Teledyne Technologies Inc (TDY) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Teledyne first-quarter earnings call.

(Operator Instructions)

I would like to turn the call over to our host, Mr. Jason VanWees. Please go ahead.

Good morning, everyone. This is Jason VanWees, Senior Vice President Strategy and M&A at Teledyne. I would like to welcome everyone to Teledyne's first-quarter 2014 earnings-release conference call. We released our earnings earlier this morning before the market opened. Joining us today are Teledyne's Chairman, President and CEO Robert Mehrabian; Senior Vice President and CFO, Sue Main; and Senior Vice President, General Counsel and Secretary, Melanie Cibik.

After remarks by Robert and Sue, 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 our earnings release and 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 approximately one month. Here is Robert.

Thank you, Jason, and good morning everyone. Teledyne started 2014 with record quarterly sales and earnings per share. Sales were $573.5 million and earnings per share were $1.20, which increased 12.1% compared to last year. With the significant cost reduction actions taken in 2013, the higher-margin commercial sales mix and a well-funded pension, we were able to generate margin improvement of 116 basis points.

As a reminder, in the last two years, we reduced our workforce by 8.8% and during 2013 we consolidated operations across 15 sites with a reduction of over 375,000 square feet for approximately 7% of our total footprint. While total revenue increased only modestly, organic growth in the US and international commercial markets, and some small acquisitions, more than offset a declining sales to the US government. And an expected decline in sales resulting from completion of a software-based radio program with a foreign government which impacted both the first and the second quarters of 2013.

This quarter, orders were generally strong across the Company with a total book-to-bill ratio of 1.07, with robust orders in our marine, oil and gas instrumentation businesses contributing significantly. In the first quarter, sales to international and domestic commercial customers comprised approximately 75% of our total revenue. Furthermore, given their greater profitability, these businesses contributed over 80% of our profit.

I will now comment on our business segments, after which Sue Main will review some of the financials in more detail and provide an earning outlook for the second quarter and full year 2014. Turning to our Instrumentation segment, first quarter sales increased 11.3% to $258.9 million with international sales representing over 55% of this revenue. Sales of Marine instrumentation increased 18.5% with organic growth of 8% primarily due to continued growth in sales of interconnect systems using offshore energy production, as well as an increase sales of systems used for current and wave measurements and inertial sensors for a remotely-operated underwater vehicles or [ROBs]. Orders were also strong with a book-to-bill ratio of 1.13.

In the environmental domain, sales of process and air-monitoring equipment increased [3.1]% driven by renewed growth in domestic markets. Laboratory and field instrumentation sales increased slightly due to the acquisition of CETAC, that provided of automated sampling systems. Sales of Electronic Test and Measurement systems also increased $1.5 million. This represented an organic growth of 3.4%.

GAAP segment operating profit increased, but margins declined slightly due in part to recent acquisitions and a $900,000 reserve taken in the quarter. Excluding the impact of recent acquisitions, margin improvements made within Marine instrumentation and Electronic Test and Measurement increased, but were partially offset by declines within the Environmental group. Finally, in this segment, we completed a small acquisition, PHOTON Machines, at the beginning of the second quarter. There will be minimal impact on sales because Teledyne CETAC already distributes Photon Machines' primary products. However, the key technology of laser ablation for sample preparation in elemental spectroscopy now resides within Teledyne.

Turning to the Digital Imaging segment, this segment provides a broad portfolio of visible light, laser-based, infrared, x-ray and ultraviolet sensors, cameras and software. First quarter sales in Digital Imaging decreased slightly compared to last year. Sales of sensors and cameras for commercial digital machine applications increased very nicely, driven by greater sales to the general industrial as well as semiconductor and electronic inspection markets. However, this gain was offset by lower sales of the infrared imaging sensors and systems to the US government. GAAP segment operating profit increased substantially in this segment with margin improvement of 444 basis points greater than last year, partially due to our cost structure coupled with the high margin commercial sales mix.

Turning to the Aerospace and Defense electronic segment, first quarter sales decreased $9.8 million. However, I want to emphasize that the first and second quarters of 2013 each included approximately $20 million in sales related to a specific software-based radio program for a foreign government which is now complete. Besides this negative comparison, the segment performed well with good growth in our commercial avionics and satellite communications businesses and even a modest growth in our US government sales. Despite the reduction in sales, operating profit increased 314 basis points primarily as a result of cost reduction actions throughout 2013.

Turning to the Engineering Systems segment, first quarter revenue declined from last year as a result of lower US government sales. However, orders were strong with segment book-to-bill ratio of 1.28 due in part to a five-year $60 million NASA contract award for the launch vehicle stage adapter which will be used in the space launch systems. Segment operating profit decreased slightly as a result of lower sales, but margins improved 128 basis points primarily due to the reversal of gross FAS 87 pension expensing the prior year, to a modest pension income this year.

In conclusion, sales from our commercial industrial businesses continue to grow across the Company. The performance of Marine instrumentation was very strong, and there were solid gains in commercial machine division, as well as avionics and satellite communication. Furthermore, our substantial cost reduction efforts throughout 2013 coupled to prudent management of our pension liabilities have begun to deliver meaningful margin improvement. I will now turn the call over to Sue Main.

Thank you, Robert, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our second quarter and full year 2014 outlook. Regarding earnings per share, while the first quarter of 2014 included $2.3 million of discrete tax benefits, the first quarter of 2013 included $2.7 million of tax benefits. Turning to cash flow, in the first quarter, cash flow from operating activities was $26.4 million, compared with a cash usage of $56.7 million for the same period of 2013. The higher cash provided by operating activities in the first quarter of 2014 primarily reflected the absence of pension contributions, as well as improved working capital management, partially offset by higher income tax payments.

Free cash flow, that is cash from operating activities less capital expenditures, was $14.7 million in the first quarter of 2014, compared with a usage of $21.6 million after adjusting for pension contributions. Given our strong cash flow and fully-funded pension, the Company used $23.6 million in the first quarter of 2014 to repurchase approximately 244,000 shares of its common stock under its stock repurchase program authorized in October of 2011. Capital expenditures were $11.7 million in the first quarter, compared to $16.3 million for the same period of 2013. Depreciation and amortization expense was $23.2 million in the quarter, compared with $21.9 million last year. We ended the quarter with $486.2 million of net debt, that is $559.9 million of debt and capital leases, less cash of $73.7 million for a net debt-to-capital ratio of 23.9%.

Turning to pension and stock compensation expense, in the first quarter of 2014, gross GAAP pension income was $0.3 million, compared with gross pension expense of $4.3 million in the same period of 2013. Stock option compensation expense was $2.7 million in the first quarter of 2014, compared with $1.8 million in the first quarter of 2013. Finally, turning to our outlook, management currently believes that GAAP earnings per share in the second quarter of 2014 will be in the range of $1.24 to $1.28 per share. We expect full year 2014 earnings per share of approximately $5.10 to $5.14. The 2014 full year effective tax rate is expected to be 29.5%, excluding discrete items such as nonrecurring tax benefits or adjustments. I will now pass the call back to Robert.

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

(Operator Instructions)

Greg Conrad, Jefferies.

Good morning.

Good morning, Greg.

I was hoping, just in terms of capital deployment, this was the first time that you bought shares in probably over two years. Is there a shift in how we should be thinking about capital deployment and how should we read into that in terms of acquisitions?

Thank you, Greg. First, we announced earlier this year that we intend to buy some of our shares back. Our intentions so far are to buy back enough shares to offset dilution from stock compensation awards that are made during the year.

If you look back the last 10 years, we -- dilution from our stock compensation cumulatively has been about $1.20 hit to our earnings per share. All we decided to do is just start buying back our stock to prevent that dilution going forward.

On the flip side, I think we have sufficient capital and a good strong balance sheet to continue on our acquisition pattern, especially if we find things that are attractive and additive to our portfolio.

Thank you. And just in terms of aerospace and defense electronics margins, that is the highest number, it may be ever or at least in the recent past, and if you look at kind of the trends, commercial aerospace should continue to be favorable. You have already done the restructuring and I think in the past you've talked about a 14% level. Should we think that 15.5% number is a good number moving forward?

Yes. I think that's a good number moving forward. At least as far as we can see for 2014.

Thank you.

Thank you, Greg.

Mark Jordan, Noble Financial.

Good morning, Robert. A question relative to portfolio or business strategy, if you look at the Company now, you've really emphasize growing the commercial side of the business and then paring down the relative significance of the governmental exposure. My question is specifically for the engineering systems business which has been challenge from a top-line basis. Do you feel that over the longer term you have the scale for that business to be one: successful and two: attractive for you?

Yes. Thanks, Mark. That business has become a smaller portion of our portfolio. This quarter was about 10.5% of our overall portfolio.

The flip side is that the business as I mentioned had a really good book-to-bill ratio of 1.28 this quarter. What the shift that has happened there that is important to note is that we've exited our businesses that had to do with system engineering and technical assistance work, which is the lowest margin work that we have there, and we've shifted that business in two directions.

First, to more manufacturing programs which is what I said about the space launch adaptive. Second, we are taking the systems engineering capabilities and applying them across the Company to areas where we can use their overall systems capabilities to get large programs, such as the one that we got with the Navy and the glider program. And then they're building, of course, the shallow water underwater vehicle for special operations.

So in some ways the business, yes, it's gotten smaller. In other ways it's become a much more important part of our portfolio because of their broader capabilities in putting together large programs.

Thank you very much.

Thanks, Mark.

Jim Ricchiuti, Needham and Company.

Thank you. Robert, I think in the last call you gave some color in terms of how you saw the year unfolding with some of the various businesses, and I was just wondering if you've seen, just given coming out of Q1, any change to that. For instance, I think on Engineered Systems you had anticipated that to be flat to up this year.

You had a strong bookings quarter, but clearly from a revenue standpoint Q1 was a little weaker. How do you see the year unfolding there and maybe on the digital imaging side as well?

Thanks, let me start with Engineered Systems. I think we'll pick up as we go through the year, so I think we'll end the year pretty flat with last year. So I think the significant decline the first quarter was probably the low point of the business.

We might have a little decline in Q2 vis-a-vis Q2 of last year, but right now our plans are to pick up later in the year. So overall I think we will end up flat.

Moving to Instrumentation, I think organically we'll be in the 3% up range for the year. In Digital Imaging we should be around the same range, 3% or so. Maybe a little less. And A&D considering the fact that we are giving up $40 million of kind of a one-time program for a radio that we had in Europe last year, we will make that up hopefully and end up flat.

So our fundamental basic programs are going to be up and we should end the year fairly flat. The rest of the programs we would have to make up 5% to make up for that $40 million. That's the best color I can give.

That's very helpful. And just going back to Digital Imaging, it sounds like the commercial portion of that had a very good quarter or good quarter and sensors, camera portion of the business. Can you say how much that was up, and just in general how much of the digital imaging business now is commercial? Is it the lions share?

Yes. But let me start with the latter.

The Digital Imaging business also is the larger part of the business, and even in the imaging that we have within Teledyne scientific imaging, we have some commercial businesses. We make some, for example, infrared cameras and sensors for commercial applications, and overall, I think the Digital Imaging, the bulk of businesses were up, I'm going to say double digits, and imaging and scientific was down about 12%.

Primarily because they push out of some of our government programs. I think if you look at the whole digital imaging, I would think about 27%, 28% of it is government business and the rest is commercial.

Okay. Great. Thank you very much. I appreciate it.

Thank you.

Chris Quilty, Raymond James.

Thanks, Robert. I just wanted to follow up on something you said earlier about Engineered Systems and exiting the sort of time and material type contracts. There were no divestment's in that business, am I correct? I think what you're primarily conveying is you're just not bidding on new contracts?

Yes, Chris. You are absolutely correct. Fundamentally we -- first we had this conflict of organization and conflict that we had to overcome because we're bidding both on contracts and then in some ways [in seed up] work you are kind of supervising or helping with contracts. So we got out of that.

The other part is just what was said. This had low margin business. The pressure from the government to parcel out big chunks of that to small firms that qualify brings the margins down into the 2% to 3%. That is not something that we want to do. Yes, it makes the revenues look good but overall it doesn't help at all.

Okay. And it looks like you experienced government weakness both in the Engineered Systems business as well as -- actually not in the Aerospace Defense. Somewhat in the Instrumentation. Do you think you've seen the biggest part of the defense headwinds here in the first quarter and they should subside, either due to sequestration effects, or budget, or year over year comparables or are you likely to see continued headwinds through the balance of the year?

I think, Chris, in Q2 we will again have that $20 million of headwind from the software radio-based, software-based radio program that we had with the foreign government. But if you put that aside, I think we expect that our defense businesses in the US have stabilized. We're actually, for a change, getting some orders in programs like a traveling wave tube that we have not had for a while.

The book-to-bill ratio in our microwave products has improved significantly over one. So, I'm going to say that because of some new contract releases from the major primes--and also the other thing that is happening there, a number of qualified suppliers through the primes have decreased significantly, so we've postured ourselves reasonably well. Overall I think the challenges there are behind us with the exception of the one program that was a one shot for last year to a foreign government.

Okay. And shifting back to the Engineered Systems. I know last year you identified several big programs that you were targeting and I think you won two of the three. Do you have any similar large opportunities here in 2014?

No. I think with the most recent award that we got from NASA on the adapter for the space launch system, we don't expect anything very large. We do expect that some of our programs that you're very familiar, obviously with the shallow water vehicle.

As those come out of there limited-rate production they will pick up in the future years because those are big programs for us. But right now I don't see anything out there, with the minor exception of if we do something in our space imaging, if we add some other programs, especially for the hyperspectral cameras that were going to our multiuser platform that we're going to put on the international Space Station.

Got it. And speaking of underwater vehicles, have you had any material involvement in what's going on with Malaysian Air 370?

Yes. Actually one of our colleagues, Tom Altshuler who is Vice President and manager of our Benthos, Gavia and Webb facilities has been on CNN continuously.

First, historically, Chris, we produced the pingers themselves. We sold that product line last year, it was a small product line. And so we understand that whole acoustic business is what our Marine camera and measurement systems are based on.

Second, the so-called detectors or the micro forms, those are ours primarily. And both of those use the same technology as you are familiar with. You send an electrical signal to a ceramic which the electrical signal causes ceramic to deform. As it deforms, it creates an acoustic pulse in the water.

You get the same thing at the other end, acoustic [pulses rise], ceramic deforms a little bit and it creates an electric signal which you record. We have been heavily involved. People are using our equipment for the discovery. So we also make a whole bunch of others longer-life pingers etcetera but right now we are certainly aware and involved in the frequencies and wavelengths, the dissipation of energy.

Great. And final question. I know you gave some guidance on the revenue outlook by segment. Is there any update to the margin guidance that you provided previously?

Our margins went up this quarter as you know. I think they will hold in Q2 and I'm hoping in Q3 and Q4 they'll pick up a little more. So, we'll end up the year, I hope--by the end of the year, I hope we'll end up higher than Q1.

Great. Thank you very much.

Thanks, Chris.

(Operator Instructions)

Michael Ciarmoli, KeyBanc Capital Market.

Good morning guys and thanks for taking my questions. Robert, we have been talking about the margin expansion, I'm just trying to reconcile, you know, the non-operational items flowing through there like the pension and it looks like the tailwind in the first quarter was about $4.6 million. Is that going to be kind of similar run rate through the year which I guess sort of implies maybe $0.35 pickup from pension?

And then just as I reconcile, it seems like the tax rate came down a bit which probably adds a little bit more to the bottom line. Same thing with the share buyback. You are probably not going to buy a ton, like you said, just to offset the creep. But maybe if you could parse out the margin expansion that is maybe purely cost-cutting operational versus some of the pension and non-operational events.

Yes. I'm going to say, let me start in the bigger picture. I'm going to say from the 120 basis point improvement in margin, perhaps 80 of it might be from pension and other stuff. The pension for the whole year over last year, we're talking about $0.26 to $0.28 improvements, in that range.

In terms of taxes, if you look at this year, we have some discrete tax events that have happened. This year we had a discrete tax event in the first quarter of $0.06. Last year first quarter we had $0.07.

But to put things in perspective, we really don't expect a lot of other discrete tax awards this year or discrete tax benefits this year except if Congress passes the R&D tax credits. It passed the Senate committee and it has to be acted by the Senate and the House. If that happens we might get another $0.10 or $0.12 pickup.

Last year on the other hand, if you look at all the discrete tax credits that we got last year throughout the year, they added up to over $0.55. And we were fortunate because against that we had approximately $0.47 of restructuring costs that we took, so it's kind of balanced that out.

Net to net we ended up with maybe $0.07, $0.08, $0.09 of tax benefits above the restructuring last year, and this year except for the R&D tax benefits, we're in about same place. We're going to have about $0.07 of tax benefit. Maybe a couple more pennies here and there, so it is a wash year over year if you look at it that way.

Okay. That's helpful. And maybe just shifting, can you give us some color on why you bought Photon? What was the driver behind bringing them in house?

It was very simple. We do have spectroscopy capabilities which we actually manufactured a very interesting machine from our Leeman Labs for spectroscopy. It's a coupled plasma device, and to do that, you need samples.

CETAC also has a line of machines and they were using the Photon machines laser ablation. What this permits you to do is use very strong pulsed lasers in the nanosecond range and you ablate a sample. So we were already using their stuff, partially out of CETAC, and we decided it is better to bring them in and have the complete line, Teledyne line.

And laser ablation works really well where you have very small amounts of samples on the surface and you want to lift them up and be able to look at the composition of the sample. So it was kind of rounding up our portfolio bringing it in house. Yes.

Got it. And last one for me, what kind of activity did you guys see from the new oil and gas technology development center? I think you were talking about the temps to gain share via customer attachment as a result of shared R&D. Maybe if you could give us kind of a status update.

Yes. That turned out to be a really good thing for us because as you know, we do have a very strong scientific capability here at our science center at Teledyne in Thousand Oaks.

What that new center enables us to do is to co-locate some of our people from here to there, and so they work alongside the production people introducing new predictive materials, new ceramic [features] for high power. That's turned out to be a really good program for us, and the flip side of it is also our customers can come and spend time with us there.

And the flip side is we've also built some facilities in our customer's plants, for example, at FMC plant in Brazil. And so all in all, that's a great business for us and we are introducing new products, and we think that business has really good legs on it.

Got it. Perfect. That's all I have. Thank you.

Thank you.

Steve Levenson, Stifel.

Thanks. Good morning everybody.

Good morning, Steve.

I think you answered most of the questions, but just on the push out in DALSA, is that partly related to contracting officers being on furlough during sequestration? Just waiting for the contract, or was it actually something beyond that?

Yes. I think I may have misled you, but I think what we were talking about, push out of contracts in our Imaging business here in California, which is the infrared--

Okay.

-- primarily for space and a lot of classified programs. It was not so much the sequestration effects. It was earlier, but right now it's just delaying getting some of the large contracts. Especially classified programs.

We anticipate with time those things would straighten themselves out because as you probably are aware, we are one of two companies in the nation that can produce a really high-end mercad teluride for space. We pretty much own the space programs for the astronomy domain. And we share the programs with another company for other military and classified applications. So we anticipate that over the long term that would stabilize.

Okay. Thanks. And then the way your strategy's been working, the balance of business and where profits are generated has changed. Obviously it has changed favorably, but do you feel a need to change the strategy at all? Are you looking to expand into other areas, and if so, what might those be?

Well, our strategy has always been kind of consistent to buy things or add things that are relevant to what we're already doing. So they are extensions of what we're doing.

We're always looking for things that are relevant to our existing businesses, and we intend to continue that. We spend a lot of our time--we're probably the first company that started buying businesses in the underwater marine domain and have been very successful.

We've bought about 14 small businesses there, but those prices have gotten way out of hand now. People are paying 15, 16, 17 multiples of [EBITDA] and 3x to 4x revenue for those businesses, so we're back looking at some of the other stuff that maybe a little more, how should I say, reasonably priced, but still are consistent with our portfolio. More focused on commercial, more focus on international.

At 15 to 17 times EBITDA do you ever think of selling any. (laughter)

(laughter) That is a great question now. Thank you.

Thanks a lot.

Thanks.

There are no other questions in queue, please continue.

Thanks, Tricia. I will now ask Jason to conclude our conference call. Thank you, everyone.

Thanks, Robert, and thanks again everyone for joining us this morning. If you have follow-up questions, please do feel free to call me at the number listed on the earnings release. As always, news releases are available on our website Teledyne.com. Operator, if you could conclude the conference call and provide the replay details over the line we would appreciate it.

Ladies and gentlemen, today's conference will be made available for replay after 10 AM this morning until May 23 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 318008. International participants may dial 1320 365-3844.

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