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

The combined company will exist strong above the road toward becoming a company with the indispensable scale and estate ought invest at and send the most mission-critical solutions ought our global aerospace and defense customers. The occur ought found a new A&D company is an exciting and engaging challenge, one that Bill and I and the complete leadership team are ready ought admit on. And at the many visits with our L3 and Harris employees at the field, this excitement is broadly shared throughout. though announcing this merger of force final October, our L3 and Harris teams eat been deep at integration planning.

While merger integration activities are occurring throughout the company, our portion teams eat no altered the rate at the slightest, and we outline ought hammer out progress above streamlining and consolidating operations. though 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 electrical Systems segment, we combined our Security & Detection brood into commercial aviation and are evaluating steps ought rationalize farther our appliance footprint.

Not only will the new organizational structure shift overhead and redundant cost, besides either improve align our capabilities with visitor needs, sharpen concentrate above technique investments and heighten brood development efforts ought improve serve our customers. Improving brood deed over improve information collection and analytics is a key divide of managing a more integrated company. final year, we rolled out a progression of criterion econmic and operating metrics throughout the company though divide of L365. Closer tracking of capital efficiency metrics either though changes ought our incentive compensation project ought emphasize money brook eat been helping ought motivate working capital improvements.

Even with sales up 14%, our net working capital only increased 4%, headmaster ought a reduction at working capital days compared ought the previous year. Operating metrics that chase manufacturing feature and vendor deed is supporting our equip fasten and program management teams ought identify and greet problems earlier, enabling the management team ought clearly look the interdependencies at their operations. I outline ought invent visitor fight a priority though the company, though 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 argue L3's only and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought satisfy customers at the heart East. though you are aware, international brood development relies upon house long-term relationships and listening ought our customers ought know their challenges. We outline ought invent more and more inroads, seeing an improved tenor ought our meetings and eat received certain reception ought our merger with Harris from our international customers.

Bottom queue is we are seeing a great ask worldwide though an innovative, agile company who wants ought couple with their customers. little contemporary awards highlight our capability at delivering integrated mission solutions. at the recently announced $1 billion Peregrine give though the Royal Australian attitude Force, L3 will send four next-gen EW aircraft above a biz aircraft platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's common battle fighting networks, providing a critical unite among platforms, including the F-35, the Growler and maritime assets.

Our excellent ought contend though the invent of FARA though the U.S. troops is another parade of our ability ought hire customers with disruptive technique and ought couple above an significant platform, integrating various communications and mission systems. Many of our capabilities align with the Army's peak priorities, and we outline ought assign estate ought satisfy these needs. Our brood development activities are now more ambitious and focused and either improve integrated with order and proposal, engineering and R&D functions.

I look many more instances of collaboration over divisions though we massacre upon our strategy. Leadership throughout the company is buying into the conception that we can benefit more and improve serve our customers if we trade together. Next, I lack ought affect above the progress we are making above the capability front. Attracting, developing and retaining peak engineering and managerial capability is the lifeblood of the company.

We began leveraging our HR organization ought mature strategies ought become more effective at planning our capability needs, at recruiting and retention and at identifying and exercise our emerging leaders ought admit above larger roles at the company. We made significant progress at the past year engaging our workforce. Overall, the investments and changes we are making ought better the brood 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 portion performance. Our strong quarterly deed was led by the ISR Systems portion which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating salary increased 40%, generating a border of 10.4%, up 120 basis points from the previous period.

Growth was most impressive at our aircraft procurement and ISR missionization brood though little key programs accelerated, including the U.S. attitude 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 vulgar grew double digits.

Given the broad-based growth at this segment, we outline ought desire ISR Systems ought exist our fastest-growing brood with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a strong 1.19. Operating salary 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 mingle and charge reduction. Lastly, electrical Systems sales grew 2% and operating salary rose 3%. ES' segment-leading border improved 20 basis points ought 14.7%.

The piece was impacted by a sales refuse at the Defense exercise Solutions brood because of final year's loss of the C-17 exercise condense ought the OEM. However, key highlights at electrical Systems include double-digit growth at precision weapons which grew sales 18% at the quarter. because of the headwinds from the C-17 loss, we desire modest sales growth at 2019, besides we outline ought desire improved border from ongoing charge takeout and favorable condense performance. Given our strong deed at the first piece 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 headmaster and capital econmic Officer

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

Segment operating salary and adjusted diluted EPS each grew 24%, and portion border increased 90 basis points ought 11.5%. We either generated certain release money brook which is meaningful though we always eat negative money brook at our first quarters.Next, I'll comment above some details almost the 2019 first quarter. Adjusted diluted EPS was $2.89, an enlarge of $0.55 or 24% above the 2018 first piece driven largely by operating salary 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 brood divestiture loss.

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

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

As a reminder, most of our productivity improvements and charge reduction actions display at favorable condense 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 fare stemming from the service belief accrual freeze that we implemented effective January 1.

Other contributors ought border expansion largely included sales growth, a lower G&A evaluate and brood divestitures at ISR and favorable condense deed and reduced G&A expenses at Communications and Electronics. The impose evaluate increased ought 14.7% from 11.1% though the first piece of final year and that was largely because of lower stock-based compensation fare deductions. We either generated certain release money brook of $146 million, compared ought a money outflow of $85 million though the 2018 first piece and that improvement was due largely ought improve working capital deed and growth at earnings. either compared ought the 2018 first quarter, we reduced our working capital days by 10 ought 82.

As Chris explained, we eat placed more attention above improving working capital and generating release money brook 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 almost 6.5% above 2018. Most of the guidance enlarge is at ISR Systems.

And I'll add that given our contemporary strong orders and robust backlog, we ought exist able ought motivate more upside ought this year's sales. at the segments, we desire 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 above track. memorize that above our January 29 earnings call, we explained the three drivers of our 2019 border expansion: L365 productivity charge savings, lower pension fare and lower losses at the Traveling wave subway business.

Each of these will further almost 40 basis points of border expansion. With count ought the Traveling wave subway brood improvements, we outline ought desire those ought greatly happen at the second half of 2019. Our combined sales growth and border expansion this year will originate at portion operating salary growth of 18% above 2018. We held our portion border guidance midpoints at 11.2% though ISR, 11.1% though Communications and 14.4% though Electronics with the segments expanding border 110 basis points, 200 basis points and 70 basis points, respectively, compared ought 2018.

We lowered our impose evaluate ought 19% from 20%, largely because of lower expected foreign salary taxes. And though release money flow, we increased it ought $1.055 billion, which is almost 13% higher than 2018 with a money conversion evaluate of 113%. money at the purpose of March was $1.1 billion. And regarding capital allocation, at February, we increased our quarterly money dividend by $0.05 ought $0.85 per share.

We calm desire no debt repayments. And though we previously explained, we suspended division purchases until the L3 Harris merger is completed. Looking at the second quarter, we desire sales among $2.6 billion and $2.7 billion with growth of almost 3%, operating border at the high 11% range, with border expanding more than 100 basis points above the 2018 second quarter, and release money brook among $100 million and $200 million. Finally, ought end my econmic review, we had a identical good initiate ought the year with our first-quarter results.

The company is growing at a robust pace, becoming more effective and advantageous and either expanding margin. though 2019, we desire ought become orders, sales, operating salary and release 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, capital Executive Officer, and President

Thanks, Ralph. though you saw above April 4, both L3 and Harris received shareholder approvals though the merger, and Harris either recently announced the sale of their evening vision business, both significant steps ought consummating the deal. We outline ought trade with vulgar regulatory authorities ought benefit the indispensable approvals. And though you heard above the Harris earnings scream this morning, everything is tracking ought project and there's no convert 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 evaluate arrest offsite at the ISR facility at Texas. though L3 and Harris teams benefit more exposure ought each other's operations and people, the more we become grateful of the technique and capability of the combined company and the latent though what we can conduct together. I've been working closely with Bill above the integration, and we will equip details above the board, organizational structure and management shut bargain close.

Given that this is responsible L3's final session scream though a divide public company, I lack ought personally thank vulgar of the men and women of L3 Technologies though the difficult trade and dedication throughout the years though making L3 a great lay ought work. And a exceptional because of my executive leadership team though their leadership and deed during the past couple of years, specially with the rate of change. though this chapter at the company's history comes ought an end, a new and exciting chapter begins. I eat ought acknowledge the two CEOs previous me, frank Lanza and Mike Strianese, though their vision and difficult trade ought acquire L3 ought this stage.

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

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

Yes, Chris. I was thinking almost this yesterday. And I counted that it's been 52 consecutive quarterly earnings calls though me. therefore it's been a giant experience and I'm identical grateful though it.

So I either lack ought thank everyone above the scream today though their past and continued benefit at L3 and directly ought exist L3 Harris, specially the analysts above the scream either though the analysts who previously covered L3.

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

Outstanding. vulgar right. Kerry, why don't we empty the lines though questions.

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and company -- Analyst

Yes. It's Gautam indeed above though Cai. Congratulations above a great brook obviously at L3. I lack ought fair demand above the release money brook improvement at the piece and some of the working capital initiatives more broadly, if you could fair clarify classification of how much low-hanging fruit you perceive there ought be? And then fair though a follow-up, when you fair admit the LTM release money brook of both Harris and L3, we're at fair below $2.4 billion.

I'm fair eccentric how you view, Chris, the longer language $3 billion release money purpose given we've already chopped a destiny of lumber here. Thanks.

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

Gautam, thank you identical much though the puzzle and the compliment. We're fairly excited almost the first quarter, besides a lack manner ought progress though 2019 obviously. I consider the concentrate above working capital and money generation was something that we attitude together at late December. We flat changed the incentive comp project ought highlight the importance of generating release cash.

And Bill and I address a destiny almost the $500 million of synergies and the $3 billion of money brook at year three. And I used to talk we eat more faith at achieving those numbers today than we did when we first announced this bargain above October 14. I'll lease Ralph address almost some of the improvements we made here at the first quarter.

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

Sure. therefore though I commented, we had a dramatic reduction at our working capital days quarter-over-quarter. And if you can recall, the first piece of 2018 was our high-water badge at condition of working capital 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 basic blocking and tackling, trying ought accumulate our receivables sooner, continuing ought become the company and become inventory at a slower rate and taking actions ought change our unbilled receivables into billed receivables sooner.

So it's a concerted trouble over vulgar those fronts. though the vulgar year, we're expecting working capital days reduction though well, and we consider that's going ought exist at least two ought three days year above year. therefore we ought look more improvement the remainder of this year though well. And obviously, we're going ought attempt ought conduct better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next puzzle will become 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 strong at the piece flat despite the strong 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 draw anything dispatch or is the pipeline a tiny part improve than you were originally thinking?

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

That's a great 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 almost at the past at systems and standardizing policies and procedures. There were a couple of ISR accelerations.

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

and an international customer. And we maybe eat three ought four extra bids prominent that could exist worth $100 million each. therefore there could exist $300 million ought $500 million of more orders of F-16 though an example. C-130 AMP, hopefully we'll hear above that.

As I mentioned, the team and I eat been spending time at the heart East. I consider we eat some interesting strategies and partnerships there that could direct ought significant growth. And the classified world is indeed picking up. That's an piece we've been focused above and eat seen some growth, and given some of the next generation capabilities we have, I desire more wins there.

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

Carter Copeland -- Melius inquiry -- Analyst

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

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

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

But yes, it used to exist a math at that normal time