Teledyne Technologies Inc (TDY) 2002 Q1 法說會逐字稿

Ladies and gentlemen, good day. Thank you for standing by. Welcome to the Teledyne Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. Instruction will be given at that time. If you should require assistance during the call, please press zero followed by star. An operator will assist you. As a reminder, today's conference call is being recorded. I'll now turn the conference call over to your host, Mr. . Please go ahead, sir.

van leese: Good morning, everyone. This is , director of Corporate Development and Investor Relations at Teledyne Technologies. I'd like to welcome you to Teledyne Technologies first quarter earnings release conference call. We released our earnings earlier this morning, and joining us today are Teledyne's term president and CEO, Robert Mehrabian; Senior Vice President and CFO Bob Naglieri; and Senior Vice President, General Counsel and secretary, John Kuelbs. After remarks by Robert and Bob we'll ask for your questions. However, 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, risk and caveats as noted in the earnings release and our SEC filings, and of course actual results may differ materially.

Also, in order to avoid selective disclosures, this call is simultaneously being webcast and a replay both by a webcast and dial-in will be available for about a month. Here is Robert.

Thank you, Jason, and good morning. Since you already have our earnings release, I will not go through all the details. The benefits of our multiple cost reduction efforts undertaken in 2001 are clearly reflected in the improved financial performance of our company. We achieved a 44 percent year-over-year increase in income when noncash pension income is excluded on a slightly lower revenue base. Furthermore, management of working capital helped the company achieve positive cash-flow from operations in the first quarter of 2002, compared with a significant cash usage of approximately $26 million in the first quarter of 2001.

Given the continuing weak economic environment, we are especially leased with the performance of our electronics and communications segment. And we continued to believe that the company is better positioned to achieve sustainable earnings growth when the commercial market that we serve turn it on.

In the remainder of my comments I will first elaborate on the operating performance in our business segment and, second, I will comment on our market outlook for 2002. Bob Naglieri, our CFO, will then discuss more details about our financial performance.

Turning to the business segments. Although sales in our electronics and communications segment were relatively flat, first quarter operating profit increased 34 percent from last year. Excluding noncash pension income, operating profit was up 75 percent. As I discuss our electronics and communication businesses I will break up my comments into three separate market categories. First, commercial short cycle electronics; second, defense electronics; and third, commercial long-cycle electronics.

Let me start first with our short-cycle electronic products. In this product, which serve the semiconductors, telecommunication and general industrial markets, orders and sales increased slightly compared to the fourth quarter of 2001 after several quarters of sequential revenue decline. We believe that we are seeing the bottoming out in the demand for many of our short-cycle electronic product lines. For example, we've received the first new orders in nearly 12 months for relays used in wireless bay stations and data networking. Although we do not anticipate a dramatic upturn in the relays business in the near term, our customers have continued to develop new, and our relays have been selected for over 150 new electronic and communication applications.

In the commercial optical telecommunications market, we have significant lowered our expenses and are continuing to receive new orders for packaging design and prototype production from small optical component companies. While we do not anticipate any significant near-term recovery in this business, through the work that we are currently performing we have been able to utilize our core manufacturing assets and retain our engineering capability for when the market returns.

On the other hand, after four quarters of sequential revenue decline, orders and sales in our industrial instruments business increased modestly in the first quarter of 2002. We are continuing to seek opportunities to grow in instrumentation markets through both new product development and acquisitions. Our focus in this segment is driven by several factors including our expertise in high-precision components and instrumentation and opportunities to leverage our broader electronic technologies and our low-cost manufacturing facilities in Mexico.

Second, let me now turn to our defense electronic businesses. Sales of defense electronics in the first quarter of 2002 increased relative to both the first and the fourth quarters of 2001. Strong sales of military microelectronics such as those used for secure communication and traveling wave tubes used in radar and electronic warfare systems continued in the first quarter of 2002. We expect demand for these products to remain stable in 2002 as both product lines are used in a variety of military programs.

For example, as we've previously mentioned, we believe that the programs such as the F-22 and the new joint strike fighter represent significant revenue potential for our defense electronics businesses. We are currently delivering products for the F22 rafter including ejection seat sequencers and various microelectronic modules and relays, and we continue to estimate that each F22 will contain up to about $400,000 of components produced by Teledyne.

We have also recently received new orders primarily for the production of sophisticated military communication equipment in our high-mix, low-volume contact manufacturing services. In addition, military programs such as the Crusader vehicle have received increased development funding, and we believe such programs will result in improved sales in late 2002 and 2003.

Furthermore, in the last few quarters we've been able to expand our commercial businesses into the defense electronics space. For example, this quarter we expanded our commercial geophysical instrument product line to include sensors for military anti-submarine warfare application, and we've also, as we've mentioned previously, we recently broadened our commercial avionics business with our first commercial off-the-shelf product for the C17 military transport aircraft. We are currently pursuing other opportunities to apply our commercial aviation products to military aircraft.

Third, in our long cycle commercial electronics businesses which serve primarily the aviation and medical market, while we're beginning to feel the effects of industry turn-down in commercial aviation, Teledyne has continued to benefit from new product introductions in our avionics businesses. For example, the first delivery of an Airbus 320 equipped with Teledyne's new data management system occurred during the first quarter of 2002. We currently expect that our share of the data acquisition systems on new airbus A320 and A330, 340 aircraft will increase from less than 10 percent in year 2000 to up to 50 percent in year 2005.

Our increasing market share on airbus aircraft and our new wireless ground-link and high-speed air-to-ground communication products coupled with a relatively stable replacement and business jet market should help our commercial avionics remain relatively healthy despite the projected decrease in OEM air transport shipment.

Finally, in the electronics area dealing with medical arena we are providing manufacturing services for medical system manufacturers and custom micro-electronic modules for implantable medical devices such as pacemakers. Demand for our products and services in the medical segment remain relatively stable, and we are looking for ways to expand this business.

Let me turn now to our next segment which is the systems engineering segment. From a revenue standpoint this was a tough quarter for our government engineering services business. However, nearly the entire year-over-year revenue decline in the first quarter came from environmental program and certain under-performing commercial businesses which were sold or shot down during 2001. Our core defense businesses such as those related to the national missile defense, the international space station, and certain classified programs continue to perform well. In fact, in recent months orders in this segment have been increased considerably.

First quarter 2002 bookings were up 11 percent from the first quarter of 2001 and exceeded sales by almost 50 percent. Both the increased defense budget and the establishment of the Office of Homeland Security continue to suggest an improved outlook for defense-related engineering services.

Also, given our incumbent status in a variety of high-value programs, combined with focused government resources and increased defense budget, the long-term outlook for this segment is attractive.

Turning to our aerospace engines and component segment, orders and sales during the first quarter of 2002 for our aircraft piston engine business increased over 10 percent relative to both the first and fourth quarter of 2001. We are pleased to see a pickup in orders from the general aviation market given the specially weak market environment last year. Nonetheless, given the current state of the economy, rising fuel costs, and the company's dependence on after-market aviation sales, we are being conservative and do not expect a significant recovery in the piston engine business in 2002.

In turbine engine business we continue to be optimistic regarding the new JASSM cruise missile program. As a reminder, the JASSM, or joint air to surface standoff missile, is expected to begin production near the end of this year and is designed to be compatible with a variety of Air Force and Navy platforms. Based on our estimates, our total revenue from JASSM program could approach several hundred million dollars over the program life.

Given the more stable market outlook in this segment, as well as our efforts to increase focus on our electronics and communication and systems engineering software segment, we are again exploring strategic alternatives for the product lines in our aerospace engines and components segment.

Finally, in our energy systems segment, revenues in the first quarter of 2002 were flat compared to the first quarter of last year while operating profit decreased due to increased investment in fuel-cell programs. Our goal is to keep operating profit near break-even as we continue to focus on sales of tangibles energy technology products such as fuel-cells, test stations, and hydrogen refueling system. At the same time, we continue to look for opportunities to create shareholder value with this asset.

In summary, our 2001 cost reduction actions have been effective in keeping our company healthy and profitable. We entered the second quarter with guarded optimism regarding the economic environment for commercial short cycle electronic businesses. Our businesses are now more focused having sold their exited five under-performing product lines and our manufacturing facilities have never been leaner, and we have significantly improved our cost structure and operating earnings.

We believe that our businesses will continue to enjoy a substantial increase in profitability when the commercial markets in which we participate turn around. We are truly excited about the long-term potential for each of our major businesses. Not only does President Bush's latest proposed defense funding show annual procurement increases of 10 percent through 2007, but we believe that we are in some of the most high priority programs in that budget. On the systems side of the business we have critical responsibilities on key programs such as the national missile defense and may have new opportunities resulting from homeland security.

Given, though some commercial markets such as commercial aerospace may be down in the near term, our long-term outlook remains quite positive. New products such as wireless ground link and our increasing share on airbus aircraft could result in increased revenue even in a depressed aerospace cycle. Furthermore, we are looking to add to our commercial electronics business through acquisition.

Finally, given our free cash flow and strong balance sheet, we have the financial flexibility to make such acquisitions. I will now turn the call over to our CFO, Bob Naglieri.

Thanks, Robert. Let me start by providing some detailed financial information in support of Robert's comments. I'll talk about the first quarter actual and in some cases be able to provide some full-year estimates, and then I'll discuss the second quarter and full-year outlook.

We generated positive cash flow from operations of about $8.5 million which was mostly driven by operating earnings and net inventory reduction, somewhat offset by customer receivables. Net inventories continued to decline as a result of our supply chain initiatives and turned approximately six times annually. That's about a 50 percent increase from a few years ago. Although receivables increased by about $11 million versus December 31 of 2001, we're very comfortable with the aging and average days to collect these receivables. The increase in receivables was mostly due to a very low December the last quarter of '01 balance because of some one-time payments on a US government contractor by a key customer.

We expect cash flow to approximate net income for the year. Capital expenditures were $3.5 million for the first quarter of 2002 as compared to $9.4 million in the first quarter of last year. Again, looking forward, we continue to forecast spending for the year in the $21 million range. According to our plans and prior tracking, we will allocate most of these dollars to our electronics businesses. By the way, the $21 million in capital expenditures also offset the $21 million depreciation for the year.

Total debt to total capitalization is at 10 percent with actual debt reduced to $19.5 million from the $30 million of last quarter.

As Robert indicated, operating margins expanded in the first quarter very nicely. Our goal of offsetting the loss of non-cash pension income and continually expanding our margins has been largely successful. We accomplished this by head-count reductions last year 14 percent, exiting or closing marginal businesses and consolidating facilities.

At this time when the market returns to normal levels, especially in our short-cycle electronic businesses, we anticipate that this profit expansion will continue. The only disappointment in operating performance is in our piston engine business where a true-up in our aircraft liabIlity reserves and litigation costs associated with our crankshaft problem of two years ago impacted operating profits by $1.8 million.

As Robert indicated, orders booked versus sales billed in our short-cycle businesses have improved slightly, although when you look at it it's still at a substantially lower level than previous trends.

As you know, there are mixed signals from the semiconductor and Telcom industries, two industries which drive our short-cycle results.

Finally, before I turn to our outlook, we have adopted FAS142 which as you know addresses goodwill amortization and I'm pleased to say with no impact on our operating results. As a matter of record, goodwill amortization in the first quarter of 2001 last year was a mere $187,000. And obviously this year it will be zero with the adoption of FAS142.

Also noted in our financials, the asset value of good will is $26 million. I might also add that that $26 million, about $20 million was added in the fourth quarter of last year.

Now let me turn to 2002 and give you an outlook. At this point, we continue to see an essentially overall flat year-over-year volume comparison versus 2001 last year. Our incremental cost savings offsetting the reduction in net cash pension income will certainly help. We are still anticipating some improvement in the second half for our short-cycle businesses. And, frankly, the second quarter will be a key indicator for us in this arena.

In summary, we believe full-year earnings will be in the range of 66 to 78 cents of earnings per share and anticipate the second quarter in the range of 15 to 18 cents of earnings per share.

I'll turn it over to Robert so we can respond to your questions.

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

Very good. Ladies and gentlemen, if you'd like to ask a question please press the "1" on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you're on a speakerphone, please pick up your handset before pressing the numbers. Again, if you have a question, please press "1" at this time. First question in queue is from the line of from . Please go ahead.

Good morning. Just touching on this aircraft liability reserve and litigation cost issue, is this going to be something that's going to be ongoing for the year, or do you think you've reserved enough for it at this point?

Steve, we don't know exactly the answer to that question primarily because we are in the very early stages of entering our litigation with the suppliers that supplied the defective steel for our crankshaft. So we may have some costs associated with that trial which should be starting sometime in the second quarter.

Can you maybe provide a maximum liability here?

I really don't want to speculate that the liability on our part is really the expenses that we would have with the trial.

Now, is this included in your guidance at this point?

Yes.

Okay. Because excluding that liability, the guidance for 2Q really seems a little conservative, 15/18, because if you backed out these reserves you really did about 20 in the quarter. So should I really model in a similar reserve or expense in 2Q?

Steve, our guidance is what it is. Yes.

Just in terms of the net effect of the acquisitions and divestitures for the quarter in terms of the revenue line?

Basically, the net effect of the acquisition was about 4 million up and the divestiture was about 2 million down. So net, 2 up.

And you guys also touched on the homeland security possibilities you have. Can you touch on that a little more?

Well, we have some proposals. We've been very active in generating proposals on that front. We are not in a position yet to talk about what we have, but we are active in that arena and hope to get some programs there.

Lastly, the corporate expense is about $3.9 in the quarter. Is that a good number to use going forward?

It's a little bit high, but that's on the track of where we've been spending.

Thank you.

Next question is from the line of Mark Jordan from AG Edwards. Please go ahead.

Good morning, gentlemen. First of all, let me just go back to the issue of guidance. At the end of last quarter you had a more narrow range of 70 to 75 cents. Now we broadened at both ends. Is it again fair to say that the broadening of the range is a function of the lack or inability to quantify the potential legal expenses in the piston engine business, and that's what's caused you to broaden the expectations?

No. Mark, I actually, the end of last quarter in January our guidance for the year was 64 to 80 cents. And what we have done is, we've narrowed the range somewhat to 66 to 78. So I don't think we were narrower.

Okay. Second question again on the overhead issue, at $3.9 million last year in each quarter you range between $3.4 and $3.2 million. Has there been some reclassification or, again, are there some incremental charges that are being flowed through the expense structure?

No. I don't think so. There is, there was somewhat lowered numbers there because of our performance last year. We did not expect and did not receive the kinds of bonuses that would be rolled into the overhead structure.

Okay. Looking at the engineering solutions business, you mentioned that, one, the environmental business had really gone down appreciably. Is there a potential for this rebounding, or should this be viewed as an area that will not come back for you?

The primary area there, Mark, was we had a joint program when another entity in chemical weapons destruction using a process called which was an ammonia-based process. And that program terminated, and the Army has really decided to continue with their own process which is the incineration and a couple other developmental processes. So that we kind of exited that business. That's where the decline in revenues comes from.

We are still active in programs that have to do with the nonstockpile chemical weapons removal and subsequent destruction. And those programs are healthy and are moving forward.

Okay. A last question, you mentioned in your more traditional defense business that you had a very strong book to bill ratio of approximately $1.5. Were those contracts -- what was the duration of those contracts? Many of those can be five years in duration. Or were they one year?

This is primarily in our systems engineering area, and generally what we do is when we announce bookings we really take a one-year contract that's fully funded into consideration.

Okay. So that book to bill ratio would imply that should see some growth in that sector then as the year evolves.

We think there might be some growth in that section, but you know the timing of the orders are just as important. Sometimes you get orders earlier in the year, and some of those orders may be more back-end loaded near the end of the year. So we might see a little uptake in that business but not a whole lot.

Thank you very much.

Next question is from from Goldman Sachs. Please go ahead.

Hi, Bob. I just had a couple of questions. First, with respect to systems engineering, now that we've sort of gotten out of this chem demilitarization business, what are we looking for in the way of revenues for systems engineering? It's going to be probably closer to, what, $200, $210 million?

Howard, we see the number in the $195 to $200 million range.

And then just sort of a follow-on with respect to some of the opportunities you have with respect to national missile defense and also sort of the transformation initiatives that the Department of Defense is undertaking. Have you tasked people in Huntsville to sort of go after some greater opportunities? Because we see a whole host of opportunities in that area. And can you be a little more specific of what you're targeting?

Well, we have, obviously you know, existing programs in the national missile defense. We also have programs with the Strategic Defense Command, Missile Defense Command, and we believe that latter program will have a multiyear announcement very soon where we will enjoy a substantial position in that program. We have also been able to get at least one classified program that we are not at liberty obviously to discuss in an environment like this. And we are bidding on a whole range of new programs. With our new leadership Jim Link our people are pretty active in that area.

So if you end up stepping up in proposal, we shouldn't necessarily look at that as a bad thing because the opportunity set is very large, and that, you know, maybe margins will be a little bit tougher for awhile here.

Yeah. But obviously when we're stepping up in our proposals, Howard, that's a good thing. I think our margins which are now about excluding our pension in income, if you exclude pension margins at about 7.5 to 8 percent, we think the margins should stay around that range even though we are increasing our proposal activities.

Thank you. The second thing is, even if we add back the problems in engines and components, you're still underperforming what would be considered reasonable for the business. Could you address -- I mean, is it all in piston or is it just the low level of volume in the gas turbine area?

I think it's both, but the big drop in that business when you compare it, for example, to two years ago, 2000, it's been in the turbine business. The turbine business, as you recall, when we make spares for the J-69 trainer, both have been pretty good business for us including foreign military sales of both parts as well as engines. We've seen a drop-off in that, though we've recently seen some order pick-up; but that's where a lot of the profitability in that business was coming. On the piston engine side, 2001 in general was a very weak year for us, as you know. And 2002, while we're seeing a little pick-up in spares and we have also the OEM work of course, we are very optimistic about our electronic controls which are now being introduced across the board in both our engines and our competitors' engines.

We think that the piston engine is really a volume business with fairly fixed costs are there. As our volumes increase we should enjoy profitability if we can increase the volumes. So we're very volume-dependent on that, especially in our spare parts.

And then the last thing is, you talked about addressing of this business from a strategic point of view. And if by the time you're finished with this strategic review, you could come to the conclusion that may end up with a balance sheet that has substantially more cash than debt, is that a fair way to think about where you could be taking the company?

Yeah, that's possible. As you know, Howard, right now while we have debt is really insignificant compared to most companies. But we could have more cash. On the other hand, we could also be using the cash for acquisitions that we are right now actively pursuing.

The timing in terms of coming to a resolution on this particular issue is that --

It would be sometime this year before the end of the third quarter.

Thank you very much.

Next question is from from Cedar Creek Management. Please go ahead.

Yeah. More follow-up on that looking at strategic alternatives for the aerospace and components to aerospace engines and components business. Did you mean on the turbine side of it or the piston side or the batteries or what -- is there any more focus you can give us on that?

I mean everything. Does that help?

I guess so. Is it reasonable to assume that this would be some sort of package deal, or you're thinking about separate buyers for turbines and pistons?

It could be both, Steve. I'm not trying to be evasive. We're just sparsing the process.

Could you give us a little bit more focus on where acquisitions might be made, what specific areas you're focusing on?

Primarily in electronics and communication and at this time we are looking at electronic instrumentations. To be more specific as you may recall, we did make a small acquisition in the fourth quarter. That was the Advanced Pollution Instrumentation which we concluded -- by the way I should say that we at the time we said it would be an acretive acquisition. It was acretive from the first month of the acquisition. So that's the area we've now focused on. But we're also looking a little more broadly at other electronics areas. But it's in that segment right now.

One final question. Could you give us some idea what the upside might be in your litigation against suppliers? What have you sued them for? Give us some big, broad-brushed picture.

We do know that we took, just to give you a ballpark number -- you may recall that we took a $12 million charge for reserve for the expenses that we anticipated to incur, hard-cash expenses in that business. And we have spent that money in the past year or so. And it may be a little more now. And so that ought to give you at least a hard-cash number that we have there.

Thank you.

Once again, if you have a question, please press "1" at this time. We have no further questions in queue at this time. Please continue.

Thank you, Operator. I'll now ask Jason to conclude our conference call.

van leese: Thanks, Robert. Again, thanks everyone for joining us this morning, and if you've got follow-up questions please feel free to call me. The number on the earnings release. And always, all the news releases are available on our website as is the webcast replay.

Operator, if you could just conclude the call and give the dial in replay info, I'd appreciate it.

I sure can. Ladies and gentlemen, this conference is available for replay beginning today at 10:30 a.m. Pacific time through May 24 at midnight. To access the AT&T Executive Playback Service, dial 1-800-475-6701, and the access code 633628. International participants dial area code 320-365-3844, and again the access code 633628. This does conclude your conference for today. Thank you for your participation, and thank you for using AT&T Executive Teleconference. You may now disconnect.

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