Teledyne Technologies Inc (TDY) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Teledyne first-quarter earnings conference call. (Operator Instructions) Also as a reminder, today's teleconference is being recorded.

At this time, I will turn the conference over to your host, Mr. Jason VanWees. Please go ahead, sir.

Thank you, Tony, and good morning, everyone. This is Jason VanWees, Senior Vice President Strategy and M&A at Teledyne. I would like to welcome everyone to Teledyne's first-quarter 2016 earnings release conference call. We released our earnings earlier this morning.

Joining us today our Teledyne's Chairman, President, and CEO Robert Mehrabian; Chief Operating Officer Al Pichelli; Senior Vice President and CFO Sue Main; and Senior Vice President, General Counsel, and Secretary Melanie Civic. After remarks by Robert and Sue, we will ask for your questions.

Of course, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks, and caveats as noted in the earnings release and in our periodic SEC filings. And of course, actual results may differ materially.

In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay both via webcast and dial in will be available for approximately one month.

Here's Robert.

Thank you, Jason, and good morning, everyone. We started 2016 with record orders with a book to bill of over 1.2, driven by strong bookings across the majority of our government businesses.

While some industrial sectors, especially energy, remain weak, those markets appear to be stabilizing. For example, total book to bill for our instrumentation segment was just less than 1, or 0.98.

Nevertheless, we are maintaining our emphasis on cost control and strong operating discipline. And we are currently implementing significant additional cost reduction actions, especially within marine instrumentation. Specifically, in the second quarter, we will exit approximately 200,000 square feet of facilities or roughly 4% of our total footprint.

These actions and the bond reinitiatives we took starting in 2013 through 2015, largely within our aerospace and defense businesses, and together will eliminate collectively approximately 11% of our footprint. By maintaining our reduced footprint and manpower while the defense market improved, we were able to report record operating margin in our aerospace and defense electronics segment.

I should note that while we are reducing manufacturing costs, we have not wavered on our commitment to innovation and new product development. In fact, internally funded R&D as a percentage of sales was nearly a record in the first quarter. Coupled with relevant externally funded R&D, we spent approximately 11% of our revenues on new technologies and product.

Finally, we generated record free cash flow for any first quarter, allowing us to complete three acquisitions early in the second quarter with a minimum increase in net debt compared to year-end 2015.

As we have noted in the past, our balanced business portfolio is not dependent on any single product or market. For example, one year ago, our aerospace and defense businesses comprised less than 35% of sales. In the first quarter of 2016, they represent more than 40% of our total sales.

In the first quarter of 2015, marine instrumentation accounted for 28% of product sales, with nearly two-thirds of marine sales coming from oil and gas market. A year later, total marine instrumentation represented 21% of sales in the first quarter of 2016, with approximately half, or just 10%, of our total sales from oil and gas exploration and production.

In summary, over the last three years, we have been able to successfully manage change. While at least one part of our business portfolio was under severe pressure, we have been able to reasonably manage revenue and GAAP earnings as well as permanently reduced our cost structure and acquired complementary businesses.

In the years following the 2008 financial crisis, we were generally able to maintain revenue, margins, and earning. Once markets stabilized, we experienced strong growth in sales and earnings as well as greater pace of M&A activity from 2011 through 2014.

I now believe that the period of US government sequestration and its consequences has concluded and the worst of the declines in the energy market have dissipated. Thus, by early 2017, we should again be able to enter another period of multi-year growth.

Turning back to the quarterly results, GAAP earnings per share of $1.10 decreased from last year's $1.20. The $0.10 decline largely resulted from the 6.1% decrease in revenue and a modest decline of 41 basis points in operating margin. And some foreign-currency headwind, partially offset by a reduced headcount.

Sales to international customers decreased, but this was almost solely due to lower sales of marine instrumentation related to oil and gas exploration and production. And the decline was partially offset by increased overseas sales of environmental and electronic test and measurement instruments as well as avionics.

I will now briefly comment on our business segments, after which Sue Main will review some of the financials in more detail and provide an earnings outlook for the second quarter and full year 2016. First-quarter sales in our instrumentation segment decreased 17.2% from last year's.

Sales of marine instrumentation decreased almost 29% due to lower sales of interconnect systems and other marine sensors and systems for energy exploration and production. This was partially offset by higher sales of interconnect and marine systems for US government applications. Year-over-year comparisons for marine instrumentation will also be especially difficult in the second quarter. But will then ease in the second half of 2016.

In the environmental domain, sales increased 1.6% and reflect a continued growth international sales of ambient air analyzers using pollution control. Sales of electronic test and measurement systems declined $1 million, while international sales increased slightly, but were offset by lower domestic volume.

Early in the second quarter, we completed two strategic acquisitions for Teledyne LeCroy's protocol solutions group. Protocol analyzers are used by engineers to troubleshoot data communication systems and test interoperability, compliance, and interference among electronic devices such as smartphones, PC video cards, and automotive infotainment system.

Specifically, Teledyne LeCroy was already the market leader in protocol test tools for serial data standards, like universal serial box for USB and peripheral component interconnect express, or PCI express. And through Quantum Data and Frontline, our two new acquisitions, we will provide leading products for high definition multimedia interface, or HDMI, Bluetooth, and Wi-Fi.

Turning to digital imaging segment, first-quarter sales were essentially flat with last year, while GAAP operating margin declined 117 basis points, primarily due to lower revenue of traditional space-based infrared sensors. Revenue and margin both increased in our core Teledyne DALSA businesses.

Yesterday, we announced that we closed the acquisition of CARIS, a leading developer of geospatial software designed for hydrographic and the marine community. While CARIS will work closely with our marine instrumentation businesses, its capabilities in software development and its operating locations more closely align with our digital imaging group in Canada.

Turning to aerospace and defense electronics segment, first-quarter sales increased 8.1% organically from last year, as both US defense sales and commercial sales globally increased during the quarter. In addition, bookings were strong in both major end markets, with a book to bill of 1.15. As mentioned earlier, segment operating margin was a record, increasing 205 basis points from last year.

In addition, in our earnings this morning, we announced the pending divestiture of a non-core business from this segment. While Teledyne Printed Circuits has been part of Teledyne for over 50 years, the planned divestiture is consistent with our ongoing evolution and focus on high technology, high margin, proprietary engineered startup.

Turning to the engineered systems segment, first-quarter revenue increased 1.9% and operating margin increased 182 basis points. Sales increased from nuclear and environmental programs, but were partially offset by lower shipments of hydrogen generators and cruise missile engine.

In summary, before turning the call over to Sue, I did want to add some color regarding the second quarter and remainder of 2016. Over the next few quarters, but especially in Q2, we will be incurring significant severance and lease termination costs as well as M&A transaction expense for the recent three acquisitions and the divestiture announced this morning.

Our outlook does include these charges on a GAAP basis, but the outlook also assumes a gain on the sale of the real estate no longer needed, especially as a result of our prior facility consolidation. Thus, the Q2 income statement will likely be a bit complex, with severance, lease termination, and M&A costs spread among our segments and with the potential real estate sale appearing in other income.

I will now turn the call over to Sue Main.

Thank you, Robert, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert and then I will discuss our second-quarter and full-year 2016 outlook.

In the first quarter, cash from operating activities was $69.1 million compared with cash flow of $16.7 million for the same period of 2015. The higher cash provided by operating activities in the first quarter of 2016 primarily reflected lower annual bonus payments and lower income tax payments, partially offset by lower net income.

Free cash flow -- that is, cash from operating activities less capital expenditures -- was $54.9 million in the first quarter of 2016 compared with $9 million in 2015. Capital expenditures were $14.2 million in the first quarter compared to $7.7 million for the same period of 2015. Depreciation and amortization expense was $21.1 million in the first quarter compared to $23.2 million for the same period of 2015.

We ended the quarter with $636.3 million of net debt -- that is, $719.5 million of debt and capital leases less cash of $83.2 million for a net debt to capital ratio of 30.8%. In April, we acquired three businesses for an initial purchase price of approximately $60 million.

Turning to pension and stock compensation expense, in the first quarter of 2016, gross GAAP pension income was $0.5 million compared with growth pension income of $0.2 million, which included a one-time gain related to a partial pension fee in the same period of 2015. For reference, our pension, which is primarily for legacy retirees, remains fully funded. Stock option compensation expense was $3.3 million in the first quarter of 2016 compared with $3.8 million in the first quarter of 2015.

Finally, turning to our outlook, management currently believes that GAAP earnings per share in the second quarter of 2016 will be in the range of $1.20 to $1.26 per share. And we are affirming our full-year 2016 earnings-per-share outlook of $5.05 to $5.15.

As Robert mentioned, the second-quarter and full-year outlook includes severance, lease termination, and other facility consolidation costs expected to be offset by a gain on the sale of real estate no longer needed as a result of facility consolidation. The 2016 full-year effective tax rate, excluding any discrete items, is expected to be 28.8%.

I will now pass the call back to Robert.

Thank you, Sue. We would now like to take your questions. Tony, we are ready to proceed.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

I am wondering if you can perhaps -- if you are in a position to size the gain that you anticipate on the sale of the real estate?

I think it might be somewhere between $12 million to $15 million because it depends on the taxes that we have to pay there. And we know what the cost basis is, but the taxes are going to be higher than our normal taxes that we have for the Company. Because it is a real estate gain.

Okay. And Robert, I wonder if just in light of the -- what you are seeing from a booking standpoint, can you give us some sense as to how you are viewing the business by segment over the balance of the year? Even directionally how we should think about it. Thanks.

Sure. I think instruments will be down in the second quarter versus last year as it was in the first quarter, primarily due to oil and gas. And then it will flatten out the remainder of the year.

The bottom line, if you go to digital imaging, we think we will get a little uptick the remainder of the year. We could be up in the single digits. A&D, which is our aerospace and defense, for the full year should again be in the single digits, probably about 7%.

Engineered systems I think will be flat, but instruments could be down for the whole year as much as 10%. So we will end the year maybe a little down year over year, maybe a percent or two.

Okay. That's helpful.

(Operator Instructions) Chris Quilty, Raymond James.

Robert, just as a follow-up to the revenue outlook, any significant changes in the margins? And I guess I would say excluding the severance -- or maybe we should just use the severance since you stick with GAAP?

I think overall, our margins are going to be relatively flat for the year. Maybe we will get a little uptick. It could be as high as, let's say, 50 basis points, but it is going to be a pretty complex year.

If you look at segment margins, that would be different from operating margin for the whole Company, because in the segments, we will take the charges and then in the operating of the whole Company, we will take the gain. So I would say flat to 50 basis points in the bottom line.

Got you. On the aerospace and defense business, I guess focusing specifically on the government DOD side, are there any particular areas that you are seeing strength? Is it, you know, a particular technology or programs or a service branch that you are seeing the most gains from?

I think in general, we have in our communication businesses, especially in electronic warfare, we are seeing some strength, both in the US government but also foreign governments. For example, we do have a fairly sizable program with the South Koreans for their missile-defense systems.

Also, as you know, we have the program, the SWCS program, for the channel water combat systems. That is coming along really well and we are entering production now.

And then finally, I would say in some of our satellite communication programs and some of our other programs related to space, we are seeing some increases. Logistics agencies really have begun increasing their procurement. So that is helping it.

A clarification. Is the shallow water combat, I thought that at least originated in the engineered systems segment?

It is, but it also draws some products from other segments as well, including marine, for example. But also we will probably be providing some other sensors for that system from all of our segments, as we do.

Most of the engineered systems, Chris, uses products from other groups, such as we have this Littoral combat ship Frontline interrogation using our gliders, while the sales [growed up] engineered systems, the gliders are made in our marine program. They are the system integrator for a lot of these programs.

Got you. And years ago, you kind of dialed back your focus on the DOD market, correctly assessing that we were going to hit a bit of an air bubble in terms of budget and demand and downturns. What is your prospects here looking out over the next three to five years? Is this an area where you now think you might invest more, or do you have the right portfolio as it stands?

That is a good question, Jim (sic). I think the defense market is stabilized. I do not see a big upside at this time. On the other hand, we are switching a lot of our products from other businesses into defense.

To give you one specific example, while we are suffering in our interconnect technologies in oil and gas, we have the prime position on copenetrators for electric and optic communication. For example, in submarines, both Virginia class and the next set that will be come along, the Ohio class.

And so in those areas, we might increase some content by making acquisitions. But by and large, I think our defense portfolio is fairly well balanced at this time based on what I see.

Okay. And switching over to the aerospace side, where does the portfolio stand there? You have made a couple of small acquisitions in the last several years, but, again, is it more internally or M&A focused?

In the aerospace side, I think we practically have the predominant position in the areas that we play in, specifically in data acquisition and then ability to wirelessly send the data to operating centers of the airline.

There aren't many acquisitions in that domain, Jim, for us. A couple of people that compete with us are larger companies, and I don't think they would want to divest this. And so I think, Chris, if we find something, obviously we would buy it. But right now, we don't see an opportunity for acquisitions in that domain.

Great. And I missed the very earliest part of the call, so maybe this is redundant. But Robert's view on the oil and gas bottom and where it's happened, whether it's happened?

Robert's view. (laughter) I should sell this one. Everything that I know says that the bottom -- we are pretty much in the bottom. I think from Teradyne's perspective, year-over-year comparisons, we will see some negative comps in Q2. But then Q3 and Q4, we should flatten out.

All the people that discuss oil and gas are saying in 2017, prices should be somewhere between $50 and $60. If that were to happen, then I think we will get some uptick in our businesses. Because concurrent with that, there will be some increase in subsea Christmas trees, which grow on top of wellheads and manifold. Also, there will be land-based investments in oil and gas. And all of those would help us greatly.

What has happened in the industry, because of the downturn, people have really lowered their prices, operating, and production and drilling expenses. And a lot of the areas that we are familiar with, whether it is land-based, whether it is offshore, midwater, or deepwater, all the breakeven prices have come significantly down. And we think in those kinds of price ranges, things will start ticking up slowly, but they will tick up.

Got you. And did you feel any impact from the Halliburton Baker Hughes?

Not directly. But you saw Halliburton's earnings yesterday, and of course, the land-based services business are down. And overall, drilling in the past year and a half has gone from -- we had I think about 1,900 rigs out there, mostly land-based. They're down to 400. So the effect for us has been indirect. The combination would not have affected us that I know.

Great. Thank you.

(Operator Instructions) George Godfrey, B.L. King (sic).

Thank you. Wanted to ask, Robert, I don't want to put words in your mouth, but if I look at the book to bill of 1.2, easier comps, and growth -- I heard the growth outlook on the revenue segment.

Do you really feel like this could be a bottom here across each of the segments -- maybe instrumentation is a little weak. But as I look at the aerospace, I mean, 8% growth year over year. As far as I can see, that is the largest year-over-year growth in at least three years.

You are right, George. I think it is a healthy book to bill, but remember, when -- you know this better than anyone. When you have a book to bill, you are measuring it against current billings. And our current billings, as you see, are not that vibrant.

So in aerospace and defense, you are very correct. I think some of it is a longer-term book. But nevertheless, having said that, once we get through Q2, I think we're going to start seeing some uptick in everything in our Company.

Okay. And you talked about the price of oil getting back to $50, $60, and how that helps the breakeven. In talking with Jason, when you bought some of these instrumentation businesses, the price of oil was closer to $35. So if it had to be in this $40-ish range, call it, not over $50, can that still be a profitable growing business moving away from 2016 into 2017?

I believe so. It is profitable now. Our oil and gas businesses are profitable. As a matter of fact, they are (multiple speakers).

Poor choice of words. I meant growing.

Oh. Growing. Yes. That is different. I think we can grow. What is happening is that we are fortunate in that we have been investing in our product. And what has happened is that because people are reducing costs and we have reduced costs. For example, in Q2, we probably reduced costs very significantly in that area.

Yet, as the markets we see, we have increased content. We have new product. And we think that that will improve. We have programs that have to do with high reliability in the water program. We also had last year, we had -- this year more, but last year we had $15 million of [sparse] research from our oil and gas customers for underwater product development. So we think we can enjoy that. We can do okay at the $40-plus.

The other thing is it is not going to move the needle for the Company as much anymore because, as I indicated before, oil and gas now is only about 10% of our portfolio. Where we will gain share is introducing products from our connectors and other things in oil and gas in our defense market.

Right.

So it's to be expected.

And last question. Recognizing that Q2 will have a lot of moving parts and hoping to reduce a little complexity, guidance for the quarterly EPS and then for the full year, what are you assuming on the share count? I noticed the share count down about 500,000 here from Q4 to Q1, with no buybacks, according to the press release.

I think the share count will go up a little bit, maybe a little over 35 million -- 35.3 million for the full year. Right now, we are not planning at this time any share buyback because we have a fairly nice channel of acquisitions -- hopper of acquisitions. Our preference always is, George, to buy businesses.

And -- but -- and our stock is higher. When we last time we bought our stock, it was in the $72 to $74 range. And now, it is closer to about $92. I haven't looked at it today, but -- so the gain you get from share buybacks has decreased. If we spend $100 million when the stock price is at, say, $75 or so, it would benefit us $0.16 in earnings. Today, that would benefit us $0.11 in earnings.

So it is also diminishing [with us]. Plus, as I said, our preference is to buy businesses. So I think share count will go up a little bit, partially because now some of our options will also be kicking in.

Understood. Thank you very much for the commentary.

(Operator Instructions) Howard Rubel, Jefferies.

Robert, after not doing deals for awhile, all of a sudden you have stepped in and you have done some. And you have done them in markets other than oil and gas. What did you see that is different? Or how did you come across these that were as complementary as you think they can be?

Well, luck has a lot to do with it, Howard. Some of this, like the CARIS acquisition, we have been at that point for over two years. And it fits us perfectly. It is not oil and gas. It is hydrographic surveys that people use then to make charts for all commercial as well as military open water travel.

But on the others, the protocols, we were lucky that they came along and we have that optionality from LaCroy. We have others in the hopper. The problem is, Howard, as you well know, some of these businesses that we buy -- actually all the ones that we bought are private businesses. And it has a lot to do with the individual that started the business and grown it, whether it is time for them to take some chips off the table.

I am hoping that this will continue, but we have a lot in the hopper. But I don't know if it will close. Part of it is luck; part of it is what we are willing to pay. And as you well know, you have known us for a long time, we are not likely to pay outrageous amounts for acquisitions because they would not be accretive. So I think it is luck has a lot to do with it.

Just to follow up on that, though, even though the debt is up, the reality is the cost of money is still very attractive. So is there any thought in terms of where you would like to take -- I mean, are the same balance sheet metrics that applied in the past still appropriate here today?

I think our balance sheet is in really good shape right now. Right now, we are below 2 in debt to EBITDA. And if we don't do anything, that will go further south. I think we can move up to 2.5, Howard. That is kind of our internal matrix that we have set up.

And the other thing is some of our debt is of course not line of credit. It comes due over certain periods. And we have been fortunate enough to spread that over many years. So none of it comes due at once. So I think we have a lot of dry powder. I would say $500 million, $600 million if we had to use it, we could.

I hear you. Thank you very much for your time.

(Operator Instructions) Chris Quilty, Raymond James.

Actually, my question was answered, but something else I was thinking about. With the engineered systems business, it was very heavily service-centric and you have put a lot of effort in recent years into leveraging some of the manufacturing capability there. Would you consider bidding on the opportunity to build President Trump's wall?

(laughter) I know you are tweeting me out on that one.

Okay. Just had to get it in.

You're a great guy.

All right. My question was answered; thanks.

Thank you, Tony. I will now ask Jason to conclude our conference call. Jason?

Thanks, Robert, and again, thanks, everyone, for joining us. And if you have follow-up questions, certainly feel free to call me at the number on the earnings release. Tony, if you could give the replay information and conclude the call, we would appreciate it. Thanks, everyone.

Thank you. And ladies and gentlemen, this conference will be available for replay after 10 AM Pacific Time today running through June 5 at midnight. You may access AT&T Executive Playback Service at any time by dialing 800-475-6701 and entering the access code of 387044. International participants may dial 320-365-3844. Once again those telephone numbers are 800-475-6701 and 320-365-3844, using the access code of 387044.

And that does conclude your conference call for today. We do thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.