Teledyne Technologies Inc (TDY) 2003 Q2 法說會逐字稿

Welcome to Teledyne Technology Second Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. If you should require an operators assistance during the call, please press "" then "0." As a reminder, the conference is being recorded, and I will now like to turn the call over to Mr. Jason VanWees. Please go ahead sir.

Good morning everyone. This is Jason, Director of Corporate Development and Investor Relations at Teledyne. I would like to welcome everyone to Teledyne Technology's second quarter earnings release conference call. We released our earnings earlier this morning before the market opened, and joining me today are Teledyne's Chairman, President, and CEO, Robert Mehrabian; Interim CFO, Vice President and Controller Dale Schnittjer; and Senior Vice President, General Counsel and Secretary, John Kuelbs. After remarks by Robert and Dale we'll answer 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 risks, assumptions, and [inaudible] noted in the earnings release and our period SEC filings and of course actual results may differ materially. In order to avoid potential selective disclosure this call is also simultaneously being web cast and the replay both of our web cast and dial in will be available for about one month. Yes Robert.

Thank you Jason. Before I elaborate on the details of the quarter, I would like to make a few introductory comments. Teledyne have another strong quarter in revenues and earnings. Year-over-year revenues increased by 9.3% with revenue growth driven by strong organic gains in defense electronics and government systems engineering as well as acquisition. Teledyne also continued the positive trend in year-over-year GAAP earnings for the sixth consecutives quarter. Despite the negative effect of non-cash pension expense a pretax charge of $2m and a difficult environment in some of our commercial markets GAAP earnings per share were 20 cents compared to 19 cents in the second quarter of '02. Earnings per share excluding non-pension income and expense increased 27.8%.

We closed two small acquisitions during the quarter on May 16, 2003, we acquired [inaudible] an environmental instrumentation company from Emerson Electric and on June 27, we acquired the Aviation Information Solution Businesses of [Spirant] PLC. During the second quarter we also received several significant environment contracts for example, our systems engineering segment received a $20m contract from the U.S. army for the destruction of binary chemical warfare material. And our energy systems businesses received over $60m in new long-term government contracts during the quarter.

Teledyne's excellent performance continues to result from our commitment to three primary strategy goals. First, being an agile company with a flat management structure committed to operation and excellence in everything we do. Second, maintaining a stable mix of commercial and government businesses and third, focusing and investing in our strategic businesses in electronics and instrumentation products and government systems engineering which collectively contributed over 90% of the company's earnings in the second quarter. In the remainder of my comments, I'll elaborate on the operating performance of our various sectors. Dale Schnittjer will then discuss more details about our financial performance and comment on our outlook for 2003.

Now turning to our business segment. Second quarter sales in our electronics and communication segment increased 16.3% relative to the second quarter of '02. While operating profit decreased 16%, the decrease was primarily due to an increase in pension expense and elimination of some sale to Spirant Aviation Information Solution businesses prior to the acquisition, which became inter-company sales at the end of the quarter. There was some contribution also from lower margins due to product mix in some of our electronic businesses.

As I further discuss our electronics and communication businesses which have total revenues today of approximately 450m. I will break my comments into three separate market categories; first, the defense electronics which currently represent approximately 35%; second, electronic instrument which currently represent approximately 25%; and third, Avionics and other commercial electronics which currently contribute approximately 40% of our Electronics and Communications segment sales.

Let me start with the defense electronics. Our defense electronic products and services include traveling wave tools for electronic warfare, satellite communications, and radar applications. Microelectronic module for a variety of applications including secure communications, rigid-flex printed circuit board, ejection sequencers, and contract manufacturing of military electronic assembly.

In the second quarter of '03, sales of defense electronics increased approximately 30% compared to the second quarter of '02. While second quarter comparisons were especially strong, we continue to expect sales growth of defense electronics throughout the remainder of 2003. Sales of microelectronic modules that are employed in military aviation and secure communication applications continued to increase. Sales of fiber optic transmitter and receiver modules for the F-22 were steady during the quarters and the development of the similar modules for the F-35 joint Strike Fighter is progressing well.

During the quarter, we also received a new order from [Smith] Industries for microelectronic modules used in the battery charger system of the F-35. In addition, production of microelectronic modules and printed circuit card assemblies for secured communications systems such as the U.S. Army's enhanced position locating and reporting system continued to be strong in the quarter. Many of the microelectronic modules for secure communication system employs specialized secured codings that make it difficult to reverse engineer or otherwise tamper with them. We are excited about the long-term opportunity for a such components as production of tamper resistant microelectronics components seems to be an emerging technology in large demand for a variety of new programs, as well as, upgrades to existing platforms.

During the second quarter, sales of our tri-band traveling wave tubes for military satellite communication systems were also very strong driven by the war in Iraq and consistent with the increasing focus of the U.S. military on network centric warfare. Demand for spaced spares [inaudible] board radars were also especially [toned].

Let me now turn to electronic instrumentation businesses. In these businesses we manufacture a range of instruments used in industrial process control, petrochemical manufacturing, semiconductor manufacturing, energy exploration and production, and environmental analysis and emissions monitoring. In the second quarter of '03, sales of electronic instruments increased approximately 50% driven by the acquisition of Monitor Labs and Tekmar-Dohrmann now referred to as Teledyne Tekmar. Instrument sales on an organic growth basis were relatively flat compared to second quarter of '02.

Following the acquisition of Teledyne Tekmar, over half of our instrumentation revenue is derived from the environmental instrumentation markets. This patent acquisition expands Teledyne's instruments line of environmental monitoring and analysis products to include water quality in addition to our air quality instruments and systems. Tekmar's Teledyne [type] concentrators and total organic carbon analyzers have leading positions in the market for analysis of drinking water and waste water and have a growing presence in high purity applications for pharmaceutical manufacturing. We also believe Tekmar's technology which is currently employed in the laboratory market can also be applied to Teledyne's other market.

Finally, I will discuss our Avionics and other commercial electronics businesses. In the Avionics market, we developed and manufactured data acquisition and communications products for domestic and international airlines as well for business aircraft. We also manufactured electronic components including relays and connectors for commercial aviation, telecommunication, data storage, and semiconductor test market and we provide manufacturing services for [inaudible] used in medical instruments and implantable medical devices. In the second quarter of '03, sales for this other electronics market collectively declined above 5% from the second quarter of '02.

Both the air transport and business jet market remained very weak, and sales of Avionics declined approximately 20%. Our strategy is to keep our business healthy during the current commercial aerospace down cycle and our strategy combines a threefold approach. First, gain market share; second, introduce new products; and third, enter new market sometimes through acquisition. At the end of the quarter, we acquired Avionics Information Solution business known as AIS from Spirant PLC. Many of the products from this acquisition are now a part of Teledyne controls and are directly related to the Teledyne controls, market leading data acquisition recording and communications systems that monitor the health and safety of commercial and military aircrafts.

We believe that the AIS's new electronic flight backs which provide pilots with immediate access to navigation charts and other information will be of considerable interest to the worldwide airline customers of Teledyne Control. Other key products include Airborne [Fire] servers, cabin display for business aircrafts, aircraft cabins' surveillance systems, flight animation software and software based training systems for military pilot. Although the commercial aviation market is current in a trough, we believe that the operational synergies that we can achieve through the consolidation of manufacturing operations and sales and marketing organizations coupled with our range of recently developed AIS products for military as well as commercial applications makes this acquisition very attractive to Teledyne Controls.

In our other commercial electronics market sales to the medical customers increased approximately 50% in the quarter, driven by demand for printed circuit cards and subassemblies used in medical diagnostic equipments such as MRI, CAT scan, PET scan, and other systems. We also sell microelectronic modules used in implantable medical devices such as pacemakers. Sales of relay using in wireless infrastructure and semiconductors test equipments remained soft and we are not forecasting any near term improvement.

Turning now to our government systems engineering segments; in the second quarter revenues in this segment increased 6% compared to last year. For the third consecutive quarter, year-over-year sales increased in every major program category including national missile defense program, space program such as those related to the international space station and NASA’s martial, space flight centers as well as our environmental program.

Finally second quarter 2003, ordered in our energy systems segment for funded government contracts were 1.1 times second quarter 2003 sales. We achieved record operating profit in this segment in the second quarter, primarily as a result of success fees associated with the Ground-Based Midcourse Defense or the GMD missile defense program. The largest profit contribution in the second quarter of 2003 resulted from finalization of award and incentive fees for work performed during 2002. And therefore will not be repeated in subsequent quarters. During the remainder of the year, we expect that profitability in this segment will return to normalize levels of approximately 8-9% of sales. Teledyne Brown Engineering, our primarily government systems engineering business, celebrated its 50th anniversary during the quarter and we are quite optimistic about the strength of our franchise and the long-term demand for Teledyne Brown's core capabilities in defense based and environmental systems engineering and test services.

Turning to our aerospace engines and components segments, sales during the second quarter of 2003 for aircraft piston engine business increased marginally relative to the second quarter of last year. Although, after markets sales decreased in the second quarter, sales of engine for engines for our new OEM piston engine aircraft increased 44%. Due to strong demand for new composite OEM piston aircraft for which we are the sole source engine suppliers, we’ll continue to increase OEM market shares and currently estimate that our market share in our OEM piston aircraft deliveries is at a highest level in several years. Furthermore, as we announced earlier in the first quarter, we are continuing to perform a joint visibility study for a next generation piston aviation engine currently in development by Honda Motors Company.

As an aside, I must note that we are dealing with a very difficult aircraft product liability insurance market, perhaps the hardest market since 1985. Dale Schnittjer will have some further comments on this subject. In the turbine engine business, second quarter sales and operating profits decreased in comparison with the second quarter of 2002. Decreased sales of spare parts for air force training aircraft were partially offset by sales of turbine engine for JASSM cruise missile program. We currently expect JASSM shipment as well as deliveries of engines for other tactical missiles and decoys such as ITAL to increase in the remainders of 2003.

Finally, in our energy system segments revenues in the second quarter of 2003 increased by 10% compared to last year and we narrowed that operating loss to just over $200,000. In the second quarter of '03, we received substantial new government contracts in this segments. First two contracts from NASA, collectively valued at $10m over 3 years for the production of new thermoelectric power generators, and second an 10 years over $50m contract from the Department of Energy for which we will develop with Boeing, our partners, a new power system for several deep space [stroke]. In the energy technologies market place, we continue to believe that we possess a unique business. One which encompasses both a growing base of long-term government contract as well as a portfolio of tangible commercial energy technology product, which has fuel cell test station and hydrogen refueling systems.

As I conclude my remarks, I would like to emphasize that our performance this quarter reflex our commitment to our strategic growth. We achieved organic growth in our electronics and systems engineering businesses. We close to synergistic acquisitions and we ended the quarter again with a very strong balance sheet. I will now turn the call over to Dale Schnittjer.

Thank you Robert and good morning. I will first discuss some additional financials for quarter not covered by Robert plus add some full year highlights when warranted, then I will give an update on two critical business issues, insurance and pensions that impact 2003 and 2004, and finally I will discuss our 2003 outlook.

In the second quarter cash provided from operating activities totaled $13.5m compared with cash provided from operating activities of $25.3m for the same period of 2002. The primary difference year-over-year in cash provided from operating activities was a tax refund of $5.7m in April of 2002 that was not duplicated in 2003 and an increase in working capital in 2003 primarily driven by higher receivables for the second quarter of 2003 resulting from higher sales in the quarter. After paying approximately $21m for the two acquisitions that Robert mentioned, we continue to be free of debt with approximately $5m of cash in the bank. Capital expenditures for the second quarter of 2003 were $3.7m compared to $3.5m for the same period of 2002. For the full year of 2003, we expect total capital expenditures of approximately $20-21m, slightly below depreciation of approximately $22m.

As we have previously stated, this year's capital includes approximately $6.5m most of which will be spent in the second half of the year for the expansion of our defense-oriented traveling wave tube facility in Sacramento, California. In the quarter, we wrote off our remaining $2m minority investment in a private company, which engaged in manufacturing and development of micro-optics and micro-electronics mechanical devices due to the results of our second quarter impairment analysis.

Now on business issues, there are two business issues that continue to impact our company. The cost of insurance and pension cost. As we noted in previous disclosures, we have been evaluating options related to renewal of our aircraft product liability insurance coverage, which expired at the end of May 2003. We brought this issue to conclusion with our insurance underwriters and as of June 1, 2003, the total cost of the company's aircraft product liability insurance increased to approximately $1m per month or approximately 75%. Offsetting some of this increase in insurance cost will be anticipated cost reductions as well as price increases in the piston engine business. Before I talk about our 2003 outlook, I will discuss pension and its related impact on our future financial results.

In the past two years declines in the capital market have resulted in an increase in pension [audio gap] and the requirement in future years to make pension contributions. In 2003 pension expense will be approximately $7m or a negative EPS impact of 13 cents compared to pension income of $2.3m or positive EPS impact of 4 cents in 2002. Looking forward to 2004 pension expense will be approximately $10m or a negative EPS impact of 18 cents. Additionally, assuming the capital markets do not significantly improve in the remainder of 2003, we currently anticipate making a pension cash contribution in late 2004 for the 2003 and 2004 periods. The after tax cash impact of this contribution is currently anticipated to be approximately $18m. Subsequent to November 29, 2004, the company will be able to charge pension cost to the US government under various government contracts.

Now let me turn to our 2003 outlook. Management believes that full year 2003 earnings including pension and insurance cost will be in the range of 68-74 cents per share, an improvement compared to the previous guidance range of 62 cents to 72 cents per share. We believe 2003 earnings per share excluding pension will be in the range of approximately 81 cents to 87 cents compared to 73 cents in 2002. This 2003 guidance is an improvement from the 75-85 cents per share that was given at the end of the last quarter. I will now pass this call back to Robert.

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

Thank you. Ladies and gentlemen if you would like to queue up with a question please press "" then "1" now. You will hear a tone indicating your line has been placed in queue and you may remove your line from queue at anytime by pressing the "" key. Our first question is from the line of Mark Jordan with A.G. Edwards. Please g o ahead.

Good morning gentlemen. Could you first talk about the anti-tamper packaging potential that you see? First of all, can you talk about who are some of the major OEMs that you are working with in that area and what products would they be used in? And secondly, can you try to size the market for us?

Good morning Mark. The customers for those products are both the military and some customers that obviously you would appreciate we can't -- we cannot identify. The market for those products is significantly or modules or sales in this area have increased by approximately 15%. The anti-tamper products -- some of them are driven by [NASA] which are also used in various trade gears that are directed by them. The size of the market -- I cannot estimate at this time, but for us its becoming a significant market because we not only make the microelectronics modules, but we also make the printed circuit boards that go along with those into various systems. But those are all sides of the market I'm not able to estimate.

Okay. With the fuel cell business -- the two contracts that you won here in the quarter which would -- if you average it out maybe 8m in annualized revenues -- how much of that -- of those contracts replaced existing business with the government? And how much of that would be sort of net new revenue streams?

Mark, those are net new revenues. We already have a government business program there that's between $6-7m a year -- that’s goes to 2008. So these two additions will be new additions to the existing programs, which we think then provides a fairly good stable base of government programs for that business over a fairly long term.

Okay. Looking at 2004 for your Systems group, I would -- what type of organic [growth] do you believe that business can generate? And would you say that the more normalized 8-9% profit margins should be expected throughout that year or would you have some overt bonuses will be logically expected in '04 also?

I haven't really given guidance -- we haven't really given guidance for 2004, but it seems to us that the preliminary indications are that the budget for the missile defense programs are going to be up. We also are, of course, very interested to see what will happen with the resumption of the NATO space program -- the flight. In terms of the award fees, let me note that the way the award fee program worked this year was that we and the prime provider of the services to the government on the Ground-Based Midcourse Defense. We had an award fee structure that was what is referred to as shared destiny. So our award fee is very much dependant on their performance and our performance combined and how they negotiated the final award fee. So we recorded our award fees on a going forward in a -- based on our prior experience and in a way that would not overstate our sales in that domain. In the end they did get a fairly good award fee and obviously we were the beneficiaries of that. On a going forward basis we are now back to the program that we have before that is our award fees primarily based on our own performance and therefore we are able to much better estimate as to what those fees might be. Obviously, we always try to be relatively conservative in that estimate so there might be some up tick, but it won't of the magnitude that we enjoyed this year.

Okay. You've mentioned that as of November of '04 you will now be -- you will be able to start billings to the Federal government pension expense on some of that business. Could you tell us how significant that would have been say if you would have been able to charge back to the Federal government those pension expenses say for all of '04? What type of impact it would have had on the P&L?

Let Dale answer that question.

Mark, it would be in the vicinity of $10m or little more than.

But I don’t think it would a direct impact on the P&L because that -- at least in the long-term it maybe, but in the short term I don’t think it would be.

That's just a funding requirement and would not have had a major effect on the income statement that's all.

You wouldn't flow that through as a -- as a billing in your receivable?

Well it's -- if the issue becomes one of the amount of contracts that you have that are cost plus versus fix price, the effect in your comparative position on those fixed price contracts and so it's a difficult thing to look backwards and know exactly. But we don't see a major difference.

But it will do one thing, I think that your cognizance of -- it will help us in terms of the how much cash funding we need to put into our pension assuming that depends on the funding continues -- it will release some of the cash funding requirement on the company.

Okay. So it would help -- it will give you cash to help fund that, but would not flow through the P&L?

Not much of it, it would have flow through the P&L.

There will be some impact to P&L, but at this time as I said as you know, that depends on a number of other factors and until we actually see that in place we can't tell you exactly what that would be.

Okay. A final question if I may. There -- you know why the, you know, clearly the white body jet business is suffering here. It seems that there has been a sort of growing demand for the deployment of smaller jet region -- regional jets. What exposure do you have to that marketplace and is that a potential offset to the weaknesses that you see at a bowing?

Well the -- in the narrow body jet as example -- we supply data acquisition systems to this market. That’s been okay -- good for us actually because primarily if you take the smaller jets we do have data acquisition systems well as mini data acquisition systems that go on those jets like [inaudible]. Some of this business is still soft, but in the other single oil Airbus jets, for example, we are gaining market shares. So that’s kind of protecting us from the downside a little bit. You may recall that we said earlier back about a year ago we had about 10% of that market by the end of this year in the Airbus market. We should have about 30% and probably up to 50% of that market by 2005. So, we think with the fact that we have won a majority of the significant competitions for data management system, specially, during the first half of this year. That protection of our downside and you right about the regional jet like [Embraer], while the markets been soft there, it hasn’t been as bad as it's been for longer jets.

Thank you very much.

Thank you.

Next we have Chris [Quilty] with Raymond James.

Good morning gentlemen. Congratulations on good quarter. I wonder a circle back you had mention in the aircraft engine and component business that the aftermarket was still weak, but you didn’t real put any flash in there in terms of are you seeing continued declines in that business, is the rate of decline slowing, and perhaps your thoughts on the longer-term outlook when we see a real recovery in that business?

Good morning, Chris. I -- the decline, the softness in that market is stabilized, but we see on the average with the way we dealt with that market or measured that market is by the number of engine orders that we have everyday. We usually -- like in our estimates for this year we were anticipating having 8-9 engines per day in the aftermarket and we are down about 1.5 engines from that estimate. Now that doesn’t sound like a lot. These are relatively expensive engines and 1.5 engines a day are dropped to a lot of engines and revenue for us. I think the market stabilized, but we are not seeing any improvement in that market at this time.

On the flip side as I mentioned, we are enjoying a pretty strong growth in our OEM markets because the new clients -- the composite clients, for example, made by [Sears] are selling pretty well and they -- and we are the sole-source engines for that as well as [Lancer] and others. So it's a mix of the two, the business this quarter was relatively stable compared to last year maybe a little up in revenues.

Okay. And did you -- I think you had said in the past you are going to continue to focus on some cost cutting in that area but the facility there is pretty lean in terms of having recently being upgraded in both capital equipment and processes is it [no]?

Yes it is. On the other hand, what we have is that we have an opportunity to take full advantage of what we have done in that production system, and as you know in liner operations really that’s not a process -- that’s not process that ends, it's a road without finish. We can always improve on our cost reductions in that area.

We are also taking obvious the inventory out as we do this linear operations and that helps us in our financials as well. I think we have room for improvement there. We just took some additional workforce reductions there. I don’t know whether that will be totally enough to make up for the increases we sign our insurance. So, we have to look at some increases in price at the same time without pricing ourselves out of the market.

Okay. In a related area, last I'd saw the, I think the House Arm Service Committee put a pretty good whack on the JASSM program, is that going to play into any of your expectations for the next year or do you think that gets funded back to original levels?

Well, we saw that as well, and obviously we are very cognizant of that. We think that that funding most of it will go back in primarily because there are some funds that have been set aside for use as a supplemental appropriation to replenish the munitions stock that was diminished during the Iraq war. And as you may know the JASSM is really the most -- the newest and the most versatile [funds] which can be used on a variety of aircraft missiles that's available. So we think overall while that funding is gone down temporarily at least in the -- both the house and the senate committees, we think those funds will probably go back up whether they will go back all the way to the original level, I don't know, but I think they will be go back up.

Okay. In the area of contract manufacturing -- I may have just missed it in the run down -- well did you give an indication of what you are seeing in terms of demand and performance in that area?

We had actually seen an up-tick in both our military as well as our medical. In the military, we have seen approximately a 60% improvement in military electronics systems manufacturing year-over-year and then again back out primarily; if you recall I talked about the U.S. Army's enhanced position on locating reporting system, which is a battle field communication system while we make the microelectronic modules with secured coatings on them. We also make printed circuit [cards assembly] square boards. On the medical side, we are seeing a steady improvement in that business. It is slow but steady improvement because we are starting to get into making sub assemblies for more diagnostic equipments. We used to make MRI and CAT scan systems and now we have begun making circuit card assemblies for positron emission tomography or PET systems. So that's a good business for us.

Okay, and final question here in the area of environmental. You had a number of acquisitions recently, and it looks like the most recent one were you were projecting basically no earnings contribution, so obviously that being -- most of you either been under performing or wasn't sufficiently leveraged, can you kind of give us a road map of where do you think you are going to see, it is the word that synergies are out of those businesses or cross selling opportunities that are either going to lead to an acceleration of what had been their sales, market share gains or just it's straight cost out of the business.

Let me start with the most recent acquisition which is Teledyne Tekmar; that acquisition -- the revenues in that acquisition are approximately $20-22m. We expect that acquisition to be accreted to earnings. First, that is first. Second, in the environmental monitoring system, in our both prior acquisitions that we made which are API and Monitor Labs in the monitoring instrumentation business which is API's business those markets have being very strong. With the boxes to very -- other people including Monitor Labs, that measured to be exclusive. Where we have see some softness is in the market where people actually buy our complete systems from monitor labs for continuous monitoring and we think that that market -- the down turn in that market is temporary and it will come back.

So, overall we are fairly bullish about our environmental instrumentation businesses and in terms of synergies which we mentioned we -- as I mentioned in my comment, we have really not played -- haven’t had a product for the water pollution segment of the environmental market; what the Tekmar acquisition does is that it provides us access to that market. The difference is most of the work they do within laboratory systems, whereas as our other instruments are in continuous process of measurements systems and this gives us an opportunity to take that product and move it to continuous processes. We also have operation of synergies between these acquisitions, because we are beginning to share manufacturing resources. For example, some of our resources in Mexico, as well as cross using some of the products from one business to the other. So, all in all, we feel pretty good about that.

Okay very good gentlemen, please keep up the good work.

Thanks Chris.

If you still have additional questions please press "" then "1" now. One moment please. And there are no additional questions at this time.

Thank you operator. I will now ask Jason to conclude our conference call.

Thanks Robert. Again thanks everyone for joining us this morning and if you have any follow-up question, please feel free to give me call at the number on the earnings release and all the releases are available on our website Teledyne.com. Operator if you please conclude the call and give the playback information, thank you.

Certainly. This conference will be available for replay after July 24th 11.30 a.m. until August 24th at midnight. You may access the replay service by dialing 1-800-475-6701 and entering the access code 690486. International participants may dial 1-320-365-3844 and entering the same access code 690486. That does conclude your teleconference for today. Thank you for your participation. You may now disconnect.