Teledyne Technologies Inc (TDY) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Third Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

Thank you and good morning, everyone. This is Jason VanWees, Senior Vice President, strategy at M&A Teledyne. I would like to welcome everyone to Teledyne's Third Quarter 2014 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Sue Main, and Senior Vice President and General Counsel and Secretary, Melanie Cibik. After remarks by Robert and Sue we will 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 assumptions, risks and caveats as noted in the earnings release and our periodic SEC filings and, of course, actual results could 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. Record sales of $601.1 million increased 5.2% compared to last year with reasonable organic growth of 3.4%. Third quarter GAAP earnings per share of $1.47 was also a record, increasing 19.5% compared to last year. I should note that earnings both this year and last were aided by discrete tax items. Nevertheless, excluding these tax benefits and unusual charges, which has restructuring and legal charges, earnings clearly increased at a healthy double digit rate year-over-year. Operating margin of almost 12.4% also increased considerably and was nearly a record. Our results continue to demonstrate the successful transformation of Teledyne into a higher margin industrial comp technology company committed to operational excellence.

Overall sales growth was driven by strong organic growth in the U.S. of about 7% and continuing gains in international markets and some small acquisitions. While our government businesses now represent around just 25% of our total sales, we were nevertheless pleased to report modest organic growth in government sales in the quarter. In our commercial businesses, we achieved growth in all major global regions. Growth in sales in the Americas was left relatively broad but particularly strong among marine instrumentation and commercial aerospace. Commercial sales in the EMEA region and Africa, including Africa collectively, increased slightly due in part to the demand of the marine and environmental instrumentation. Finally, Asia Pacific sales continued to grow across most of our businesses, but especially in avionics, electronics relay and test measurement instrumentation and digital imaging.

I will now comment on our business segments after which Sue Main will give you some of the financials in more detail and provide an earnings outlook for the fourth quarter and full year 2014. Turning to our instrumentation segment, third quarter sales increased 9.3% to $280.4 million with organic growth of 5.4%. Sales of marine instrumentation increased 10.4% with organic growth of 7.5%, primarily due to continued growth in sales of interconnect systems used in offshore energy production, as well as [native] sales related to land based shale projects. In addition, sales of our underwater autonomous vehicles or AUV's also increased nicely. In the environmental domain, sales increased 15.7% with organic growth of 5.7%.

Most product categories spanning the process and air quality and laboratory and field instrumentation reported sales growth both domestically and internationally. Sales of electronic test and measurement systems decreased slightly by less than $1 million. Nevertheless, we are very encouraged with the improved orders year-over-year, and more importantly, the improved operating margin in this business. GAAP operating profit in this segment increased and operating margin improved 118 basis points due to higher sales and improved operating performance, especially at companies acquired within the last two years. 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.

Third quarter sales in digital imaging decreased 9.1% compared to last year. This was largely as a result of lower sales of infrared imaging devices to the U.S. and foreign governments. Sales of sensors and cameras for commercial machine (inaudible) applications increased driven by greater sales for semiconductors and electronic inspection. Production of MEM devices also improved. GAAP segment operating profits decreased primarily due to lower sales but also a greater mix in the quarter of lower margin cost price as opposed to fixed price programs in our government businesses and lower margins in our laser-based imaging. Turning to the aerospace and defense electronics segment, third quarter sales increased 6.1% organically. This product category achieved growth with our commercial avionics business performed very well as it has all year. Growth in the microwave and interconnect businesses primarily resulted from increased international and commercial sales. Operating profits more than doubled and operating margin increased 770 basis points.

Even excluding significant charges in 2013 as a result of cost reductions, margins still improved over 150 basis points. Turning to the engineering systems segment. Third quarter revenue increased 9.9% and operating profits more than tripled with record margin of 11.6%. Both sales and margin benefited from a greater mix of marine and space manufacturing programs as opposed to defense and space engineering services program. Also, we have increases in commercial hydrogen generator sales. In conclusion our commercial businesses are growing and becoming more profitable. Our government business have stabilized and operate with a lower cost structure. We have a significant pending acquisition, which we hope to close in the fourth quarter. We have repurchased 1.4 million shares of our stock in the first nine months of 2014. Also, due to our balanced business mix, record of consistent improvement in profitability and strong cash generation, the credit market regards us positively as reflected in our unsecured notes offering at an average fixed rate of just under 3%. And finally, we expect to deliver our 13th consecutive year of GAAP earnings per share growth in 2014. I will now turn the call over to Sue Main.

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 fourth quarter and full year 2014 outlook. Regarding earnings per share, the third quarter of 2014 included pretax charges of $2.3 million, related to asset writedowns and legal matters, offset by net discrete tax benefits of $6.1 million. The third quarter of 2013 included pretax charges of $14.3 million, primarily related to severance of facility consolidations, offset by $11.6 million of net discrete tax benefit. Turning to cash flow, in the third quarter, cash from operating activities was $79.2 million compared with a cash flow of $49.5 million for the same period of 2013. The higher cash provided by operating activities in the third quarter of 2014 primarily reflected the impact of higher net income, the timing of accounts receivable collections, lower payments related to severance and facility consolidations, partially offset by higher income tax payments.

Free cash flow, that is cash from operating activities less capital expenditures, was $70.1 million in the third quarter of 2014 compared with $31.8 million in 2013. In September we priced $125 million of senior unsecured notes with an average fixed rate of 2.97% and we expect the notes to be issued in December of this year. Also in September we entered into an accelerated share repurchase agreement. Pursuant to this agreement and some open market transactions, we repurchased approximately 1,026,000 shares in the third quarter and 1.4 million shares year-to-date. Capital expenditures were $9.1 million in the third quarter compared to $17.7 million for the same period of 2013. Depreciation and amortization expense was $23.5 million in the quarter, compared with $23.1 million last year. We ended the quarter with $452 million of net debt, that is $577.8 million of debt in capital leases less cash of $125.8 million for a net debt to capital ratio of 22.7%.

Turning to our pension and stock compensation expense, in the third 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 $3.9 million in the third quarter of 2014 compared with $3 million in the third quarter of 2013. Finally, turning to our outlook, management currently believes that GAAP earnings per share from continuing operations in the fourth quarter of 2014 will be in the range of $1.35 to $1.39 per share. We expect full year 2014 earnings per share of approximately $5.49 to $5.53. The 2014 full year effective tax rate is expected to be 28.5% excluding discrete items such as nonrecurring tax benefits or adjustments. I will now pass the call back to Robert.

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

(Operator Instructions). We do have a question from the line of Jim Ricchiuti. Please go ahead.

Thanks. Good morning. Robert, I wonder if you would spend a few moments on the pending acquisition of Ball Technology. I wonder if you could talk a little bit about how this expands or strengthens your position in this market, and then I just have a follow-up question on the marine instrumentation business. Thanks.

Sure, Jim, good morning to you. Just a little progress on Ball. The waiting period for Hart-Scott-Rodino was October 16 and it passed. They have a shareholders' meeting scheduled for November 17, and we expect, anticipate, to close on November 18. In terms of the product and the fit to our businesses, they make acoustic energy sources, as you know. And we make essentially streamer cables and those are very complementary to our product. They also make some high reliability underwater cables and connectors for the same type of system, and so that is very complementary to our oil exploration businesses. And on the other side of the ledger they have a very strong miniature underwater remotely operated vehicle or ROV used in maritime security search and rescue and other applications, and that complements our underwater vehicles both tethered ROVs and untethered AUVs. This will kind of really enhance our overall capabilities for underwater vehicles.

So it sounds like there is good customer overlap, but certainly not that much product overlap at all or virtually none.

You are absolutely correct. There is some customer overlap. They actually would broaden our customer base in that domain and there is no product overlap that we know of.

And just if I may one final question on - you touched a little bit on the energy market, the exploration market. Just in light of the volatility in oil prices, you know, at what point do prices get to levels where it could begin to negatively impact this part of your business, which has been going very well as we have seen from some of the recent orders?

I think if you kind of take a ballpark number like $80 an hour - $80 a barrel for oil, then on the exploration side we are already seeing some weakness in there. I would say it could be as much as 15% to 20% in the exploration side. Right now we have not seen any effects on our production businesses. Most of the production businesses that we are involved in, at least the offshore ones, are deep or ultra-deep water productions with very long lives, and the $80 doesn't seem to affect those significantly. If it goes below $80, we may see some effect in the shorter term, but right now we are not seeing that. And I think for the next year, based on, especially, some of the recent wins that we've announced, we would should be okay.

Got it. Thanks very much.

Thank you.

Our next question comes from the line of Greg Conrad. Please go ahead.

Good morning.

Good morning, Greg.

I was hoping to just start with engineered systems. You had, you know, both good top and bottom line growth. Is a lot of this growth from, you know, programs that you have won over the past two years, and do you kind of view this rate sustainable as we go forward?

Yeah, I -- thank you. That is a great question. I think fundamentally we have, as you know, we have primed - we are priming now some programs. So the best I can say about that business is it is kind of stabilized. I know we had significant growth this quarter. We might even have a little growth next quarter, but what we have done is we have a number of prime programs and the launch vehicle stage adapter is one this has helped us with increased revenue. Some of our manufacturing, especially gun mounts for literal combat ships, that is a little lumpy so we had some gains here because we shipped more than last year. But that will kind of normalize next year. I think the best I can say about this business, Greg, is that we expect year-over-year, especially going forward into next year, that this business will stabilize. We used to be heavily dependent on just missile defense and NASA. Now we have broadened our base into manufacturing, as well as underwater vehicles like the shallow water combat vehicle, and, of course, the glider program that we have in our auto marine businesses that are being managed from a systems perspective by this segment. We are happy with the business. It is stable now and we think it will just go along as it has been.

And then just a quick question on pension. I know you guys are fully funded, but you know when I think about the half done and Map 21 does that change your cash flow at all, pension related, as we go through the next couple years?

I'm going to ask Susan to answer that question.

No, those changes don't impact us.

Okay. Thanks. That's all I got. And thanks for your time.

Thank you.

The next question from the line of Michael Ciarmoli . Please go ahead.

Hey, good morning, guys. Thanks for taking my questions.

Good morning.

Robert just to maybe stay on the topic of energy, and we'll get back to that topic of energy and oil prices. You guys had your analyst day earlier in the year. A lot of focus on oil and gas. A lot of focus on what sort of drivers would power your business, whether it is production or orders for trees. What should we be watching for as the biggest driver? I know you said, you know, exploration has been weak, production holding. But I mean are you guys really tracking, you know, industry-wide CapEx to get a gauge on how this business performs, or should we just watch, you know, overall tree awards that are out there? I mean can you give us maybe a sense of what the biggest drivers are that we should be watching?

Yes. First and foremost, the marine portfolio that we have is relatively diversified. You mentioned, obviously, oil exploration. That is probably this year going to be about 17%, 18% of that business. Then if you clip over to oil production, that I would say is maybe 30% to 35% of the business. So let's just say double the oil exploration. Interestingly enough, we also have onshore land oil production, especially offering cable and systems for [shallow] production and that may be some where between 7% and 8% of the business. Then, interestingly again, underwater and construction transportation hydrography in the ocean is about 25%, that's about of our business; then defense, security and other things are 14%. When you look at a portfolio that is about $600 million it is really diversified. So while we don't really think the oil production is going to change significantly for us, and while we believe oil exploration will go down somewhat, because of the diversity of the portfolio, and because of acquisitions that we are making, we think this is a fairly stable portfolio, and frankly it is our highest margin set of businesses.

Okay. That's helpful. And then maybe just shifting, last one I had. How should we be thinking about the digital imaging margins? Given the contract mix there, you know, maybe some of the more, you know, kind of cyclically sensitive industrial markets out there, European exposure. I mean should we think you can snap these margins back up to a low double digit rate, or kind - what's the expectation that you guys are looking at there?

Let me start with just looking at the mix of the businesses. There is two parts to the business. There is Teledyne Scientific and Imaging, which is a mixture of our science laboratory, R&D lab, which is about $50 million in revenue where we take no profit at all. Every dollar is reinvested in that business to help get new products to the rest of the company. The imaging business there is a mixture of primarily government, but now starting to get some commercial businesses, and it may have margins of about 10%. But when you combine the two where you take one third of the business that you take no profit from and then the margin starts creeping down. If you go to the other part of our imaging business, that is primarily in Canada, and that's the (inaudible). The machine vision business is doing relatively well, and we expect this to do well and with improved margins going forward. We also have x-ray business that, while it is growing a little slower than we had hoped, it does enjoy good margins. Where in that business where we have suffered a little bit is on our laser-based imaging businesses. And that I hope will come back. So overall I think in the next quarters maybe margins would go up slightly versus this quarter, but I think in the DARPA businesses I expect margins to improve next year in the scientific laboratories and imaging businesses in this country, which are the high end market businesses. I expect those to stay around where they are. So, overall, I think these businesses, while may not improve very much next quarter, they will be better next year.

Okay, perfect. That's helpful. I will jump back in the queue here.

Thanks a lot.

We do have a question from the line of Mark Jordan. Please go ahead.

Thank you. Good morning, Robert. Obviously, excellent operating margins in the instrumentation business at 16.7%, which is a high water mark as far as recent history at least. Adding I guess both and if you look at both, I think add back the contingent liability expenses that will pass through the P&L, that would normally have an operating margin in the 22%, 23% range, with the addition of Bolt, should we assume that the positive impact of that should keep on an annual basis the instrumentation margin in the low 16% range?

I think about that, yes. With the intangible amortization I think you have got it, yes.

Okay. Secondly, could you talk a little bit about how you are structuring your balance sheet now and moving forward relative to the desired size of fixed rate and the term of fixed rate debt, and what role that will play moving forward in your debt structure?

Yes. I think, Mark, the fixed rate, right now most of our debt is fixed rate. We will have a little maturity next year. I would say by the end of this year our fixed rate would come after the acquisition, assuming the acquisition is successful, our fixed rate would be about 65%. Interestingly enough, when you add all of our revolver and other funds availability, we will still have about over $700 million of available cash for acquisitions. If you fast forward to next year, and you say okay, we basically don't buy anything because we can't assume right now, what might be available or what we might be able to buy, if we don't buy anything our fixed rate will then go over 80% to 85% or so, and our flexibility will improve from $700 million to $850 million in terms of cash available to do things and our debt to EBITDA ratio will drop to about 1.2.

Thank you. Final question, if I may. I think you changed management up in DALSA about four months ago. With that change has there been any initiations of any major initiatives in terms of changing the operational structure or your strategy up there as a result of a new fresh look of a new management team?

Yes. First, I should note that Brian Doody who was running DALSA and had done a great job there decided to retire voluntarily, and that gave us an opportunity to send Rex Geveden who has been heading the engineered systems segment and heading the PSNI, and actually DALSA was reporting to him. He moved to Canada, and so what is changing there under Rex are three things. First, probably within at the high end of the machine vision market throughout, and very successful at it, but we have kind of not paid as much attention to the mid market and other people have been enjoying the mid market. So he is kind of going to focus both on higher end and mid market. Second, a lot of our products there have been a line scan and CCD based, but now we are increasing significantly our effort in CMOS state sensors, and also trying to increase our emphasis from line scan to area scan. And then, finally, there are two major initiatives in the DALSA business, both in Canada and the Netherlands, and those in the joint Canada/Netherlands is the CMOS x-ray business, which is coming along. It is really one of the future drivers for that business, and the second one is, of course, the uncooled infrared initiative that we have in our [men's [ Vermont foundry, and those are coming along really well. And we hope that by next year we will have wafer level packaged uncooled infrared devices available to the market. So those are the kinds of shifts that Rex is initiating.

Okay. Thank you very much.

Thank you.

We do have a question from the line of Steve Levenson. Please go ahead.

Thanks. Good morning, everybody.

Good morning, Steve.

Back to oil prices and does this open up acquisition opportunities for you? And do you think the lower oil price helps you on the negotiating side in terms of price?

I hope you are right on both counts. I - you know, anything that has to do with oil exploration people's expectations are so high. I hope this will moderate those expectations somewhat and give us an opportunity. I think that may happen. On the flip side, everybody knows that this might be just a timing issue. All of the studies that we look at show that per capita energy consumption and oil consumption is going to go significantly up when you compare what we are using in the countries like the US versus what is being used in China and the level of development that is happening. So, everything that we look at points to increased demand for energy, and so I hope you are right that temporary setbacks in the price of the oil will give us some opportunities. But I'm not sure.

Okay. Thanks. A question on the avionics side. Does the switch over to some of the new reengined airplane models change your content at all, or do you pretty much hold your work statement where it is?

I think we are going to do fine with especially with our very large contract and agreements with Boeing. The next generation 737, and the 737 Max, will have our aircraft data acquisition systems on them. And our information management system is also going to be on the next generation 737 and 737 Max, and 7478 production aircraft. And we are holding our own with Air Bus. We think overall that business is one of our healthier businesses, especially considering the backlog that both Air Bus and Boeing are enjoying.

Okay. Thanks. And last one with the pending acquisition of Bolt I know you have been good at reducing footprint and cutting overhead. Do you think there is opportunities to do that including some of your legacy businesses?

I think, certainly, when you take a public company, a standalone small public company, and you absorb it in another public company, some of the public company expenses would go away. In terms of the footprint, the area that - they are in three locals, one in San Diego, where they make the tetherred small Class ROVs. They have an operation in Houston, and they have an operation in Connecticut. We have other operations in the Houston area, which wouldn't probably help us with potentially consolidating, but, more importantly, I think in the Houston area they have a very attractive production facility and machining facility that will help us reduce the amount of investment we have to make because our own productions are growing so fast. So the advantage there would be probably we do think some of our going forward CapEx requirements.

Thanks for all of the detail.

Thank you.

We do have a question from the line of Jim Ricchiuti. Please go ahead.

Robert, I wonder if you could comment on the electronic test and measurement portion of the business. Looks like revenues were down a million or so at Teledyne LaCroix. Can you talk a little bit about what you are seeing if that market?

Let me start by saying we really like that business. Orders grew year-over-year even though sales were down slightly. Sales and orders increased modestly, sequentially. But, most importantly, to us, several things have happened in that business. First, the margins have improved significantly in the last year, and I expect that to continue. And that when you have large acquisitions, for us large like LaCroix, and larger acquisitions like DALSA, and when their margins start improving that has a very positive effect on our earnings. We are also introducing some very nice products there. We would introduced two products just a few months ago in July. A Waste Server 3000, which has had a very strong market acceptance, and a high definition oscilloscope, eight channel, with 12 bits [scope], which, obviously, increases the resolution. It is out selling our expectations, significantly. So we expect to have success in this business, and also introduce new products later on for other applications than the ones that we have been in. And then lastly, but just as significantly for me, is that the acquisition has brought some very seasoned management to Teledyne, including, of course, Tom (inaudible), who is now totally running LaCroix, but he is also heading up our environmental businesses, which is very helpful.

Got it. So a combination of would be the strength in bookings, the new products, and, potentially, some newer products that could be hitting in next couple of quarters. It sounds like you see this showing growth over the next several quarters. Is that fair to say?

I would say modest growth, but, more importantly, because of the change in the product mix and kind of in some ways, the modest ways, [Teledynizing] the business we expect that margins will improve significantly, which is just to me that is very important.

Fair enough. Thanks very much. That is very helpful.

(Operator Instructions). And there are no additional questions at this time.

Thank you, Operator. I will now ask Jason to conclude the conference call.

Thanks, Robert. And, again, thanks everyone, for joining us this morning. If you have any follow-up questions, please call me at the number listed on the earnings release. And, again, all of the news releases are available on our website, Teledyne.com. Operator, if you could conclude today's conference call and provide the replay details, that would be ideal. Thank you, everyone.

Ladies and gentlemen, this conference will be available for replay after 10AM Pacific today through November 23rd. Access the AT&T executive replay system at any time by dialing 800-475-6701, and entering the access code 332979. International participants dial 320-365-3844. Once again, those numbers are 800-475-6701, and 320-365-3844, with access code 332979. That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.