Teledyne Technologies Inc (TDY) 2010 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 Mr. Jason VanWees. Please go ahead.

Good morning, everyone. This is Jason VanWees, Vice President Corporate Development and Investor Relations at Teledyne Technologies. I'd like to welcome everyone to Teledyne Technologies' Third Quarter 2010 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened.

Joining me today are Teledyne Technologies Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Dale Schnittjer; and Executive Vice President, General Counsel and Secretary, John Kuelbs.

After remarks by Robert and Dale, we will 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, risks, and caveats as noted in the earnings release and our periodic SEC filings. And, of course, actual results may differ materially.

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

Thank you Jason and good morning, everyone. Before commenting on the specific results within our segments I have some general comments about our businesses and about our performance in the third quarter.

First, our business has performed strongly in the quarter driven by growth in our commercial markets. Total sales increased 3.4% with 10.2% sales growth in the Electronics and Communications segment led by 17% growth in our Commercial Instrumentation businesses.

Operating margin increased 39 basis points to 10.6% despite $3 million of pre-tax acquisition related costs which negatively affected margins by 68 basis points. While earnings per share were lower than the third quarter of last year, please note that last year's earnings included $0.25 of tax credit versus just positive $0.03 of net operating items this quarter. That is $0.08 of tax credit offset by $0.05 of acquisition related costs.

Also, total orders were strong in the quarter exceeding sales by almost 9.5%. In fact, quarter-end funded backlog was $884 million, just shy of the record level of $891 million in the second quarter of 2008. That is before of course the global financial crisis.

Second, during the quarter we won some significant contracts. As an example, Teledyne Scientific or Research Laboratory was awarded the single largest contract in the businesses history -- a $25 million contract known as EXACTO. The purpose of the program is to develop and demonstrate an actively guided, maneuverable 50-caliber bullet capable of addressing moving targets at extreme ranges in high winds.

Also, in the Marine domain last week our Engineered Systems segment assisted by our Marine Instrumentation businesses was awarded a contract by the US Navy Special Operations Command for Phase I of the design and development of a shallow water combat submersible, a replacement vehicle for the current Naval Sea Delivery system. The initial contract is just valued at $1.2 million but if awarded to Teledyne the entire contract including engineering development and production phases could be worth up to $400 million over five years.

Third, we closed two acquisitions during the quarter. The acquisition of Intelek plc further expanded our capabilities in microwave systems, especially for commercial customers. We also recently acquired the manufacturer of Gavia autonomous underwater vehicle, AUV. The Gavia AUV system broadens our portfolio of autonomous marine vehicle systems as the detection and surveying capabilities of this AUV complement our current marine glider systems used for long-term sensing and observation including the littoral battlespace sensing gliders for the US Navy.

Finally, in September we funded a $250 million private placement of senior notes at a weighted average interest rate of 4.8% and our current $590 million bank line is virtually undrawn. We freed our bank line not only because fixed rates are low at the present time, but because our current pipeline of complementary potential acquisitions is nearly the largest in the Company's history.

Now I will turn to our business segments and their third quarter performance. Third quarter sales in our Electronics and Communications segment, as I noted, increased by 10.2% and segment operating profit increased 9.1%. On a GAAP basis, segment operating margin decreased 13 basis points. However, the quarter's margin was negatively impacted by 92 basis points due to the $3 million pre-tax acquisition related costs that I mentioned earlier.

In the third quarter sales of Defense Electronics increased 5.7% primarily driven by acquisitions and as I mentioned earlier sales for our Electronic Instrumentation Businesses has increased 17% to approximately $150 million mainly due to 22.7% increase in sales of marine instrumentation, primarily resulting from strong sales of geophysical sensors for oil exploration as well as subsea interconnect systems. Global subsea oil production capital expenditures remained stable especially in West Africa, South America and Asia.

In addition, in our Environmental Monitoring Instrument and Industrial Instrumentation businesses, sales increased 10% and 5% respectively in the quarter. Finally, sales for Avionic and other commercial electronic businesses increased for the first time in 2.5 years led by growth in our Electronic Relays and Avionics businesses.

Turning to our Engineered Systems segment, in the third quarter the expected revenue decrease of about 18% reflected lower sales from nuclear manufacturing, missile defense engineering and NASA programs, partially offset by our growing capabilities in real-time distributed testing and other software programs. While operating profit decreased 10.3%, operating margin increased 292 basis points to near record levels.

Currently, most of our nuclear manufacturing relates to USEC's American Centrifuge project. In late July 2010 USEC updated its application for a loan guarantee to the Department of Energy. In anticipation of a favorable judgment by the DOE, USEC began remobilization of the project in early September. As a consequence, we anticipate some additional sales in the fourth quarter of this year. Should the loan guarantee be approved this could result in $25 million of additional revenue for Teledyne in 2011.

Turning to our Engineered Aerospace Engines and Component segment, sales increased 11.8% compared to last year. We reported an operating income of $1 million versus an operating income of $1.2 million in third quarter of 2009. The 2009 $1.2 million was primarily due to a reduction in certain insurance reserves.

In the General Aviation market, demand for less expensive OEM piston aircraft typically leads recoveries. While still only half of the 2008 volume, quarterly sales of engines to aircraft OEM's increased for the third consecutive quarter and improved 80% over the third quarter of 2009. In addition, we continue to invest in new product development such as the [thermal diesel engine] in order to increase overseas sales particularly in Asia. For your reference, there are less than 1,000 general aviation aircraft in China at the moment compared to over 200,000 in North America.

Finally, in our Energy and Power Systems segment sales decreased about 18.4% compared to last year as a result of reduced revenue from turbine engines for the Joint Air-to-Surface Standoff Missile, or JASSM. JASSM engine sales are expected to resume late this year and to continue through 2011. The long-term outlook for military turbine engines improved recently when the government announced the potential sale of 84 F-15 aircraft which also included 400 Harpoon Cruise missiles with our engines to Saudi Arabia.

In conclusion, business in each of our major commercial markets continues to recover nicely in 2010. In the third quarter sales related to energy exploration and production, car generation, air and water quality monitoring and commercial aviation all increased compared to last year. Going forward, we intend to continue investing in our instrumentation businesses especially in the marine, electro-optical and infrared imaging domain, as well as perhaps expand our nuclear manufacturing capabilities.

I will now turn the call over to Dale Schnittjer.

Thank you Robert and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our 2010 outlook.

On cash flow, in the third quarter cash provided from operating activities was $23.7 million compared with $46.9 million for the same period of 2009. The lower operating cash flow reflects a tough comparison over the last year and increased working capital requirements including higher deferred accounts receivable.

Free cash flow for the third quarter of 2010 was $16.8 million compared with $37.6 million for 2009. We made voluntary pension contributions of $37 million in each of the third quarters of 2010 and 2009. Adjusting for pension contributions net of taxes, free cash flow was $39.3 million in the third quarter of 2010 and was 30% greater than net income.

Capital expenditures were $6.9 million in the third quarter compared with $9.3 million for the same period of 2009. Depreciation and amortization expense was $12.6 million in the quarter compared with $10.2 million last year. We ended the quarter with $242 million of net debt. Our balance sheet remains strong with net debt to capital ratio of 24.2%.

Our credit facility has $590 million of bank commitments and expires in July of 2011. We recently began the process to renew the credit facility. As Robert mentioned, in September we funded a private placement of $250 million of senior unsecured debt. The notes have a weighted average interest rate of 12.8% and consist of $75 million of five-year maturity, $100 million with a 7-year maturity and $75 million with a 10-year maturity. The proceeds were used to pay down the existing revolving credit facility.

Because the borrowing cost of our floating rate bank debt was roughly 75 basis points and the senior fixed rate notes are at 4.8%, we expect higher interest expense in the fourth quarter of 2010 and the full-year of 2011.

On pension, in the third quarter of 2010 gross pension expense was $1.3 million compared with gross pension expense of $5.7 million in the same period of 2009. Net pension income after recovery of allowable costs pursuant to the Government Cost Accounting Standards, or CAS, was $1.1 million in the third quarter of 2010 compared with $2.6 million of net pension expense in the third quarter of 2009.

On stock options, stock option compensation expense was $1.2 million in the third quarter of 2010 compared with $1.3 million in the third quarter of 2009.

Now let me turn to the 2010 outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2010 will be in a range of $0.78 to $0.81. We expect full-year 2010 earnings per share of approximately $3.06 to $3.09, an increase from our previous outlook of $2.95 to $3.00. Regarding our pension, for the full-year 2010 we anticipate approximately $5.2 million of gross pension expense under FAS87 and FAS 158.

However, given the recovery of allowable pension costs from our CAS covered government contracts, we expect net pension income of $4.4 million or $0.07 per share in 2010 compared to $0.17 per share of net pension expense in 2009. The decrease in full-year 2010 pension expense reflects higher investment returns and the impact of pension contributions made since 2007.

In addition, as many other companies have mentioned this earnings season as a result of the current low interest rate environment we could face a fairly substantial reduction in our discount rate used for pension accounting. A potential 100 basis point reduction from our current discount rate of 6.25% could result in a $0.20 negative earnings per share impact in 2011.

Finally, as a reminder, full-year 2009 earnings per share included $0.42 of tax credits mostly related to nonrecurring prior period research and development tax credits. For the full-year of 2010 we expect capital expenditures of approximately $30 million and depreciation and amortization expense of approximately $46 million.

I will now pass the call back to Robert.

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

(Operator Instructions). Our first question is from the line of Peter Skibitski with SunTrust. Please go ahead.

Good morning, guys.

Good morning, Peter.

I may have missed this but I was just wondering what drove the tax gain this quarter?

The main driver for the improvement in the tax rate was the additional pickup in the Federal R&D tax credit for 2000 to 2005. That was actually some interest on the return. We also had the impact of the 2006 R&D tax credit.

Will it go back to a normalized sort of 37% or so in Q4?

Normalized would be closer to 38.5%.

Then can you give us any sense of your initial outlook for 2011 yet?

No. We are not prepared to do that at this time.

Okay. I tell you what, in terms of how you think about things right now -- I know the price of oil has been a bit on the rise and it sounds like it positively impacted your Marine Instrumentation Unit here this past quarter. Do you sense that the outlook is pretty strong over the next 12 months for you guys in that unit given where oil is right now?

I think in general the outlook is going to be similar to what we are enjoying now. The only negative, if there is one, is the halt in the oil production in the Gulf of Mexico. But as you look forward into 2011 about 35% of subsea capital expenditures or what people refer to as trees, subsea trees that are put on well heads, is going to be from Petrobras. They are very good customers of ours. So I think we should be okay.

Okay. Thanks very much.

You bet.

We have a question from Mark Jordan with Noble Financial. Please go ahead.

Good morning, Robert. You mentioned that there is the opportunity for the Centrifuge business to rebound and if we make the assumption that it does come back and you get the incremental $25 million in revenue out of that, is that sufficient to offset the erosion created by the OCI issues and declining NASA revenue in that group next year?

Good morning, Mark. Good question. Probably not because the $25 million or so that really has to offset about I would say $50 million or so in detriment -- it is not just Missile Defense but NASA is in a state of flux, as you know. So if we have some positive uptick on NASA especially since we have good engineering program, that may work the way you described it. But right now, as I look at it, it probably won't cover all of it.

You mentioned in your "wish list" of areas where you would like to invest -- meaning Marine Instruments, Nuclear, you did not mention Defense Electronics. Do you feel is that a function of not having good targets out there or do you think that market will be more under pressure given budgetary issues over the next year or so?

Mark, I feel we are well situated in the Defense Electronics domain. As you know we are not very platform dependent in that area. We have some very strong programs and favorable trends in UAV communications, in the EXACTO program that I mentioned, in our glider programs. Having said that, I think it would be prudent for a company like ours over a period of time to decrease our dependence on Defense. Right now we are about I would say somewhere between 46% and 47% Defense dependent. A big chunk of that is of course our Defense Electronics.

If I look forward three years from now I would like to reduce that dependence to about 30% and increase our work in commercial domain. At a company like ours of our size can actually do that by growing our commercial businesses. That is one of the reasons I mentioned Nuclear. That is one opportunity. Electro-optical is another opportunity.

A final question for Dale relative to the bank lines. It looks like your existing bank line looks like it is LIBOR plus about 50. Could you guess as to what the spread will be when you renegotiate your lines?

We think the spread will be between 175 basis points and 200 basis points.

Did that help, Mark?

Yes. That's it. Thank you very much.

Thank you, Mark.

The next question is from Steve Levenson with Stifel. Please go ahead.

Thank you. Good morning, everybody.

Good morning, Steve.

On the potential replacement for the SEAL delivery vehicle, is that all development work or is that something Teledyne could actually build in the future? Or would you have to partner up with a ship yard?

Well we would partner up with someone. Perhaps not a ship yard. We also can build the significant part of that because we do have large manufacturing capabilities. As you know, a lot of our marine instrumentation businesses are really going to be very helpful because we not only have the Sensor Suite but we have various programs to make that happen. So the answer is we will have a partner but we can build it ourselves mostly too.

Okay, thanks. In relation to Marine Instrumentation on the commercial side, as rig count increases should your sales grow at an accelerated rate beyond changes in the rig count or more evenly?

Well, I think two things are happening there. One, what we look at is in the subsea domain you have these trees which are called kind of Christmas trees. They basically are on the well head. Next year the projections are to build on those would be 160 and actually will accelerate in subsequent years. So that is favorable to us in general.

The other side is that because of the hiatus in the Gulf of Mexico there is going to be more requirements, as you well know, in controlling the well head, being able to detect any irregularities, and that would also favor us. For example, just one example, when you have a remotely operated vehicle, underwater vehicle which is really the ones that are tethered to above, when they are operating on a well head and doing things, they have to be stabilized vis-a-vis the currents and they use our velocity logs that measure three dimensional current flow to essentially help the ROV stabilize above the well head -- just like a helicopter that is hovering. So thinks like that are going to be helpful to us, as well as of course the oil production.

Okay, thanks. Last one you mentioned Electro-Optical a little bit and you have made some recent acquisitions and investments. Do you think you have a gimbal product, for example, that can challenge some of the incumbents on contracts that are up for recompletes?

I think our gimbal product, at least the one we are working with Optical Alchemy, is on the smaller scale. As you know, gimbals vary in size from 6 inches to 7 inches up to 24 inches to 30 inches in size. The one that Optical Alchemy has developed and is actually now in production on is the very small size gimbal for small UAV's and it is a very interesting system because it not only is a small gimbal that is inertially stabilized, but it also is able to give geo-referenced position. That is, you are not only providing information but you also provide target specific locations.

So I think we will make some inroads there but I don't know if we would be replacing any of the large, existing platforms. On the other hand, we are also working very hard to get our own cameras and lenses so that we will be able to offer a full platform as well as some software.

Great. Thanks for all the data.

Thank you.

We have a question from Chris Quilty with Raymond James. (Operator Instructions).

Can you hear me?

I can hear you, Chris.

I thought that was new instructions for me. A question for you. Robert, can you talk about two big programmatic changes with NASA? Constellation and it looks like the Aries I is going away and move towards some commercial launch and maybe a new Aries V heavy lift. How all of that impacts you and presumably that is all in your guidance? Actually we will hit that and I will ask a second.

Let me start with NASA. Basically there is uncertainty. Let me start there. There is a whole lot of uncertainty about the exploration program especially the Constellation where we have a strong position. I think overall for NASA programs last year were close to $100 million. This year they are going to be closer to $80 million. So we are down about $20 million from there.

As you said, funding for Aries I has been reduced by 50% and that might even be further reduced. On the other hand there is the heavy lift vehicle and the Orion Spacecraft which we can participate in. We are also pretty well positioned to capitalize on any changes in the human spaceflight program because we have a very flexible task order that are contracts with broad scope and because we didn't hold any large prime contracts for hardware development.

So I think the future is not as clear as it can be but there are some compromises being considered between Congress and the White House. I think once that is done we should do okay since we do have a lot of capabilities there and we can participate in the heavy launch development, robotic precursor missions, as well as spacecraft development. So all in all I think we will be okay.

So you think next year is flattish?

Yes, I would think flattish except if there were some significant new developments. We will hold our own.

Okay. So the second question on the GMD program, that is up for bid on the follow-on sustainment contract. I think you are just teamed with the Boeing incumbent?

Actually we used to be, but right now we are with Lockheed as a second-tier sub in some of that work. We have a number of programs that are, as you know, we also have of course work with Boeing as well but we have two pieces there. One of them is in the missile defense development end of it and the other one is in the part of our work that is SETA work which is Systems Engineering and Technical Assistance. Both of those programs have declined.

We don't expect that those programs would improve significantly. Just to give you, Chris, a ballpark number, last year we had about $136 million in total among all these programs in revenue. This year we expect it to be closer to $100 million. If we can hold that we would be fortunate.

That is why I said earlier that really we have to kind of reduce our dependence on Defense programs going forward as a company because as you and I well know, it is not possible to expect significant investment in these programs considering the status of our deficit nationally.

But the migration of that program as it stands now, I think they have stopped putting GDI's in holes and they are moving on towards more of a testing phase. So wouldn't you benefit from a higher level of operational tests?

Yes. I think in general you are absolutely correct. On the other hand, the increase in GMD, for example, the $300 million that $251.3 million, that is primarily aimed at preserving supply chain capabilities and that won't affect us positively because that will again be used for hardware procurement. But you are right. The more they move towards that I think the better that is for us. So that is why I said we might be able to hold our own on this program.

Okay. In your Environmental Test Equipment have you yet felt the free flow of TARP money help in any of your end markets there?

(laugh)

Are you laughing?

You may have asked me that question before. Well, let's see. How should I answer that? Without being political, I will say no.

Okay. Final question here. The glider business. A -- have you bought up every glider company that exists yet? And, B -- can you give us a sense of what the run rate of those businesses are today and kind of what the opportunity might be? Is it just the proliferation of dozens and dozens of these things into the ocean that keeps the growth going? Or is it more of a service to maintain the number of gliders that exist today?

There are two parts. First, let me correct we haven't bought all the underwater vehicle businesses up. There is one, at least, big one out there that we know of. Having said that, there are a number of different sets of underwater vehicles as you know. Glider is one and I will come back to that in a second. There are these underwater systems called floats. There are about 3,000 of those across the world that essentially measure temperature, conductivity or salinity, density and relay that information to a satellite and various researchers use that.

So there are the gliders. There are the floats and then there are the underwater vehicles that are powered. Those come in two domains. One, are tethered -- that is they have an umbilical cord. The second are free and those are powered by usually a lithium battery. I would say our total, to answer your question, our total underwater vehicle business is still relatively small. It is about $30 million. In terms of glider deployment the biggest program that we currently have is the one I mentioned earlier which is in front of the battleship they deploy gliders to be able to detect and measure temperature and density so that they can accurately then resolve sonic signals.

In that, that program is in early development and testing now and it has been very successful. That programming itself could have as many as 150 gliders in this total. The Navy is testing those I think into the next week off the San Diego coast. That is a $55 million program by itself. So let's see -- I think that is about all I can say. Of course we are not only investing in gliders because we want to have gliders and UAV but because we also have so many different sensors we want to have a truck to be able to add our sensors and test them collectively so others can also deploy them in their systems.

I hope that answers the question.

It does. Actually just a follow-up on Mark's question about the min-sub program. I guess the actual news I had seen today was that the SEALs were cancelling the SEAL delivery vehicle follow-on program. Is that --?

Not that I know of. I haven't seen that. I know we were awarded this program only last week and it may be that they are stopping production of the existing system but not the future.

The legacy AFSPS?

I don't know the name, Chris. I do know this new program was competitively bid and there were two winners for the first phase I think. I am being told -- hold on a second -- I'm being told the one you mentioned is a sub.

Yes. That was the dry vehicle.

Yes. This is not.

Okay. Got it. Just want to make sure.

Ours is flooded.

On purposes, you should say.

On purposes.

Okay. That's good. Alright, thanks guys.

Thanks, Chris.

We have a question from Peter Skibitski with SunTrust. Please go ahead.

I'm just curious maybe you could make some comments on how pricing is trending? I guess specifically in the Electronics segment.

You know, in the Defense side of the Electronics there is going to be continuous pressure on reducing prices from the primes. On the other hand, we have kind of scaled our company as a whole including that business so that our break-even points have gone down. Costs have gone down. And, we haven't been adding people like many other companies so our cost structure is fairly stable. We should be okay there.

Then anything that goes of course overseas now the dollar is trending in a direction that is favorable to us.

Okay. So on the commercial side you are seeing more favorable pricing I suppose?

I think so. Especially if it is exporter related because of the cheaper dollar.

Okay. And Robert, anything bidded in terms of competitive opportunities out there over the next 12 months like the shallow water combat submersible?

Yes, we are actually bidding on a number of programs especially in the Nuclear domain which might be favorable. There is a program, as I mentioned, we have some very strong software capability in our Engineered Systems. One program that we are bidding on is the Objective Simulation Framework program. It is a software intensive program that could have a substantial affect on us if we were the winners.

Are you bidding as prime?

Yes we are. That is why it is so exciting. Of course we talked about USEC's optic on that.

Okay, great. Thank you.

Thank you, Peter.

We have a question from Jeremy Devaney with BB&T Capital Markets.

Good morning, gentlemen. Thanks for taking my question. Actually Robert I wanted to go back to USEC. I apologize if you have already spoken on it. I am bouncing between two calls here. I wanted to explore USEC a little bit more. Are you still anticipating when that program comes live that it would be on the order of $10 million to $11 million a quarter?

You are right. Really a little less but about, I would say, $30 million to $35 million a year. There was news out of USEC only last night I just forgot to mention. It seems that they had kind of a positive development with the DOE's evaluation of their loan proposal. The loan guarantee proposal has two phases. There is a technical phase and a financial phase in the evaluation. Their news release said that they had been given instructions and a framework which sounded like it was going towards the financial. So if one were to look at it more positively one can assume that the technical part of their program they have made a lot of progress on. Or else, I guess, they wouldn't got to the financial part.

So that announcement that they made significant progress with DOE, vis-a-vis their $2 billion loan guarantee, is positive news for us too.

That certainly is positive. Then separately I was wondering -- I had a discussion with someone recently about some of the alternative energy initiatives going on over at DoD. I was wondering if you had explored all of the positioning of your hydrogen generators in relation to DoD's fossil fuel consumption and what you think your opportunities are there to kind of leverage your alterative energy into DoD?

I'm not sure really about that. We have some small contracts with DOE, not DoD. These are the R product e-contracts. We also have some other work with government agencies with our alternative fuel program. You know, I just don't see it. I mean, they talk about these programs but I just don't see them.

Alright, great. Well thank you for the answers and keep up the good work.

Thank you.

At this time there are no further questions in queue.

Thanks, Paul. I will now ask Jason to conclude our conference call.

Thanks, Robert. Again, thank you everyone for joining us this morning. If you have follow-up questions please feel free to call me at the number on the earnings release. Operator, if you would go ahead and give the replay information and then conclude the call we would appreciate it. Thanks, everyone.

Ladies and gentlemen this conference will be available for replay after 10 a.m. Pacific Time today through midnight Pacific Time on November 28. You may access the AT&T Executive Replay Service at any time by dialing 1-800-475-6701, entering access code 167791. International participants dial 320-365-3844 with access code 167791. This does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.