THOUSAND OAKS Jun 17, 2015 (Thomson StreetEvents) -- Edited Transcript of Teledyne Technologies Inc earnings conference call or presentation Thursday, April 30, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jason VanWees Teledyne Technologies, Inc. - SVP, Strategy and M&A * Robert Mehrabian Teledyne Technologies, Inc. - Chairman, President, CEO * Sue Main Teledyne Technologies, Inc. - SVP, CFO ================================================================================ Conference Call Participants ================================================================================ * Greg Konrad Jefferies - Analyst * Jim Ricchiuti Needham & Company - Analyst * Mike Ciarmoli KeyBanc Capital Markets - Analyst * Steve Levenson Stifel Nicolaus - Analyst * Chris Quilty Raymond James & Associates, Inc. - Analyst * Mark Jordan Noble Financial Group - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne First Quarter Earnings Call. (Operator instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to Jason VanWees, please go ahead. -------------------------------------------------------------------------------- Jason VanWees, Teledyne Technologies, Inc. - SVP, Strategy and M&A [2] -------------------------------------------------------------------------------- Good morning, everyone. This is Jason VanWees, Senior Vice President, Strategy and M&A at Teledyne, and I'd like to welcome everyone to Teledyne's First Quarter Earnings Release Conference Call. We released our earnings earlier this morning. Joining us today are Teledyne's Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Sue Main; and Senior Vice President, General Counsel and Secretary, Melanie Cibik. After remarks by Robert and Sue, we will ask for 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 may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast, and the replay, both via webcast and dial-in, will be available for approximately one month. Here's Robert. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [3] -------------------------------------------------------------------------------- Thank you, Jason, and good morning, everyone. Teledyne reported first quarter sales of $565 million. Excluding the impact of foreign currency, sales were largely flat with last year. Due to continued operating discipline and cost reductions, GAAP operating margin increased 40 basis points to 11.9%, and gross margin was at an all-time record. Despite lower revenue, and a tax benefit of $0.06 per share in 2014, GAAP earnings per share were flat year-over-year. During the quarter, a number of technical and product introduction milestones were accomplished. We shipped our first uncooled or microbolometer-based infrared cameras that incorporate proprietary imaging algorithms. We had significant sales related to our new ultra-high-power subsea connectors. We successfully demonstrated state-of-the-art guided munitions technology, referred to as EXACTO, and we received the largest single after-market avionics order in the Company's history. Teledyne continues to have a broad and balanced portfolio of highly engineered products, and our business is diversified and resilient to changes in specific end markets. Given low oil prices and more precisely, excess exploration vessel capacity, we expected a decline in certain offshore energy markets. In January of this year, we specifically mentioned that certain energy businesses such as geophysical sensors used in offshore oil exploration, would decline as much as 25% to 35% in 2015. We continue to believe this will be the case, but for perspective, this particular business represents less than 5% of Teledyne's total revenue. However, as oil exploration-related revenue declined year-over-year, our business related to offshore energy production reported record sales and backlog remains healthy, given strong orders for new products and market share gains. In other markets, environmental instrumentation and avionics grew nicely from last year, offsetting some declines in our US Government businesses. In the first quarter, sales to the US Government, which represented about 24% of total sales, declined with much of the shortfall related to timing on orders and shipments, and some gaps in ongoing programs. Foreign currency translation primarily impacted our instrumentation and digital imaging segments, but acquisitions helped mitigate these declines. In our commercial businesses, total sales increased slightly, both in the US and internationally. Reported revenue, even net of FX translation, was stable in all major global regions with the notable exception of Europe. In the near term, we are not counting on a pickup in the global economy or a moderation in foreign currency headwinds. Also, last year we benefited by approximately $0.50 per share in earnings from tax benefits, including the R&D tax credit, as well as net legal settlements. Furthermore, despite freezing our non-qualified pension plan for the top 20 executives, non-cash pension expense has increased due to the lower discount rate in 2015. Because at this point we believe a more cautious view on sequential earnings improvement is prudent, and we have modestly adjusted our prior full-year outlook by $0.11 a share, or just shy of 2%. Teledyne's success depends on our ability to manage change, both operationally and strategically, across our portfolio of businesses. In those businesses that are growing, we're continuing to invest. In others, we're staying nimble and aggressively managing costs. Also, we will continue to make acquisitions, generate long-term growth, as well as attractive return on investment capital through implementation of operational excellence in our acquired businesses. I will now comment on our business segments, after which Sue Main will review some of the financials in more detail and provide an earnings outlook for the second quarter and full years 2015. Turning to the instrumentation segment, first quarter sales increased 4.4% from last year's. Sales of marine instrumentation increased 5.9%, despite a significant expected year-over-year decline in the sales of geophysical sensors that I previously mentioned. We also had, of course, negative impact of foreign currency which impacted this group specifically. As I mentioned previously, sales to offshore energy production industry remained very strong. Robust orders continued, resulting in stable backlog in businesses primarily serving this market. In the environmental domain, sales increased 10.4% which was all organic and reflected increased sales of both laboratory and field instrumentation, as well as greater sales of air monitoring and gas process [analyzers]. Sales of electronic test and measurement systems declined, with roughly half of the decline due to foreign currency translation. GAAP segment operating profit increased, and operating margin improved 109 basis points, due to higher sales and improved operating performance, especially within the environmental instrument group. Turning to the digital imaging segment, first quarter sales decreased 11.3% compared to last year, primarily due to lower sales from US Government R&D contracts, as well as specialty sensors for remote sensing applications. These were partially offset by higher sales of X-ray sensors or medical imaging. Sales of cameras for general industrial machine vision applications increased slightly, but were offset by declines in sales of cameras or semiconductor and electronic inspection. The year-over-year decline in government R&D is largely due to the conclusion of DARPA's Extreme Accuracy Task Ordinance Program, also known as EXACTO, or the guided bullet. Nevertheless, a milestone was reached in February during live-fire demonstration, which showed that the EXACTO was able to hit moving and evading targets with extreme accuracy, at sniper ranges unachievable with traditional rounds. We're hopeful that additional funding will become available for this and similar programs later this year. GAAP operating margin continues to increase, and was 77 basis points greater than last year. Turning to aerospace and defense electronics segment, first quarter sales decreased minus 7.9%, while US Government sales declined, our commercial avionics business has continued to perform very well. Operating profit declined due to lower sales and lower margins in a number of defense electronic businesses. However, due to cost reduction efforts, and an increase in orders recently, we expect improved sales and margins in the balance of the year. Turning to the engineered systems segment, first quarter revenue increased 6.2%, and operating margin increased 35 basis points. Both sales and margin benefited from the greater mix of marine and space manufacturing programs, and higher sales of energy system products such as commercial hydrogen generators. In conclusion, through acquisitions and strong cost control, we were able to mitigate headwinds from foreign exchange and the timing of certain government programs. We are also confident about sequential earnings improvement. However, we do not want to be overly optimistic or plan for a significant second half recovery in the global economy, or our specific end markets. And finally, our strategy remains the same. First, focus on highly engineered products for specialized end markets. Second, a commitment to operational excellence to improve margins. And third, continued investment including greater emphasis on acquisitions to grow our portfolio of businesses. I will now turn the call over to Sue Main. -------------------------------------------------------------------------------- Sue Main, Teledyne Technologies, Inc. - SVP, CFO [4] -------------------------------------------------------------------------------- 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 second quarter and full year 2015 outlook. In the first quarter, cash flow from operating activities was $16.7 million, compared with a cash flow of $27.1 million for the same period of 2014. The lower cash provided by operating activities in the first quarter of 2015 primarily reflected payments for legal matters, the payment of a scheduled earn-out obligation, and the timing of accounts payable payments, partially offset by lower income tax payments. Free cash flow, that is, cash from operating activities less capital expenditures, was $9 million in the first quarter of 2015, compared with $15.4 million in 2014. Capital expenditures were $7.7 million in the first quarter, compared to $11.7 million for the same period of 2014. Depreciation and amortization expense was $23.2 million in both 2015 and 2014. In February, we entered into an accelerated share repurchase, or ASR agreement, for 1.5 million shares at an initial price of $94.68. We ended the quarter with $719.8 million of net debt, that is, $830 million of debt and capital leases, less cash of $110.2 million, for a net debt-to-capital ratio of 35.1%. Turning to pension and stock compensation expense, in the first quarter of 2015, gross GAAP pension income was $0.2 million due to a one-time gain of $1.2 million from the freezing of our non-qualified pension plan, compared with gross pension income of $0.3 million in the same period of 2014. Stock compensation expense was $3.8 million in the first quarter of 2015, compared with $2.6 million in the first quarter of 2014. Finally, turning to our outlook, management currently believes that GAAP earnings per share from continuing operations in the second quarter of 2015 will be in the range of $1.30 to $1.34 per share. We expect full-year 2015 earnings per share of approximately $5.60 to $5.65. The 2015 full-year effective tax rate is expected to be 29.5%. I do want to emphasize a few items regarding our 2015 outlook compared to 2014. First, our pension assumptions include a discount rate decrease of 90 basis points, and changes in mortality assumptions, which will increase non-cash pension expense in 2015. Second, 2014 results benefited from net legal settlements, significant discrete tax items including $0.06 in the first quarter of 2014, and the 2014 R&D tax credit, which is not currently effective for 2015, as well as a slightly lower tax rate. I will now pass the call back to Robert. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [5] -------------------------------------------------------------------------------- Thank you, Susan. We would now like to take your questions. Linda, if you're ready to proceed with the questions and answers, please go ahead. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator instructions) We will begin with the line of Greg Konrad with Jefferies, please go ahead. -------------------------------------------------------------------------------- Greg Konrad, Jefferies - Analyst [2] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [3] -------------------------------------------------------------------------------- Good morning, Greg. -------------------------------------------------------------------------------- Greg Konrad, Jefferies - Analyst [4] -------------------------------------------------------------------------------- How you doing? Just want to start with Europe. In your prepared remarks, you mentioned that most markets were stable with the exception of Europe. Can you maybe give a little bit more color around that, in terms of just different end markets? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [5] -------------------------------------------------------------------------------- I think Europe was down, Greg, about -- I would say about 5% to 6%, somewhere in between those two, overall. Approximately 10% of our sales are in foreign currency, and in the first quarter, the foreign currency translation basically overall impacted our revenue by 1.5%. -------------------------------------------------------------------------------- Greg Konrad, Jefferies - Analyst [6] -------------------------------------------------------------------------------- That makes sense. And then, just in terms of US Government, you mentioned imagers for remote sensing were down in the quarter. Was that tied to any specific program, and what is the opportunity pipeline for that business? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [7] -------------------------------------------------------------------------------- The first one that I mentioned on the government, is we had a very successful demonstration of our program called EXACTO, which is basically a 50 millimeter bullet that can be guided by a sniper team. That program came to an end, and that was a pretty large program for us in our scientific business here. We expect some additional funding later, but there's a gap in funding there. We also have some gaps in our space programs, especially classified. And a few minor shortages in our microwave businesses, but we expect these to pick up between Q3 and Q4. So, I think most of the government program declines are temporary and timing-related. -------------------------------------------------------------------------------- Greg Konrad, Jefferies - Analyst [8] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [9] -------------------------------------------------------------------------------- Thank you, Greg. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Great, and next we will go to the line of Jim Ricchiuti with Needham & Company, please go ahead. -------------------------------------------------------------------------------- Jim Ricchiuti, Needham & Company - Analyst [11] -------------------------------------------------------------------------------- Thank you. Good morning. I was wondering if you could, Robert, perhaps elaborate on the growth you are seeing in environmental? You cited that as being one of the areas that's strong. And same with commercial avionics which I guess has been strong now for a couple of quarters? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [12] -------------------------------------------------------------------------------- Right. Let me start with the environmental, and then go to commercial avionics, Jim. On the environmental, we have a variety of programs ranging from water to air quality, to pharmaceutical laboratory techniques, to some food and beverage techniques, and food and beverage essentially using our processes to detect impurities. By and large, we've seen improvement in our air quality monitoring programs in both China and India. China recently has adopted a cap program for sulfur dioxide and NOx mass emissions, which provide sales opportunities for us. We also have stack flow monitoring systems. Air quality monitoring in China has stabilized, but it's picked up more in the US, ambient air quality monitoring, and it's better than it was last year. There's also some new APA standards for ozone, ground level ozone detection. So, all of these are helping us. In the remainder, if I move over to commercial aircraft and avionics, as you know, Jim, there are -- there's a tremendous backlog at both Boeing and Airbus. In 2015, that's anticipated to be about 11,500 planes, with the potential additional backlog this year of about 1,500. Now, we have content on various aircraft that is substantial for the size of the business that we run. Our backlog, I mean, some of these programs that I just mentioned, exceeds $600 million, and it's multi-year backlog. Now of course, we're sole source on a number of programs at Boeing, and so this is -- we've been gaining market share, by the way, in the retrofit domain, especially with our Wireless GroundLink products. So, we're kind of bullish about this business. The industry is doing well. The aircraft manufacturers have tremendous backlog, and the airlines are actually making money, expect it to make maybe $25 billion this year. So, that's a good business for us. -------------------------------------------------------------------------------- Jim Ricchiuti, Needham & Company - Analyst [13] -------------------------------------------------------------------------------- And one final question, I wonder if you can comment on the bookings in the quarter, and to the extent you can, maybe talk a little bit about how the bookings were in the various segments? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [14] -------------------------------------------------------------------------------- Okay. Overall, bookings for the Company was 1. It varies from the high of 1.3, 1.4, down to a low of 0.85. And fundamentally, if I went through the segment, I would say that aerospace and defense is close to 1, instruments by and large are at about 0.95, environmental is slightly over 1, digital imaging is under 1, at about 0.85, and our engineered system business is significantly over 1 because we want some long-range programs there. -------------------------------------------------------------------------------- Jim Ricchiuti, Needham & Company - Analyst [15] -------------------------------------------------------------------------------- Okay, great. That's helpful, Robert. I'll jump back in the queue. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [16] -------------------------------------------------------------------------------- You bet. You bet, thank you. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- All right, and next we will go to the line of Kevin Ciabattoni with KeyBanc, please go ahead. -------------------------------------------------------------------------------- Mike Ciarmoli, KeyBanc Capital Markets - Analyst [18] -------------------------------------------------------------------------------- Hey, good morning guys, it's actually Mike Ciarmoli. So, Robert, just on the guidance specifically, it sounds like there's some conservatism on the economy. But I mean, is there anything specific driving that $0.11? I mean, are you looking, is it just conservatism, or is it you know, are you seeing specific weakness in certain pockets? Because you know, I mean, this would be -- correct me if I'm wrong, but this is the first time you're guiding to down year-over-year GAAP earnings? I mean, since I can remember, at least going back to 2000. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [19] -------------------------------------------------------------------------------- Let me just -- two comments. It's going back to 2001, but I wouldn't say it's conservatism. I would say, I would use the word -- prudence -- in a more appropriate word. We are not counting on any tax benefits. You can't put tax -- we have very small amount of tax benefit compared to last year. We had about $0.38, between tax, one-time tax benefits and R&D. And you can't predict earnings based on that. If the R&D tax credit doesn't pass, or if we get some audit letter, or something happens, then you can't count on that. So, we kind of exclude most of that. Second, every day you -- whether you read the paper, listen to the Fed, or read other industrial companies like ours, everybody's cautious because of what the foreign exchange -- we haven't seen foreign exchange changes of this magnitude for a long time. And the other thing we have to be cautious about, is that our tax rate changes depending on how much foreign earnings we have, and with Europe being in the tank right now, we can't really count on that either. So, we're taking the guidance down less than 2%. I think it's prudent at this point, with everything that's going on in the world, and with the oil price being half of what it was last year this time. -------------------------------------------------------------------------------- Mike Ciarmoli, KeyBanc Capital Markets - Analyst [20] -------------------------------------------------------------------------------- Okay, that's fair. And should we think about, was the pension gain in the guidance for the year, and should we assume that you guys do the full buyback on the ASR? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [21] -------------------------------------------------------------------------------- Yes. Let me answer the second one, first. ASR is done for practical purposes. You basically reach an agreement with a financial institution, you take the shares, and they buy those shares over time. And the difference in the price of the shares either becomes a positive or a negative number, in terms of cash. But the shares are out. In terms of the pension, because of the change in the discount rate, as Sue mentioned, we expect overall a pension headwind of about $0.06 for the year versus last year. Now, if you look at it and say, we also have frozen or non-qualified pension, excluding that, it's more like $0.08. By freezing the non-qualified pension for highly compensated employees like myself, we were able to shave off a couple of pennies off that negative number. So, by and large we do have a pension headwind of $0.06 year-over-year, including the non-qualified freeze. -------------------------------------------------------------------------------- Mike Ciarmoli, KeyBanc Capital Markets - Analyst [22] -------------------------------------------------------------------------------- Got it, and then, did you guys -- I mean, on the order front, especially on subsea, I mean, you guys -- it sounds like with new products gaining share, you guys seem pretty confident. I know there's some press out there, but maybe more so on the offshore drilling side that we could see cancellations. But in terms of I guess your subsea order flow production, I mean, it seems like backlogs, everything holding up fairly well? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [23] -------------------------------------------------------------------------------- Yes, backlog is about 0.95 right now, and as you well know, the -- about 63% of new oil discoveries since 2010 have been in deep water, and that's where we excel. And those programs have long legs on them, they're multiple year, tens of billions of dollars investments. You can't shut them off quickly like you do in fracking. And there, we have both new products and we have for example, new high-power products which we're gaining market share with. These are products that go, let's say, 6 kilovolts with 900 amps. And we also have pressure temperature sensors; we also have Ethernet products, optical and electro-optical products. So, we're increasing content and gaining share. -------------------------------------------------------------------------------- Mike Ciarmoli, KeyBanc Capital Markets - Analyst [24] -------------------------------------------------------------------------------- Got it, perfect. Thanks, guys. I'll jump back in the queue. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [25] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Next, we'll go to the line of Steve Levenson with Stifel. Please go ahead. -------------------------------------------------------------------------------- Steve Levenson, Stifel Nicolaus - Analyst [27] -------------------------------------------------------------------------------- Thanks, good morning, everybody. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [28] -------------------------------------------------------------------------------- Good morning, Steve. -------------------------------------------------------------------------------- Steve Levenson, Stifel Nicolaus - Analyst [29] -------------------------------------------------------------------------------- On the government revenues, where you said there was a timing difference, can you tell, was that administrative or was it related to funding? Is it something that'll continue, or something that'll catch up? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [30] -------------------------------------------------------------------------------- It's both. Some of it is administrative, and I would say those are just programs that are getting pushed off a little bit. Some of it is a funding gap at the present time, I mentioned the EXACTO program. And some of it, Steve, is on us. We have an [agents] traveling wave tube program that is really looking for strong production, and in Q1, [at least] we hadn't made these traveling wave tubes for a number of years. We stumbled a little bit. We solved the problem now, and some of it is on us. And so, it's a mixture of three things. You didn't mention the stumble, but I will. But we've recovered now, and that program is moving ahead as it should be. -------------------------------------------------------------------------------- Steve Levenson, Stifel Nicolaus - Analyst [31] -------------------------------------------------------------------------------- Got it. Thank you for that information. So that's retrofit, I take it? For the most part? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [32] -------------------------------------------------------------------------------- Actually, on the [agents] program, these are new products. We've had, we have retrofit products, but we also have -- these are also, we make spares for existing radar. So, they're not retrofit as such, but they're spares. -------------------------------------------------------------------------------- Steve Levenson, Stifel Nicolaus - Analyst [33] -------------------------------------------------------------------------------- Got it. Last question on the strength of the dollar, are there any foreign acquisition targets that were too expensive for you before that maybe the strong dollar will help you with now? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [34] -------------------------------------------------------------------------------- Yes, I just had an example of that, is earlier this morning we announced that we bought the remaining 49% of Optech, is the LIDAR company, laser company, that -- when we initially decided to -- well, we always wanted to buy it all, but now it was 20% cheaper than it was when the first time we looked at it a while back. And there are other foreign acquisitions, especially in Europe, that we're looking at. Also, you know, when you have cash parked in Canada or overseas, that cash earns essentially nothing. We had over $100 million outside the US, so we intend to use that cash. Good question, thank you. -------------------------------------------------------------------------------- Steve Levenson, Stifel Nicolaus - Analyst [35] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- All right, next we'll go to the line of Chris Quilty with Raymond James, please go ahead. -------------------------------------------------------------------------------- Chris Quilty, Raymond James & Associates, Inc. - Analyst [37] -------------------------------------------------------------------------------- Thanks, Robert. Wanted to follow up on your comments earlier about the oil and gas market. I think you had said your geophysical sensors was -- you were predicting down 25% to 35%, and my question was, are you sticking with that original guidance that you provided previously, or have you ratcheted that down? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [38] -------------------------------------------------------------------------------- Yes, I think Chris, it's probably going to be closer to 40%. It depends. We have probably this -- we don't have - I'm not able to mention the name, but we have probably the singular customer that still has vessels and is very successful in what they do, because of the 3-D accuracy of their streamer cables which we produced for them, and their ability to get data, really robust data, from those. But having said all of that, everybody's parking their vessels now, including our largest customer. So, we don't see any light at the end of that tunnel. It's down about 39%, to be precise. It's down about 39% this quarter. On the flip side of that, Chris, is that similar cables are used in the military, and we are bidding on a couple of very large programs, because we have unique capabilities in making these large streamer cables. And as you -- as a former Navy man know this better than I, those are the kinds of things you use around vessels to detect acoustic signals. -------------------------------------------------------------------------------- Chris Quilty, Raymond James & Associates, Inc. - Analyst [39] -------------------------------------------------------------------------------- Okay. Also, you mentioned what percent of business was exchange, or of revenues, were exposed to foreign currency? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [40] -------------------------------------------------------------------------------- I'm not -- the thing is, we have about 45% international sales of which 10% are directly affected by foreign currency, and when we look at that carefully, that cost us about $8 million in revenue and about 1.5% of our revenue. The flip side of that also, also the negative side of that, as you well know, Chris, is that yes, you get less revenue because of the foreign currency. But, you also are selling in foreign currency and you have to lower your prices to be able to compete. So, it's a double-whammy, but we're weathering it. We're taking costs out and we'll be fine. -------------------------------------------------------------------------------- Chris Quilty, Raymond James & Associates, Inc. - Analyst [41] -------------------------------------------------------------------------------- How about with Canada? I mean, you've just gotten a nice discount on your cost of sales there, with DALSA. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [42] -------------------------------------------------------------------------------- Yes. Canada is the flip side. That's why I said, 10%, because we have 45% international sales, Canada is the flip side where we produce products in Canadian dollars and we sell them primarily in US dollars. So, that's the flip side of the benefit. That's why it only comes down to 10%. Otherwise, it would be as high as 25%. -------------------------------------------------------------------------------- Chris Quilty, Raymond James & Associates, Inc. - Analyst [43] -------------------------------------------------------------------------------- Okay. And the Bolt acquisition, I know you were projecting that business to be down, just due to the end markets they serve. Is it you know, about on track for your expectations, underperforming, or outperforming? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [44] -------------------------------------------------------------------------------- It is, when we acquired it, the exploration market was about where it is now, the projection. The sales are a bit weaker, not much, but a bit weaker than what we were started projecting. But the operating profit is unplanned, and you know, we will -- we're very aggressively integrating that. And as you know, once we begin our integration processes, our margins improve. So, they'll probably start pretty well. -------------------------------------------------------------------------------- Chris Quilty, Raymond James & Associates, Inc. - Analyst [45] -------------------------------------------------------------------------------- Okay, and I just wanted to confirm, was it true that the -- with the DARPA EXACTO video that that was you, as the untrained shooter? (laughter) -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [46] -------------------------------------------------------------------------------- (laughter) I wish I could say yes, but the fact is, it wasn't. It was one of our -- actually, I think it was one of our customers, that was testing it. And it was someone -- by the way, the shooters were engineers, here. So, it was an interesting experience. -------------------------------------------------------------------------------- Chris Quilty, Raymond James & Associates, Inc. - Analyst [47] -------------------------------------------------------------------------------- That's both scary and good, I guess. Good luck on that program. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [48] -------------------------------------------------------------------------------- Thank you, Chris. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- All right, and next we'll go to the line of Mark Jordan with Noble Financial. Please go ahead. -------------------------------------------------------------------------------- Mark Jordan, Noble Financial Group - Analyst [50] -------------------------------------------------------------------------------- Good morning, Robert. Question on the engineering services business. I know a few years back, you had a couple of programs that had long gestation periods, for example the special forces delivery vehicle. I was wondering if, is there anything in that portfolio that may mature into volume productions in the latter part of the year, that will move the needle for that segment? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [51] -------------------------------------------------------------------------------- Yes, I think what I -- let me just make a broad comment. I think in that segment, we expect incremental improvements in revenue as we go through the year. The program that -- the first program, underwater vehicle, is called the Shallow Water, or SWCS vehicle, that's used for Navy SEALS. And we will go into low-rate initial production next year. I think we will have two boats, maybe three, next year, max, but these are very sizeable boats, and we have the test facilities which are the more important, they're also a part of the program, which is a very large water pool to be able to test these boats. It's a very good program for us, and very successful, and the total potential revenue in that program is about $680 million. The other program, again, related to underwater that we've had, is our program for gliders, underwater vehicles that use buoyancy to go up and down. And in that program, we have about, so far up to end of 2014, we've gained -- we've sold about $28 million. These are used by the Navy for sensing in front of battleships, sensing the properties of the water, so they can predict acoustic signals more accurately. And we project that in the next five years, we will have another $50 million of revenues in our glider program, so those are the two big programs that relate to water, and underwater capabilities. -------------------------------------------------------------------------------- Mark Jordan, Noble Financial Group - Analyst [52] -------------------------------------------------------------------------------- Okay. Given the currency headwinds that you face, could you make some comments as to what type of growth rate, either overall or by segments, that you might expect for the year now? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [53] -------------------------------------------------------------------------------- Yes, and I'll -- I'll just give it to you in an organic mode, if I may. And I think the currency will remain -- will hit us the same as it has throughout the year. So, it's -- right now it's affecting us 1.5%. Let's say we'll stay there. I think what will happen, that on a GAAP basis, we probably would end up with positive revenue of between very low single digits, between 1% and 2%. So, we'll make up the 1.5% and gain between 1% and 2%. I think if you looked at, you asked me about the segments. I think digital imaging will be flat. It doesn't have as much foreign currency headwind because of what Chris asked, and I answered. Nevertheless, there is some softness in that market, especially in flat-panel quality inspections in Southeast Asia. I think our aerospace and defense would be up, probably a couple of percent. Engineered systems would be up as they were in Q1, maybe a couple of percent overall. And instruments should be relatively flat. The FX there is hitting us harder than other areas; the FX is affecting us about 2.5% in instruments. So even with that, I think we should be up about 1%. -------------------------------------------------------------------------------- Mark Jordan, Noble Financial Group - Analyst [54] -------------------------------------------------------------------------------- Okay, thank you very much. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [55] -------------------------------------------------------------------------------- You bet, Mark. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Next we'll go to the line of Jim Ricchiuti with Needham & Company, please go ahead. -------------------------------------------------------------------------------- Jim Ricchiuti, Needham & Company - Analyst [57] -------------------------------------------------------------------------------- Yes, just wanted to follow up on the questions about acquisitions. Is it fair to say that looking at the portfolio, you are looking to perhaps beef up more of the instrumentation business? And I would assume that you're probably full up in the energy area, so is that -- would you look more in environmental and electronic? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [58] -------------------------------------------------------------------------------- You're correct, Jim. I think -- but the instrumentation, and digital imaging I would say, they carry -- there's a large spread there. We have in instrumentation for example, we have LeCroy, which is test and measurement. I like that area. I like the area because in terms of our core competencies across the company, in digitization and microwave, and in general, digital analytics of signals, we would like to see if we can get something there. But if you move away from there, it is the more traditional areas, and we're always looking for environmental acquisitions. Underwater, I think we might do some more, but it would be non-oil related. It would be more in the domain of being able to analyze signals, or do large-scale mapping of ocean currents and densities, et cetera. And lastly, I think the one area that is in digital now, obviously, is X-rays. We're making good progress there. We have really the world's most sensitive CMOS X-ray sensors, that give you the best digital images at very low dosages. We'd like to make more acquisitions in that area, to kind of enhance our ability to supply our customer a more system-level product. -------------------------------------------------------------------------------- Jim Ricchiuti, Needham & Company - Analyst [59] -------------------------------------------------------------------------------- Got it, that's helpful. And just on the subject of LeCroy, excluding currency, is that -- Robert, is the business flattish? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [60] -------------------------------------------------------------------------------- Yes, it's probably down about 1% year-over-year, not because just of currency affected it, about 1.5%, maybe as much as 2%. But what affects it is, Europe's been the strongest market, and since Europe, regardless of currency, is stagnant, relatively stagnant, we've taken a little bit of a hit there. The flip side of that is, that they have introduced a significant number of new products, and we expect that those would do very well. They have, of course, the highest bandwidth, 100 gigahertz product at the very top end, then introduce some new products at the lower range, and you know, they're the company that really developed a whole new market for their 12-bit scope. So, we're very comfortable with that business staying where it is for now, until Europe does better and until the FX problem is partially mitigated. -------------------------------------------------------------------------------- Jim Ricchiuti, Needham & Company - Analyst [61] -------------------------------------------------------------------------------- Got it, thank you. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [62] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Next we'll go to the line of Kevin Ciabattoni with KeyBanc, please go ahead. -------------------------------------------------------------------------------- Mike Ciarmoli, KeyBanc Capital Markets - Analyst [64] -------------------------------------------------------------------------------- Hey thanks, it's Mike again. Hey, Robert, just real quick, the acquired revenue contribution this year from Bowtech and taking the remaining stake in Optech, is that a meaningful portion of revenues, or can you talk maybe just in general how it -- you know, significant contribution, or negligible? -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [65] -------------------------------------------------------------------------------- The Optech is none, because we own 51%, Kevin. As you know, you consolidate revenue. You put earnings or losses, the portion that you don't own, you put it below the line. So, from a revenue perspective, that would not continue because it's already consolidated, has been, in our revenue stream since we've got the 51%. On Bolt, and more recently, we just bought Bowtech which is an underwater visual camera company, I think we will have about $45 million to $55 million in revenue this year from those two acquisitions. And these are incremental, obviously. -------------------------------------------------------------------------------- Mike Ciarmoli, KeyBanc Capital Markets - Analyst [66] -------------------------------------------------------------------------------- Perfect, thanks, guys. -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [67] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- (Operator instructions) -------------------------------------------------------------------------------- Robert Mehrabian, Teledyne Technologies, Inc. - Chairman, President, CEO [69] -------------------------------------------------------------------------------- Operator, thank you very much. We will just stop there, and I'll now ask Jason to conclude our conference call, please. -------------------------------------------------------------------------------- Jason VanWees, Teledyne Technologies, Inc. - SVP, Strategy and M&A [70] -------------------------------------------------------------------------------- Thanks Robert, and again, thanks everyone for joining us this morning. If you have any follow-up questions, of course please feel free to call me at the number listed on the earnings release, and all our releases are available on our website, Teledyne.com. Operator, if you could please conclude the call and provide the replay details, we'd certainly appreciate it. Goodbye, everyone. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- Ladies and gentlemen, this conference will be available for replay after 10:00 a.m. Pacific today, until May 30, 2015, at midnight. You may access the AT&T Replay System at any time by dialing 1-800-475-6701, and entering the access code 352688. International participants may dial 1-320-365-3844, and enter the access code 352688. That does conclude our conference for today. Thank you for your participation. You may now disconnect.
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