Q2 2020 Teledyne Technologies Inc Earnings Call
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Ladies and gentlemen, thank you for your patience in holding and welcome to the Teledyne second quarter earnings call. At this time all participants are in a listen only mode. Later on we will be conducting a question and answer session instructions will be given at that time, if you should require assistance anytime during the call.
Please press Star then zero 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 second quarter earnings release Conference call. We released our earnings earlier. This morning before the market open joining me today, I Teledyne's Executive Chairman, Robert Moravian, President and CEO Al Pichelli senior.
Vice President and CFO, Sue main and SVP General Counsel, Chief compliance Officer, and Secretary Melanie said that.
After remarks by Robert out and Sue we will ask your questions.
Of course before we get started our attorneys have reminded me to tell you at 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.
Bolt via webcast and island will be available for approximately one month.
There is Robert.
Thank you Jason Good morning, and thank you for joining our earnings call.
Before discussing our results I want to emphasize.
All of our worldwide manufacturing sites as well as our corporate office not research laboratory have been and remain operational.
Oh, okay.
Because our priority remains the health and safety our employees.
Continuing social dismissing enhance cleaning protocols usage, our face masks.
Personal protective equipment.
I shall make you a few comments about our performance in the current environment.
And our outlook for the remainder of Twentytwenty.
Despite record economic contraction and a challenging operating environment for manufacturers.
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 out Twentytwenty 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 it is reasonable level of credit predictability and helped us.
Give us the confidence to provide our outlook in April.
Looking back at the second quarter.
The overall market and demand dark blue played out as we had envisioned.
In April.
We have predicted second quarter sales due to decreased 5% year over year.
Versus the actual results off 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 gate business, which was acquired in January.
This brought our dry and 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.
Tony in dental health care markets, where weakness due to covert 19 was expected.
Well, we also saw temporary declines in surgery and cancer radio therapy due to one.
I have heard patient treatments to.
Our customers Destocking and three fewer 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 expectations.
Ongoing simplification of our processes.
And margin improvement actions, including aggressive cost cutting in the first type of Twentytwenty delivered superior results.
Now looking forward to the balance up 2020.
We remain positive overall.
Just as commercial sales to Asia improve late in the first quarter.
We expect that recovery in sales in Europe, and the Americas later this year.
However.
In light of we 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.
I was there any losses result, we now expect 20 to 20 full year sales to be declined approximately 3% from 2000 that 19.
Sales of instrumentation on imaging existing sequentially in the fourth quarter and defense electronics and engineered system sales continuing to remain robust throughout the year.
We're now forecasting get recovery in commercial we are not forecasting get recovery in commercial aerospace in 2020. However, this market will contribute less than 5% to our source of revenue.
Before turning to outdoor report on the second quarter performance by segment.
To emphasize the following.
First.
As we have repeatedly demonstrated in the past.
We know how to be disciplined and performed well in challenging environments.
Second.
In prior cycles, where revenue was challenged we protected earnings while at the same time, increasing cash flow.
For example.
In 2009, when revenue declined 4% GAAP earnings were flat and free cash flow increased over 50% from 2008 and was a record for teledyne at the time.
Likewise.
In 2016, when totally revenue declined 6%.
GAAP earnings were flat.
Free cash flow again increased over 50% from 2015 and was again a record for teledyne out at the time.
More importantly.
In subsequent years.
We kept our lower cost structure.
Hence GAAP earnings nearly doubled over the subsequent three to four years in addition.
Following some periods of general market weakness.
Due to Teledyne strong balance sheet, we were able to complete our largest and beds acquisitions for example.
We announced acquisition of Teledyne also in 2010.
And teledyne it to be in 2016, both of which where our largest acquisitions on those dates.
Fast forward to 2020.
We are aggressively managing variable costs as well as permanently reducing costs were not appropriate.
Our balance sheet is exceptionally strong.
With over $280 million to $80 million of cash and cash equivalents and a borrowing capacity of over $1.2 billion.
I will now comment on the performance of our floor business segments.
Thank you Robert.
And our instrumentation segment overall second quarter sales were flat versus last year.
Sales and marine instrumentation decreased 1.3% into quarter. However.
Operating profit improved due to business simplification initiatives and improved pricing and procurement activities.
As a reminder, Wow marine includes products sold to the energy industry. We expect this market to directly account for just over a third 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 claim detection business.
While sales or certain products, such as medical grade oxygen sensors increased during the quarter, just could not offset declines in general industrial markets, such as stack gas emissions monitoring and waste water flow and sampling.
Sales of electronic test and measurement systems decreased 9.8%.
While there was strengthened our protocol solutions group.
Sales of general purpose of silver scopes 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.
Okay.
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 that straight detectors for dental and medical applications.
Partially offset by greater sales of infrared detectors for defense market.
Sales of industrial vision systems were largely flat with last year.
Our strength in semiconductor inspection and markets in Asia, partially 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 years, 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 one wed.
GAAP segment operating margin decreased due to lower sales, but also over 340 basis points of charges for severance and facility consolidations.
India engineered systems segment second quarter revenue increased 6.4%.
Primarily due to greater sales from marine nuclear and other manufacturing programs.
While our electronic manufacturing services.
Segment operating profit increased 20% with margin up 123 basis points.
I will now turn to call to Sue will offer some additional commentary regarding the second quarter and our Twentytwenty outlook. Thank you Alan Good morning, everyone. I'll first discuss some additional financials for the quarter not covered by Robert It now and then I will discuss our third quarter and full year 2020 outlet.
In the second quarter cash flow from operating activities was $155.8 million compared with cash flow of $83.2 million for the same Cade F 2019.
The cash provided by operating activities and the second quarter 2020 reflected improved collection of accounts receivable, all 33.4 million of deferred tax payments, partially offset by lower operating income.
Free cash flow batteries cash from operating activities less capital expenditures was $139.2 million and the second quarter of 2020 compared with $65.1 million in 2018.
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 $29.8 million on the second quarter compared to $27.1 million for the phone paid of 2000 multiple.
We ended the quarter was $468.6 million of let Paul that is $851.4 million of debt less cash of $382.8 million for a net debt to capital ratio of 44.8%.
Stock option compensation expense was $5.7 million in the second quarter of 2020, compared with $5.8 million in the second quarter 2018.
Turning to our outlook management currently believe that GAAP earnings per share in the third quarter of 2020, well be in the range of $2.25 to $2.45 per share.
For the full year 2020.
GAAP earnings per share outlook is $9.45 to $10 compared with the prior outlet at $9.30 to $10.
The 2020 <unk> full year estimated tax rate, excluding discrete items is expected to be 22.8%, a 220 basis point increase compared to full year 2019.
You implied to less R&D tax credits.
In addition, we currently expect less discrete tax items and 2020 compared with 2009 Paul.
Please note that the estimates for third quarter and full year 2020, GAAP diluted earnings per share exclude any potential type related to Airbus Oneweb satellites I'll now pass the call back to FX.
Thank you assume.
We would like to take your questions now.
Lori if you're ready to proceed with the questions and answers. Please go ahead.
And ladies and gentlemen, if you would like to ask a question at this time. Please press one then followed by zero.
And our first question comes from Craig Conrad from Jefferies. Please go ahead.
Good morning.
Good morning, Greg.
Just to start on margins I mean, it seems like you may be took down the organic growth outlook, a little bit in Q3.
EPS or 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 NH to whether its restructuring or anything and embedded in the margins.
Sure Greg.
First let's.
Let's go back to Q2, the margin was 14.8% operating margin, we thinking Q3, the margins going to go up.
To up to about 15.4%.
And with thinking Q4 and go up further so we should end the year to around 15% considering the first quarter. Most creed low at 13.3, so we expect to have continuous improvement.
In margin.
And.
Forgive me the second part to your question.
Had to deal with.
Oh, just have you embedded any additional restructuring you kind of call yeah.
Yeah, 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 5000.
Caught up 11800 Thats, 8.5%.
So we'll be below 11000.
When the year ends consequently.
We think we'll have maybe another $4 million to $5 million of charges in.
Good morning, and Q4.
Collectively let just say five.
And then you kind of called out digital imaging, maybe being a little bit.
Worse than expected, but instrumentation a little bit.
That are and kind of a ramp into Q4 I mean, when we think about towards the end the year as digital imaging, maybe where they're the most opportunity that kind of see increases kind of as as we exit the year.
Yes.
Let me.
The surprise in digital imaging was the following up the.
We expect that dental.
Market.
Our sensors to be down because people are not going to dense is in the current circumstances, well, there's a little surprising to us.
The Don.
Slope in radio therapy that 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 the people that would be tested for cancer or colon cancer or various dies and thats 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 is maybe upwards of $20 million in Q4 Bush.
Primarily.
In digital imaging.
As well as I should say in instrumentation. So collectively we expect those two to do much better in Q4 than they did in Q2.
And then just last one for me I mean free cash flows kind of running.
Expectations, we 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 do I think in April Greg I mentioned that were expected cash Toby outdoor there are.
375 free cash flow to meet our daughters of $275 million for the year.
Going up that now to probably about $400 million, maybe a little more but let's just say from numbers $400 million of free cash flow into current circumstances that that would be at record for us.
Last year.
We had $394 million. So if we can exceed that that would be a record not.
Going back as I mentioned in my comments.
We.
Has the capacity.
Two.
Hi things.
Excluding acquired remediate.
Of the order of 1.2 billion.
Anything we buy is going obviously, how soon MBA 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 is the one acquisition thats been sitting out there for candidates, which.
The situation still undecided.
I would take up to about 550, maybe a little more because of the change in the currency.
And then we have appetite for other acquisitions I hope.
Significant loans.
In this environment.
Just like we did with also in 2010 I need to be in 2016.
Those economic conditions, but those businesses were not performing very well, we were able to acquire met with the breeze at reasonable price so our appetite.
I think will improve with time as our cash position improves with time also.
Thank you.
Thank you Greg.
And our next question comes from Jim Ricchiuti from Needham and company. Please go ahead.
Hi, Thank you 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 in digital imaging or there's still opportunities for you to look at instrumentation acquisitions as well.
A year, you're right on Jim both areas I think digital imaging, obviously photon us would be a complementary acquisition had really good complimentary acquisition. If we were able to make it to digital imaging on the other hand in the instrumentation area.
Our second.
Hi margin business.
Then we would like to make acquisitions there too so.
Those are that those are the two main areas.
You noted.
Okay, and Hey, maybe just in general terms, how how were the 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.
Yep.
Let me start again, let me go back to Q1, we had a really good book to Bill in Q1.
We will about a 1.29.
In Q1 in Q2 things went out with dropped to about 2.85, so collectively.
We think we'll end the year just below one.
Q3 should improve over Q2, and Q4 should be a little over one.
We think we'll end the year by maybe.
Nine eight of that order that includes pretty lumpy.
Orders, especially in our engineered systems.
So I think.
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 gold domain in PNM.
And instruments I.
I think instruments in general in Q2, we were just a little or no tough one.
I think Q3 would be Mona and Q4 would be one so we should be okay. The digital imaging, we should end up a little over one.
With.
Aerospace and defense the past will pick up so we should be just under 1 billion the year, even with aerospace being done and engineered systems is lumpy. So I think you know it doesn't matter, it's going to be at around one in India.
Okay. That's helpful and Robert maybe as a final question just in light of the economic environments, you obviously have.
Less visibility on the short cycle business, you do have some saskatchewan as long as side and 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 way.
We need to at least be mindful of.
Well I think you hit it on the had we.
We think that.
The declines would be most.
In aerospace and defense.
As as has been.
We think in Q3 for example that would be done about 20%.
For the year it could be as much as fortinet a half percent.
I think.
Where we have some risks.
In the environmental instruments.
And.
Some of our test and measurement, so even though the protocol analyzers or doing really well.
We're seeing some encouraging signs in early July as now.
Alluded to.
Got it certainly to to tell but.
I'm hopeful that.
Some of the environmental and PNM.
As is beginning pickup in China will also pickup in Europe and subsequent in the U.S., but the danger really is.
Has to do with environmental digital I think will be okay. Because we got a very diverse portfolio within throughout the year for the full year, we might be down <unk> percent.
Which is to me is acceptable, especially since.
As we go along we're also improving margins.
In digital imaging, we think there by the end of the year the margin there when improved 130, or so basis points up 1% decline is acceptable.
Got it thanks very much.
Sure.
And our next question comes from Joe Giordano from Cowen and company. Please go ahead.
Hey, guys Hey, John.
Good morning, Joe.
Can you can you talk about cost savings in the quarter and how you kind of characterize them how much was more structural in nature versus how much was more due to volume declines in temporary savings that may have to come back back into the business as things start to pick up.
Yes, the primary savings Joe.
Come from people.
We spent approximately 1.2 $1.3 billion our people expense.
What.
What happened there is that we have a turnover.
So we havent 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.
Well this level of roll it forward net.
Charges that we take.
I would be as much as $40 million to $50 million.
No.
Having said that it is our fully hedged.
So keep that more 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 now saving over $25 million in procurement this year and that is not baby because we buy fuel.
Savings because we are buying again at a lower cost beer because.
We're signing contracts we are favor.
Suppliers.
If we can get done.
That will save us another $20 million.
In terms of the.
1000 people that I mentioned.
I'd say half of it.
It was maybe because the market demand going down like it controls where market tanks to 50%.
And the other half is really proactive on us talk and.
Reducing nextcity in our operations.
We intend to keep that we've done that in prior years, we've kept our lower cost as we move forward.
I hope that answers.
No. It does thank you.
I also wanted to ask on China itself, you're seeing some of the better signs there.
Over the last couple of months, how would you categorize that as the.
How much of that is like a restock off of low levels versus actual pull through a real demand.
Oh.
I think its demand driven.
It's not the.
It's not as good as it was last year buddies improved over the first two quarters'.
I think.
They are.
Doug oxide is that.
They have.
Increased.
There is back to work efforts.
Having said that.
China as a whole.
Is only.
Percentof, our total sales so.
There's also improved demand beyond China.
In Asia overall in Taiwan Korea.
Other places so we see.
Continuing improvement in demand there and we're kind of projecting that will take some of that up in Europe first and then finally in the Americas.
Great and then maybe last for me.
It sounds it sounds like you're looking pretty actively on M&A and you talked about what you eat what you are able to.
Close on in prior downturns.
I guess what color can you give us here. This is a weird downturn we're.
Economics of companies had gone down dramatically, but prices of the of the businesses have not.
So what are you seeing in terms of valuation and how people are thinking about selling their company than what price they deserve.
Well you know.
That's a that's an excellent question.
Everybody looks in the rear view mirror right, even though.
Prices have not gone down as much on some of the piece 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 you know that that's the price that they deserve.
Having said that.
It's an opportune time.
Most of these companies.
Our shareholders.
And shareholders.
Bob various degrees of patients and they go look in the rear view mirror as much as the management on the board's do so I think I think they're going to be opportunities for us there are opportunities for us.
We may not be able to get something at the market price that is trading at but we certainly not going to pay what they were a year ago. So.
You know.
We love where to kind of searching our way through that.
Opportunity.
To see what's possible.
Great. Thanks, guys.
Sure.
And as a reminder, ladies and gentlemen, if you would like to ask a question. Please press. One then followed by zero.
No worries theres nobody else.
Skipping a question.
What I like to do is job I like to end the call announced Jason to conclude the conference call. Please.
Thanks, Thanks, Robert and again, thanks, everyone for joining us today of course, if you follow up questions. Please feel free to accommodate the number listed on the earnings release.
If you give the replay information and close the call. We would appreciate a great. Thank you.
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