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

The combined company will exist well above the highway toward becoming a company with the inherent scale and property to invest at and send the most mission-critical solutions to our global aerospace and defense customers. The occur to upright a new A&D company is an exciting and engaging challenge, one that Bill and I and the complete 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 energy final October, our L3 and Harris teams hold been deep at integration planning.

While merger integration activities are occurring throughout the company, our fragment teams hold no altered the velocity at the slightest, and we last 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 electrical Systems segment, we combined our Security & Detection affair into commercial aviation and are evaluating steps to rationalize farther our device footprint.

Not sole will the new organizational structure touch overhead and redundant cost, except because well improve align our capabilities with guest needs, sharpen concentrate above technique investments and heighten affair development efforts to improve serve our customers. Improving affair action across improve data collection and analytics is a key segregate of managing a more integrated company. final year, we rolled out a sequence of criterion econmic and operating metrics throughout the company because segregate of L365. Closer tracking of main efficiency metrics too because changes to our incentive compensation design to emphasize cash run hold been helping to drive working main improvements.

Even with sales up 14%, our net working main sole increased 4%, major to a reduction at working main days compared to the foregoing year. Operating metrics that chase manufacturing trait and vendor action is supporting our equip bind and program management teams to identify and speech problems earlier, enabling the management team to clearly look the interdependencies at their operations. I last to compose guest war 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 to controversy L3's sole and disruptive capabilities and to highlight our technique solutions. My team and I went out again to satisfy customers at the heart East. because you are aware, international affair development relies upon habitation long-term relationships and listening to our customers to know their challenges. We last to compose more and more inroads, seeing an improved tenor to our meetings and hold received certain reception to our merger with Harris from our international customers.

Bottom rope is we are seeing a large beg worldwide because an innovative, agile company who wants to comrade with their customers. few trend awards highlight our genius at delivering integrated mission solutions. at the recently announced $1 billion Peregrine give because the Royal Australian air Force, L3 will send four next-gen EW aeroplane above a biz aircraft platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's common war fighting networks, providing a critical attach among platforms, including the F-35, the Growler and maritime assets.

Our preference to compete because the create of FARA because the U.S. troops is another demonstration of our ability to utilize customers with disruptive technique and to comrade above an significant platform, integrating different communications and mission systems. Many of our capabilities align with the Army's peak priorities, and we last to segregate property to satisfy these needs. Our affair development activities are now more ambitious and focused and because well improve integrated with bid and proposal, engineering and R&D functions.

I look many more instances of collaboration across divisions because we kill upon our strategy. Leadership throughout the company is buying into the thought that we can become more and improve serve our customers if we career together. Next, I expect to affect above the proceed 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 to mature strategies to modify more effective at planning our genius needs, at recruiting and retention and at identifying and habit our emerging leaders to accept above larger roles at the company. We made significant proceed at the past year engaging our workforce. Overall, the investments and changes we are making to improve the affair are beginning to generate tangible benefits to 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 modify to a review of our fragment performance. Our well quarterly action was led by the ISR Systems fragment which grew funded orders 58% and sales 23%. Book to bill was 1.38. Operating allowance increased 40%, generating a brim of 10.4%, up 120 basis points from the foregoing period.

Growth was most impressive at our aeroplane procurement and ISR missionization affair because few key programs accelerated, including the U.S. air force 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 sum grew double digits.

Given the broad-based growth at this segment, we last to expectation ISR Systems to exist our fastest-growing affair with improved margin. Communications and Networked Systems returned to growth with funded orders up 26% and sales up 11%. Book to bill was a well 1.19. Operating allowance rose 31% and margins improved 160 basis 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 brim improvement was driven by program performance, sales combine and cost reduction. Lastly, electrical Systems sales grew 2% and operating allowance rose 3%. ES' segment-leading brim improved 20 basis points to 14.7%.

The region was impacted by a sales refuse at the Defense habit Solutions affair owing to final year's loss of the C-17 habit session to the OEM. However, key highlights at electrical Systems include double-digit growth at precision weapons which grew sales 18% at the quarter. owing to the headwinds from the C-17 loss, we expectation modest sales growth at 2019, except we last to expectation improved brim from ongoing cost takeout and favorable session performance. Given our well action at the first region and improving bid momentum, we are increasing our 2019 guidance.

Now I will modify it above to Ralph to review our financials and furnish details of our updated guidance.

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

Thanks, Chris. I'll review some details almost the first region and then our 2019 guidance update. Reviewing the first quarter, because Chris explained, we had a too well holiday to the year and we exceeded our plan. Orders increased 28% and sales grew 14%, sum of which was organic.

Segment operating allowance and adjusted diluted EPS each grew 24%, and fragment brim increased 90 basis points to 11.5%. We because well generated certain liberate cash run which is meaningful because we always hold negative cash run at our first quarters.Next, I'll comment above some details almost the 2019 first quarter. Adjusted diluted EPS was $2.89, an expand of $0.55 or 24% above the 2018 first region driven largely by operating allowance growth stemming from our 14% sales growth and our 90 basis points of brim expansion. Adjusted diluted EPS excludes integration and transaction expenses related to the L3 Harris merger and a $2 million affair divestiture loss.

Sales increased 14% to $2.7 billion driven by well growth at our DoD and international markets. at the fragment 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 region growth rates. at Electronics, sales were negatively impacted by final summer's C-17 habit session loss which lowered growth by 440 basis points at that segment.

Operating brim action was too good. complete fragment operating brim increased to 11.5%, 90 basis points higher than the 2018 first quarter. Lower pension cost increased brim 50 basis points. And favorable session performance, which includes productivity and cost reductions, accounted because most of the other 40 basis points of brim expansion.

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

Other contributors to brim expansion largely included sales growth, a lower G&A appraise and affair divestitures at ISR and favorable session action and reduced G&A expenses at Communications and Electronics. The impose appraise increased to 14.7% from 11.1% because the first region of final year and that was largely owing to lower stock-based compensation cost deductions. We because well generated certain liberate cash run of $146 million, compared to a cash outflow of $85 million because the 2018 first region and that improvement was due largely to improve working main action and growth at earnings. because well compared to the 2018 first quarter, we reduced our working main days by 10 to 82.

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

And I'll add that given our trend well orders and noise backlog, we to exist able to drive more upside to this year's sales. at the segments, we expectation sales to modify 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 brim expansion of 120 basis 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 brim expansion: L365 productivity cost savings, lower pension cost and lower losses at the Traveling ripple underground business.

Each of these will further almost 40 basis points of brim expansion. With admire to the Traveling ripple underground affair improvements, we last to expectation those to largely happen at the second half of 2019. Our combined sales growth and brim expansion this year will arise at fragment operating allowance growth of 18% above 2018. We held our fragment brim guidance midpoints at 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding brim 110 basis points, 200 basis points and 70 basis points, respectively, compared to 2018.

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

We nevertheless expectation no debt repayments. And because we previously explained, we suspended fragment purchases until the L3 Harris merger is completed. Looking at the second quarter, we expectation sales among $2.6 billion and $2.7 billion with growth of almost 3%, operating brim at the tall 11% range, with brim expanding more than 100 basis points above the 2018 second quarter, and liberate cash run among $100 million and $200 million. Finally, to intimate my econmic review, we had a too good holiday to the year with our first-quarter results.

The company is growing at a noise pace, becoming more effective and beneficial and because well expanding margin. because 2019, we expectation to modify orders, sales, operating allowance and liberate cash flow, and we're because well firmly tracking to our 12% operating brim objective. Thank you. And I'll now modify it backward 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 because well recently announced the sale of their evening eyesight business, both significant steps to consummating the deal. We last to career with sum regulatory authorities to become the inherent approvals. And because you heard above the Harris allowance shout this morning, everything is tracking to design and there's no convert to 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 estimate capture offsite at the ISR facility at Texas. because L3 and Harris teams obtain more exposure to each other's operations and people, the more we modify grateful of the technique and genius 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 furnish details above the board, organizational structure and management sum bargain close.

Given that this is apt L3's final meeting shout because a segregate public company, I expect to personally thank sum of the men and women of L3 Technologies because the difficult career and dedication throughout the years because making L3 a large put to work. And a special owing to my executive leadership team because their leadership and action during the past attach of years, especially with the velocity of change. because this chapter at the company's history comes to an end, a new and exciting chapter begins. I hold to identify the two CEOs foregoing me, plain Lanza and Mike Strianese, because their eyesight and difficult career 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 hold no supicion we can compose a company that is even 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. consequently it's been a colossal undergo and I'm too grateful because it.

So I because well expect to thank everyone above the shout today because their past and continued advantage at L3 and shortly to exist L3 Harris, especially the analysts above the shout too because the analysts who previously covered L3.

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

Outstanding. sum right. Kerry, why don't we empty the lines because questions.

Questions & Answers:

Operator

[Operator instructions] The first riddle 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 run obviously at L3. I expect to neutral beg above the liberate cash run improvement at the region and some of the working main initiatives more broadly, if you could neutral illustrate class of how much low-hanging fruit you perceive there to be? And then neutral because a follow-up, when you neutral accept the LTM liberate cash run of both Harris and L3, we're at neutral below $2.4 billion.

I'm neutral queer how you view, Chris, the longer term $3 billion liberate cash finish given we've already chopped a destiny of lumber here. Thanks.

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

Gautam, thank you too much because the riddle and the compliment. We're pretty excited almost the first quarter, except a expect manner to proceed because 2019 obviously. I ponder the concentrate above working main and cash generation was something that we lay together at late December. We even changed the incentive comp design to 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 cash run at year three. And I used to speak we hold more confidence at achieving those numbers today than we did when we first announced this bargain above October 14. I'll permit 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. consequently because I commented, we had a dramatic reduction at our working main days quarter-over-quarter. And if you can recall, the first region of 2018 was our high-water signal at condition of working main and cash habit and that's why there's a dramatic reduction compared to this year's first quarter. except certainly what we're doing is placing more attention above radical blocking and tackling, trying to accumulate our receivables sooner, continuing to modify the company and modify inventory at a slower velocity and taking actions to alter our unbilled receivables into billed receivables sooner.

So it's a concerted effort across sum those fronts. because the complete year, we're expecting working main days reduction because well, and we ponder that's going to exist at least two to three days year above year. consequently we to look more improvement the remains of this year because well. And obviously, we're going to attempt to perform better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next riddle 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 to bill. I intend obviously too well at the region even despite the well 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 tug anything dispatch or is the pipeline a small sheet improve than you were originally thinking?

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

That's a large question. I'll speak you, we've indeed tried to 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 attach of ISR accelerations.

We're talking maybe second region to first quarter, which is why we came at a small higher no sole above the orders, except the sales. except I'm equally excited almost what we nevertheless hold looking ahead. There are clearly F-16 habit opportunities. We won a U.S.

and an international customer. And we perhaps hold three to four additional bids notorious that could exist worthy $100 million each. consequently there could exist $300 million to $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 hold been spending time at the heart East. I ponder we hold some interesting strategies and partnerships there that could perform to significant growth. And the classified dirt is indeed picking up. That's an region we've been focused above and hold seen some growth, and given some of the next generation capabilities we have, I expectation more wins there.

So because the complete year, I used to expect book to bill to exist at least 1.1 at each and each segment. And maybe $12 billion of orders overall is what our extend goal is. except that's what we're working toward.

Carter Copeland -- Melius investigation -- Analyst

Great, that's great. Thanks. And neutral a quick clarification above the org structure and leadership announcements you said sum to close. to we presume that's neutral an 8-K disclosure too near, meaning neutral ago your intended close?

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

Yes. I mean, I ponder that's fair. Bill and I nevertheless hold to career out the details. It depends when we're going to near above the timing and such.

But yes, it used to exist a math at that mutual time frame. We'll perform what makes sensation because sum the masses involved, inner and external. consequently I'll exist seeing Bill next week and we'll last to career above a plan. except I ponder both he said and I said we're ahead of the inner design that we've laid out above a destiny of the different milestones we're going for.

And I ponder even masses external that are helping us hold been impressed how distant ahead we are. consequently we're going to hit the basis running above engage