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

The combined corporation will exist vigorous above the highway toward becoming a corporation with the indispensable scale and goods ought invest at and send the most mission-critical solutions ought our global aerospace and defense customers. The opportunity ought found a new A&D corporation is an exciting and engaging challenge, one that Bill and I and the sum leadership team are ready ought receive 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 energy final October, our L3 and Harris teams eat been deep at integration planning.

While merger integration activities are occurring throughout the company, our part teams eat no altered the speed at the slightest, and we last ought hammer out proceed above 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 worry into commercial aviation and are evaluating steps ought rationalize farther our installation footprint.

Not only will the new organizational structure touch overhead and redundant cost, besides also improve align our capabilities with passenger needs, sharpen concentrate above technique investments and heighten worry development efforts ought improve serve our customers. Improving worry fundamental across improve data collection and analytics is a key divide of managing a more integrated company. final year, we rolled out a sequence of standard economical and operating metrics throughout the corporation though divide of L365. Closer tracking of main efficiency metrics also though changes ought our incentive compensation design ought emphasize cash flow eat been helping ought motivate working main improvements.

Even with sales up 14%, our net working main only increased 4%, principal ought a reduction at working main days compared ought the previous year. Operating metrics that explore manufacturing estate and vendor fundamental is supporting our equip tie and program management teams ought identify and report problems earlier, enabling the management team ought clearly visit the interdependencies at their operations. I last ought compose passenger war a priority because the company, because myself and the sum leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

military ought 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 core East. though you are aware, international worry development relies upon house long-term relationships and listening ought our customers ought learn their challenges. We last ought compose 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 row is we are seeing a big demand worldwide because an innovative, agile corporation who wants ought colleague with their customers. little trend awards highlight our competence at delivering integrated mission solutions. at the recently announced $1 billion Peregrine confer because the Royal Australian attitude Force, L3 will send four next-gen EW aeroplane above a biz aeroplane platform. This includes a base communications infrastructure that will integrate with the Commonwealth's common pains fighting networks, providing a acute unite between platforms, including the F-35, the Growler and maritime assets.

Our option ought competition because the compose of FARA because the U.S. troops is another demonstration of our competence ought hire customers with disruptive technique and ought colleague above an significant platform, integrating different communications and mission systems. Many of our capabilities align with the Army's climax priorities, and we last ought section goods ought satisfy these needs. Our worry development activities are now more ambitious and focused and also improve integrated with order and proposal, engineering and R&D functions.

I visit many more instances of collaboration across divisions though we murder upon our strategy. Leadership throughout the corporation is buying into the conception that we can favour more and improve serve our customers if we task together. Next, I expect ought influence above the proceed we are making above the faculty front. Attracting, developing and retaining climax engineering and managerial faculty is the lifeblood of the company.

We began leveraging our HR organization ought ripen strategies ought fetch more effective at planning our faculty needs, at recruiting and retention and at identifying and drill our emerging leaders ought receive 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 improve the worry are beginning ought generate tangible benefits ought growth and margin. Our employees are increasingly embracing the change and the fabric of integration, collaboration and innovation is becoming woven deeper into the route of our thinking.

Now let's become ought a review of our part performance. Our healthful quarterly fundamental was led by the ISR Systems part which grew funded orders 58% and sales 23%. Book ought bill was 1.38. Operating allowance increased 40%, generating a edge of 10.4%, up 120 base points from the previous period.

Growth was most impressive at our aeroplane procurement and ISR missionization worry though little key programs accelerated, including the U.S. attitude constrain Compass Call, Australian Peregrine and the U.S. Missile Defense Agency HALO program. at addition, EO/IR sensors, soldier systems and space and sensor businesses sum grew double digits.

Given the broad-based growth at this segment, we last ought shortage ISR Systems ought exist our fastest-growing worry 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 allowance 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 edge improvement was driven by program performance, sales blend and salary reduction. Lastly, electrical Systems sales grew 2% and operating allowance rose 3%. ES' segment-leading edge improved 20 base points ought 14.7%.

The section was impacted by a sales reject at the Defense drill Solutions worry owing ought final year's loss of the C-17 drill concord ought the OEM. However, key highlights at electrical Systems contain double-digit growth at precision weapons which grew sales 18% at the quarter. owing ought the headwinds from the C-17 loss, we shortage modest sales growth at 2019, besides we last ought shortage improved edge from ongoing salary takeout and favorable concord performance. Given our healthful fundamental at the first section and improving direction momentum, we are increasing our 2019 guidance.

Now I will become it above ought Ralph ought review our financials and equip details of our updated guidance.

Ralph D'Ambrosio -- Senior Vice principal and head economical Officer

Thanks, Chris. I'll review some details nearly the first section and then our 2019 guidance update. Reviewing the first quarter, though Chris explained, we had a too healthful commence ought the year and we exceeded our plan. Orders increased 28% and sales grew 14%, sum of which was organic.

Segment operating allowance and adjusted diluted EPS each grew 24%, and part edge increased 90 base points ought 11.5%. We also generated certain release cash flow which is meaningful though we often eat negative cash flow at our first quarters.Next, I'll comment above some details nearly the 2019 first quarter. Adjusted diluted EPS was $2.89, an amplify of $0.55 or 24% above the 2018 first section driven chiefly by operating allowance growth stemming from our 14% sales growth and our 90 base points of edge expansion. Adjusted diluted EPS excludes integration and transaction expenses related ought the L3 Harris merger and a $2 million worry divestiture loss.

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

Operating edge fundamental was too good. entire part operating edge increased ought 11.5%, 90 base points higher than the 2018 first quarter. Lower pension spend increased edge 50 base points. And favorable concord performance, which includes productivity and salary reductions, accounted because most of the other 40 base points of edge expansion.

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

Other contributors ought edge expansion chiefly included sales growth, a lower G&A evaluate and worry divestitures at ISR and favorable concord fundamental and reduced G&A expenses at Communications and Electronics. The impose evaluate increased ought 14.7% from 11.1% because the first section of final year and that was chiefly owing ought lower stock-based compensation spend deductions. We also generated certain release cash flow of $146 million, compared ought a cash outflow of $85 million because the 2018 first section and that improvement was due chiefly ought improve working main fundamental 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 eat placed more attention above improving working main and generating release cash 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 estimate by $150 million ought $10.9 billion, which is expected growth of nearly 6.5% above 2018. Most of the guidance amplify is at ISR Systems.

And I'll add that given our trend healthful orders and vigorous backlog, we ought exist able ought motivate more upside ought this year's sales. at the segments, we shortage sales ought grow 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 edge expansion of 120 base points ought 12% is unchanged and firmly above track. remember that above our January 29 allowance call, we explained the three drivers of our 2019 edge expansion: L365 productivity salary savings, lower pension spend and lower losses at the Traveling wave underground business.

Each of these will advance nearly 40 base points of edge expansion. With fame ought the Traveling wave underground worry improvements, we last ought shortage those ought chiefly happen at the second half of 2019. Our combined sales growth and edge expansion this year will arise at part operating allowance growth of 18% above 2018. We held our part edge guidance midpoints at 11.2% because ISR, 11.1% because Communications and 14.4% because Electronics with the segments expanding edge 110 base points, 200 base points and 70 base points, respectively, compared ought 2018.

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

We quiet shortage 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 shortage sales between $2.6 billion and $2.7 billion with growth of nearly 3%, operating edge at the high 11% range, with edge expanding more than 100 base points above the 2018 second quarter, and release cash flow between $100 million and $200 million. Finally, ought finish my economical review, we had a too good commence ought the year with our first-quarter results.

The corporation is growing at a vigorous pace, becoming more effective and advantageous and also expanding margin. because 2019, we shortage ought grow orders, sales, operating allowance and release cash flow, and we're also firmly tracking ought our 12% operating edge objective. Thank you. And I'll now become it back ought Chris.

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

Thanks, Ralph. though you saw above April 4, both L3 and Harris received shareholder approvals because the merger, and Harris also recently announced the sale of their evening eyesight business, both significant steps ought consummating the deal. We last ought task with sum regulatory authorities ought favour the indispensable approvals. And though you heard above the Harris allowance shriek this morning, everything is tracking ought design and there's no change 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 obtain more exposure ought each other's operations and people, the more we fetch grateful of the technique and faculty of the combined corporation and the latent because what we can fulfill together. I've been working closely with Bill above the integration, and we will equip details above the board, organizational structure and management near task close.

Given that this is apt L3's final conference shriek though a divide public company, I expect ought personally thank sum of the men and women of L3 Technologies because the difficult task and dedication throughout the years because making L3 a big lay ought work. And a special owing ought my executive leadership team because their leadership and fundamental during the past link of years, especially with the speed of change. though this chapter at the company's history comes ought an end, a new and exciting chapter begins. I eat ought admit the two CEOs previous me, unfold Lanza and Mike Strianese, because their eyesight and difficult task ought obtain L3 ought this stage.

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

Ralph D'Ambrosio -- Senior Vice principal and head economical Officer

Yes, Chris. I was thinking nearly this yesterday. And I counted that it's been 52 consecutive quarterly allowance calls because me. hence it's been a giant undergo and I'm too grateful because it.

So I also expect ought thank everyone above the shriek today because their past and continued favour at L3 and directly ought exist L3 Harris, especially the analysts above the shriek also though the analysts who previously covered L3.

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

Outstanding. sum right. Kerry, why don't we vacant the lines because questions.

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and corporation -- Analyst

Yes. It's Gautam indeed above because Cai. Congratulations above a big flow obviously at L3. I expect ought impartial ask above the release cash flow improvement at the section and some of the working main initiatives more broadly, if you could impartial interpret kind of how much low-hanging fruit you perceive there ought be? And then impartial though a follow-up, while you impartial receive the LTM release cash flow of both Harris and L3, we're at impartial beneath $2.4 billion.

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

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

Gautam, thank you too much because the issue and the compliment. We're fairly excited nearly the first quarter, besides a shortage route ought proceed because 2019 obviously. I count the concentrate above working main and cash generation was something that we lay together at late December. We flat changed the incentive comp design ought highlight the importance of generating release cash.

And Bill and I report a fate nearly the $500 million of synergies and the $3 billion of cash flow at year three. And I used to state we eat more pledge at achieving those numbers today than we did while we first announced this task above October 14. I'll permit Ralph report nearly some of the improvements we made here at the first quarter.

Ralph D'Ambrosio -- Senior Vice principal and head economical Officer

Sure. hence though I commented, we had a dramatic reduction at our working main days quarter-over-quarter. And if you can recall, the first section of 2018 was our high-water symbol at condition of working main and cash usage 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 theorem blocking and tackling, trying ought amass our receivables sooner, continuing ought grow the corporation and grow inventory at a slower speed and taking actions ought alter our unbilled receivables into billed receivables sooner.

So it's a concerted pains across sum those fronts. because the complete year, we're expecting working main days reduction though well, and we count that's going ought exist at least two ought three days year above year. hence we ought visit more improvement the remains of this year though well. And obviously, we're going ought attempt ought fulfill better.

Gautam Khanna -- Cowen and corporation -- Analyst

Appreciate it.

Operator

The next issue will fetch 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 too healthful at the section flat in spite of the healthful 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 haul anything send or is the pipeline a little bit improve than you were originally thinking?

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

That's a big question. I'll state you, we've indeed tried ought reinvigorate the BD organization and function. We've made investments that you've heard me report nearly at the past at systems and standardizing policies and procedures. There were a link of ISR accelerations.

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

and an international customer. And we maybe eat three ought four extra bids noted that could exist worthy $100 million each. hence 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 core East. I count we eat some interesting strategies and partnerships there that could direct ought significant growth. And the classified dirt is indeed picking up. That's an section we've been focused above and eat seen some growth, and given some of the next generation capabilities we have, I shortage more wins there.

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

Carter Copeland -- Melius inquiry -- Analyst

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

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

Yes. I mean, I count that's fair. Bill and I quiet eat ought task out the details. It depends while we're going ought near above the timing and such.

But yes, it used to exist a math at that commonplace time frame. We'll fulfill what makes sensation because sum the nation involved, interior and external. hence I'll exist seeing B