Edited Transcript of TDY earnings conference call or presentation 22-Jan-20 4:00pm GMT

Teledyne continues to benefit from our balanced portfolio of common technologies serving different complementary market. We begin 2020 with growth in our defense businesses expected to offset declines in sales of OEM avionics. Marine instrumentation continues to recover, with growing sales, but also with orders having exceeded sales for the sixth consecutive quarter. In Digital Imaging, we expect to see continued strength in certain high-growth markets like micro-electromechanical system or MEMS and a modest recovery in certain commercial machine vision market, such as the semiconductor industry.

Given the short-cycle nature of our environmental and electronic test and measurement instrumentation businesses, at this point, we’re only projecting low single-digit GDP-like organic growth.

Finally, our balance sheet remains exceptionally strong, with a quarter-end leverage ratio of 1.4x, and we’re continuing to pursue acquisition opportunities.

Before turning the call to Al, I want to emphasize that all of our financial results this morning are reported on a GAAP basis with no adjustments for amortization, stock compensation, acquisition charges, purchase accounting, restructuring or other charges.

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

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Aldo Pichelli, Teledyne Technologies Incorporated – President & CEO [4]

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Thank you, Robert. In our Instrumentation segment, overall fourth quarter sales increased 14.5% from last year. Sales of marine instrumentation increased 14.7% organically in the quarter. And we also closed 2019 with the highest year-end backlog since 2014. In addition, operating profit improved significantly.

In the environmental domain, sales increased 31.9% as a result of our recent acquisition of the Gas and Flame Detection business. In addition, greater organic sales of pollution control instrumentation were offset by lower sales of selected process gas analyzers and laboratory instruments.

Sales of electronic test and measurement systems increased sequentially to the highest level of 2019, but decreased 6.8% year-over-year given an especially tough comparison. For the full year, sales increased 6% organically.

Overall, Instrumentation segment operating profit increased 38.4% in the quarter, and margin increased 340 basis points, with margins increasing for test and measurement and marine instrumentation. Excluding the Gas and Flame Detection acquisition and related purchase accounting, margins also increased within the environmental instrumentation.

Turning to the Digital Imaging segment. Fourth quarter sales increased 20.1%. Sales of our proprietary medical and dental X-ray detectors, again, increased significantly year-over-year. Sales of geospatial sensor systems and MEMS devices also grew nicely, as did sales of advanced infrared and visible light detectors for defense and space applications.

The strong growth in these businesses more than offset some expected declines in the portion of our industrial machine vision business, which serves consumer electronics and generally factory automation markets, especially in Asia. However, sales of these products did increase sequentially, given some recent recovery in the semiconductor-related inspection systems. GAAP segment operating profit increased 29.8% and margin increased 131 basis points generally as a result of the increased sales volume.

In the Aerospace and Defense Electronics segment, fourth quarter sales increased 2.7%, primarily due to strong growth across the majority of our Defense Electronics businesses, partially offset by lower sales of OEM aerospace electronics. Segment operating margin decreased 208 basis points to 19.2%. The operating margin primarily resulted from product mix differences in Defense Electronics and lower sales of commercial avionics.

In the Engineered Systems segment, fourth quarter revenue decreased 1.7%, with greater sales related to space and energy programs, electronic manufacturing and turbine engines, more than offset by lower sales from missile defense programs and energy systems. Segment operating profit and margin was flat year-to-year.

Before turning to Sue, I want to offer some additional commentary regarding our 2020 outlook. Given the points raised by Robert earlier, we believe that total organic revenue growth into full year 2020 will be 3% to 3.5%. In addition, the full year contribution from the scientific camera, Gas and Flame Detection, Micralyne and OakGate acquisition will add another $100 million or so of incremental revenue. This translate to total revenue of approximately $3.36 billion to $3.37 billion for 2020.

I will now turn the call over to Sue.

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Susan L. Main, Teledyne Technologies Incorporated – Senior VP & CFO [5]

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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 the first quarter and full year 2020 outlook.

In the fourth quarter, record cash flow from operating activities was $167.9 million compared with cash flow of $125.5 million for the same period of 2018. The cash provided by operating activities in the fourth quarter of 2019 reflected the impact of higher operating income, cash flow from recent acquisitions and improved working capital management.

Free cash flow, that is cash from operating activities less capital expenditures, was $144 million in the fourth quarter of 2019 compared with $106.8 million in 2018. Capital expenditures were $23.9 million in the fourth quarter compared to $18.7 million for the same period of 2018.

Depreciation and amortization expense was $29.3 million in both the fourth quarters of 2019 and 2018. We ended the quarter with $651.1 million of net debt, that is $850.6 million of debt less cash of $199.5 million for a net debt-to-capital ratio of 19.4%. Stock option compensation expense was $5.7 million in the fourth quarter of 2019 compared with $4.9 million in the fourth quarter of 2018.

Turning to our outlook. Management currently believes that GAAP earnings per share in the first quarter of 2020 will be in the range of $2.25 to $2.35 per share. And for the full year 2020, our GAAP earnings per share outlook is $11.20 to $11.30. The 2020 full year estimated tax rate, excluding discrete items, is expected to be 22.3%, a 170 basis point increase compared to full year 2019 due in part to less R&D tax credits as a percentage of taxable income. In addition, we currently expect significantly less discrete items in 2020 compared with 2019.

I will now pass the call back to Robert.

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Robert Mehrabian, Teledyne Technologies Incorporated – Executive Chairman [6]

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Thank you, Sue. We’d like — we’d now like to take your questions. Greg, if you’re ready to proceed with the questions and answers, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Andrew Buscaglia.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [2]

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I was hoping you could dig a little bit more into marine. So you’re on your second quarter now of what looks like the beginning of a ramp. How sustainable is this — is the growth into next year? And then can you also talk a little bit about — I would think, given you got marine finally rebounding here, you got potentially machine vision rebounding here, I would think that your organic growth rate guidance will be higher than that 3% — I believe you said 3%, 3.5%. So what’s — can you talk about how that’s weighing it down or what’s weighing it down?

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Robert Mehrabian, Teledyne Technologies Incorporated – Executive Chairman [3]

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Sure, Andrew. Let me start with marine. I think our orders in marine were significant this year. We ended the year with about 1.1% in terms of book-to-bill. The — it’s been a good run. There are — the oil prices hovered between $55 and $65 for Brent, and a lot of deepwater production is profitable below $50. So we’re seeing both improvements in our seismic activities and the activities for oil exploration as well as long-term oil production contracts. We think that in 2020, marine would have increased revenues in the range of about 6.6% versus 4% in 2019.

Now continuing with the second part of your question, which is why we have organic growth less than 4% or so. This year, we achieved about 4.4%. We’re projecting between 3% and 3.5% for next year, that’s primarily affected by the 737 MAX. It impacts our revenues by 1%. That’s our best guess right now, which is equivalent to about $30 million. We anticipated that we would have revenues of over $40 million, maybe as much as $45 million. And because of the delays that you’re very familiar with, we expect that, that would be down about — affect our revenue about 1% or $30 million.

Having said that, I think it’s important that — to note that with even that hit that we’re taking in our revenue because of our balanced portfolio even in the Aerospace and Defense segment, we expect revenue to be flat year-over-year because the defense businesses are going to do much better this year than they did last year. So the answer to your question is primarily driven by MAX. Whenever it comes back into production, we’ll pick it up again.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [4]

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Yes. No, that’s helpful. And maybe could you just comment, too, on the — you said machine vision in the quarter seems to — you got a little uptick sequentially here. What’s your expectation for 2020? I mean you got semis markets moving higher or just good commentary out of those markets. So what are you guys thinking?

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Robert Mehrabian, Teledyne Technologies Incorporated – Executive Chairman [5]

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Right now, we think that in the machine vision that we will get some pickup from semi. We think for the year we’ll probably organically grow 3% to 3.5%, but we also made an acquisition, sci-cam acquisition, last year as well as Micralyne, et cetera. I think overall, machine vision would be over 5%, maybe 5.1% to 5.2%. The Digital Imaging that includes machine vision is recovering modestly. Where we’ve done well really is in the health care, which is our X-ray business and our MEMS areas, and we think those areas will help us as well.

We think the sales in that whole Digital Imaging will increase from what was this year about $900 million to about $990 million — I’m sorry, $900 million to about $1.4 billion, $1.450 billion. So — I mean $1,045,000,000. And so we’re positive about machine vision. Of course, it is — if the business picks up more, especially in the flat panel displays, then we’ll do better.

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Operator [6]

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Your next question comes from the line of Joe Giordano.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division – MD [7]

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Robbe, you answered a bunch of my questions there. But maybe can we just talk about margins a little bit? And how much — how dilutive was the M&A in the quarter? And how much is — how dilutive do you have it into 2020 margins, and maybe we can get a little color on margins by segment there?

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Robert Mehrabian, Teledyne Technologies Incorporated – Executive Chairman [8]

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Yes. I can give you margins first, if I may, by segment and related to ’19. Let me start with instrumentation. Instrumentation had full year margin of about 18.1% and that was really good because it improved about 370 basis points over 2018. We think that will go up again in 2020, perhaps as much as 70 basis points. Right now, we think it will end up at 18.8%. And moving to Digital Imaging, Digital Imaging margins were flat year-over-year at ’18 it was 17.8% and ’19 was 17.8%. We think we’re going to get some margin improvement there, perhaps as much as 65 basis points. Aerospace and Defense and Engineered Systems, we don’t think we’re going to improve margins. Aerospace and Defense, primarily because the margins are already pretty high at 20.8%, but also, as I mentioned because of the headwind from 737 MAX, we think even though defense will make up for the revenue, margins will stay flat. And in Engineered Systems, we think margins would remain about 9.7%. So overall, in the segment, we think that the margins will increase overall, about 45% — or 45 basis points, and the company as a whole, it will be about 50 basis points.

Regarding the question you asked about dilution — appreciation, dilution from the acquisitions, the Roper acquisition was with scientific cameras, was not dilutive. Right now, Gas and Flame, which is the business we bought from 3M and Micralyne, which we bought, we think they will add about — they added about 50 basis points in dilution, probably in Q4. Now we think going forward, they will be flat. Most of our acquisitions that we make maybe dilutive at very early on because of the expenses we have in acquiring them, but after a while, they’re accreted.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division – MD [9]

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That’s very helpful. Just wanted to clarify, I think you said earlier, marine up about 6.5% in 2020. What about the oil and gas, the energy component of marine specifically? I just want to make sure I’m — I wasn’t confusing which things you’re talking about there?

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Robert Mehrabian, Teledyne Technologies Incorporated – Executive Chairman [10]

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Yes. Let me just point that out. I think in the oil and gas — first, let me start with a big picture. This year, we ended marine at about $450 million, which was a 3.9% improvement over ’18. Our present plans or our present anticipation is that, that will go up 6.6% to $480 million. Of that, the oil and gas in 2019 was about $185 million, and we think that will increase to $202 million, a healthy increase for us. And we think the rest of marine, which is — has to do with defense and security and other things that will go up from $265 million to $278 million. So to put it in a nutshell, the 6.6% is balanced between oil and gas and the other businesses, especially defense, where we do have really good programs, especially in the submarine area.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division – MD [11]

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So maybe last for me. On the health care part of Digital Imaging, that business has been great for you guys. And what’s the outlook and kind of current thoughts around new customers and new fields like on surgery and mammography? And what’s the — what’s kind of the pacing in discussions with big customers there and what’s embedded in your guidance for growth in health care in 2020?

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Robert Mehrabian, Teledyne Technologies Incorporated – Executive Chairman [12]

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We think we’re going to have a little growth in health care, but it’s not going to be as robust as we had in 2020 because we had a lot of new OEMs sign up in 2020, and we don’t see any new OEMs right now. It could happen, but we don’t see it right now. We have — in prior years, we had really good extraoral surgery, we had good intraoral, we had mammography. So we think it’s going to be relatively flat, maybe increase another $10 million year-over-year. I think last year, it was about $255 million. We are projecting by about $265 million or so this year. But it’s a healthy business. And we’re trying to also move up market with some of our products. So as the year progresses, I think we’ll be able to project improvements, especially in mammography and other OEMs as we move closer to 2021.

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Operator [13]

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

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Robert Mehrabian, Teledyne Technologies Incorporated – Executive Chairman [14]

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Well, thank you very much, Greg. What I’d like to do is ask Jason to conclude the conference call. Thank you.

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Jason VanWees, Teledyne Technologies Incorporated – EVP of Strategy, Margin Improvement Programs and Mergers & Acquisitions [15]

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Thanks, Robert. And again, thanks, everyone, for joining us this morning. If you do have follow-up questions, please feel free to call me at the number on the earnings release. And of course, all our news releases are available on our website. Greg, if you could conclude the conference call, then please provide the replay details for the audience. We’d certainly appreciate it. Thanks again.

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Operator [16]

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Thank you. Ladies and gentlemen, this conference will be available for replay after 10:00 a.m. Pacific Time today through February 22. You may access the AT&T executive replay system at any time by dialing 1 (866) 207-1041 and entering the access code 1455431. International participants dial (402) 970-0847. That does conclude your conference for today. Thank you for your participation and for using AT&T teleconferencing. You may now disconnect.