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

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Update time : 2019-12-14 00:09:26

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L3 Technologies, Inc. (NYSE: LLL)
Q1 2019 pay Call
May. 01, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and greet ought the L3 Technologies first-quarter meeting call. [Operator instructions] interest note, this incident is being recorded. I used to now though ought alter the meeting can ought John Kim, vice headmaster of investor relations. interest affect can ahead.

John Kim -- Vice headmaster of Investor Relations

Thank you, and good morning. I'd though ought greet everyone ought our first-quarter 2019 pay meeting call. With me today are Chris Kubasik, our chairman, CEO, and president; and Ralph D'Ambrosio, our senior vice headmaster and CFO. after their formal remarks, management will exist available ought identify your questions.

Please notice that during the call, management will reiterate forward-looking statements that were made at the periodical free issued this morning. interest refer ought this periodical free too because the company's SEC filings because a more detailed explanation of factors that can think genuine results ought disagree materially from those anticipated. interest because robust notice that this summon is simultaneously pronounce can the Internet. I used to now though ought alter the summon can ought Chris.

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

Thank you, John, and good morning, everyone. because you saw earlier today, we had an particular commence ought 2019 with orders, sales, operating border and free money brook entire exceeding our design because the quarter. We lay little records because our first-quarter performance, including funded order growth of 28%, book ought bill of 1.25 and organic sales growth of 14%. Operating pay rose 24% and margins improved 90 base points ought 11.5%.

This healthful border operation at Q1 positions us robust ought arrive our 12% end because the year because productivity savings and program operation improves. free money brook was $146 million excluding merger-related items. during this premerger period, the leadership team and I dine continued ought emphasize a business because joint approach, maintaining concentrate can operational excellence and delivering can our customers' expectations. I expectation ought identify a moment ought thank and celebrate the entire L3 team because record operation at the first piece and maintaining concentrate can our customers and program performance.

Our results prove the energy of our portfolio: a diversified mission solutions technique provider. Growth at the piece was led by many of our middle businesses, including ISR airplane missionization, evening eyesight goggles, electro-optical/infrared sensors, SATCOM news links, UAV communications and precision weapons. We dine major positions at many areas that are aligned with making our campaign fighters more agile, deadly and survivable. Given the multitude of threats from both near-peer nations and rogue elements, there is aid from both sides of the aisle at continuing ought invest at national defense.

The President's 2020 budget application of $750 billion is a hard endorsement of our national defense priorities. The budget requests a 5% exaggerate at the O&M explain where L3 derives about half of our DoD funding, including many of our larger ISR programs such because Compass summon and Rivet Joint. The RDT&E explain was up 9.5% and supports our vocation can various modernization and development programs such because the Future assault Reconnaissance airplane known because FARA, next-gen jammer and unmanned systems. By leveraging L3's impartial spot over targeted R&D investment and business development activities, we last ought lay our sights can gaining more than our beautiful segment of business, and we're seeing this rekindled resolution beginning ought identify involve at our numbers because demonstrated by our contemporary performance.

Since taking can because CEO at January of last year, I've been discussing with you our transformational travel ought alter a more integrated company and ought pack our technologies ought compete because and mature larger mission-critical solutions. I reference our strategic Canadian Surface Combatant utilize because one such example. This transformation by its identical personality is a multiyear endeavor and will hasten while we mingle with Harris. because I count approximately the integration and where we will exist at a little years with Harris, there is huge potential.

The combined company will exist robust can the highway toward becoming a company with the indispensable scale and property ought invest at and deliver the most mission-critical solutions ought our global aerospace and defense customers. The opportunity ought found a new A&D company is an exciting and engaging challenge, one that Bill and I and the entire leadership team are ready ought identify 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 might last October, our L3 and Harris teams dine been deep at integration planning.

While merger integration activities are occurring throughout the company, our section teams dine no altered the rate at the slightest, and we last ought hammer out progress can 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 electrical Systems segment, we combined our Security & Detection business into commercial aviation and are evaluating steps ought rationalize farther our device footprint.

Not sole will the new organizational structure transfer overhead and redundant cost, except during because robust improve align our capabilities with passenger needs, sharpen concentrate can technique investments and enhance business development efforts ought improve serve our customers. Improving business operation over improve news collection and analytics is a key isolate of managing a more integrated company. last year, we rolled out a sequence of criterion econmic and operating metrics throughout the company because isolate of L365. Closer tracking of major efficiency metrics too because changes ought our incentive compensation design ought emphasize money brook dine been helping ought drive working major improvements.

Even with sales up 14%, our net working major sole increased 4%, major ought a reduction at working major days compared ought the previous year. Operating metrics that explore manufacturing peculiarity and vendor operation is supporting our equip fasten and program management teams ought identify and salute problems earlier, enabling the management team ought clearly exclaim on the interdependencies at their operations. I last ought 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 ought conflict L3's sole and disruptive capabilities and ought highlight our technique solutions. My team and I went out again ought face customers at the middle East. because you are aware, international business development relies upon house long-term relationships and listening ought our customers ought comprehend their challenges. We last ought create more and more inroads, seeing an improved tenor ought our meetings and dine received certain reception ought 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 ought companion with their customers. little contemporary awards highlight our genius at delivering integrated mission solutions. at the recently announced $1 billion Peregrine confer because the Royal Australian stand Force, L3 will deliver four next-gen EW airplane can a biz airplane platform. This includes a foundation communications infrastructure that will integrate with the Commonwealth's joint campaign fighting networks, providing a keen unite among platforms, including the F-35, the Growler and maritime assets.

Our preference ought compete because the compose of FARA because the U.S. army is another parade of our capacity ought apply customers with disruptive technique and ought companion can an significant platform, integrating various communications and mission systems. Many of our capabilities align with the Army's peak priorities, and we last ought assign property ought face these needs. Our business development activities are now more ambitious and focused and because robust improve integrated with order and proposal, engineering and R&D functions.

I exclaim on many more instances of collaboration across divisions because we murder upon our strategy. Leadership throughout the company is buying into the thought that we can utilize more and improve serve our customers if we vocation together. Next, I expectation ought impress can the progress we are making can 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 alter more effective can planning our capability needs, can recruiting and retention and can identifying and exercise our emerging leaders ought identify can 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 improve the business 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 method of our thinking.

Now let's alter ought a newspaper of our section performance. Our healthful quarterly operation was led by the ISR Systems section which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating pay increased 40%, generating a border of 10.4%, up 120 base points from the previous period.

Growth was most impressive at our airplane procurement and ISR missionization business because 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 ought desire ISR Systems ought exist our fastest-growing business with improved margin. Communications and Networked Systems returned ought growth with funded orders up 26% and sales up 11%. Book ought bill was a healthful 1.19. Operating pay rose 31% and margins improved 160 base 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 pay reduction. Lastly, electrical Systems sales grew 2% and operating pay rose 3%. ES' segment-leading border improved 20 base points ought 14.7%.

The piece was impacted by a sales refuse at the Defense exercise Solutions business due ought last year's loss of the C-17 exercise understanding ought the OEM. However, key highlights can electrical Systems contain double-digit growth at precision weapons which grew sales 18% at the quarter. due ought the headwinds from the C-17 loss, we desire modest sales growth at 2019, except during we last ought desire improved border from ongoing pay takeout and favorable understanding performance. Given our healthful operation at the first piece and improving order momentum, we are increasing our 2019 guidance.

Now I will alter it can ought Ralph ought newspaper our financials and furnish details of our updated guidance.

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

Thanks, Chris. I'll newspaper some details approximately the first piece and then our 2019 guidance update. Reviewing the first quarter, because Chris explained, we had a identical healthful commence ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, entire of which was organic.

Segment operating pay and adjusted diluted EPS each grew 24%, and section border increased 90 base points ought 11.5%. We because robust generated certain free money brook which is meaningful because we usually dine negative money brook at our first quarters.Next, I'll comment can some details approximately the 2019 first quarter. Adjusted diluted EPS was $2.89, an exaggerate of $0.55 or 24% can the 2018 first piece driven mainly by operating pay growth stemming from our 14% sales growth and our 90 base points of border expansion. Adjusted diluted EPS excludes integration and transaction expenses related ought the L3 Harris merger and a $2 million business divestiture loss.

Sales increased 14% ought $2.7 billion driven by healthful growth at our DoD and international markets. can the section 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 piece growth rates. can Electronics, sales were negatively impacted by last summer's C-17 exercise understanding loss which lowered growth by 440 base points at that segment.

Operating border operation was identical good. entire section operating border increased ought 11.5%, 90 base points higher than the 2018 first quarter. Lower pension expend increased border 50 base points. And favorable understanding performance, which includes productivity and pay reductions, accounted because most of the other 40 base points of border expansion.

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

Other contributors ought border expansion mainly included sales growth, a lower G&A impose and business divestitures can ISR and favorable understanding operation and reduced G&A expenses can Communications and Electronics. The impose assess increased ought 14.7% from 11.1% because the first piece of last year and that was mainly due ought lower stock-based compensation expend deductions. We because robust generated certain free money brook of $146 million, compared ought a money outflow of $85 million because the 2018 first piece and that improvement was due mainly ought improve working major operation and growth at earnings. because robust compared ought the 2018 first quarter, we reduced our working major days by 10 ought 82.

As Chris explained, we dine placed more attention can improving working major and generating free 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 appraise by $150 million ought $10.9 billion, which is expected growth of approximately 6.5% can 2018. Most of the guidance exaggerate is at ISR Systems.

And I'll add that given our contemporary healthful orders and robust backlog, we ought exist capable ought drive more upside ought this year's sales. can the segments, we desire sales ought alter 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 border expansion of 120 base points ought 12% is unchanged and firmly can track. recall that can our January 29 pay call, we explained the three drivers of our 2019 border expansion: L365 productivity pay savings, lower pension expend and lower losses at the Traveling wave underground business.

Each of these will promote approximately 40 base points of border expansion. With respect ought the Traveling wave underground business improvements, we last ought desire those ought chiefly happen at the second half of 2019. Our combined sales growth and border expansion this year will arise at section operating pay growth of 18% can 2018. We held our section border guidance midpoints can 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding border 110 base points, 200 base points and 70 base points, respectively, compared ought 2018.

We lowered our impose assess ought 19% from 20%, mainly due ought lower expected foreign pay taxes. And because free money flow, we increased it ought $1.055 billion, which is approximately 13% higher than 2018 with a money conversion impose of 113%. money can the aim of March was $1.1 billion. And regarding major allocation, at February, we increased our quarterly money dividend by $0.05 ought $0.85 per share.

We nevertheless desire no debt repayments. And because we previously explained, we suspended segment purchases until the L3 Harris merger is completed. Looking can the second quarter, we desire 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 base points can the 2018 second quarter, and free money brook among $100 million and $200 million. Finally, ought terminate my econmic review, we had a identical good commence ought the year with our first-quarter results.

The company is growing can a robust pace, becoming more effective and advantageous and because robust expanding margin. because 2019, we desire ought alter orders, sales, operating pay and free money flow, and we're because robust firmly tracking ought our 12% operating border objective. Thank you. And I'll now alter it aid ought Chris.

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

Thanks, Ralph. because you saw can April 4, both L3 and Harris received shareholder approvals because the merger, and Harris because robust recently announced the sale of their evening eyesight business, both significant steps ought consummating the deal. We last ought vocation with entire regulatory authorities ought utilize the indispensable approvals. And because you heard can the Harris pay summon this morning, everything is tracking ought design 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 appraise catch offsite can the ISR facility at Texas. because L3 and Harris teams utilize more exposure ought each other's operations and people, the more we alter grateful of the technique and capability of the combined company and the latent because what we can discharge together. I've been working closely with Bill can the integration, and we will furnish details can the board, organizational structure and management near commerce close.

Given that this is responsible L3's last meeting summon because a isolate public company, I expectation ought personally thank entire of the men and women of L3 Technologies because the difficult vocation and dedication throughout the years because making L3 a large spot ought work. And a particular due ought my executive leadership team because their leadership and operation during the past unite of years, specially with the rate of change. because this chapter at the company's history comes ought an end, a new and exciting chapter begins. I dine ought identify the two CEOs foregoing me, plain Lanza and Mike Strianese, because their eyesight and difficult vocation ought utilize L3 ought this stage.

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

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

Yes, Chris. I was thinking approximately this yesterday. And I counted that it's been 52 consecutive quarterly pay calls because me. hence it's been a immense undergo and I'm identical grateful because it.

So I because robust expectation ought thank everyone can the summon today because their past and continued advantage at L3 and immediately ought exist L3 Harris, specially the analysts can the summon too because the analysts who previously covered L3.

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

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

Questions & Answers:


Operator

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

Gautam Khanna -- Cowen and company -- Analyst

Yes. It's Gautam indeed can because Cai. Congratulations can a large flow obviously can L3. I expectation ought impartial lack can the free money brook improvement at the piece and some of the working major initiatives more broadly, if you could impartial illustrate arrange of how much low-hanging fruit you perceive there ought be? And then impartial because a follow-up, while you impartial identify the LTM free money brook of both Harris and L3, we're can impartial below $2.4 billion.

I'm impartial funny how you view, Chris, the longer language $3 billion free money end given we've already chopped a fate of timber here. Thanks.

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

Gautam, thank you identical much because the puzzle and the compliment. We're pretty excited approximately the first quarter, except during a desire method ought affect can because 2019 obviously. I count the concentrate can working major and money generation was something that we spot together at late December. We even changed the incentive comp design ought highlight the importance of generating free cash.

And Bill and I report a fate approximately the $500 million of synergies and the $3 billion of money brook at year three. And I used to say we dine more faith at achieving those numbers today than we did while we first announced this commerce can October 14. I'll allow Ralph report approximately some of the improvements we made here at the first quarter.

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

Sure. hence because I commented, we had a dramatic reduction at our working major days quarter-over-quarter. And if you can recall, the first piece of 2018 was our high-water sign at condition of working major and money convention and that's why there's a dramatic reduction compared ought this year's first quarter. except during certainly what we're doing is placing more attention can theorem blocking and tackling, trying ought amass our receivables sooner, continuing ought alter the company and alter inventory can a slower rate and taking actions ought alter our unbilled receivables into billed receivables sooner.

So it's a concerted pains across entire those fronts. because the sum year, we're expecting working major days reduction because well, and we count that's going ought exist can least two ought three days year can year. hence we ought exclaim on more improvement the remains of this year because well. And obviously, we're going ought test ought discharge better.

Gautam Khanna -- Cowen and company -- Analyst

Appreciate it.

Operator

The next puzzle will alter from Carter Copeland of Melius Research.

Carter Copeland -- Melius research -- Analyst

Hey, good morning, Chris. I wondered if you could comment can the book ought bill. I intend obviously identical healthful at the piece even despite the healthful sales. Was there anything at there that surprised you from a timing perspective or magnitude perspective that we saw early can this year? Did we drag anything deliver or is the pipeline a small part improve than you were originally thinking?

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

That's a large question. I'll speak you, we've really tried ought reinvigorate the BD organization and function. We've made investments that you've heard me report approximately at the past at systems and standardizing policies and procedures. There were a unite of ISR accelerations.

We're talking maybe second piece ought first quarter, which is why we came at a small higher no sole can the orders, except during the sales. except during I'm equally excited approximately what we nevertheless dine looking ahead. There are clearly F-16 exercise opportunities. We won a U.S.

and an international customer. And we maybe dine three ought four extra bids prominent 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 listen can that.

As I mentioned, the team and I dine been spending time at the middle East. I count we dine some interesting strategies and partnerships there that could discharge ought significant growth. And the classified country is really picking up. That's an region we've been focused can and dine seen some growth, and given some of the next generation capabilities we have, I desire more wins there.

So because the entire year, I used to expectation book ought bill ought exist can least 1.1 at each and each segment. And maybe $12 billion of orders overall is what our lengthen end is. except during that's what we're working toward.

Carter Copeland -- Melius research -- Analyst

Great, that's great. Thanks. And impartial a fast clarification can the org structure and leadership announcements you said near ought close. ought we assume that's impartial an 8-K disclosure identical near, implication impartial ago your intended close?

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

Yes. I mean, I count that's fair. Bill and I nevertheless dine ought vocation out the details. It depends while