Q4 2019 Earnings Call

Okay.

Ladies and gentlemen, thank you for standing by welcome to the Teledyne fourth quarter earnings release Conference 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. If you should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded.

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

Thank you. Good morning, everyone. This is Jason Vanwees Executive Vice President and I want to welcome everyone to tell others fourth quarter and full year 2019 earnings release Conference call. We released our earnings earlier this morning for the market open.

Joining me today are teledyne's.

Give chairman Robert Moravian, President and CEO Al Pichelli, Senior Vice President and CFO , assuming and SVP and General Counsel, Chief compliance Officer, and Secretary Melanie Civics after remarks by Robert Allen suit, we will last for questions of course, though before we get started our attorneys have reminded me to tell you that all forward looking statements made.

This morning are subject to various risks and caveats as noted in the earnings release and are periodic SEC filings and in order to avoid potential selective disclosure is this call is simultaneously being webcast and a replay hauled via webcast and island will be available for approximately one month.

There is Robert.

Thank you, Jason and good morning, everyone and thank you for journey.

Joining our earnings call.

The second second quarter.

We achieved all time record sales earnings per share and free cash flow Likewise.

40 years 2019 last by any measure and Ensco DS.

Each of sales earnings GAAP operating margin and free cash flow, we're all time records.

Fourth quarter end for U.S sales increased 11.5% down 9% respectively.

Organic growth for both periods also exceeded 4%, including some modest clarity currency headwinds at <unk>, 0.6% in Q4 and about 1% headwind for the full year 2019.

In addition, hard part the fourth quarter and four year.

GAAP operating margin expanded just under 110 20 basis points.

Fourth quarter earnings were $3.06 exceeding $3 per share for the first time, an increase of 24.9%.

Compared to last year.

Why we've increased our emphasis on margin improvement we are continuing our proven strategy.

Disciplined capital deployment for compound growth in earnings and cash flow.

In 2019, we deployed 400000 $84 million on complimentary acquisitions, and our New York. This month, we announced the acquisition of both gate technology as software and hardware company focused on the test validation and operating.

Performance self solid state electronic storage media.

This is our third bolt on acquisition core Teledyne Lecroy and our laws Teledyne to provide a complete set our protocol analysis software and hardware used from the design of new data storage devices. So do you sell search devices in hybrid.

Scaled cloud storage networks.

Teledyne continues to benefit from our balanced portfolio of common technologies serving different.

Complementary market.

We began 2020.

We had growth in our defense businesses expected.

Offset declines in sales up well E M and beyond.

Marine instrumentation continues to recover with growing sales, but also with orders having exceeded sales for the sixth consecutive quarters.

In digital imaging, we expect to see continue strength in certain high growth markets like Michael Electromechanical systems.

Our mens.

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 lead only projecting low.

Single digit GDP like organic growth.

Finally.

Our balance sheet remains exceptionally strong.

With at quarter end leverage ratio of 1.4 X and we're continuing to pursue acquisition opportunities.

Before turning the call to out 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.

I would not comment on the performance of our floor business segments.

Thank you Robert and 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 and backlog since 2014.

In addition, operating profit improved significantly.

India 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 and 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 22.1%.

Sales of our proprietary medical and dental X Ray detectors again increased significantly year over year.

Sales are geospatial sensor systems and Mems devices also grew nicely as did sales and advanced infra red and visible light detectors for defense and space applications.

The strong growth in these businesses more than offset some expected declines entity 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 a 131 basis points generally as a result or that could increase 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 electronic businesses, partially offset by lower sales of OEM Aerospace <unk> 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 over year.

Before turning to turning to Sue I wanted 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 Gaston flame detection micro line and Okay acquisition will add another 100 million Arsenal of incremental revenue.

This translate to total revenue of approximately 3.36 to 3.37 billion.

Our 2020.

We'll now turn to call over just soon.

Thank you Alan good morning, everyone.

Well, thanks discuss some additional financials for the quarter not covered by Robert announce and then I will discuss our first quarter and full year 2020 outlet.

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 2008 pull.

The cash provided by operating activities in the fourth quarter 2009 full 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 with $144 million below fourth quarter 2019, compared with $106.8 million in 2018.

Capital expenditures by 23.9 million dollar late in the fourth quarter compared to $18.7 million the default rate of 2008 pool.

Depreciation and amortization expense with $29.3 million in both definitely put eight of 2019 2018.

We ended the quarter with $651.1 million of net debt that is 850.6 million dollar debt less cash of $199.5 million for net debt to capital ratio of 19.4%.

Stock option compensation expense was 5.7 million dollar fourth quarter, 2008, full compared with $4.9 million and the flight class of 2018.

Turning to our outlook management currently believe that GAAP earnings per share in the first quarter 2020 will be in the range at $2.25 to $2.35 per share.

And for the full year 2020, our GAAP earnings per share outlet in $11 in 27 to $11 and any sense.

The 2025 full year estimated tax rate excluding discrete items.

But to be 22.3%, a 170 basis point increase okay. Two full years 29 pool due in part to less R&D tax credits as the percentage of taxable income.

In addition, we currently expect significantly less discrete items in 2020 compared with 20 in April .

Ill now pass the call back to aspect. Thank you too.

We thought we'd now like to take your questions. Greg. If you are ready to proceed with the questions and answers. Please go ahead.

Thank you, ladies and gentlemen, if you'd like to ask a question. Please press one zero on your telephone keypad you may withdraw your question at anytime by repeating the one zero command if you're using the speakerphone. Please pick up the handset before prosigna numbers. Once again, if you have a question you May press. One then zero at this time and one moment. Please for your first question.

Your first question comes from the line of.

Andrew Buscaglia. Please go ahead.

Hey, guys. Thanks for taking my question.

Good morning, Andrew Good morning.

I was hoping you dig a little bit more into marine so you're on your second quarter now of.

We'll looks like of 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.

We think that your organic growth rate guidance would be higher than that really he said three 3% to 5%. So what can you talk about how that.

Being a down per month weighing a damn.

Sure Andrew let me start with Marine I think.

Our ordinary shares in marine where job.

Significant this year, we ended the year with about 1.1.

In terms of above book to Bill.

It's been it's been a good drawn there are.

No oil prices hovered between 55 and $65 for Brent.

And amount of deepwater.

Production.

He is probably the mone below $50. So we're seeing both.

Improvements in our seismic activities and other activities for oil exploration.

As well as long term oil production contracts, we think that in 2020.

Irene would have.

Increased revenues.

In the range of about 6.6% versus 4% in 2019.

No.

Beginning 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 three at three and a half more next year that's primarily.

Primarily affected by this 737, Max it impacts our revenues by 1% up that's our best guess right now which is equivalent to about $30 million.

We anticipated that we would have revenues up.

But we are 40, maybe as much as 45.

And because of the delays that you're very familiar with.

We expect that that would be down about effect, our revenue about a percent our $30 million.

Having said that I think it's important to.

Two nodes that.

With ease on that hit that Weve, 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 answers to your question is primarily driven by Max when it comes back into production.

We'll picking up again.

Yeah. It now that's helpful.

And maybe can you just commented on the you said machine vision in the quarter seems to go a little uptick sequentially here.

So what's your expectation for 2020 I mean.

You got semi is markets moving higher or dirt is good commentary out of those markets. So what do you guys think getting.

Right now we think that.

In the machines.

Vision that we will get some pickup from semi we think are for the year.

We'll probably organically grow 3% to 3.5%, but we also made that acquisition.

Side Cam acquisition.

Last year as good as Microturbine et cetera, I think overall machine region would be over 5%.

Maybe 5.15, 0.2%.

The digital imaging that includes.

Machine vision.

His recovery.

Modestly where we've done well really is in the health care, which is our extra business.

And our men's areas and.

We think those areas will help us as well we think the sales in that total.

Digital imaging will increase from.

A lot worse this year about 900.

To about 990 million Im sorry, 902 about.

Billion 4 million billion for PC. So I mean 1 billion for 1.045 billion and so we're positive about machine vision of course, even if the business picks up more especially in the flat panel this sprays and.

We'll do better.

Yes.

Got it alright, thanks for the color.

Thank you.

Your next question comes from the line of Joe Giordano. Please go ahead.

Hey, guys good morning.

Morning, Joe.

Whenever you answered a bunch of my questions there, but maybe you 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.

Yeah, I can give you a margins first the five made by segment and related to 19.

Let me start with instrumentation.

Instrumentation had 40 year margin Ocuvite, 18.1%.

And that was really good because it improved about 270 basis points over 2018.

We think that will go up again in 2020, perhaps as much as 70 basis points.

Right now, we think you'd end up at 18.8%.

And.

Moving to digital imaging.

Digital imaging margins were flat year over year 718 was 17.8 and 19 was 70 17.8.

I think we're going to get some margin improvement there.

Perhaps as much as 65 basis points.

Aerospace and defense on engineered systems, we don't think we're going to improve margins aerospace and defense, primarily because the margins are already present high at 20.8%, but also as I mentioned because of the headwind from them.

737 Max.

We think given the defense would make up towards the revenue margins will stay Frac and then engineered systems, we think margins would remain about 9.7%. So overall in the segments, we think that.

The margins.

We'll increase overall about 45% or 45 basis points and the company as a whole.

It will be about.

50 basis points regarding that.

Question, you asked about dilution.

Accretion dilution.

From.

The acquisitions.

The Roper acquisition was a scientific cameras was not dilutive.

Right now got some flame, which is the business, we borrowed from Tdm and micro loan find which we bought.

We think.

They realize about.

They added about 50 basis points in dilution probably in Q4 within going forward, there will be fairly flat.

Most of our acquisitions that we make maybe diluting that very early on because of expenses, we have in acquiring them, but after a while demonstrating.

That's very helpful. Just wanted to clarify I think you said earlier marine up about six and a half person and 2020, what what about the oil and gas the energy component of Marine specifically I just want to make sure I am I wasn't confusing, which things youre talking about there yeah, Let me just.

I think that out I think.

In the oil and gas.

First let me start with the big creature. This year, we ended marine at about $450 million, which was at 3.9% improvement over 18.

Our president.

Class or in our prisons anticipation is that that was up 6.6% to $480 million.

That the oil and gas in 2019 was about $185 million and we think that increased to $202 million.

Perhaps the increase for us.

I think the rest of marine reduced as to do with defense.

And security and others things can go up from 265 to 278, so too.

Put it in a nutshell.

The 6.6 is balanced between oil and gas and.

Other businesses, especially defense, where we do have really good programs, especially.

In the.

Submarine area.

Maybe last for me on the health care part of digital imaging.

Yeah. That's business has been great for you guys and what's the outlook in kind of current thoughts around.

New customers in new fields, like you know on surgery, and mammography and what's the what's kind of the pacing in discussion with big customers, there and what's embedded in your and your guidance for growth in healthcare and 25.

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, M., we don't see any new Oems right now could happen, but we don't see drive now.

We have in prior years, we had really good xotwo surgery, we had good intro bad mammography. So we think it's going to be ready selectively slot, maybe increase and other $10 million year over year I think last year was about 250 by the project team of up to 65 or so.

This year, but it's a healthy business now we're trying to also move up market with some of our product. So as the year progresses, I think we'd be able.

Two project improvements specialty mammography and other Oems as we move closer to 2021.

Thanks very much.

Thank you.

If there are any additional questions. Please press one then zero.

And at this time there are no further questions.

Well, thank you very much Greg or bought I'd like to do is as Jason to conclude the conference call. Thank you.

Thanks, Robert and again, thanks, everyone for joining us. This morning, if you do a follow up questions. Please feel free to call me 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 them. Please provide the replay details for the audience. We certainly appreciate it thanks again.

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