Teledyne Technologies Inc (TDY) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Teledyne First Quarter Earnings Call. That the time, all participants are in a listen-only mode. Later there will be an opportunity for questions. (Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jason VanWees. Please go ahead.

Thank you. And good morning, everyone. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne. And I would like to welcome everyone to Teledyne's First Quarter 2012 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened.

Joining me today are Teledyne's President, Chairman 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'll ask for you 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 simultaneously being webcast, and a replay both via webcast and dial in, will be available for about one month. Here's Robert.

Thank you, Jason. Good morning, everyone. First quarter of $494 million increased 5.5%. Earnings per share from continuing operations was $0.96 compared to $087 in 2011.

As we have progressively done over the last decade, we continued our emphasis on higher margin, industrial growth markets, increased our global presence, and like always, further pushed continuous improvement in our operations. Our current portfolio of higher technology businesses provide proprietary highly-engineered products and serve markets such an energy exploration and production, global infrastructure, factory automation, transportation and communications.

In order to drive organic growth in this market, we continue to invest in research and development. In fact, R&D expense increased 20% compared to last year.

In the first quarter, we received record orders of $528 million, excluding acquired backlog. Overall, book to bill was $1.07. And despite our greater mix of short-cycle businesses, backlog was approximately $990 million compared to approximately $945 million at 2011 fiscal year end.

International sales contributed more than 40% of total revenue in the quarter. And US government sales accounted for just 31% of sales, down from 36% in 2011 and 47% just a few years ago. The profile of our government businesses also continues to evolve, with an increase in proprietary products over engineering services. Finally, given the greater profitability of our commercial businesses, the US government in the first quarter accounted for only about 20% of income.

I will now comment on our business segments, after which Dale Schnittjer will review some of the financial in more detail and provide an earning outlook for the second quarter and full year 2012.

Starting with our Instrumentation segment; this segment comprises our highest margin group of businesses, and primarily serves the off-shore energy, including deep water exploration and production and global infrastructure markets. International sales represented more than 55% of the segment sales in the first quarter. Despite a tough year-over-year comparison, first quarter sales in the instrumentation segment increased slightly to $160.6 million. Sales, however, increased 7.9% sequentially compared to fourth quarter of 2011.

Record sales of environmental instruments grew 10% year-over-year, while sales of marine instrumentation contracted slightly. Growth in environmental instruments continued due, in part, from increased power and petrochemical activity in Asia, Russia, and the Middle East. While marine instruments declined slightly year-over-year, this was largely timing related. We experienced good sequential growth of 8.8%.

In the deep water oil production market, we announced in January that our oil and gas group was awarded a three-year global frame agreement with FMC Technologies to supply a wide portfolio of interconnect and fencing products and services, in support of FMC's off-shore oil and gas business. In March, FMC was awarded a $1.5 billion agreement for sub-sea trees and equipment from PetroBras of Brazil. Given our frame agreements with FMC and our 11-year local presence in the Brazilian market, we expect that this will provide an excellent opportunity for Teledyne over the next several years.

Turning to the Digital Imaging segment; this segment provides a broad portfolio of visible, infrared, x-ray and ultraviolet sensors, cameras and softwares. First quarter sales in Digital Imaging increased 42% compared to last year. Most of the revenue growth was due to the full year results of DALSA, which was acquired in February, 2011. However revenue growth, excluding DALSA, was 7.5%.

Segment operating profit increased, but operating margin was compacted by; one, 270 basis points of increased R&D spending compared to last year; two, approximately 325 basis points acquisition related intangible asset amortization; and three, the reclassification of Canadian R&D tax credits from above the line segment income to below the line provision for taxes.

The non-DALSA revenue growth resulted from increased sales related to classified imaging programs, greater shipment of laser eye protection glasses and sales of new mid-wave UAV tactical imaging cameras.

Immediately after the end of the quarter, we increased our ownership interest in Optech Incorporated from 19% to 51%. Optech provides fully integrative light detection and ranging, or LIDAR, systems and camera imaging systems used in airborne, terratial mapping, airborne laser bathymetry, mobile mapping and laser imaging.

Turning to our Aerospace and Defense Electronics segment; first quarter sales decreased 1.3% compared to first quarter of 2011. However, sales of high margin commercial Avionics, aircraft batteries and electronic relays increased almost 15%. Sales of microwave devices and interconnects were stable, and increased modestly due to the acquisition of VariSystems. The decline in the segment sales resulted from significant decreased revenue of low margin government electronic manufacturing services.

Given the improved mix, segment operating profit increased 6%, and segment operating margin increased 95 basis points. Within this segment, US government sales were 36% of total, down from 45% in 2011 and almost 50% in 2009. The acquisition of VariSystems during the quarter was another example of our focus on expanding our portfolio of commercial product for industrial growth markets, such as the oil and gas industry.

Turning to the Engineered Systems segment; first quarter revenue and margins declined slightly, given the anticipated reduction of Systems Engineering and Technical Assistance Program, as a result of US government budget cuts, and a revised organizational conflict of interest policy, partially offset by increased manufacturing work for marine, aerospace and industrial applications. We believe that government sales in this segment have largely stabilized, due in part to revenue not being generated from nearly $1 billion of major contracts won in 2011.

In conclusion, we now have a portfolio of high technology industrial businesses, and we continue to increase our international presence, while the government portion of our earnings has also decreased to only 20%. Finally, we also have a proven track record of earnings improvement, and we expect 2012 to be our 11th consecutive year of GAAP earnings growth.

I will now turn the call over to Dale Schnittjer.

Thank you, Robert, and good morning. I will first discuss some additional financials fro the quarter not covered by Robert, and then I will discuss our 2012 outlook. On cash flow -- in the first quarter, cash provided from operating activities from continuing operations was a cash usage of $19.7 million, compared with positive cash flow of $6.6 million for the same period of 2011. Free cash flow was a cash usage of $30.3 million in the first quarter of 2012. Adjusted for pension contributions, net of taxes, free cash flow was $2.2 million.

Capital expenditures were $10.6 million in the first quarter, compared to $6.5 million for the same period of 2011. Depreciation and amortization expense was $16.8 million in the quarter, compared to $13.9 million last year. We expect to invest approximately $65 million in capital in 2012. Also, for the full year of 2012, we expect depreciation and amortization expense to be approximately $75 million, with amortization expense at approximately $28 million of the $75 million. We ended the quarter with $316.5 million of net debt.

That is $401.4 million of debt and capital leases, less cash of $84.9 million, for a net debt to capital ratio of 23.2%. Cash was temporarily elevated at end of the first quarter, since we borrowed on the last day of the quarter to fund the purchase of the majority interest in Optech which closed early on the first day of the second quarter.

Next on pension; net pension income, after recovery of allowable costs pursuant to government cost accounting standards, was $1.5 million in the first quarter of 2012, compared with $0.2 million of net pension income in the first quarter of 2011. There was a small positive variance in net pension income in the first quarter of 2012. However, on a full-year basis, the pension impact for 2012 versus 2011 is expected to be flat, primarily due to planned amendments and the impact of voluntary cash contributions, offset by a reduction in the discount rate for 2012.

On stock options; stock option compensation expense was $1.5 million in the first quarter of 2012, compared with $1.4 million in the first quarter of 2011. Stock option expense for 2012 will be higher in the balance of the year compared to the first quarter, and we will also -- and will also be greater than prior years. This is due to; first, no employee stock options were granted in the first quarter of 2012. This year's stock options will be granted in April, given the timing of the proxy proposal. And this will increase expense relative to the first quarter. Second, our stock options vest over three years. And because no employee stock options were granted in 2009, expense was relatively low during the 2009 through 2011. Finally, stock option expense will likely be higher due to an expected increase in fair value per share of stock options.

Moving to the 2012 outlook; Management currently believes that GAAP earnings per are share from continuing operations in the second quarter of 2012 will be in the range of $0.97 to $0.99. We expect full year 2012 earnings per share from continuing operations of approximately $3.98 to $4.04.

Stock option expense is expected to be $8.7 million in 2012, compared to $5.8 million in 2011.

Finally, the 2012 full year affected tax rate, excluding any tax credits or other adjustments, is expected to be 32.5%, compared to 34% for 2011. I will now pass the call back to Robert.

Thank you, Dale. Before we take your questions, I would like to note that our three segment executives, Brian Doody, Rex Geveden, and Al Pichelli are with us here today. And I may pass along some of the questions for them to answer. Operator, if you're ready to proceed with the questions and answers, please go ahead.

Certainly. (Operator Instructions). Okay, and your first question comes from the line of Michael Ciarmoli of KeyBanc Capital Markets. Please go ahead.

Good morning, guys. Thanks for taking my question. Nice quarter.

Thank you, Michael.

Robert, if I could just parse into the EPS increase. You got a little bit of a tax benefit in the quarter. And it seemed like what had been some pension tailwinds -- or headwinds turned into some tailwinds. Was that really the drivers behind the increase? Or was there any operational gains that drove the increase for the full-year view?

I think we got about $0.025 from tax and maybe $0.01 -- maybe less than $0.01. We did take up some earnings from our acquisition of VariSystems, which was probably the driver there.

Okay. And then if I've got my math right, and maybe you can comment on the full-year -- the organic growth at the corporate level for the quarter and for the full year, you guys still look to be under some pressure, maybe slightly down to low single-digit. Do you have any organic growth expectations for the full year?

Yes, we do. I think our expectation is in the 5%, maybe a little more, for the year. The thing that we think will happen with us is that we will increase our commercial businesses and maybe shrink our government businesses, like we did in the first quarter. And that part of that, as you know, Michael, is planned. We really have gotten out of the [sido] type work pretty much.

Right. Is that the plan, shrinkage of government, is that just the natural pressures and challenges? Or are you guys thinking about doing anything strategically with some of those segments and some of those business units there?

Let me just say both of those.

Okay. That's helpful. And last question and I'll just jump off here. You mentioned, I think in a prepared comments, some of the short cycle businesses. And I know there had been, maybe a quarter or two ago, some concerns what was happening in Europe. What are you seeing in some of those -- maybe the industrial automation, the semi-cap equipment? Can you comment on what kind of order trends you're seeing right now?

We saw some softness in the semi-cap equipment earlier, but we're seeing some pick-up there. In Europe, I think, just like everybody else, everything is stagnant. I would say Europe is neutral for us. On the other hand, Asia-Pacific, we're seeing some positive signs. Middle East -- interesting. The Middle East, Russia, there's significant build-up of petrochemical and other activities that's helping us. The only exception in Europe, I would say for us, is Norway, because of our oil and gas presence.

Okay. And with that Asia-Pacific, I know you've got some of the machine vision that was tied to consumer electronics. Any kind of real changes there, with demand trends in that specific market?

Yes, I think I'm going to actually answer that and then let, perhaps, Brian Doody make a comment. I think what we're seeing is some of the machine vision that we have for flat panel display, a lot of the large flat panel display companies are not doing well. On the other hand, we're seeing a pickup in small notebook and other display devices that you're cognizant of -- what you heard yesterday in the market. We're seeing pick-ups there. So while there's some weakness, there's some positives. Brian, do you want to add to that?

Sure. Thanks, Robert. In Asia, we have generally had a very strong position in inspection for semiconductor capital equipment, which includes inspecting flat panel displays, as Robert mentioned. The real bright spot for us is the increased use of very high resolution, smaller displays for tablets and smartphones. This, combined with pressure and some bad press that manufacturers are getting for working conditions, is pushing these manufacturers to increase their automation levels within the factories. That's a driver for our growth. So we are starting to see some of those factors push up demand, as we come out of this downcycle in this particular industry.

Perfect. Thanks a lot, guys. I'll jump back in the queue.

Okay, thank you. (Operator Instructions). You have a question from the line of Chris Quilty of Raymond James. Please go ahead.

Good morning, Robert, gentlemen.

Good morning, Chris.

Question, you called out the record R&D spending in the quarter. Is that merely a reflection of a fully loaded impact of DALSA? Or are there some one-time investments you've undertaken this year that you see a specific payback on?

I think that's really a pick-up from DALSA. DALSA has got about -- they have two parts of R&D expenditures. One is their internal, which is about 10%, 10% plus. The other is they do customer-directed R&D. This is from the internal R&D pick-up. Brian, do you have any other comments?

No, I think you've hit it correctly, Robert. The R&D spend from [TALDA] and DALSA will fluctuate as our contract business goes up and down in our rework. And as the industries in semiconductor CapEx are in down cycles, they tend to increase their R&D activity and move towards next generation product development. So we actually increase our R&D during those periods. And that's exactly what we're seeing.

Chris, just on a bigger scale, internally-sponsored R&D in 2011 was about $102 million. Our anticipation is that that will be about $212 million this year -- I'm sorry, $112 million this year.

You had me there for a moment.

Yes, me too. Everybody here's jaws dropped.

Switching gears, can you characterize for us the acquisition pipeline? How you feel about pricing multiples, valuation expectations and whether you're seeing anything more interesting from a sector basis?

I'm must say, there has been more activity for us in that domain. Obviously, we're interested in things -- products that are going to the ocean and oil and gas, that's where VariSystems came in. Optech, interestingly enough, some of the lighter images come right on the shoreline. So you can see some of the features of the shoreline. And of course, we're looking to buy things that will take images under the water -- more precise images than the scans we have now. I think overall, there's some opportunities -- perhaps some larger opportunities, as we get along here.

Okay. Question for Dale on the -- following the anticipated pension contribution in the second half of the year. Where does that put you -- anticipated and funding status?

Well, if we include the pre-payment in our plan currently, we're 100% funded. And that would put us at about 105%.

And what would be the rationale for overfunding?

Well, that funding assumes an 8.25% rate of return. We don't know what the return will be exactly and the liability continues to grow, as you take an additional year of discounting off of the PBO liability. So that's not a lot of leeway sitting on top of the pension liability that we have.

Understand 8.25% is reason enough. Final question, the marine instruments was down in the quarter, I believe. Was that just due to comparables?

And I know we've talked about this already, but Robert, can you talk about the anticipated impact of fracking -- or the growth of fracking over the next couple of years, whether that's a net positive or negative for your business demand?

I think from my perspective, that's a net positive, especially with our acquisition of VariSystems. Obviously, there's some regulations coming down there, but those won't be effective until 2015. That shouldn't affect us much. And as you remember, those relate to the first -- when you start the fracking process, you get some gases that come up that may have to be either burned or captured. Right now, they're being burned. But I think what will affect fracking is probably the price of gas. And people are shifting their emphasis to oilsands, which again, is good for us. So we think generally that's a positive for us.

Very good. Thank you.

Thank you.

The next question from the line of Robert Kirkpatrick of Cardinal Capital. Please go ahead.

Good morning. Could you please expand a bit on the FMC relationship, the order that they receive from PetroBras, and what that could mean for the marine part of your business, going forward?

The FMC PetroBras agreement is for increased [sub-sea trees], Rob. And our agreement with FMC -- we've always had a very good relationship with FMC. In Brazil, especially, I think we're kind of sole-sourced to them in a lot of this stuff that we can make. What the frame agreement does is kind of solidifies our position for them over multiple years.

And the other thing, in general, that's happening in the deep sea market -- exploration market is if you look at -- they measure the number of sub-sea trees. These are the large trees that sit on top of the oil wells. Those are expected to almost double between 2011 and 2015.

Now, of course, that's great for us all the way because we make -- we own half the electrical market there -- connector market and perhaps as much as 90% plus of the optical connector market. And then we also make fresh air and temperature sensors and other sensors. And our underwater vehicles and other people's underwater vehicles use a lot of our Doppler velocity measurement devices. So all in all, that whole area is really positive for us.

Great. Thank you so much.

Thanks, Rob.

Okay, thank you and the next question from the line of Mark Jordan of Noble Financial. Please go ahead.

Thank you. First question is relative to -- you alluded to some of the larger production contracts for the Marines for the assault vehicle, et cetera. When would those contracts go into a production mode versus being in design and development?

I'm going to let Rex speak up on this -- Rex Geveden, who runs both our engineer systems and our scientific and imaging gear. Let me just note -- on the underwater vehicles, they are a separate contract in the marine businesses, there are two big contracts that the Engineered Systems does. One of them is gliders, which are self-powered vehicles -- underwater vehicles. And the next one is the shallow-water vehicle for delivering special ops folks. So you'll let Rex answer the more detailed questions.

Thank you, Robert. The contract for our shallow-water combat submersible is in the engineering development phase right now. That goes through about the summer of 2013. At which point, the production would occur. We have -- the contract has options for up to 42 vehicles in it. And that production contract would go over five years past 2013, so up to 2018. We have indications that we would produce perhaps 16 to 18 vehicles in that timeframe, excluding any foreign military sales.

On the glider program that Robert referred to, we're in the production phase on that one right now. We've delivered about 50 vehicles of the unpowered gliders to the customer. And we have -- they have options for another 100 vehicles that we would produce over the next two years.

Okay. Second question, we just talked about upgrading of undersea fields with new trees, added sensors. What is the catalyst for the producing company to actually go out and do that upgrade? And how much lead time is there in going back and making the decision for a significant capital upgrade?

Most of these are, Mark -- these are new trees that are being put, they're just drilling new holes. Deep ocean is the only really growing domain left for oil production, new oil production. So when we say trees are going to be added, those would be for new production and primarily for in the deepwater domain. And we not only make the connectors, but we make a whole set of sensors that are either located down there or on vehicles that are used for assembling stuff on the ocean floor.

Is there any difference in terms of the level of sophistication of the equipment placed underwater by geographic area? By that I mean, if it's in US Gulf waters, is it any different than would be utilized in Brazil or Russia, for that matter?

I think it's not location by itself, Mark, but I think you have an important point. The deeper you go, as you start getting down to 7,000 feet or more, the material challenges become really serious, because you cannot really replace material -- you don't want to replace them. They have a minimum 25-year life requirement.

The one advantage that we have over competitors is that in our research -- scientific research domain here, we have a very strong history of materials used in challenging environments in space. And we're taking a lot of that know-how and now bringing it to ocean -- deep ocean floor structures. And our customers find that very attractive. Because here they're putting stuff in deepwater that are very challenging environment, both in terms of pressure and temperature, and they want to have predicted maps of how long this stuff will last. We're able to produce that. And we're the only company that does that right now. So we are at an advantage with our customers in doing things like that.

Thank you very much.

Thank you, Mark.

Okay, thank you. And the next question comes from the line of Steve Levenson of Stifel Nicolaus. Please go ahead.

Good morning. I'll apologize, I don't know whether this has been asked before, because I've been flipping back between calls. On the electronic manufacturing, could you discuss the timing issue? And is this a business that you think still has long-term opportunities? Or is it maybe on your list for changes?

I'll let Al Pichelli take that. He runs both our instrument segment and our electronics commercial and defense electronics segments.

Sure, thank you, Robert. And yes, as we look at our contract manufacturing services, there was a tapering off activity early part of this year, specifically EMS, where we build circuit cart assemblies and [box build] for some of the major primes, Raytheon, Northrop Grumman, as an example. We are on some very attractive programs but there has been a delay in funding in some of these programs. These are ones in which we're sole-sourced. And we believe that there will be some recovery as we get near the end of this year and into 2013. So we do believe it's a more of a timing temporary delay.

If you take the bigger picture there, Steve, that segment, the Electronics segment, was essentially flat year-over-year. On the other hand, our electronic manufacturing services, EMS, part of that business was done almost 30%. So we picked that up in other areas of the business, as I mentioned. Some of it are commercial Aerospace where we put computers on commercial aircraft. And some of it -- also we have good businesses in our microwave businesses.

So Avionics was up probably about 15%, microwave was up about 5%. And they made up for the downspike of that EMS. And the other thing is the EMS margins are much lower, so overall, operating profit increased 6% year-over-year, even though EMS was down almost 30%.

Thank you for all the detail.

Thank you.

Okay, thank you. (Operator Instructions). You have a follow-up question from the line of Michael Ciarmoli of KeyBanc Capital Markets. Please go ahead.

Hey, guys, thanks for taking the follow-up. Just to follow-up maybe on the margins, Robert. If I looked at the Aerospace and Defense Electronics, it seems clearly there's pressure on the EMS, but it's the fourth quarter where margins have trended lower. Is this more of a function of some of the contracting and funding delays?Can you hold this 14% level? Or are we expecting these margins to trend back down towards that kind of 10% to 12% range?

I think -- I'm rarely given to optimism on these things, but on the other hand I must say, I think the margins are going to improve in that domain, maybe 50 basis points over the year, rather than go down.

And is that a function of maybe the strength in some of the Avionics and some of the other areas?

You're right. It's a mix issue. But also, even in our manufacturing, we expect some of that programs, as Al mentioned, to come back. And as I indicated earlier, we did buy VariSystems, which is a difficult environment connector and cable product line. And we think that will have better margins also.

Okay. And then just on the $528 million in orders you referenced, can you give us any sense of the end market mix there? Were there any stand-outs or any concentration?

Yes, I think most of it is commercial, really good pick-up in some of our marine businesses, a little in the government business. But we have acoustics, we had a really nice pick-up in some of our classified programs out of our imaging group here in Thousand Oaks, and in some of our Avionics, especially in commercial aircrafts, where we supply both what is referred to as the wireless downlink and now the uplinks to a commercial aircraft. We've had some nice pick-ups there. And we've had some nice pick-ups in our Engineered Systems. So I think across the board we see some strength in our bookings. And we don't count long-term bookings for which the money has not been allocated.

Right. Perfect. Thanks a lot, guys.

Thank you.

There are now further questions in the queue.

Thank you. Thank you, Operator. And now I'll turn the call over to Jason to conclude it.

Thanks, Robert. And again, thank you everyone for joining us this morning. If you do have follow-up questions, please feel free to call me at the number listed on the earnings release. Again, all of our earnings releases are available on our website, Teledyne.com.

Operator, if you could give the replay information and end today's conference call, that would be fantastic.

I certainly will. Ladies and gentlemen, this conference will be made available for replay after 10 am through May 25th at midnight. Operator: You may access AT&T Executive Replay System at any time by dialing 1-800-475-6701, entering access code 235-585. International participants, dial 320-365-3844, and again, that access is 235-585. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.