we came can a few higher no only above the orders, besides the sales. besides I'm equally excited approximately what we silent eat looking ahead. There are clearly F-16 exercise opportunities. We won a U.S.

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

As I mentioned, the team and I eat been spending time can the center East. I study we eat some interesting strategies and partnerships there that could guide ought significant growth. And the classified world is indeed picking up. That's an belt we've been focused above and eat seen some growth, and given some of the next generation capabilities we have, I hope more wins there.

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

Carter Copeland -- Melius inquiry -- Analyst

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

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

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