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

The combined corporation will exist healthy at the street toward becoming a corporation with the necessary scale and goods ought invest at and send the most mission-critical solutions ought our global aerospace and defense customers. The occur ought construct a new A&D corporation is an exciting and engaging challenge, one that Bill and I and the sum leadership team are ready ought 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 possess been deep at integration planning.

While merger integration activities are occurring throughout the company, our portion teams possess no altered the rate at the slightest, and we thrive ought hammer out proceed at 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 affair into commercial aviation and are evaluating steps ought rationalize farther our instrument footprint.

Not unique will the new organizational structure touch overhead and redundant cost, besides either improve align our capabilities with visitor needs, sharpen concentrate at technique investments and heighten affair development efforts ought improve serve our customers. Improving affair rule along improve data collection and analytics is a key isolate of managing a more integrated company. final year, we rolled out a progression of standard economical and operating metrics throughout the corporation because isolate of L365. Closer tracking of headmaster efficiency metrics also because changes ought our incentive compensation design ought emphasize money flow possess been helping ought drive working headmaster improvements.

Even with sales up 14%, our net working headmaster unique increased 4%, headmaster ought a reduction at working headmaster days compared ought the previous year. Operating metrics that pursue manufacturing peculiarity and vendor rule is supporting our furnish safe and program management teams ought identify and address problems earlier, enabling the management team ought clearly scream on the interdependencies at their operations. I thrive ought invent visitor endeavour 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 ought controversy L3's unique and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought satisfy customers at the center East. because you are aware, international affair development relies upon house long-term relationships and listening ought our customers ought learn their challenges. We thrive ought invent more and more inroads, seeing an improved tenor ought our meetings and possess received sure reception ought our merger with Harris from our international customers.

Bottom row is we are seeing a large request worldwide because an innovative, agile corporation who wants ought fellow with their customers. little modern awards highlight our genius at delivering integrated mission solutions. at the recently announced $1 billion Peregrine grant because the Royal Australian air Force, L3 will send four next-gen EW airplane at a biz aircraft platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's common battle fighting networks, providing a critical connect amid platforms, including the F-35, the Growler and maritime assets.

Our alternative ought compete because the forge of FARA because the U.S. army is another demonstration of our genius ought use customers with disruptive technique and ought fellow at an significant platform, integrating various communications and mission systems. Many of our capabilities align with the Army's peak priorities, and we thrive ought isolate goods ought satisfy these needs. Our affair development activities are now more ambitious and focused and either improve integrated with bid and proposal, engineering and R&D functions.

I scream on many more instances of collaboration along divisions because we kill upon our strategy. Leadership throughout the corporation is buying into the view that we can become more and improve serve our customers if we task together. Next, I expectation ought impress at the proceed we are making at 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 age strategies ought become more effective at planning our genius needs, at recruiting and retention and at identifying and training our emerging leaders ought accept at larger roles at the company. We made significant proceed at the past year engaging our workforce. Overall, the investments and changes we are making ought improve the affair are beginning ought generate tangible benefits ought growth and margin. Our employees are increasingly embracing the modify and the fabric of integration, collaboration and innovation is becoming woven deeper into the manner of our thinking.

Now let's become ought a magazine of our portion performance. Our robust quarterly rule was led by the ISR Systems portion which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating revenue increased 40%, generating a border of 10.4%, up 120 basis points from the previous period.

Growth was most impressive at our airplane procurement and ISR missionization affair because little key programs accelerated, including the U.S. air compel 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 thrive ought wish 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 robust 1.19. Operating revenue 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 border improvement was driven by program performance, sales mix and charge reduction. Lastly, electric Systems sales grew 2% and operating revenue rose 3%. ES' segment-leading border improved 20 basis points ought 14.7%.

The zone was impacted by a sales reject at the Defense training Solutions affair due ought final year's loss of the C-17 training council ought the OEM. However, key highlights at electric Systems include double-digit growth at precision weapons which grew sales 18% at the quarter. due ought the headwinds from the C-17 loss, we wish modest sales growth at 2019, besides we thrive ought wish improved border from ongoing charge takeout and favorable council performance. Given our robust rule at the first zone and improving direction momentum, we are increasing our 2019 guidance.

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

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

Thanks, Chris. I'll magazine some details about the first zone and then our 2019 guidance update. Reviewing the first quarter, because Chris explained, we had a identical robust initiate ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, sum of which was organic.

Segment operating revenue and adjusted diluted EPS each grew 24%, and portion border increased 90 basis points ought 11.5%. We either generated sure liberate money flow which is meaningful because we always possess negative money flow at our first quarters.Next, I'll comment at some details about the 2019 first quarter. Adjusted diluted EPS was $2.89, an expand of $0.55 or 24% at the 2018 first zone driven chiefly by operating revenue growth stemming from our 14% sales growth and our 90 basis points of border 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 robust growth at our DoD and international markets. at the portion 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 zone growth rates. at Electronics, sales were negatively impacted by final summer's C-17 training council loss which lowered growth by 440 basis points at that segment.

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

As a reminder, most of our productivity improvements and charge reduction actions show at favorable council performance. each portion had double-digit border compared ought the 2018 first quarter. ISR border 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 border expansion chiefly included sales growth, a lower G&A worthy and affair divestitures at ISR and favorable council rule and reduced G&A expenses at Communications and Electronics. The tax worthy increased ought 14.7% from 11.1% because the first zone of final year and that was chiefly due ought lower stock-based compensation price deductions. We either generated sure liberate money flow of $146 million, compared ought a money outflow of $85 million because the 2018 first zone and that improvement was due chiefly ought improve working headmaster rule and growth at earnings. either compared ought the 2018 first quarter, we reduced our working headmaster days by 10 ought 82.

As Chris explained, we possess placed more attention at 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 tax by $150 million ought $10.9 billion, which is expected growth of about 6.5% at 2018. Most of the guidance expand is at ISR Systems.

And I'll add that given our modern robust orders and healthy backlog, we ought exist able ought drive more upside ought this year's sales. at the segments, we wish sales ought become 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 border expansion of 120 basis points ought 12% is unchanged and firmly at track. memorize that at our January 29 revenue call, we explained the three drivers of our 2019 border expansion: L365 productivity charge savings, lower pension price and lower losses at the Traveling wave subway business.

Each of these will contribute about 40 basis points of border expansion. With esteem ought the Traveling wave subway affair improvements, we thrive ought wish those ought chiefly occur at the second half of 2019. Our combined sales growth and border expansion this year will originate at portion operating revenue growth of 18% at 2018. We held our portion border guidance midpoints at 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding border 110 basis points, 200 basis points and 70 basis points, respectively, compared ought 2018.

We lowered our tax worthy ought 19% from 20%, chiefly due ought lower expected foreign revenue taxes. And because liberate money flow, we increased it ought $1.055 billion, which is about 13% higher than 2018 with a money conversion worthy of 113%. money at the purpose 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 cottage wish no debt repayments. And because we previously explained, we suspended portion purchases until the L3 Harris merger is completed. Looking at the second quarter, we wish sales amid $2.6 billion and $2.7 billion with growth of about 3%, operating border at the high 11% range, with border expanding more than 100 basis points at the 2018 second quarter, and liberate money flow amid $100 million and $200 million. Finally, ought end my economical review, we had a identical good initiate ought the year with our first-quarter results.

The corporation is growing at a healthy pace, becoming more effective and advantageous and either expanding margin. because 2019, we wish ought become orders, sales, operating revenue and liberate money flow, and we're either firmly tracking ought our 12% operating border objective. Thank you. And I'll now become it backward ought Chris.

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

Thanks, Ralph. because you saw at April 4, both L3 and Harris received shareholder approvals because the merger, and Harris either recently announced the sale of their evening vision business, both significant steps ought consummating the deal. We thrive ought task with sum regulatory authorities ought become the necessary approvals. And because you heard at the Harris revenue summon this morning, everything is tracking ought design and there's no modify ought 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 appraise grip offsite at the ISR facility at Texas. because L3 and Harris teams become more exposure ought each other's operations and people, the more we become grateful of the technique and genius of the combined corporation and the latent because what we can carry out together. I've been working closely with Bill at the integration, and we will furnish details at the board, organizational structure and management end commerce close.

Given that this is apt L3's final rally summon because a isolate public company, I expectation ought personally thank sum of the men and women of L3 Technologies because the difficult task and dedication throughout the years because making L3 a large put ought work. And a particular because of my executive leadership team because their leadership and rule during the past connect of years, especially with the rate of change. because this chapter at the company's history comes ought an end, a new and exciting chapter begins. I possess ought admit the two CEOs previous me, unfold Lanza and Mike Strianese, because their vision and difficult task ought obtain L3 ought this stage.

By combining what makes L3 such a particular corporation with the best of what Harris has ought offer, I possess no doubt we can invent a corporation that is flat more agile, innovative and customer-centric, a best-of-breed aerospace and defense technique corporation that delivers superior appraise because employees, because customers and because the shareholders.

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

Yes, Chris. I was thinking about this yesterday. And I counted that it's been 52 consecutive quarterly revenue calls because me. hence it's been a vast experience and I'm identical grateful because it.

So I either expectation ought thank everyone at the summon today because their past and continued advantage at L3 and directly ought exist L3 Harris, especially the analysts at the summon also 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 question will become from Cai Von Rumohr of Cowen and Company.

Gautam Khanna -- Cowen and corporation -- Analyst

Yes. It's Gautam indeed at because Cai. Congratulations at a large flow obviously at L3. I expectation ought fair ask at the liberate money flow improvement at the zone and some of the working headmaster initiatives more broadly, if you could fair illustrate classification of how much low-hanging fruit you perceive there ought be? And then fair because a follow-up, when you fair accept the LTM liberate money flow of both Harris and L3, we're at fair under $2.4 billion.

I'm fair curious how you view, Chris, the longer language $3 billion liberate money aim given we've already chopped a destiny of wood here. Thanks.

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

Gautam, thank you identical much because the question and the compliment. We're pretty excited about the first quarter, besides a expect manner ought proceed because 2019 obviously. I count the concentrate at working headmaster and money generation was something that we lay together at late December. We flat changed the incentive comp design ought highlight the importance of generating liberate cash.

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

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

Sure. hence because I commented, we had a dramatic reduction at our working headmaster days quarter-over-quarter. And if you can recall, the first zone of 2018 was our high-water symbol at condition of working headmaster and money custom and that's why there's a dramatic reduction compared ought this year's first quarter. besides naturally what we're doing is placing more attention at theorem blocking and tackling, trying ought heap our receivables sooner, continuing ought become the corporation and become inventory at a slower rate and taking actions ought change our unbilled receivables into billed receivables sooner.

So it's a concerted effort along sum those fronts. because the entire year, we're expecting working headmaster days reduction because well, and we count that's going ought exist at least two ought three days year at year. hence we ought scream on more improvement the rest of this year because well. And obviously, we're going ought effort ought carry out better.

Gautam Khanna -- Cowen and corporation -- Analyst

Appreciate it.

Operator

The next question will become from Carter Copeland of Melius Research.

Carter Copeland -- Melius inquiry -- Analyst

Hey, good morning, Chris. I wondered if you could comment at the book ought bill. I intend obviously identical robust at the zone flat in spite of the robust sales. Was there anything at there that surprised you from a timing perspective or magnitude perspective that we saw early at this year? Did we haul anything send or is the pipeline a minute portion improve than you were originally thinking?

Chris Kubasik -- Chairman, leader 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 about at the past at systems and standardizing policies and procedures. There were a connect of ISR accelerations.

We're talking perhaps second zone ought first quarter, which is why we came at a minute higher no unique at the orders, besides the sales. besides I'm equally excited about what we cottage possess looking ahead. There are clearly F-16 training opportunities. We won a U.S.

and an international customer. And we perhaps possess three ought four additional bids noticeable that could exist worthy $100 million each. hence there could exist $300 million ought $500 million of more orders of F-16 because an example. C-130 AMP, hopefully we'll hear at that.

As I mentioned, the team and I possess been spending time at the center East. I count we possess some interesting strategies and partnerships there that could conduct ought significant growth. And the classified clay is indeed picking up. That's an belt we've been focused at and possess seen some growth, and given some of the next generation capabilities we have, I wish more wins there.

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

Carter Copeland -- Melius inquiry -- Analyst

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

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

Yes. I mean, I count that's fair. Bill and I cottage possess ought task out the details. It depends when we're going ought near at the timing and such.

But yes, it used to exist a math at that usual time frame. We'll carry out what makes feeling because sum the nation involved, inner and external.