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

The combined corporation will exist robust above the road toward becoming a corporation with the inherent scale and property ought invest at and ship the most mission-critical solutions ought our global aerospace and defense customers. The happen ought found a new A&D corporation is an exciting and engaging challenge, one that Bill and I and the complete 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. during announcing this merger of land final October, our L3 and Harris teams consume been deep at integration planning.

While merger integration activities are occurring throughout the company, our piece teams consume no altered the velocity at the slightest, and we flourish ought hammer out proceed above streamlining and consolidating operations. although 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 material into commercial aviation and are evaluating steps ought rationalize farther our implement footprint.

Not only will the new organizational structure transfer overhead and redundant cost, besides also improve align our capabilities with passenger needs, sharpen concentrate above technique investments and heighten material development efforts ought improve serve our customers. Improving material regulation across improve data collection and analytics is a key piece of managing a more integrated company. final year, we rolled out a progression of criterion econmic and operating metrics throughout the corporation during piece of L365. Closer tracking of main efficiency metrics too during changes ought our incentive compensation plot ought emphasize coin flow consume been helping ought motivate working main improvements.

Even with sales up 14%, our net working main only increased 4%, headmaster ought a reduction at working main days compared ought the preceding year. Operating metrics that pursue manufacturing feature and vendor regulation is supporting our furnish safe and program management teams ought recognize and salute problems earlier, enabling the management team ought clearly observe the interdependencies at their operations. I flourish ought create passenger fight a priority although the company, although myself and the complete leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military ought argument L3's sole and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought face customers at the center East. during you are aware, international material development relies upon habitation long-term relationships and listening ought our customers ought know their challenges. We flourish ought create more and more inroads, seeing an improved tenor ought our meetings and consume received certain reception ought our merger with Harris from our international customers.

Bottom queue is we are seeing a large need worldwide although an innovative, agile corporation who wants ought fellow with their customers. few contemporary awards highlight our talent at delivering integrated mission solutions. at the recently announced $1 billion Peregrine give although the Royal Australian attitude Force, L3 will ship four next-gen EW plane above a biz plane platform. This includes a foundation communications infrastructure that will integrate with the Commonwealth's joint battle fighting networks, providing a critical unite among platforms, including the F-35, the Growler and maritime assets.

Our alternative ought compete although the create of FARA although the U.S. army is another parade of our talent ought use customers with disruptive technique and ought fellow above an significant platform, integrating different communications and mission systems. Many of our capabilities align with the Army's peak priorities, and we flourish ought question property ought face these needs. Our material development activities are now more ambitious and focused and also improve integrated with order and proposal, engineering and R&D functions.

I observe many more instances of collaboration across divisions during we murder upon our strategy. Leadership throughout the corporation is buying into the conception that we can acquire more and improve serve our customers if we trade together. Next, I need ought affect above the proceed we are making above the talent front. Attracting, developing and retaining peak engineering and managerial talent is the lifeblood of the company.

We began leveraging our HR organization ought mature strategies ought become more effective at planning our talent needs, at recruiting and retention and at identifying and exercise our emerging leaders ought acknowledge 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 ought perfect the material 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 spend ought a journal of our piece performance. Our robust quarterly regulation was led by the ISR Systems piece 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 foundation points from the preceding period.

Growth was most impressive at our plane procurement and ISR missionization material during few key programs accelerated, including the U.S. attitude compel 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 complete grew double digits.

Given the broad-based growth at this segment, we flourish ought need ISR Systems ought exist our fastest-growing material 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 foundation 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 mingle and price reduction. Lastly, electric Systems sales grew 2% and operating revenue rose 3%. ES' segment-leading border improved 20 foundation points ought 14.7%.

The area was impacted by a sales decline at the Defense exercise Solutions material owing ought final year's loss of the C-17 exercise condense ought the OEM. However, key highlights at electric Systems involve double-digit growth at precision weapons which grew sales 18% at the quarter. owing ought the headwinds from the C-17 loss, we need modest sales growth at 2019, besides we flourish ought need improved border from ongoing price takeout and favorable condense performance. Given our robust regulation at the first area and improving direction momentum, we are increasing our 2019 guidance.

Now I will spend it above ought Ralph ought journal our financials and furnish details of our updated guidance.

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

Thanks, Chris. I'll journal some details approximately the first area and then our 2019 guidance update. Reviewing the first quarter, during Chris explained, we had a same robust commence ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, complete of which was organic.

Segment operating revenue and adjusted diluted EPS each grew 24%, and piece border increased 90 foundation points ought 11.5%. We also generated certain release coin flow which is meaningful although we repeatedly consume negative coin flow at our first quarters.Next, I'll comment above some details approximately the 2019 first quarter. Adjusted diluted EPS was $2.89, an amplify of $0.55 or 24% above the 2018 first area driven mostly by operating revenue growth stemming from our 14% sales growth and our 90 foundation points of border expansion. Adjusted diluted EPS excludes integration and transaction expenses related ought the L3 Harris merger and a $2 million material divestiture loss.

Sales increased 14% ought $2.7 billion driven by robust 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 although ISR and Communications included some favorable quarterly timing items which will lower their second area growth rates. at Electronics, sales were negatively impacted by final summer's C-17 exercise condense loss which lowered growth by 440 foundation points at that segment.

Operating border regulation was same good. complete piece operating border increased ought 11.5%, 90 foundation points higher than the 2018 first quarter. Lower pension revenue increased border 50 foundation points. And favorable condense performance, which includes productivity and price reductions, accounted although most of the other 40 foundation points of border expansion.

As a reminder, most of our productivity improvements and price reduction actions show at favorable condense performance. each piece had double-digit border compared ought the 2018 first quarter. ISR border increased 120 foundation points ought 10.4%, Communications increased 160 foundation points ought 10.7% and Electronics increased 20 foundation points ought 14.7%. Operating margins benefited from lower pension revenue stemming from the service certainty accrual freeze that we implemented effective January 1.

Other contributors ought border expansion mostly included sales growth, a lower G&A evaluate and material divestitures at ISR and favorable condense regulation and reduced G&A expenses at Communications and Electronics. The impose evaluate increased ought 14.7% from 11.1% although the first area of final year and that was mostly owing ought lower stock-based compensation revenue deductions. We also generated certain release coin flow of $146 million, compared ought a coin outflow of $85 million although the 2018 first area and that improvement was due mostly ought improve working main regulation and growth at earnings. also compared ought the 2018 first quarter, we reduced our working main days by 10 ought 82.

As Chris explained, we consume placed more attention above improving working main and generating release coin 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 evaluate by $150 million ought $10.9 billion, which is expected growth of approximately 6.5% above 2018. Most of the guidance amplify is at ISR Systems.

And I'll add that given our contemporary robust orders and well backlog, we to exist capable ought motivate more upside ought this year's sales. at the segments, we need sales ought spend 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 border expansion of 120 foundation points ought 12% is unchanged and firmly above track. memorize that above our January 29 revenue call, we explained the three drivers of our 2019 border expansion: L365 productivity price savings, lower pension revenue and lower losses at the Traveling wave subway business.

Each of these will advance approximately 40 foundation points of border expansion. With honour ought the Traveling wave subway material improvements, we flourish ought need those ought mostly hazard at the second half of 2019. Our combined sales growth and border expansion this year will arise at piece operating revenue growth of 18% above 2018. We held our piece border guidance midpoints at 11.2% although ISR, 11.1% although Communications and 14.4% although Electronics with the segments expanding border 110 foundation points, 200 foundation points and 70 foundation points, respectively, compared ought 2018.

We lowered our impose evaluate ought 19% from 20%, mostly owing ought lower expected foreign revenue taxes. And although release coin flow, we increased it ought $1.055 billion, which is approximately 13% higher than 2018 with a coin conversion evaluate of 113%. coin at the aim of March was $1.1 billion. And regarding main allocation, at February, we increased our quarterly coin dividend by $0.05 ought $0.85 per share.

We however need no debt repayments. And during we previously explained, we suspended piece purchases until the L3 Harris merger is completed. Looking at the second quarter, we need sales among $2.6 billion and $2.7 billion with growth of approximately 3%, operating border at the high 11% range, with border expanding more than 100 foundation points above the 2018 second quarter, and release coin flow among $100 million and $200 million. Finally, ought familiar my econmic review, we had a same good commence ought the year with our first-quarter results.

The corporation is growing at a well pace, becoming more effective and advantageous and also expanding margin. although 2019, we need ought spend orders, sales, operating revenue and release coin flow, and we're also firmly tracking ought our 12% operating border objective. Thank you. And I'll now spend it hind ought Chris.

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

Thanks, Ralph. during you saw above April 4, both L3 and Harris received shareholder approvals although the merger, and Harris also recently announced the sale of their evening eyesight business, both significant steps ought consummating the deal. We flourish ought trade with complete regulatory authorities ought benefit the inherent approvals. And during you heard above the Harris revenue shriek this morning, everything is tracking ought plot 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 evaluate arrest offsite at the ISR facility at Texas. during L3 and Harris teams obtain more exposure ought each other's operations and people, the more we become grateful of the technique and talent of the combined corporation and the latent although 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 near commerce close.

Given that this is responsible L3's final rally shriek during a piece public company, I need ought personally thank complete of the men and women of L3 Technologies although the difficult trade and dedication throughout the years although making L3 a large lay ought work. And a extraordinary owing ought my executive leadership team although their leadership and regulation during the past unite of years, specially with the velocity of change. during this chapter at the company's history comes ought an end, a new and exciting chapter begins. I consume ought confess the two CEOs previous me, unfold Lanza and Mike Strianese, although their eyesight and difficult trade ought benefit L3 ought this stage.

By combining what makes L3 such a extraordinary corporation with the best of what Harris has ought offer, I consume no doubt we can get a corporation that is even more agile, innovative and customer-centric, a best-of-breed aerospace and defense technique corporation that delivers superior evaluate although employees, although customers and although the shareholders.

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

Yes, Chris. I was thinking approximately this yesterday. And I counted that it's been 52 consecutive quarterly revenue calls although me. consequently it's been a enormous undergo and I'm same grateful although it.

So I also need ought thank everyone above the shriek today although their past and continued favour at L3 and presently ought exist L3 Harris, specially the analysts above the shriek too during the analysts who previously covered L3.

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

Outstanding. complete right. Kerry, why don't we cavity the lines although 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 really above although Cai. Congratulations above a large flow obviously at L3. I need ought impartial need above the release coin flow improvement at the area and some of the working main initiatives more broadly, if you could impartial illustrate kind of how much low-hanging fruit you perceive there ought be? And then impartial during a follow-up, when you impartial acknowledge the LTM release coin flow of both Harris and L3, we're at impartial under $2.4 billion.

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

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

Gautam, thank you same much although the question and the compliment. We're fairly excited approximately the first quarter, besides a need manner ought proceed although 2019 obviously. I think the concentrate above working main and coin generation was something that we attitude together at late December. We even changed the incentive comp plot ought highlight the importance of generating release cash.

And Bill and I address a destiny approximately the $500 million of synergies and the $3 billion of coin flow at year three. And I used to tell we consume more belief at achieving those numbers today than we did when we first announced this commerce above October 14. I'll allow Ralph address approximately some of the improvements we made here at the first quarter.

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

Sure. consequently during I commented, we had a dramatic reduction at our working main days quarter-over-quarter. And if you can recall, the first area of 2018 was our high-water symbol at condition of working main and coin 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 above inherent blocking and tackling, trying ought accumulate our receivables sooner, continuing ought spend the corporation and spend inventory at a slower velocity and taking actions ought vary our unbilled receivables into billed receivables sooner.

So it's a concerted pains across complete those fronts. although the complete year, we're expecting working main days reduction during well, and we think that's going ought exist at least two ought three days year above year. consequently we to observe more improvement the remainder of this year during well. And obviously, we're going ought attempt ought perform better.

Gautam Khanna -- Cowen and corporation -- Analyst

Appreciate it.

Operator

The next question 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 ought bill. I intend obviously same robust at the area even despite the robust 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 dispatch or is the pipeline a few 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 ought reinvigorate the BD organization and function. We've made investments that you've heard me address approximately at the past at systems and standardizing policies and procedures. There were a unite of ISR accelerations.

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

and an international customer. And we maybe consume three ought four additional bids remarkable that could exist worth $100 million each. consequently there could exist $300 million ought $500 million of more orders of F-16 during an example. C-130 AMP, hopefully we'll listen above that.

As I mentioned, the team and I consume been spending time at the center East. I think we consume some interesting strategies and partnerships there that could guide ought significant growth. And the classified soil is indeed picking up. That's an region we've been focused above and consume seen some growth, and given some of the next generation capabilities we have, I need more wins there.

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

Carter Copeland -- Melius investigation -- Analyst

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

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