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

The combined company will exist robust above the street toward becoming a company with the inherent scale and wealth to invest at and send the most mission-critical solutions to our global aerospace and defense customers. The opportunity to construct a new A&D company is an exciting and engaging challenge, one that Bill and I and the entire leadership team are ready to acknowledge 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 might persist October, our L3 and Harris teams dine been deep at integration planning.

While merger integration activities are occurring throughout the company, our division teams dine no altered the speed at the slightest, and we last to hammer out further 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 electric Systems segment, we combined our Security & Detection affair into commercial aviation and are evaluating steps to rationalize farther our equipment footprint.

Not maiden will the new organizational structure transfer overhead and redundant cost, besides too improve align our capabilities with passenger needs, sharpen concentrate above technique investments and heighten affair development efforts to improve serve our customers. Improving affair constitution across improve data collection and analytics is a key segregate of managing a more integrated company. persist year, we rolled out a progression of standard econmic and operating metrics throughout the company though segregate of L365. Closer tracking of leading efficiency metrics too though changes to our incentive compensation design to emphasize cash flow dine been helping to motivate working leading improvements.

Even with sales up 14%, our net working leading maiden increased 4%, main to a reduction at working leading days compared to the preceding year. Operating metrics that pursue manufacturing trait and vendor constitution is supporting our supply tie and program management teams to identify and salute problems earlier, enabling the management team to clearly exclaim on the interdependencies at their operations. I last to create passenger campaign a priority because the company, because myself and the entire leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military to debate L3's only and disruptive capabilities and to highlight our technique solutions. My team and I went out again to satisfy customers at the heart East. though you are aware, international affair development relies upon house long-term relationships and listening to our customers to know their challenges. We last to create more and more inroads, seeing an improved tenor to our meetings and dine received certain reception to our merger with Harris from our international customers.

Bottom row is we are seeing a large lack worldwide because an innovative, agile company who wants to link with their customers. little modern awards highlight our ability at delivering integrated mission solutions. at the recently announced $1 billion Peregrine agreement because the Royal Australian stand Force, L3 will send four next-gen EW aeroplane above a biz aeroplane platform. This includes a basis communications infrastructure that will integrate with the Commonwealth's mutual pains fighting networks, providing a critical link among platforms, including the F-35, the Growler and maritime assets.

Our preference to contend because the compose of FARA because the U.S. army is another parade of our ability to utilize customers with disruptive technique and to link above an important platform, integrating different communications and mission systems. Many of our capabilities align with the Army's peak priorities, and we last to assign wealth to satisfy these needs. Our affair development activities are now more ambitious and focused and too improve integrated with order and proposal, engineering and R&D functions.

I exclaim on many more instances of collaboration across divisions though we kill upon our strategy. Leadership throughout the company is buying into the notion that we can become more and improve serve our customers if we trade together. Next, I desire to impress above the further 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 to ripen strategies to become more effective at planning our capability needs, at recruiting and retention and at identifying and drill our emerging leaders to acknowledge above larger roles at the company. We made important further 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 alter and the fabric of integration, collaboration and innovation is becoming woven deeper into the method of our thinking.

Now let's depart to a periodical of our division performance. Our noise quarterly constitution was led by the ISR Systems division which grew funded orders 58% and sales 23%. Book to bill was 1.38. Operating salary increased 40%, generating a edge of 10.4%, up 120 basis points from the preceding period.

Growth was most impressive at our aeroplane procurement and ISR missionization affair though little key programs accelerated, including the U.S. stand 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 entire grew double digits.

Given the broad-based growth at this segment, we last to wish 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 noise 1.19. Operating salary 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 communication and ground-based SATCOM system shipments. Operating edge improvement was driven by program performance, sales mix and revenue reduction. Lastly, electric Systems sales grew 2% and operating salary rose 3%. ES' segment-leading edge improved 20 basis points to 14.7%.

The region was impacted by a sales decline at the Defense drill Solutions affair due to persist year's loss of the C-17 drill agreement to the OEM. However, key highlights at electric Systems include double-digit growth at precision weapons which grew sales 18% at the quarter. due to the headwinds from the C-17 loss, we wish modest sales growth at 2019, besides we last to wish improved edge from ongoing revenue takeout and favorable agreement performance. Given our noise constitution at the first region and improving order momentum, we are increasing our 2019 guidance.

Now I will depart it at to Ralph to periodical our financials and supply details of our updated guidance.

Ralph D'Ambrosio -- Senior Vice principal and chief econmic Officer

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

Segment operating salary and adjusted diluted EPS each grew 24%, and division edge increased 90 basis points to 11.5%. We too generated certain release cash flow which is meaningful though we often dine negative cash flow 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% at the 2018 first region driven chiefly by operating salary growth stemming from our 14% sales growth and our 90 basis points of edge 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 noise growth at our DoD and international markets. at the division 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 persist summer's C-17 drill agreement loss which lowered growth by 440 basis points at that segment.

Operating edge constitution was too good. entire division operating edge increased to 11.5%, 90 basis points higher than the 2018 first quarter. Lower pension price increased edge 50 basis points. And favorable agreement performance, which includes productivity and revenue reductions, accounted because most of the other 40 basis points of edge expansion.

As a reminder, most of our productivity improvements and revenue reduction actions show at favorable agreement performance. each division had double-digit edge compared to the 2018 first quarter. ISR edge 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 price stemming from the service faith accrual freeze that we implemented effective January 1.

Other contributors to edge expansion chiefly included sales growth, a lower G&A evaluate and affair divestitures at ISR and favorable agreement constitution and reduced G&A expenses at Communications and Electronics. The impose evaluate increased to 14.7% from 11.1% because the first region of persist year and that was chiefly due to lower stock-based compensation price deductions. We too generated certain release cash flow of $146 million, compared to a cash outflow of $85 million because the 2018 first region and that improvement was due chiefly to improve working leading constitution and growth at earnings. too compared to the 2018 first quarter, we reduced our working leading days by 10 to 82.

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

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

Each of these will advance almost 40 basis points of edge expansion. With respect to the Traveling wave subway affair improvements, we last to wish those to chiefly happen at the second half of 2019. Our combined sales growth and edge expansion this year will arise at division operating salary growth of 18% at 2018. We held our division edge guidance midpoints at 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding edge 110 basis points, 200 basis points and 70 basis points, respectively, compared to 2018.

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

We but wish no debt repayments. And though we previously explained, we suspended section purchases until the L3 Harris merger is completed. Looking at the second quarter, we wish sales among $2.6 billion and $2.7 billion with growth of almost 3%, operating edge at the high 11% range, with edge expanding more than 100 basis points at the 2018 second quarter, and release cash flow among $100 million and $200 million. Finally, to end my econmic review, we had a too good depart to the year with our first-quarter results.

The company is growing at a strong pace, becoming more effective and beneficial and too expanding margin. because 2019, we wish to become orders, sales, operating salary and release cash flow, and we're too firmly tracking to our 12% operating edge objective. Thank you. And I'll now depart it uphold to Chris.

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

Thanks, Ralph. though you saw above April 4, both L3 and Harris received shareholder approvals because the merger, and Harris too recently announced the sale of their evening eyesight business, both important steps to consummating the deal. We last to trade with entire regulatory authorities to earn the inherent approvals. And though you heard above the Harris salary exclaim this morning, everything is tracking to design 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 evaluate arrest offsite at the ISR facility at Texas. though L3 and Harris teams obtain more exposure to each other's operations and people, the more we become grateful of the technique and capability of the combined company and the latent because what we can carry out together. I've been working closely with Bill above the integration, and we will supply details above the board, organizational structure and management finish career close.

Given that this is apt L3's persist assembly exclaim though a division public company, I desire to personally thank entire of the men and women of L3 Technologies because the difficult trade and dedication throughout the years because making L3 a large lay to work. And a especial due to my executive leadership team because their leadership and constitution during the past link of years, specially with the speed of change. though this chapter at the company's history comes to an end, a new and exciting chapter begins. I dine to acknowledge the two CEOs foregoing me, frank Lanza and Mike Strianese, because their eyesight and difficult trade to obtain L3 to this stage.

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

Ralph D'Ambrosio -- Senior Vice principal and chief econmic Officer

Yes, Chris. I was thinking almost this yesterday. And I counted that it's been 52 consecutive quarterly salary calls because me. accordingly it's been a huge sustain and I'm too grateful because it.

So I too desire to thank everyone above the exclaim today because their past and continued advantage at L3 and instantly to exist L3 Harris, specially the analysts above the exclaim too though the analysts who previously covered L3.

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

Outstanding. entire right. Kerry, why don't we cave the lines because questions.

Questions & Answers:

Operator

[Operator instructions] The first mystery will depart 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 large flow obviously at L3. I desire to just lack above the release cash flow improvement at the region and some of the working leading initiatives more broadly, if you could just interpret arrange of how much low-hanging fruit you perceive there to be? And then just though a follow-up, when you just acknowledge the LTM release cash flow of both Harris and L3, we're at just under $2.4 billion.

I'm just queer how you view, Chris, the longer vocabulary $3 billion release cash purpose given we've already chopped a destiny of lumber here. Thanks.

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

Gautam, thank you too much because the mystery and the compliment. We're pretty excited almost the first quarter, besides a lack method to further because 2019 obviously. I ponder the concentrate above working leading and cash generation was something that we site together at late December. We flat changed the incentive comp design to highlight the importance of generating release cash.

And Bill and I lesson a destiny almost the $500 million of synergies and the $3 billion of cash flow at year three. And I used to state we dine more faith at achieving those numbers today than we did when we first announced this career above October 14. I'll allow Ralph lesson almost some of the improvements we made here at the first quarter.

Ralph D'Ambrosio -- Senior Vice principal and chief econmic Officer

Sure. accordingly though I commented, we had a dramatic reduction at our working leading days quarter-over-quarter. And if you can recall, the first region of 2018 was our high-water badge at condition of working leading and cash manners and that's why there's a dramatic reduction compared to this year's first quarter. besides certainly what we're doing is placing more attention above radical blocking and tackling, trying to amass our receivables sooner, continuing to become the company and become inventory at a slower speed and taking actions to alter our unbilled receivables into billed receivables sooner.

So it's a concerted trouble across entire those fronts. because the entire year, we're expecting working leading days reduction though well, and we ponder that's going to exist at least two to three days year at year. accordingly we to exclaim on more improvement the surplus of this year though well. And obviously, we're going to attempt to carry out better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next mystery will depart 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 noise at the region flat in spite of the noise 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 deliver or is the pipeline a small bit improve than you were originally thinking?

Chris Kubasik -- Chairman, chief 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 lesson almost at the past at systems and standardizing policies and procedures. There were a link of ISR accelerations.

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

and an international customer. And we perhaps dine three to four extra bids noted that could exist worthy $100 million each. accordingly there could exist $300 million to $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 dine been spending time at the heart East. I ponder we dine some interesting strategies and partnerships there that could carry out to important growth. And the classified clay is indeed picking up. That's an region we've been focused above and dine seen some growth, and given some of the next generation capabilities we have, I wish more wins there.

So because the sum year, I used to desire 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 purpose is. besides that's what we're working toward.

Carter Copeland -- Melius investigation -- Analyst

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

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

Yes. I mean, I ponder that's fair. Bill and I but dine to trade out the details. It depends when we're going to finish above the timing and such.

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

And I ponder flat masses outer that are helping us dine been impressed how distant ahead we are. accordingly we're going to strike the basis running above engagement 1. And that's one of the reasons we're gaining more and more faith at some of the econmic targets that we've laid out because you.