Teledyne Technologies Inc (TDY) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Technologies Third Quarter Earnings Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to turn the conference over to Jason VanWees. Please go ahead.

Good morning, everyone. This is Jason VanWees, Senior Vice President, Strategy and M&A at Teledyne, and I'd like to welcome everyone to Teledyne's Third Quarter 2017 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened.

Joining me today are Teledyne's Chairman, President and CEO, Robert Mehrabian; COO, Al Pichelli; Senior Vice President and CFO, Sue Main; and Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik.

After remarks by Robert and Sue, we will ask for your questions. Of course, though, 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 our periodic SEC filings. And yes, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay, via webcast and dial-in, will be available for approximately 1 month.

Here's Robert.

Thank you, Jason, and good morning, everyone, and thank you for joining our earnings call. I'm pleased to report that in the third quarter, we achieved all-time record GAAP earnings per share and all-time record GAAP operating margin. Our results were due to: first, strong overall organic sales growth, exceeding 8%; and second, excellent contributions from acquisitions, especially Teledyne e2v. In particular, our image -- Digital Imaging segment performed exceptionally well, and we also achieved strong organic sales growth in each Instrumentation product group, including marine instrumentation as well as the majority of our government and defense businesses. Furthermore, total company orders continue to exceed sales and free cash flow was a record for any third quarter.

Before commenting on our business segments in more detail, I want to offer some perspective on our performance, products and end markets. In the third quarter, sales growth was well balanced among our segments as well as among product lines within our segments. For example, organic growth in our Digital Imaging segment exceeded 20%. The largest drivers for this growth were cameras for machine vision applications, such as flat-panel displays and CMOS-based digital X-ray detectors for dental and medical imaging.

After several years of investment in the development of these high-resolution, low-dosage X-ray detectors, we are pleased to see OEM adoption now accelerating. Other Digital Imaging product lines, including micro-electromechanical systems or MEMS, geospatial mapping systems and our government imaging businesses also increased organically at double-digit rates.

In our Instrumentation segment, sales of both environmental and electronic test and measurement instruments also increased organically at double-digit rates.

Finally, orders in our long-cycle government-based businesses representing about 24% of total sales, began increasing early this year and we have now achieved 3 consecutive quarters of year-over-year organic growth in these businesses.

As I mentioned last quarter, in the absence of major headwinds, such as offshore energy, our results demonstrate Teledyne's strong, consistent and balanced underlying business performance as well as our successful acquisition strategy and the integration execution.

Turning back to the quarterly results. Total revenue increased 25.7% compared to last year, with earnings per share growing even more, increasing to just over 30%. GAAP operating margin also increased 97 basis points despite 44 basis points of charges related to the e2v acquisition. And even with these charges, both operating margin and EBITDA margin were historical records for Teledyne.

Finally, a short comment on the presentation of our full year 2017 results and outlook. The first quarter of 2017 was the one and only quarter in our history in which we highlighted non-GAAP adjusted earnings, simply given the magnitude of the e2v acquisition-related expenses. So while we're providing a full year outlook adjusted for such expenses, it is worth noting that we have only adjusted the full year outlook for specific nonrecurring transaction cost which we expect to end this year. We do not, and never have, adjusted for ongoing expenses, such as amortization of intangible assets. For reference, in full year 2017, amortization alone will represent approximately $40 million or about $0.80 per share of noncash expense.

Now turning to our 4 business segments. In our Instrumentation segment, third quarter sales increased 11.6% from last year. Segment operating profit and operating margin also increased due to margin improvement at each major product category. Sales of marine instruments increased 4.3% due primarily to higher sales of interconnect and cable solution. This was our second year-over-year increase in sales of marine instruments and we currently believe that this product line, in aggregate, has stabilized.

In the environmental domain, sales increased 21.8%, largely as a result of continued growth in industrial air monitoring instruments as well as increased sales of laboratory and life science instruments, which included the acquisition of Hanson Research and Scientific Systems, also referred to as SSI.

Sales of electronic test and measurement systems increased 13% overall and 10.1% organically.

Sales of protocol analyzers, used by engineers to troubleshoot data communication systems and test interoperability, for example, between wireless devices, continue to be healthy and product line gross margins and overall operating margin continue to increase.

Turning to the Digital Imaging segment. Third quarter sales increased 94.4%, with organic growth of 23.1%. As mentioned earlier, the organic increase in sales was broad-based, across both our commercial and defense businesses, with particularly strong growth for industrial machine vision cameras and X-ray detectors for life science applications. E2v -- Teledyne e2v was a strong contributor, adding approximately $70 million of revenue in the quarter.

GAAP operating margin increased 478 basis points from last year despite headwinds from amortization of intangibles and about $2.9 million of transaction-related charges from e2v.

In the Aerospace and Defense Electronics segment, third quarter sales increased 7.6%, primarily as a result of the acquisition of Teledyne e2v. Segment operating margin declined due to increased sales towards some lower margin defense programs as well as relocation costs of a manufacturing facility from Mexico to the United States. Nevertheless, overall margin remained healthy at 17.8%.

In the Engineered Systems segment, third quarter revenue increased 9.9%, and operating margin improved 75 basis points. The higher revenue and margin primarily resulted from greater sales for marine manufacturing programs and cruise missile turbine engines.

In concluding my comments, I want to first offer some perspective on our outlook. Given our strong third quarter results and balanced growth across our business portfolio, we now believe that full year 2017 total company organic growth will be approximately 6% compared to 5.5% noted last quarter and 4.5% at -- noted at the end of -- for the first quarter.

Due to our strong cash flow, we have reduced leverage from 3.0x to 2.6x in the 6 months following the acquisition of Teledyne e2v. And this also includes the acquisition of SSI for $31 million in July of this year.

Finally, given our strong balance sheet, success in e2v integration and stability across all of our markets, we are currently pursuing a broad range of acquisition opportunities.

I will now turn the call over to Sue.

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 fourth quarter and full year 2017 outlook.

In the third quarter, cash flow from operating activities was $107.9 million compared with cash flow of $98 million for the same period of 2016. The higher cash provided by active -- operating activities in the third quarter of 2017 primarily reflected the impact of higher net income and cash flow from Teledyne e2v, partially offset by higher income tax payments.

Free cash flow, that is cash from operating activities less capital expenditures, was $92.3 million in the third quarter of 2017 compared with $83.6 million in 2016.

Capital expenditures were $15.6 million in the third quarter compared to $14.4 million for the same period of 2016.

Depreciation and amortization expense was $31.4 million in the third quarter compared to $22.8 million for the same period of 2016. The increase in depreciation and amortization largely resulted from the acquisition of e2v.

We ended the quarter with approximately $1.1 billion of net debt. That is approximately $1.2 billion of debt and capital leases less cash of $82.5 million for a net debt-to-capital ratio of 37.5%. Our leverage ratio was 2.6x at the end of the third quarter of 2017 compared to 2.8x at the end of the second quarter of 2017.

Stock option compensation expense was $3.2 million in the third quarter of 2017 compared with $2.5 million in the third quarter of 2016.

Regarding e2v acquisition-related charges, the third quarter of 2017 contained $2.9 million of pretax charges in our Digital Imaging segment. Nonrecurring charges specifically related to the acquisition have now ended. However, full year 2017 results will be impacted by a total of $28.1 million or approximately $0.56 per share.

Turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2017 will be in the range of $1.70 to $1.75 per share. And for the full year 2017, our GAAP earnings per share outlook is $6.10 to $6.15.

Adjusted full year earnings per share are expected to be in the range of $6.66 to $6.71. This compares to our prior outlook of $6.15 to $6.25. The 2017 full year effective tax rate excluding any discrete items is expected to be 27.7%.

I will now pass the call back to Robert.

Thank you, Sue. We would now like to take your questions. Operator, if you are ready to proceed with the questions and answers, please go ahead.

(Operator Instructions) Our first question will come from the line of Greg Konrad with Jefferies.

I was hoping maybe we could start just to discuss some of the margin drivers in Digital Imaging. Historically, there has been a lot of moving pieces with R&D and amortization. Have the margin expectations for that segment kind of been reset, just judging from Q3 performance?

I think the margins in Q3 were exceptionally high, Greg, primarily because of real up-pull from DALSA and e2v. Some of -- as you know, in our Digital Imaging, we have 2 other components that are lower margin businesses. One of them is our Digital Imaging at Teledyne, which is our infrared imaging and the other one is our research laboratory, which we take no profit from. So I think in the fourth quarter these margins would moderate somewhat. And we think the other thing that may go against us a little bit is flat-panel display production, which we provide cameras for, may be moving out from Q4 into 2018.

And that's -- since you've brought up 2018, now that's kind of a good segue. I mean as we sit here, you've had accelerating organic growth through the first 3 quarters. Can you maybe give just an indication of where you think -- see things going in 2018?

Yes, I think, organic, right, of course you know that looking into the future, it's not that easy. I think organically, my expectations at the present time are still, call about 3%. It could be a little higher, but 3% is where our thoughts are. And I think total growth would be around 6%. It could be a little higher, again as I said, but right now, that's where we're setting our expectations.

And just last one for me. I mean, in the past, you've kind of given a full year margin outlook for segment, just to go back to my first question. Just kind of looking at Q3, can you maybe discuss margin by segment?

Yes, I can try. I think Instrumentation would be a little over 14%. Digital Imaging probably around 14.5%. Aerospace and Defense Electronics about 18.5%. And I think Engineered Systems about 12.8%, 12.9%. The total segment margin, as you recall, first quarter and throughout, we've taken $9.4 million of charges because of e2v. So we -- so the first quarter was lower. We think we'll end up over 15%, maybe 15.2%. I hope that helps.

Our next question comes from the line of Jim Ricchiuti with Needham & Company.

Robert, just going back to the Digital Imaging. Is the growth, the activity you're seeing in the industrial machine vision area, is that mainly display-related or are you seeing growth in demand just more broadly across factory automation?

I think it's broader than that. We have cameras, of course, for flat-panel display. But we introduced some cameras for 2-dimensional displays, some custom sensors that we make. I would say we have a balanced growth in that domain. We're also starting to produce our Uncooled infrared sensors, which we've developed, as I have indicated before, we now can make way for label package detectors. So I think it's broader than flat panel. But flat panel is very important. It drives about $50 million a year for our business in that -- in there.

And that flat panel is both liquid-crystal display and the newer OLED technology?

Yes.

Okay. You mentioned, I think, the book to bill was around 1 for the quarter. Was that book to bill fairly constant across the 4 business segments? Or were there any significant variations in that in either Digital Imaging, Instrumentation?

Yes, Jim, I think the book to bill is a little over 1. It's like -- more like 1.04. I think in the Instrumentation, it's a little below 1. In Digital Imaging, it's probably about 1.07. Aerospace and Defense Electronics is 1.03. Engineered Systems is high, but that's because these programs are long-term programs. There, our book to bill is more like 1.2, but as I said, those are longer-term programs. So overall, it's about 5% above 1.

Okay. And last question and I'll get back in the queue. I was surprised by the growth -- the organic growth that you showed in electronic test and measurement. I don't recall seeing that kind of growth from the LeCroy business in a while. What's driving that?

Well, there's 2 parts to that, Jim. First, the LeCroy business is healthy, partly because they're introducing a lot of new products. But secondly, in the test and measurement, audio electronics business, we do have a significant business in protocol test -- protocol analyzers. And that business is growing much faster than the oscilloscope business. Even though the oscilloscope business has really moved up. In the protocol business, which as I mentioned before, tests the interoperability between devices, we have mostly #1 position in High-Definition Multimedia Interface, Bluetooth and other domains. So the increasing cloud storage has also helped our protocol businesses. So it's a combination of both protocol and LeCroy, oscilloscopes.

(Operator Instructions) Our next question comes from the line of George Godfrey with CL King.

In the Instrumentation, you touched on test and measurement, which as reported, was up 13%. And then just looking at the other 2 segments, marine, this is the second quarter with nice growth there, 4%; and then environmental, 22% growth this quarter. Now that you've touched on test and measure, can you just touch on the factors in the marine and environmental segments as well?

Of course. First, let me start with the marine, if I may. As I mentioned in the earnings call, the marine businesses have stabilized. What do I mean by that is that we essentially lost about 30% of our market between 2014 and '16. This year, we're operating about $425 million, $430 million. And the other thing about that is that our marine businesses have flipped, used to be 60%, 40%: Energy, offshore energy exploration and production; and then 40% which was science, defense, security and Hydrography and transportation. Now it's the flip side of that. The defense is much stronger, and the oil and exploration and production is more like 40% of the portfolio. And as a consequence, that has stabilized and we've had a modest growth, but also importantly, we've had improvements in margin, because we took a lot of cost out in that businesses. Last year, we took almost 25% of the people and then we did significant facility consolidation. We're even now finishing up consolidating a facility from the U.K. to Florida. So that's the marine business.

On the environmental businesses, the growth is coming across that segment, or subsegment, and it's very, very strong in environmental programs that do pollution monitoring and air quality monitoring. For example, we have very good position in China. And we also have really good products in laboratory and life sciences business, and we're growing very well there. And then we did make a small acquisition, the high-pressure pumps, very accurate high-pressure pumps used in things like high-pressure liquid chromatography and that helped also. But organically, we have double-digit growth because of the health of our businesses across the various product lines.

That's excellent. And then just one question for Sue. Looking at the discrete tax benefits this quarter, the $9.9 million versus $6.6 million. And if I go back to Q4 of '16, it looks like discrete tax benefit was $9.4 million there? Do you expect a similar -- I know it's not in the guidance, but will there be a discrete tax benefit in Q4, approximately at somewhere near the magnitude of those numbers?

No, not at all.

Not at all. Okay.

I think Q4's discrete is going to be maybe $0.04 to $0.05. Some of that, as Sue mentioned earlier, coming from stock option exercises. Of course, the higher our stock price, the more tax benefits we get when people exercise stock options. But then we do have -- because of that, we have share creep-up. So that works against us.

Our next question is a follow-up from the line of Jim Ricchiuti with Needham & Company.

Sounds like you're suggesting a bit of a pickup in acquisition activity. I'm wondering if you can in, again, in broad terms, talk about where you might see some attractive opportunities, which segments? And would these be -- tend to be smaller or are there some opportunities maybe for some larger deals?

Both. First, let me start with the segments, please. Obviously, anything related to imaging, because now our portfolio there is becoming stronger and stronger. And now we have probably the world's best imaging businesses when you look at -- and broadest businesses when you look at a range from infrared, down to visible and ultraviolet. We have all the combination of the products. So we look -- going to look there first. And then just the area we just spoke about, which is the environmental area, is another nice area for us to make acquisitions. If there was anything in protocols, we'd like to acquire. But as I said, we already have out of the 5 areas we cover, we have #1 position in 4 of them.

In terms of size, it could be both. We're looking at small acquisitions and we would be interested in doing something larger. With the cash flow that Sue indicated, if you look at our debt, it's about -- net debt is about $1.1 billion. Our EBITDA is about $430 million, $440 million. So if we didn't do any acquisitions, we could pay down that debt essentially in 2.5 years, approximately. So -- and we have capacity, debt capacity, maybe $500 million currently, but then if we acquire anything, of course that brings some EBITDA with it, so that would let us do something larger. So we're looking at both of those.

And we have no further questions in queue.

Thank you very much, operator. I'll now ask Jason to conclude our conference call.

Thanks, Robert. And again, thanks, everyone, for joining us this morning. And if you do have follow-up questions, please feel free to call me at the number on the earnings release. All earnings releases are available on our website, teledyne.com. Ryan, if you would please conclude the call and give the replay information, we'd appreciate it. Thank you.

Okay, ladies and gentlemen, as you heard, today's call was recorded for replay. That replay will be available starting at 10 a.m. Pacific today, and run through December 2 at midnight. You may access the AT&T replay system by dialing 1 (800) 475-6701 and entering the access code 430455. International participants may dial into the United States at (320) 365-3844. Thank you for your participation. You may now disconnect.