Teledyne Technologies Inc (TDY) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for your patience and holding, and welcome to the Teledyne Second Quarter Earnings Call. (Operator Instructions)

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

Thank you, Laurie, and good morning, everyone. This is Jason VanWees, Executive Vice President, and I would like to welcome everyone to Teledyne's Second Quarter Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; President and CEO, Al Pichelli; Senior Vice President and CFO, Sue Main; and SVP, General Counsel, Chief Compliance Officer and Secretary; Melanie Cibik. After remarks by Robert, Al and Sue, we will ask for your questions. But of course, 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 approximately 1 month.

Here is Robert.

Thank you, Jason. Good morning, and thank you for joining our earnings call. Before discussing our results, I want to emphasize that all of our worldwide manufacturing sites as well as our corporate office and research laboratory have been and remain operational. However, because our priority remains the health and safety of our employees, we're continuing social distancing, enhanced cleaning protocols and usage of face masks and personal protective equipment. I shall now make a few comments about our performance in the current environment and our outlook for the remainder of 2020.

Despite record economic contraction and a challenging operating environment for manufacturers, Teledyne performed extremely well in the second quarter. Our results reflect aggressive cost control and disciplined execution. In fact, although sales decreased approximately 5% compared to both last year and the first quarter of 2020, overall GAAP operating margin increased sequentially 150 basis points.

Teledyne's business portfolio remains exceptionally well balanced across end markets and geographies. Also, our mix of long-cycle and short-cycle business provides a reasonable level of predictability and helped us -- gave us the confidence to provide our outlook in April.

Looking back at the second quarter. The overall market and demand outlook played out as we had envisioned. In April, we predicted second quarter sales to decrease 5% year-over-year versus the actual results of negative 4.9%. That said, demand for Instrumentation was better than forecast due to continued demand for test and measurement protocol analyzers and a record quarter for OakGate business which was acquired in January. These product lines serve technology markets related to solid-state storage and cloud networking, where capital spending remains relatively robust.

On the other hand, digital imaging sales were slightly lower than forecast not only in dental health care markets where weakness due to COVID-19 was expected, but we also saw temporary declines in surgery and cancer radiotherapy due to: one, deferred patient treatment; two, our customers destocking; and three, pure new OEM equipment installations in hospitals. Otherwise, everything else, from a sales perspective, essentially occurred as expected.

More importantly, operating margin, earnings and cash flow, each exceeded our April expectations. Ongoing simplification of our processes and margin improvement actions, including aggressive cost-cutting in the first half of 2020, delivered superior results.

Now looking forward to the balance of 2020. We remain positive overall. Just as commercial sales to Asia improved late in the first quarter, we expect a recovery in sales in Europe and the Americas later this year. However, in light of the initiated shutdowns and travel restrictions, it is prudent to assume such recovery will begin in the fourth quarter.

In other words, we expect the overall sales level in the third quarter to be very similar to Q2. As a result, we now expect 2020 full year sales could be declined approximately 3% from 2019, with sales of Instrumentation and imaging increasing sequentially in the fourth quarter and the first electronics and engineered system sales continuing to remain robust throughout the year. We're now forecasting a recovery in commercial -- we are not forecasting a recovery in commercial aerospace in 2020. However, this market will contribute less than 5% to our total revenue.

Before turning to Al to report on the second quarter performance by segment, I want to emphasize the following: first, as we have repeatedly demonstrated in the past, we know how to be disciplined and perform well in challenging environments. Second, in prior cycles, where revenue was challenged, we protected earnings, while at the same time, increasing cash growth. For example, in 2009, where revenue declined 4%, GAAP earnings were flat, and free cash flow increased over 50% from 2008 and it was a record for Teledyne at the time.

Likewise, in 2016, when total revenue declined 6%, GAAP earnings were flat, and free cash flow, again, increased over 50% from 2015, and was again a record for Teledyne at the time.

More importantly, in subsequent years, we kept our lower cost structure, hence GAAP earnings nearly doubled over the subsequent 3 to 4 years.

In addition, following some periods of general market weakness, due to Teledyne's strong balance sheet, we were able to complete our largest and best acquisitions. For example, we announced the acquisition of Teledyne DALSA in 2010 and Teledyne e2v in 2016, both of which were our largest acquisitions on those dates. Fast forward to 2020. We are aggressively managing variable costs as well as permanently reducing costs where appropriate. Our balance sheet is exceptionally strong with over $380 million of cash and cash equivalents and a borrowing capacity of over $1.2 billion.

Al will now comment on the performance of our 4 business segments.

Thank you, Robert. In our Instrumentation segment, overall second quarter sales were flat versus last year. Sales of marine Instrumentation decreased 1.3% in the quarter, however, operating profit improved due to business simplification initiatives and improved pricing and procurement activities.

As a reminder, while marine includes products sold to the energy industry, we expect this market to directly account for just over 1/3 of total marine sales in 2020 or approximately $150 million of annual revenue compared to almost $400 million in 2014.

In the environmental domain, sales increased 7.9% as a result of our acquisition of the Gas and Flame Detection business, while sales of certain products, such as medical-grade oxygen sensors increased during the quarter. This could not offset declines in general industrial markets such as stack gas emissions monitoring and wastewater flow and sampling.

Sales of electronic test and measurement systems decreased 9.8%. While there was strength in our Protocol Solutions Group, sales of general-purpose oscilloscopes declined year-over-year, especially in Europe and the U.S. Nevertheless, order trends and sales leads in Asia and Europe have improved in recent weeks. Overall, Instrumentation segment operating profit and margin were flat with last year despite $2.8 million in higher severance and facility consolidation costs.

Turning to Digital Imaging segment. Second quarter sales decreased 4.3% and primarily reflected lower sales of X-ray detectors for dental and medical applications, partially offset by greater sales of infrared detectors for the defense market. Sales of industrial vision systems were largely flat with last year, as strength in semiconductor inspection end markets in Asia largely offset some weakness in Europe and North America.

GAAP segment operating margin of 19.7%, was the second highest quarterly margin ever achieved, but was 108 basis points below last year's all-time record of 20.8%.

In the Aerospace and Defense Electronics segment, second quarter sales declined 18.7%, as greater defense sales were more than offset by a 49% decline in sales of commercial aerospace products as well as lower commercial space sales related to OneWeb.

GAAP segment operating margin decreased due to lower sales, but also over 340 basis points of charges for severance and facility consolidations.

In the Engineered Systems segment, second quarter revenue increased 6.4%, primarily due to greater sales from marine, nuclear and other manufacturing programs, as well as electronic manufacturing services. Segment operating profit increased 20%, with margin up 123 basis points.

I will now turn the call to Sue, who will offer some additional commentary regarding the second quarter and our 2020 outlook.

Thank you, Al, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert and Al, and then I will discuss our third quarter and full year 2020 outlook.

In the second quarter, cash flow from operating activities was $155.8 million compared with cash flow of $83.2 million for the same period of 2019. The cash provided by operating activities in the second quarter of 2020 reflected improved collection of accounts receivable and $33.4 million of deferred tax payments partially offset by lower operating income. Free cash flow, that is cash from operating activities less capital expenditures, was $139.2 million in the second quarter of 2020 compared with $65.1 million in 2019.

Capital expenditures were $16.6 million in the second quarter compared to $18.1 million for the same period of 2019. Depreciation and amortization expense was $29.0 million in the second quarter compared to $27.1 million for the same period of 2019.

We ended the quarter with $468.6 million of net debt, that is $851.4 million of debt less cash of $382.8 million for a net debt-to-capital ratio of 14.0%. Stock option compensation expense was $5.7 million in the second quarter of 2020 compared with $5.8 million in the second quarter of 2019.

Turning to our outlook. Management currently believes that GAAP earnings per share in the third quarter of 2020 will be in the range of $2.25 to $2.45 per share, and for the full year 2020, our GAAP earnings per share outlook is $9.45 to $10 compared with the prior outlook of $9.30 to $10. The 2020 full year estimated tax rate, excluding discrete items, is expected to be 22.8%, a 220 basis point increase compared to full year 2019, due, in part, to less R&D tax credits.

In addition, we currently expect lead discrete tax items in 2020 compared with 2019. Please note that the estimates for third quarter and full year 2020 GAAP diluted earnings per share exclude any potential charge related to Airbus OneWeb satellites.

I will now pass the call back to Robert.

Thank you, Sue. We would like to take your questions now. Laurie, if you're ready to proceed with the questions and answers, please go ahead.

.

(Operator Instructions) And our first question comes from Gregory Konrad from Jefferies.

Just to start on margins. I mean it seems like you maybe took down the organic growth outlook a little bit in Q3, EPS are kind of flat. I mean should we think about similar margins in Q3 and then a ramp in Q4? And what type of assumptions have you made in terms of onetimers in H2, whether it's restructuring or anything embedded in the margins?

Sure, Greg. First, let's go back to Q2, the margin was 14.8%, operating margin. We think in Q3, the margin is going to go up to -- up to about 15.4%. And we think in Q4, it will go up further. So we should end the year around 15%, considering the first quarter was pretty low at 13.3%. So we expect to have continuous improvement in margin.

And forgive me, the second part of your question had to do with?

Just -- have you embedded any additional restructuring, you kind of called it into?

Yes. Yes. I think -- Greg, sorry about that. We have about $19 million year-to-date. We are still reducing our workforce. We -- by the end of the second quarter, we were down about 660 people. We expect by the end of the year to be down about 1,000, out of 11,800, that's 8.5%. So it'll be below 11,000 when the year ends. Consequently, we think we'll have maybe another $4 million to $5 million of charges in Q3 and Q4 collectively. Let's just say $5 million.

And then you kind of called out Digital Imaging maybe being a little bit worse than expected with Instrumentation a little bit better and kind of a ramp into Q4. I mean when we think about towards the end of the year, is Digital Imaging maybe where there's the most opportunity to kind of see increases kind of as we exit the year?

Yes. Let me -- the surprise in Digital Imaging was the following. We expect that the dental market for our sensors to be down because people are not going to dentist in the current circumstances. What was a little surprising to us was the down slope in radiotherapy, that's cancer treatment and equipment services that we provide upgrades. What we found out was that in the cancer therapy, really most of the downside was because of people that would be tested for cancer or colon cancer or various types, and that shrank quite a bit. Now having said that, we think that Q3 would be relatively flat with Q2. And we think that we'll have another maybe upwards of $20 million in Q4, primarily in Digital Imaging as well as, I should say, in Instrumentation. So collective, we expect those to do much better in Q4 than they did in Q2.

And then just last one for me. I mean free cash flow is kind of running ahead of expectations where you kind of laid out last quarter. Any update there? And then kind of tied to that, you had mentioned M&A, I mean, any change in terms of your near-term appetite and kind of what you're seeing in terms of opportunities?

Let me start with the cash. I think in April, Greg, I mentioned that we expect that cash to be of the order of $375 million free cash flow to be of the order of $375 million for the year. I'm going to up that now to probably about $400 million, maybe a little more, but let's just say, round numbers, $400 million of free cash flow. In the current circumstances, that would be a record for us. Last year, we had $394 million. So if we can exceed that, that would be a record.

Now going back, as I mentioned in my comments, we have the capacity to buy things, excluding acquired EBITDA of the order of $1.2 billion. Anything we buy is going to obviously have some EBITDA associated with it. So it could be higher depending on what we buy. I'm going to hazard a guess, by the end of the year, we may have as much as capacity as $1.5 billion. Having said that, there's the one acquisition that's been sitting out there for a product, which the situation is still undecided. That would take up about $550 million, maybe a little more because of the change in the currency. And then we have appetite for other acquisitions, I hope, significant ones in this environment. Just like we did with DALSA in 2010 and e2v in 2016. Under those economic conditions of those businesses were not performing very well, and we were able to acquire them with a -- at a reasonable price. So our appetite, I think, will improve with time as our cash position improves with time also.

Our next question comes from Jim Ricchiuti from Needham & Company.

Maybe just to follow-up on that comment, Robert. If you look at that M&A pipeline, are there areas in the business where you would like to focus more of the M&A activity, is it Digital Imaging? Or are there still opportunities for you to look at Instrumentation acquisitions as well?

You're right on, Jim, both areas. I think Digital Imaging, obviously, Photonis would be a complementary acquisition, a really good complementary acquisition, if we were able to make it to Digital Imaging. On the other hand, in the Instrumentation area, that's our second high-margin business, and we would like to make acquisitions there, too. So those are the 2 main areas, as you noted.

Okay. And maybe just in general terms, how were the booking trends in the quarter? Can you give us any color as to the book-to-bill? And I assume there's been some variability in the book-to-bill in the different segments.

Yes. Let me start. Again, let me go back to Q1. We had a really good book-to-bill in Q1. We were at about 1.09 in Q1. In Q2, things went south. We dropped to about 0.85. But collectively, we think we'll end the year just below 1. Q3 should improve over Q2 and Q4 should be a little over 1. We think we'll end the year by maybe 0.98 of that order. That includes pretty lumpy orders, especially in our Engineered Systems. So I think this -- you have to take into consideration that our aerospace business, the book-to-bill is pretty low because of the decline in that whole domain. In T&M and instruments, I think instruments, in general, in Q2, we were just a little north of 1. And we think Q3 would be 1 and Q4 would be 1. So we should be okay there. Digital Imaging, we should end up a little over 1, with aerospace and defense, defense will pick up. So we should be just under 1, when end the year even with aerospace being down, and Engineered Systems is lumpy, so I think it doesn't matter. It's going to be around 1 in the end.

Okay. That's helpful. And Robert, maybe it's a final question. Just in light of the economic environment, you obviously have less visibility on the short-cycle business. You do have -- it sounds like you do have some insight in some of the other businesses. But as you look at the portfolio, where is there potentially more uncertainty relative to that full year kind of revenue sales decline of 3% that we need to at least be mindful of?

Well, I think you hit it on the head. We think that the declines would be most pronounced in aerospace and defense as has been, we think in Q3, for example, that would be down about 20%. And for the year, it could be as much as 14.5%. I think where we have some risks is in the environmental instruments and some of our test and measurement. So even though the protocol analyzers are doing very well. We are seeing some encouraging signs in early July, as Al alluded to. It's early to tell, but I'm hopeful that some of the environmental and T&M as it's beginning pick up in China will also pick up in Europe and subsequently in the U.S. But the danger, really, is -- has to do with environmental. Digital, I think, will be okay because we have got a very diverse portfolio. We think throughout the year, for the full year, we might be down 1%, which is -- to me, is acceptable, especially since, as we go along, we're also improving margins in Digital Imaging. We think that by the end of the year, the margin there would improve 130 or so basis points, so a 1% decline is acceptable.

And our next question comes from Joe Giordano from Cowen and Company.

Can you talk about cost savings in the quarter? And how you kind of characterized them? And how much was more structural in nature versus how much was more due to volume declines and temporary savings that may have to come back into the business as things start to pick up?

Yes. The primary savings, Joe, come from people. We spent approximately $1.2 billion, $1.3 billion, of people expense. What happened there is that we have a turnover and so we haven't been replacing those folks, except where we have really good strong orders. And then we've cut folks. And so the big change for the year is in people. And I think that savings rolling forward net of charges that we take could be as much as $40 million to $50 million.

Now having said that, it is our full intention to keep that low cost structure into next year, as we've done previously. The other area of cost savings is we have very strong initiatives in procurement. And we have a target of saving over $25 million in procurement this year. And that is not savings because we find fewer stock for savings, because we're buying them at a lower cost, because we're signing contracts with our favorite suppliers. If we can get that done that will save us another $20 million. In terms of the 1,000 people that I mentioned, I'd say half of it was maybe because the market demand going down like it controls, where market tanked to 50% of what it was. And the other half is really proactive on our part in reducing complexity in our operations. But we intend to keep that. And we've done that in prior years. We've kept our lower cost as we move forward. Hope that answers your question.

No, it does. I also wanted to ask on China. You said you're seeing some of the better signs there over the last couple of months. How would you categorize that as a -- how much of that is like a restock off of low levels versus actual pull-through of real demand?

I think it's demand-driven. It's not it's not as good as it was last year, but it's improved over the first 2 quarters. I think the upside is that they have increased their back-to-work efforts. Having said that, China, as a whole, is only 8% of our total sales. So there's also improved demand beyond China, in Asia overall, in Taiwan, in Korea, other places. So we see continuing improvement in demand there, and we're kind of projecting that will pick some of that up in Europe first, and then finally, in the Americas.

Great. And then maybe last for me. It sounds like you're looking pretty actively on M&A, and you talked about what you were able to close on in prior downturns. I guess what color can you give us here? This is a weird downturn where economics of companies have gone down dramatically, but prices of the businesses have not. So what are you seeing in terms of valuation and how people are thinking about selling their companies and what price they deserve?

Well, that's an excellent question. Everybody looks in the rear-view mirror, right? Even though prices have not gone down as much as some of the PEs have expanded over time, those that have gone down, let's say, by 30%, 40%. People keep looking back in the rear-view mirror and say, that's the price that they deserve. Having said that, it's an opportune time. Most of these companies have shareholders. And shareholders have various degrees of patients and they don't look in the rear-view mirror as much as the management and the Boards do. So I think there are going to be opportunities for us. There are opportunities for us. We may not be able to get something at the market price that it's trading at. But we're certainly not going to pay what they were a year ago. So we'll -- we're kind of searching our way through that opportunity list to see what's possible.

(Operator Instructions)

Laurie, if there's nobody else asking a question, what I'd like to do is, I'd like to end the call and ask Jason to conclude the conference call, please.

Thanks, Robert, and again, thanks, everyone, for joining us today. Of course, if you have follow-up questions, please feel free to call me at the number listed on the earnings release. Laurie, if you could give the replay information and close the call, we would appreciate it greatly.

Thank you.

And ladies and gentlemen, your replay is available through August 22, 2020, until 11:59 p.m. Pacific Daylight Time, and U.S.A. callers may dial (866) 207-1041 and enter the access code 3245794. International callers may dial (402) 970-0847, using the same code, the access code is 3245794.

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.