Teledyne Technologies Inc (TDY) 2018 Q3 法說會逐字稿

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

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

Thank you, David, and good morning, everyone. This is Jason VanWees, Senior Vice President, Strategy and M&A at Teledyne. And I like to welcome everyone to Teledyne's Third Quarter 2018 Earnings Release Conference Call. We released our earnings earlier this morning before the market open. Joining me today are Teledyne's Chairman and CEO, Robert Mehrabian; President and COO, Al Pichelli; Senior Vice President and CFO, Sue Main; and SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik. 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 our periodic SEC filings. And, of course, yes, 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 1 month.

And here is Robert.

Thank you, Jason. Good morning, everyone, and thank you for joining our earnings call. Before discussing our earnings, I'd like to make a few comments about our press release from last night regarding various executive promotions.

First, as many of you know, my prior employment contract continued through December of 2019. That contract has now been extended by the board for an additional 4 years through December of 2023. Furthermore, it's important to note that I am continuing in an operating capacity throughout this period with primary focus on strategy, technology, mergers and acquisition and margin expansion programs, including procurement.

Second, the board also promoted Al Pichelli to assume the role of CEO on January 1, 2019. Al has been our Chief Operating Officer for the last 3 years and more recently, our President, and he's had all the operating management of our company reporting to him directly. In his new role, Al would also oversee finance, legal and other corporate functions.

In addition to Al reporting to me directly, we've also promoted 2 other executives that will report to me, who will continue to be responsible for strategy, mergers and acquisitions and margin expansion programs.

With all of these new arrangements, all stakeholders, shareholders, customers and employees should remain confident that our track record of success will continue for years to come.

Now turning back to our earnings. I'm very pleased with Teledyne's third quarter results. Sales, earnings, operating margin and cash flow were either third quarter or all-time records.

Total sales increased 9.5%, almost all of which was organic. In fact, this was the highest total company organic growth in over a decade. Most importantly to me though was the breadth and balance of growth across our portfolio of businesses.

Each business segment experienced growth in sales and operating profit with the majority of our commercial and Aerospace and Defense businesses growing nicely.

Within Digital Imaging, sales of products related to Life Sciences increased significantly.

Aerospace and defense-related sales rebounded and our micro-electromechanical systems, or MEMS, business also grew, due in part to the consumables we manufactured for DNA analysis and extreme ultraviolet lithography.

Within Instrumentation, sales in all 3 product lines, that is environmental, electronic test and measurement and marine instruments, increased year-over-year with electronic test and measurement particularly strong.

GAAP operating margin of 14.55% increased 103 basis points from last year, and all-time record earnings per share of $2.43 increased 27.9% compared to last year. While margins increased from last year, we continue to see opportunities for further improvement by focusing on our largest and most profitable customers and product and simplifying and streamlining all of our business and corporate processes, including procurement.

As I mentioned earlier, this is going to be a particular area of focus for me moving forward.

I will now comment on the performance of our 4 business segments.

Overall, third quarter sales in the Instrumentation segment increased 10.2% from last year. Sales of Marine instruments increased 4.3% and primarily reflected higher sales of selected acoustic and interconnect products. Sales of autonomous underwater vehicles also increased.

In the environmental domain, sales increased 10% with organic growth of 9%, largely as a result of increased sales of laboratory and life science instruments as well as continued growth in pollutants and particulate monitoring instrumentation.

Sales of test and measurement systems increased 21.7% organically with very strong sales across the range of our products led by sales of protocol analyzer, which were exceptional. We continue to benefit from growth in cloud network storage and solid-state disk drives as well as new product launches, such as high-bandwidth, high-definition oscilloscopes.

Overall, Instrumentation segments operating margin increased, but margin declined 95 basis points, largely as a result of service and facility consolidation costs of $3.2 million in the third quarter of 2018.

Turning to Digital Imaging. In this segment, third quarter sales increased 13.2%, which was entirely organic. Sales of our Proprietary X-ray detectors increased significantly year-over-year. In addition, we achieved robust year-over-year growth in X-ray generators for cancer radiotherapy as well as geospatial hardware and software.

Finally, sales of detectors and data converters for Aerospace and Defense applications also increased. GAAP segment operating margin increased 303 basis points from last year, while the third quarter of 2017 was impacted by $2.9 million of charges related to the acquisition of e2v. 2018 operating margin, excluding these charges, still increased 155 basis points.

In the Aerospace and Defense Electronics segment, third quarter sales increased 7.2%, primarily due to growth across the majority of the Defense electronic businesses. Segment operating margin increased 179 basis points to 19.5%, primarily due to greater sales, but also improved margins.

In the Engineering Systems segment, third quarter revenue increased 2.6% with strong sales related to missile defense and nuclear, aviation and marine manufacturing programs, partially offset by lower sales of cruise missile engines.

Segment operating margin increased 64 basis points.

To conclude, I want to offer some additional perspectives on our company and our track record. Approximately 45% of Teledyne's sales are 2 long cycle markets with strong backlog. Just for reference, our current fully funded backlog, also a record, is approximately $1.5 billion. Furthermore, these markets have cycles not necessarily correlated with the general economy. Such markets, in descending order, include: defense, aerospace and medical.

Our other businesses, such as environmental and electronic test and measurement instrument, sensors and cameras for individual machine vision, and hardware and software for marine survey application are more correlated with the global economy and/or general corporate capital expenditures.

We believe the quality and composition of our business portfolio, first, allows us to outperform when business cycles are favorable as they are now; and second, help us outperform if and when 1 or more of these cycles change.

Finally, given our very strong cash flow over the past 6 quarters, our current leverage ratio is 1.7x. This is equal to the level prior to the e2v acquisition in March of 2017. Therefore, we have more than ample flexibility to invest in our businesses and pursue acquisitions, both small and large.

I will now turn the call over to Sue.

Thank you, Robert, and good morning, everyone. I will first discuss some additional financial for the quarter not covered by Robert, and then I will discuss our fourth quarter and full year 2018 outlook.

In the third quarter, cash flow from operating activities was $141.9 million compared with cash flow of $107.9 million for the same period of 2017. The higher cash provided by operating activities in the third quarter of 2018 primarily reflected the impact of higher income as well as lower income tax payments.

Free cash flow, that is cash from operating activities less capital expenditures, was $121 million in the third quarter of 2018 compared with $92.3 million in 2017. Capital expenditures were $20.9 million in the third quarter compared to $15.6 million for the same period of 2017.

Depreciation and amortization expense was $27.3 million in the third quarter compared to $31.4 million for the same period of 2017. We ended the quarter with $711.2 million of net debt. That is $837.3 million of debt and capital leases less cash of $126.1 million for a net debt to capital ratio of 24.3%.

Stock option compensation expense was $4.6 million in the third quarter of 2018 compared with $3.2 million in the third quarter of 2017. As noted in the earnings release, the third quarter of 2018 included $4.1 million of pretax restructuring costs compared with last years $2.4 million of similar charges plus $2.9 million in acquisition-related costs due to the e2v transaction.

Turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2018 will be in the range of $2.15 to $2.20 per share. And for the full year of 2018, our GAAP earnings per share outlook is $8.71 to $8.76 compared to our prior outlook of $8.18 to $8.28. The 2018 full year estimated tax rate is 21.3% before discrete items.

I will now pass the call back to Robert.

Thank you very much, Sue. David, we would like you to start with the questions, please.

(Operator Instructions) And we do have a question from the line of Jim Ricchiuti with Needham & Co.

Robert, congratulations, I wish you the best. And you may have given some detail on this already, and I may have just missed it, but what -- is there some color that you can provide on book-to-bill by some of the various business segments? And what we might anticipate as we think about growth rate for the various businesses looking out in Q4?

Sure, Jim. Let me back into that. First, I think in Q4 right now, we're anticipating about 3% growth, organic growth, primarily because we think there's going to be little sluggishness in our Marine businesses. Second, in terms of book-to-bill, right now, we are sitting around 1 after Q3. And that changes between businesses. In instruments, we are a little bit better than 1. In Digital Imaging, a little less than 1. In total I would say, we're sitting around 1. We don't have visibility into some of our short cycle businesses as much as we'd like to. So that's part of the reason that I am saying probably about 3% organic growth in the next quarter.

As you roll it up for the whole year, then it will be somewhere between 6.5% to 7% versus what I indicated last quarters, which was closer to between 5% and 6%.

Any idea -- you highlighted a little bit less visibility in the short cycle business. What are you attribute it to? Is it just some general hesitation in light of some of the macro concerns?

I think the -- in general, with all that's going on with the various tariffs, even though they don't affect us as much as most other people, and the economies across the world, I'm just a little cautious on that. That's all. There is no specific -- the last thing I would say is in the Marine area, offshore energy exploration and production was sluggish the last 3 years. Indications are that it will improve, but it'd be further out than the fourth quarter. We think maybe 2019 and 2020. So I am being a little cautious.

Okay. That actually was my follow-up as it relates to the firming in oil prices. So when would you think you would start to see a turn in terms of the bookings momentum in that business starting to pick up?

We -- for that, we look at our -- to our customers. And right now, what we are seeing is that the offshore investments are increasing. Last year to this year, I would say that almost doubled. But it takes a little while for those investments to churn into orders for our customers and subsequently to us. We believe that, that would probably start happening by close to the middle to the end of '19. There are -- the forecasts right now show that there are going to be about 100 projects worth about $140 billion sanctioned in 2019. By the time that rolls down to us, of course, it's late '19 and early '20.

And next, we have a question from the line of George Godfrey from CLK.

My congratulations to Robert as well. And I just want to follow on that line of thinking on the organic growth rates. As we head into 2019, and I'm thinking back to the beginning of the year when, and I am doing this from memory, the organic growth expectation was maybe 3% to 4%. And I look at this quarter at 9% which is actually on acceleration from 8% in Q1 and Q2. And it's really been quite strong over the last 4, 5 or 6 quarters. And where -- what my question is, can the momentum in that organic growth rate really change overnight? Or would you expect the patterns to continue into 2019? Just like on the negative side in 2016, we saw deep double-digit organic growth declines in Instrumentation, and it took a while for that to turn. So my question is can this momentum continue into 2019?

It could. Let me just say you were absolutely correct. We started -- in the year, we started in May projecting organic growth for the year of 3% to 4%. Then in August, we went 5.5% to 6%. Now we are saying 6% to 7% for the whole year. Obviously, we're a little cautious for the reasons I've mentioned earlier. If nothing serious happens to the economies and if oil prices hold, they're up -- they are down some. But if they hold, I think 2019 we should have a reasonable organic growth, so probably, I hate to predict it, but I'd say about 5% is what we look at right now.

Okay. And then just one follow-up, in the press release you highlight your desire to grow organically and through acquisitions has been the Teledyne operating model. How is the pipeline of opportunities relative to the prices that are out there? Have seen the acquisition prices perhaps take a little tick down, given the tariffs and interest rates rising in the market? And I'll leave it there.

For sure. It's a little too early to say because a lot of the things you mentioned have been very recently. Having said all of that, we do have a very healthy pipeline. And we are working on both small and midsized acquisitions at the present time. And we certainly have the capacity, the funding capacity to do them. So I'm positive about getting something done in the relatively near future.

(Operator Instructions)

Thank you, David. I'd -- what I'd like to do is, if there are no other questions, I'd like to ask Jason to conclude our conference call.

Thanks, Robert. And again, everyone, thanks for joining us this morning. If you have follow-up questions, my number is on the earnings release, please do feel free to call. David, if you could conclude the call and give the replay numbers to the audience, we depreciate it. Thanks, everyone.

Ladies and gentlemen, this conference will be made available for replay after 10:00 a.m. Pacific time today until November 24 at midnight. You may access that replay service at any time by dialing 1 (800) 475-6701 and entering the access code 455115. International participants may dial 1 (320) 365-3844.

That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.