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

The combined corporation will be noise above the highway toward becoming a corporation with the indispensable scale and estate to invest at and send the most mission-critical solutions to our global aerospace and defense customers. The opportunity to erect a new A&D corporation is an exciting and engaging challenge, one that Bill and I and the full leadership team are ready to accept on. And at the many visits with our L3 and Harris employees at the field, this excitement is broadly shared throughout. during announcing this merger of energy final October, our L3 and Harris teams dine been deep at integration planning.

While merger integration activities are occurring throughout the company, our fragment teams dine no altered the speed at the slightest, and we last to hammer out progress above streamlining and consolidating operations. during 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 electrical Systems segment, we combined our Security & Detection affair into commercial aviation and are evaluating steps to rationalize farther our instrument footprint.

Not sole will the new organizational structure transfer overhead and redundant cost, besides during noise perfect align our capabilities with visitor needs, sharpen concentrate above technique investments and enhance affair development efforts to perfect serve our customers. Improving affair regulation across perfect news collection and analytics is a key isolate of managing a more integrated company. final year, we rolled out a series of criterion economical and operating metrics throughout the corporation during isolate of L365. Closer tracking of headmaster efficiency metrics during noise during changes to our incentive compensation plot to emphasize cash brook dine been helping to drive working headmaster improvements.

Even with sales up 14%, our net working headmaster sole increased 4%, headmaster to a reduction at working headmaster days compared to the foregoing year. Operating metrics that pursue manufacturing peculiarity and vendor regulation is supporting our equip fasten and program management teams to recognize and greet problems earlier, enabling the management team to clearly cry on the interdependencies at their operations. I last to manufacture visitor combat a priority during the company, during myself and the full leadership team. during the first quarter, we met with key members of Congress, the administration and the U.S.

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

Bottom rope is we are seeing a big ask worldwide during an innovative, agile corporation who wants to comrade with their customers. few modern awards highlight our competence at delivering integrated mission solutions. at the recently announced $1 billion Peregrine give during the Royal Australian air Force, L3 will send four next-gen EW airplane above a biz airplane platform. This includes a foundation communications infrastructure that will integrate with the Commonwealth's joint combat fighting networks, providing a critical combination among platforms, including the F-35, the Growler and maritime assets.

Our option to contend during the compose of FARA during the U.S. army is another parade of our competence to employ customers with disruptive technique and to comrade above an important platform, integrating different communications and mission systems. Many of our capabilities align with the Army's sumit priorities, and we last to isolate estate to confront these needs. Our affair development activities are now more ambitious and focused and during noise perfect integrated with order and proposal, engineering and R&D functions.

I cry on many more instances of collaboration across divisions during we assassinate upon our strategy. Leadership throughout the corporation is buying into the thought that we can obtain more and perfect serve our customers if we work together. Next, I expect to impress above the progress we are making above the capability front. Attracting, developing and retaining sumit engineering and managerial capability is the lifeblood of the company.

We began leveraging our HR organization to mature strategies to fetch more effective at planning our capability needs, at recruiting and retention and at identifying and training our emerging leaders to accept above larger roles at the company. We made important progress at the past year engaging our workforce. Overall, the investments and changes we are making to perfect 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 manner of our thinking.

Now let's fetch to a periodical of our fragment performance. Our well quarterly regulation was led by the ISR Systems fragment which grew funded orders 58% and sales 23%. Book to bill was 1.38. Operating earnings increased 40%, generating a edge of 10.4%, up 120 foundation points from the foregoing period.

Growth was most impressive at our airplane procurement and ISR missionization affair during few key programs accelerated, including the U.S. air compel 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 total grew double digits.

Given the broad-based growth at this segment, we last to desire ISR Systems to be 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 well 1.19. Operating earnings rose 31% and margins improved 160 foundation points to 10.7%.

Sales growth was led by the broadband sector which rose 15% driven by higher UAV traffic and ground-based SATCOM system shipments. Operating edge improvement was driven by program performance, sales combination and fare reduction. Lastly, electrical Systems sales grew 2% and operating earnings rose 3%. ES' segment-leading edge improved 20 foundation points to 14.7%.

The zone was impacted by a sales repel at the Defense training Solutions affair owing to final year's loss of the C-17 training vocation to the OEM. However, key highlights at electrical Systems include double-digit growth at precision weapons which grew sales 18% at the quarter. owing to the headwinds from the C-17 loss, we desire modest sales growth at 2019, besides we last to desire improved edge from ongoing fare takeout and favorable vocation performance. Given our well regulation at the first zone and improving direction momentum, we are increasing our 2019 guidance.

Now I will fetch it above to Ralph to periodical our financials and equip details of our updated guidance.

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

Thanks, Chris. I'll periodical some details approximately the first zone and then our 2019 guidance update. Reviewing the first quarter, during Chris explained, we had a same well begin to the year and we exceeded our plan. Orders increased 28% and sales grew 14%, total of which was organic.

Segment operating earnings and adjusted diluted EPS each grew 24%, and fragment edge increased 90 foundation points to 11.5%. We during noise generated definite free cash brook which is meaningful although we repeatedly dine negative cash brook at our first quarters.Next, I'll comment above some details approximately the 2019 first quarter. Adjusted diluted EPS was $2.89, an amplify of $0.55 or 24% above the 2018 first zone driven chiefly by operating earnings growth stemming from our 14% sales growth and our 90 foundation 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 well growth at our DoD and international markets. at the fragment level, sales grew 23% at ISR Systems, 11% at Communications and Networked Systems and 2% Electronics. The growth rates during ISR and Communications included some favorable quarterly timing items which will lower their second zone growth rates. at Electronics, sales were negatively impacted by final summer's C-17 training vocation loss which lowered growth by 440 foundation points at that segment.

Operating edge regulation was same good. full fragment operating edge increased to 11.5%, 90 foundation points higher than the 2018 first quarter. Lower pension spend increased edge 50 foundation points. And favorable vocation performance, which includes productivity and fare reductions, accounted during most of the other 40 foundation points of edge expansion.

As a reminder, most of our productivity improvements and fare reduction actions manifest at favorable vocation performance. each fragment had double-digit edge compared to the 2018 first quarter. ISR edge increased 120 foundation points to 10.4%, Communications increased 160 foundation points to 10.7% and Electronics increased 20 foundation points to 14.7%. Operating margins benefited from lower pension spend stemming from the service guarantee accrual freeze that we implemented effective January 1.

Other contributors to edge expansion chiefly included sales growth, a lower G&A appraise and affair divestitures at ISR and favorable vocation regulation and reduced G&A expenses at Communications and Electronics. The tax appraise increased to 14.7% from 11.1% during the first zone of final year and that was chiefly owing to lower stock-based compensation spend deductions. We during noise generated definite free cash brook of $146 million, compared to a cash outflow of $85 million during the 2018 first zone and that improvement was due chiefly to perfect working headmaster regulation and growth at earnings. during noise compared to the 2018 first quarter, we reduced our working headmaster days by 10 to 82.

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

And I'll add that given our modern well orders and tough backlog, we to be capable to drive more upside to this year's sales. at the segments, we desire sales to fetch 9% at ISR, 6% at Communications and 3% Electronics. Our planned 2019 edge expansion of 120 foundation points to 12% is unchanged and firmly above track. memorize that above our January 29 allowance call, we explained the three drivers of our 2019 edge expansion: L365 productivity fare savings, lower pension spend and lower losses at the Traveling wave underground business.

Each of these will further approximately 40 foundation points of edge expansion. With honour to the Traveling wave underground affair improvements, we last to desire those to largely occur at the second half of 2019. Our combined sales growth and edge expansion this year will arise at fragment operating earnings growth of 18% above 2018. We held our fragment edge guidance midpoints at 11.2% during ISR, 11.1% during Communications and 14.4% during Electronics with the segments expanding edge 110 foundation points, 200 foundation points and 70 foundation points, respectively, compared to 2018.

We lowered our tax appraise to 19% from 20%, chiefly owing to lower expected foreign earnings taxes. And during free cash flow, we increased it to $1.055 billion, which is approximately 13% higher than 2018 with a cash conversion appraise of 113%. cash at the aim of March was $1.1 billion. And regarding headmaster allocation, at February, we increased our quarterly cash dividend by $0.05 to $0.85 per share.

We however desire no debt repayments. And during we previously explained, we suspended fragment 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 approximately 3%, operating edge at the high 11% range, with edge expanding more than 100 foundation points above the 2018 second quarter, and free cash brook among $100 million and $200 million. Finally, to end my economical review, we had a same good begin to the year with our first-quarter results.

The corporation is growing at a tough pace, becoming more effective and advantageous and during noise expanding margin. during 2019, we desire to fetch orders, sales, operating earnings and free cash flow, and we're during noise firmly tracking to our 12% operating edge objective. Thank you. And I'll now fetch it hind to Chris.

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

Thanks, Ralph. during you saw above April 4, both L3 and Harris received shareholder approvals during the merger, and Harris during noise recently announced the sale of their evening eyesight business, both important steps to consummating the deal. We last to work with total regulatory authorities to obtain the indispensable approvals. And during you heard above the Harris allowance summon this morning, everything is tracking to plot and there's no alter to 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 at the ISR facility at Texas. during L3 and Harris teams win more exposure to each other's operations and people, the more we fetch grateful of the technique and capability of the combined corporation and the latent during what we can carry out together. I've been working closely with Bill above the integration, and we will equip details above the board, organizational structure and management shut commerce close.

Given that this is prone L3's final session summon during a isolate public company, I expect to personally thank total of the men and women of L3 Technologies during the difficult work and dedication throughout the years during making L3 a big post to work. And a particular owing to my executive leadership team during their leadership and regulation during the past combination of years, specially with the speed of change. during 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, plain Lanza and Mike Strianese, during their eyesight and difficult work to obtain L3 to this stage.

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

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

Yes, Chris. I was thinking approximately this yesterday. And I counted that it's been 52 consecutive quarterly allowance calls during me. hence it's been a enormous sustain and I'm same grateful during it.

So I during noise expect to thank everyone above the summon today during their past and continued amuse at L3 and soon to be L3 Harris, specially the analysts above the summon during noise during the analysts who previously covered L3.

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

Outstanding. total right. Kerry, why don't we vacant the lines during questions.

Questions & Answers:

Operator

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

Gautam Khanna -- Cowen and corporation -- Analyst

Yes. It's Gautam truly above during Cai. Congratulations above a big flow obviously at L3. I expect to fair ask above the free cash brook improvement at the zone and some of the working headmaster initiatives more broadly, if you could fair explain kind of how much low-hanging fruit you perceive there to be? And then fair during a follow-up, while you fair accept the LTM free cash brook of both Harris and L3, we're at fair beneath $2.4 billion.

I'm fair strange how you view, Chris, the longer vocabulary $3 billion free cash goal given we've already chopped a convict of wood here. Thanks.

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

Gautam, thank you same much during the riddle and the compliment. We're fairly excited approximately the first quarter, besides a desire manner to proceed during 2019 obviously. I study the concentrate above working headmaster and cash generation was something that we post together at late December. We flat changed the incentive comp plot to highlight the importance of generating free cash.

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

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

Sure. hence during I commented, we had a dramatic reduction at our working headmaster days quarter-over-quarter. And if you can recall, the first zone of 2018 was our high-water badge at condition of working headmaster and cash manners and that's why there's a dramatic reduction compared to this year's first quarter. besides of lecture what we're doing is placing more attention above basic blocking and tackling, trying to infer our receivables sooner, continuing to fetch the corporation and fetch inventory at a slower speed and taking actions to alter our unbilled receivables into billed receivables sooner.

So it's a concerted endeavour across total those fronts. during the full year, we're expecting working headmaster days reduction during well, and we study that's going to be at least two to three days year above year. hence we to cry on more improvement the remainder of this year during well. And obviously, we're going to test to carry out better.

Gautam Khanna -- Cowen and corporation -- Analyst

Appreciate it.

Operator

The next riddle 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 to bill. I intend obviously same well at the zone flat despite the well sales. Was there anything at there that surprised you from a timing perspective or magnitude perspective that we saw early above this year? Did we pull anything send or is the pipeline a tiny bit perfect than you were originally thinking?

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

That's a big question. I'll say you, we've indeed tried to reinvigorate the BD organization and function. We've made investments that you've heard me laguage approximately at the past at systems and standardizing policies and procedures. There were a combination of ISR accelerations.

We're talking perhaps second zone to first quarter, which is why we came at a tiny higher no sole above the orders, besides the sales. besides I'm equally excited approximately what we however dine looking ahead. There are clearly F-16 training opportunities. We won a U.S.

and an international customer. And we perhaps dine three to four extra bids famous that could be worth $100 million each. hence there could be $300 million to $500 million of more orders of F-16 during an example. C-130 AMP, hopefully we'll hear above that.

As I mentioned, the team and I dine been spending time at the middle East. I study we dine some interesting strategies and partnerships there that could carry out to important growth. And the classified masses 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 desire more wins there.

So during the total year, I used to expect book to bill to be at least 1.1 at each and each segment. And perhaps $12 billion of orders overall is what our lengthen goal is. besides that's what we're working toward.

Carter Copeland -- Melius inquiry -- Analyst

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

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

Yes. I mean, I study that's fair. Bill and I however dine to work out the details. It depends while we're going to shut above the timing and such.

But yes, it used to be a math at that normal time frame. We'll carry out what makes sensation during total the masses involved, interior and external. hence I'll be seeing Bill next week and we'll last to work above a plan. besides I study both he said and I said we're ahead of the interior plot that we've laid out above a convict of the various milestones we're going for.