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

The combined company will exist healthy above the path toward becoming a company with the indispensable scale and property to invest at and forward the most mission-critical solutions to our global aerospace and defense customers. The occur to build a new A&D company is an exciting and engaging challenge, one that Bill and I and the sum leadership team are ready to confess on. And at the many visits with our L3 and Harris employees at the field, this excitement is broadly shared throughout. during announcing this merger of say attitude October, our L3 and Harris teams preserve been deep at integration planning.

While merger integration activities are occurring throughout the company, our piece teams preserve no altered the rate at the slightest, and we attitude to hammer out advance 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 career into commercial aviation and are evaluating steps to rationalize farther our tool footprint.

Not virgin will the new organizational structure touch overhead and redundant cost, besides during although healthy better align our capabilities with guest needs, sharpen concentrate above technique investments and enhance career development efforts to better serve our customers. Improving career deed over better news collection and analytics is a key divide of managing a more integrated company. attitude 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 too although changes to our incentive compensation scheme to emphasize money run preserve been helping to motivate working chief improvements.

Even with sales up 14%, our net working chief virgin increased 4%, main to a reduction at working chief days compared to the previous year. Operating metrics that explore manufacturing quality and vendor deed is supporting our equip safe and program management teams to recognize and hail problems earlier, enabling the management team to clearly visit the interdependencies at their operations. I attitude to forge guest combat a priority because the company, because myself and the sum leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military to argue L3's virgin and disruptive capabilities and to highlight our technique solutions. My team and I went out again to satisfy customers at the middle East. although you are aware, international career development relies upon dwelling long-term relationships and listening to our customers to learn their challenges. We attitude to forge more and more inroads, seeing an improved tenor to our meetings and preserve received certain reception to our merger with Harris from our international customers.

Bottom queue is we are seeing a big lack worldwide because an innovative, agile company who wants to companion with their customers. few tendency awards highlight our competence at delivering integrated mission solutions. at the recently announced $1 billion Peregrine harmony because the Royal Australian attitude Force, L3 will forward four next-gen EW aeroplane above a biz aeroplane platform. This includes a foundation communications infrastructure that will integrate with the Commonwealth's mutual battle fighting networks, providing a acute connect amid platforms, including the F-35, the Growler and maritime assets.

Our alternative to compete because the forge of FARA because the U.S. army is another parade of our competence to utilize customers with disruptive technique and to companion above an significant platform, integrating different communications and mission systems. Many of our capabilities align with the Army's climax priorities, and we attitude to divide property to satisfy these needs. Our career development activities are now more ambitious and focused and although healthy better integrated with order and proposal, engineering and R&D functions.

I visit many more instances of collaboration over divisions although we murder upon our strategy. Leadership throughout the company is buying into the sentiment that we can advantage more and better serve our customers if we occupation together. Next, I desire to impress above the advance we are making above the talent front. Attracting, developing and retaining climax engineering and managerial talent is the lifeblood of the company.

We began leveraging our HR organization to age strategies to become more effective can planning our talent needs, can recruiting and retention and can identifying and training our emerging leaders to confess 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 to better the career 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 means of our thinking.

Now let's become to a publication of our piece performance. Our sturdy quarterly deed was led by the ISR Systems piece which grew funded orders 58% and sales 23%. Book to bill was 1.38. Operating earnings increased 40%, generating a verge of 10.4%, up 120 base points from the previous period.

Growth was most impressive at our aeroplane procurement and ISR missionization career although few key programs accelerated, including the U.S. attitude constrain Compass Call, Australian Peregrine and the U.S. Missile Defense Agency HALO program. at addition, EO/IR sensors, soldier systems and universe and sensor businesses sum grew double digits.

Given the broad-based growth at this segment, we attitude to expectation ISR Systems to exist our fastest-growing career with improved margin. Communications and Networked Systems returned to growth with funded orders up 26% and sales up 11%. Book to bill was a sturdy 1.19. Operating earnings 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 communication and ground-based SATCOM system shipments. Operating verge improvement was driven by program performance, sales mingle and earnings reduction. Lastly, electrical Systems sales grew 2% and operating earnings rose 3%. ES' segment-leading verge improved 20 base points to 14.7%.

The zone was impacted by a sales decline at the Defense training Solutions career owing to attitude year's loss of the C-17 training harmony to the OEM. However, key highlights can 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, besides during we attitude to expectation improved verge from ongoing earnings takeout and favorable harmony performance. Given our sturdy deed at the first zone and improving order momentum, we are increasing our 2019 guidance.

Now I will become it can to Ralph to publication our financials and furnish details of our updated guidance.

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

Thanks, Chris. I'll publication some details nearly the first zone and then our 2019 guidance update. Reviewing the first quarter, although Chris explained, we had a same sturdy vacation to the year and we exceeded our plan. Orders increased 28% and sales grew 14%, sum of which was organic.

Segment operating earnings and adjusted diluted EPS each grew 24%, and piece verge increased 90 base points to 11.5%. We although healthy generated certain liberate money run which is meaningful although we frequently preserve negative money run at our first quarters.Next, I'll comment above some details nearly the 2019 first quarter. Adjusted diluted EPS was $2.89, an amplify of $0.55 or 24% can the 2018 first zone driven mainly by operating earnings growth stemming from our 14% sales growth and our 90 base points of verge expansion. Adjusted diluted EPS excludes integration and transaction expenses related to the L3 Harris merger and a $2 million career divestiture loss.

Sales increased 14% to $2.7 billion driven by sturdy growth at our DoD and international markets. can the piece 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 zone growth rates. can Electronics, sales were negatively impacted by attitude summer's C-17 training harmony loss which lowered growth by 440 base points at that segment.

Operating verge deed was same good. sum piece operating verge increased to 11.5%, 90 base points higher than the 2018 first quarter. Lower pension earnings increased verge 50 base points. And favorable harmony performance, which includes productivity and earnings reductions, accounted because most of the other 40 base points of verge expansion.

As a reminder, most of our productivity improvements and earnings reduction actions display at favorable harmony performance. each piece had double-digit verge compared to the 2018 first quarter. ISR verge 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 earnings stemming from the service belief accrual freeze that we implemented effective January 1.

Other contributors to verge expansion mainly included sales growth, a lower G&A tax and career divestitures can ISR and favorable harmony deed and reduced G&A expenses can Communications and Electronics. The tax assess increased to 14.7% from 11.1% because the first zone of attitude year and that was mainly owing to lower stock-based compensation earnings deductions. We although healthy generated certain liberate money run of $146 million, compared to a money outflow of $85 million because the 2018 first zone and that improvement was due mainly to better working chief deed and growth at earnings. although healthy compared to the 2018 first quarter, we reduced our working chief days by 10 to 82.

As Chris explained, we preserve placed more attention above improving working chief and generating liberate money 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 nearly 6.5% can 2018. Most of the guidance amplify is at ISR Systems.

And I'll add that given our tendency sturdy orders and tough backlog, we to exist capable to motivate more upside to this year's sales. can the segments, we expectation sales to become 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 verge expansion of 120 base points to 12% is unchanged and firmly above track. memorize that above our January 29 earnings call, we explained the three drivers of our 2019 verge expansion: L365 productivity earnings savings, lower pension earnings and lower losses at the Traveling wave underground business.

Each of these will advance nearly 40 base points of verge expansion. With glory to the Traveling wave underground career improvements, we attitude to expectation those to largely occur at the second half of 2019. Our combined sales growth and verge expansion this year will originate at piece operating earnings growth of 18% can 2018. We held our piece verge guidance midpoints can 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding verge 110 base points, 200 base points and 70 base points, respectively, compared to 2018.

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

We nevertheless expectation no debt repayments. And although we previously explained, we suspended piece purchases until the L3 Harris merger is completed. Looking can the second quarter, we expectation sales amid $2.6 billion and $2.7 billion with growth of nearly 3%, operating verge at the high 11% range, with verge expanding more than 100 base points can the 2018 second quarter, and liberate money run amid $100 million and $200 million. Finally, to end my econmic review, we had a same good vacation to the year with our first-quarter results.

The company is growing can a tough pace, becoming more effective and advantageous and although healthy expanding margin. because 2019, we expectation to become orders, sales, operating earnings and liberate money flow, and we're although healthy firmly tracking to our 12% operating verge objective. Thank you. And I'll now become it uphold to Chris.

Chris Kubasik -- Chairman, head 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 healthy recently announced the sale of their evening sight business, both significant steps to consummating the deal. We attitude to occupation with sum regulatory authorities to advantage the indispensable approvals. And although you heard above the Harris earnings bark this morning, everything is tracking to scheme 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 tax arrest offsite can the ISR facility at Texas. although L3 and Harris teams acquire more exposure to each other's operations and people, the more we become grateful of the technique and talent 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 end career close.

Given that this is apt L3's attitude conference bark although a divide public company, I desire to personally thank sum of the men and women of L3 Technologies because the difficult occupation and dedication throughout the years because making L3 a big post to work. And a exceptional owing to my executive leadership team because their leadership and deed during the past attach of years, specially with the rate of change. although this chapter at the company's history comes to an end, a new and exciting chapter begins. I preserve to admit the two CEOs previous me, unfold Lanza and Mike Strianese, because their sight and difficult occupation to acquire L3 to this stage.

By combining what makes L3 such a exceptional company with the best of what Harris has to offer, I preserve no supicion we can forge a company that is even more agile, innovative and customer-centric, a best-of-breed aerospace and defense technique company that delivers superior tax because employees, because customers and because the shareholders.

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

Yes, Chris. I was thinking nearly this yesterday. And I counted that it's been 52 consecutive quarterly earnings calls because me. consequently it's been a giant experience and I'm same grateful because it.

So I although healthy desire to thank everyone above the bark today because their past and continued advantage at L3 and shortly to exist L3 Harris, specially the analysts above the bark too although the analysts who previously covered L3.

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

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

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and company -- Analyst

Yes. It's Gautam truly above because Cai. Congratulations above a big flow obviously can L3. I desire to neutral demand above the liberate money run improvement at the zone and some of the working chief initiatives more broadly, if you could neutral explain organize of how much low-hanging fruit you perceive there to be? And then neutral although a follow-up, while you neutral confess the LTM liberate money run of both Harris and L3, we're can neutral below $2.4 billion.

I'm neutral quaint how you view, Chris, the longer term $3 billion liberate money sum given we've already chopped a lot of timber here. Thanks.

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

Gautam, thank you same much because the mystery and the compliment. We're pretty excited nearly the first quarter, besides during a expectation means to proceed because 2019 obviously. I study the concentrate above working chief and money generation was something that we post together at late December. We even changed the incentive comp scheme to highlight the importance of generating liberate cash.

And Bill and I tongue a lot nearly the $500 million of synergies and the $3 billion of money run at year three. And I used to say we preserve more confidence at achieving those numbers today than we did while we first announced this career above October 14. I'll allow Ralph tongue nearly some of the improvements we made here at the first quarter.

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

Sure. consequently although I commented, we had a dramatic reduction at our working chief days quarter-over-quarter. And if you can recall, the first zone of 2018 was our high-water sign at condition of working chief and money manners and that's why there's a dramatic reduction compared to this year's first quarter. besides during of lesson what we're doing is placing more attention above indispensable blocking and tackling, trying to amass our receivables sooner, continuing to become the company and become inventory can a slower rate and taking actions to alter our unbilled receivables into billed receivables sooner.

So it's a concerted endeavour over sum those fronts. because the sum year, we're expecting working chief days reduction although well, and we study that's going to exist can least two to three days year can year. consequently we to visit more improvement the remainder of this year although well. And obviously, we're going to attempt to do better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next mystery will fetch 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 same sturdy at the zone even in spite of the sturdy 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 deliver or is the pipeline a few sheet better than you were originally thinking?

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

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

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

and an international customer. And we maybe preserve three to four additional bids noted that could exist worth $100 million each. consequently there could exist $300 million to $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 preserve been spending time at the middle East. I study we preserve some interesting strategies and partnerships there that could do to significant growth. And the classified world is indeed picking up. That's an district we've been focused above and preserve seen some growth, and given some of the next generation capabilities we have, I expectation more wins there.

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

Carter Copeland -- Melius inquiry -- Analyst

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

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

Yes. I mean, I study that's fair. Bill and I nevertheless preserve to occupation out the details. It depends while we're going to end above the timing and such.

But yes, it used to exist a math at that commonplace time frame. We'll do what makes sensation because sum the nation involved, inside and external. consequently I'll exist seeing Bill next week and we'll attitude to occupation above a plan. besides during I study both he said and I said we're ahead of the inside scheme that we've laid out above a lot of the different milestones we're going for.