Teledyne Technologies Q1 2023 Earnings Call Transcript

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April 26, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne First Quarter Earnings 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. As a reminder, this conference is being recorded.

Operator

I'd now like to turn the call over to our host, Mr. Jason Van Wyss. Please go ahead, sir.

Speaker 1

Thanks, Brad, and good morning, everyone. This is Jason Van Weave, Vice Chairman, and I'd like to welcome everyone to Teledyne's Q1 2023 earnings release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Chairman, President and CEO, Robert Mehrabian SVP and CFO, Sumain SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibic and also Edwin Rogs, Executive VP After remarks by Robert and Sue, we will ask your questions. Of course, though, before we get started, Please be aware 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 actual results may differ materially.

Speaker 1

In order to avoid potential selective disclosure, this call is simultaneously being webcast and the replay, both via webcast and dial in, will be available for approximately 1 month. Here's Robert.

Speaker 2

Thank you, Jason. Good morning, everyone, and thank you for joining our earnings call. We began 2023 with record 1st quarter sales, operating margin, non GAAP earnings and free cash flow. Overall, sales increased 4.7% with revenue and operating profit growing in every segment. Excluding foreign currency headwind, which negatively impacted 1st quarter sales growth by approximately 1.4%, Growth in local currency would have been 6.1%.

Speaker 2

Excluding Acquisitions core growth in local currency would have been approximately 4.2%. GAAP operating margin of 17 point 5% and non GAAP operating margin of 21.1% were also 1st quarter records. 1st quarter GAAP earnings per share were $3.73 and non GAAP earnings of $4.53 were also 1st quarter record. Given record 1st quarter cash flow, Our consolidated leverage ratio declined to 2.3 even after completing the Chartwell acquisition at the beginning of the quarter. We also repaid $300,000,000 of debt, which matured on April 3, on the 1st day of Q2.

Speaker 2

Turning to our 2023 full year outlook. We are reaffirming our prior sales and non GAAP earnings As supply chain challenges improved modestly, we were able to exceed our original 1st quarter sales and earnings outlook by pulling forward some revenue from the 2nd quarter. Consequently, By maintaining the full year guidance, we've also modestly de risked the quarterly sequential revenue and earnings slopes. While our short cycle businesses are more economically sensitive, They were resilient in the Q1. We are now a little more cautious.

Speaker 2

On the other hand, we are more positive in our longer cycle medical, aerospace, defense and marine businesses. On revenue, Specifically, we continue to see total 2023 growth of approximately 5% or sales of approximately $5,730,000,000 with the 2nd quarter being roughly $1,400,000,000 Regarding margins, our earnings outlook now implies approximately 40 basis points of margin improvement for the full year 2023. Currently, we think the Instrumentation segment will be above average contributor to this, while margins in the other segments may increase more modestly. I will now further comment on the performance of our 4 business Our Digital Imaging segment Was founded on our first acquisition in 2006 of Teledyne Scientific, our research laboratories And Imaging, which provides high end infrared sensors for space and astronomy. Since then, This segment has grown organically and through acquisitions such as DALSA, E2V, Scientific Cameras, FLIR and most recently, ETM and CharGuard to contribute almost 56% of Teledyne's revenue today.

Speaker 2

1st quarter sales in this segment increased 4.7% on a cost of currency basis with foreign currency translation contributing negative 1.8%. Sales increased year over year for Industrial and Scientific Vision Systems as well as for our low dose high resolution digital X-ray detectors, but were offset by lower sales of unmanned ground systems for defense applications. Our product families increased or decreased more modestly with higher sales of surveillance, unmanned air systems and specialty semiconductor devices offset by some lower sales of certain Segment operating margin increased 40 basis points to 15.8% And adjusted for a reduced intangible asset amortization, non GAAP margin decreased 13 basis points and it was lower at 21.75%. Turning to our Instrumentation segment, it is comprised of marine, test and measurement and environmental instruments and contributes about 24% to Teledyne's revenue. Overall, 1st quarter sales increased 8% versus last year's with sales growing in all Sales of marine instruments increased a healthy 14.6% in the quarter, primarily due to strong marine defense sales, especially autonomous underwater vehicles as well as ongoing recovery Sales of electronic test and measurement systems, which include oscilloscopes, Digitizers and protocol analyzers collectively increased 5.3% year over year despite a tough comparison with the Q1 of last year.

Speaker 2

Some softness in sales of analyzers And electronic storage and high speed networking applications was more than offset by devices for wireless and video protocols as well as very strong sales of oscilloscopes and related accessories. Sales of environmental instruments increased 3.4% compared with last year with greater sales of air quality, process gas and safety analyzers, partially offset by Drug Discovery and Laboratory Instruments. The other two segments of Teledyne Our Aerospace and Defense Electronics and Engineered Systems that together contribute 20% of Teledyne's revenue. In the Aerospace and Defense Electronics segment, 1st quarter sales increased 4 2% driven by growth of both Defense and Commercial Aerospace Products. GAAP and non GAAP segment operating profit increased approximately 9.6% with margins 132 basis points greater than last year.

Speaker 2

In the Engineered Systems segment, 1st quarter revenue increased 9.1% and operating profit increased 6 0.4%, resulting in a modest 25 basis points decline in margin from last year. Finally, first, because of our unwavering focus on improving on All aspects of Televine's operations and second, prudent capital allocation and third, the broad Geographic and end markets that we serve from short cycle to long cycle, commercial to defense, I'm optimistic that Teledyne will successfully navigate through today's uncertain economic times as we have consistently Our record also shows that we have successfully dealt with multiple economic turmoils and during the ensuing recoveries have been able to acquire complementary enterprises for compounded growth. I will now turn the call over to Sue.

Speaker 3

Thank you, Robert, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our Q2 and full year 2023 outlook. In the Q1, cash flow from operating was $203,000,000 and primarily reflected higher accounts receivable collections compared with the Q1 of 2022. Free cash flow, that is cash from operating activities less capital expenditures, was $178,600,000 in the first quarter of 2023 compared with adjusted free cash flow of $58,700,000 in 20.22. The 2022 adjusted value excluded a $296,400,000 payment to the Swedish Tax Authority related to a FLIR pre acquisition tax reassessment.

Speaker 3

Capital expenditures were $24,400,000 in the first We ended the quarter with approximately $3,160,000,000 of net debt, that is approximately $3,820,000,000 of debt, less cash of $665,200,000 Stock based compensation expense was $7,900,000 in the Q1 of in 2023 compared with $9,000,000 in 2022. Turning to our outlook. Management currently believes that GAAP earnings per share in the Q2 of 2023 will be in the range of $3.76 to $3.88 per share with non GAAP earnings in the range of $4.56 to $4.66 And for the full year 2023, our GAAP earnings per share outlook is $15.80 to $16.05 And on a non GAAP basis, we are maintaining our prior outlook of $19 to $19.20 The 2023 full year estimated tax rate, excluding discrete items, is expected to be 23%. I will now pass the call back to Robert.

Speaker 2

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

Operator

You can withdraw your question at any time by repeating the 1 0 command. And if you

Speaker 2

have

Operator

We can first go to Jim Ricchiuti with Needham and Company. Please go ahead.

Speaker 4

Hi, thank you. Good morning. Robert, I'm wondering if you could Talk a little bit about the shorter cycle areas of the instrumentation business. I think you gave some color about That digital imaging short cycle business. But if you look at instrumentation, any changes that you're seeing in that shorter cycle business?

Speaker 2

Not much. There's a little bit of in one of our businesses, which is our test and measurement, We make protocol solutions provide protocol solutions to the Electronics Industry, there we have some new product protocols coming out. So people are a little Waiting for the new ones and maybe not buying the old ones. Other than that, we're the Book to bill is almost 1. Oscilloscopes are doing well.

Speaker 2

And in the TNMs, we feel We feel all right. On the environmental, the only thing that there's a little softness that we're experiencing In the pharmaceutical market where we supply a whole range of products There, but we're making that up by some of our air quality and other products That are doing well in this environment. So overall, I think we're doing okay.

Speaker 4

Got it. Since you were good enough to give us a book to bill, which I think it was for the entire instrumentation business, I'm wondering if you could provide some book to bill Any color on digital imaging and the aerospace and defense and maybe the company as a whole? Thank you.

Speaker 2

Yes. Jim, on the instrumentation, if you put marine in, which We didn't talk about. Marine has got a book to bill of 1.12. So it's very healthy. So because of that, it pulls instrumentation as a whole above 1 to 1.04.

Speaker 2

Going to digital imaging, book to bill is less than 1, not substantially, but less than 1, primarily I think Because of some of the ground based defense systems that we have, which is about a little over 0.9. But having said that, we have some really large orders And we've also post quarter had a large order for our Black Hornet, Small Air UAVs, When we had right after the quarter, as an example, we had a $94,000,000 award for dose. And by the way, those are also in high demand in the Ukraine conflict. So overall, I'm encouraged with what's Happening in Digital Imaging, there's been a little lag in the defense part, but that's coming up as the backlog is filling in and We have better orders this quarter, Q1 than we did last year. And then on the AD and E side, I think book to bill is 1.05.

Speaker 2

Engineered Systems is close to 1, but that's lumpy. So I think we're going to be fine there. Overall for the company, I'd say when you add all those numbers up, it's slightly less than 1, Maybe 0.96, 0.97, but that's not a very great concern at this time. We're just being cautious as we always are because of the uncertain times that everybody is facing. Other than that, I feel pretty good about our portfolio and its resilience.

Speaker 4

Got it. And just final question, if I may, just in light of that, some The uncertainty that's out there, I think you've talked about M and A. Should we still think Mainly about M and A, this year is more tuck in related and then potentially As we come out of this, there might be some opportunities for larger deals in 2024. Is that the better way to think about M and A again without being Specific, which I know you can't be.

Speaker 2

No, I understand, Jim. I think that's a good analysis. There might we're obviously chasing some what we call string of pearls M and As. It's possible that we might end up with something more midsized near the end of the year, But definitely with our balance sheet, we have right now, we have The drawn down on our line of credit, which is about $1,150,000,000 We've only drawn down $25,000,000 and it's sitting there. We've paid all of our debt that's coming due And we don't have any debt payments until 2024.

Speaker 2

And we have A lot of capacity for to do larger deals as the opportunity comes and of course, we're looking at things. But you're right, Larger deals take time and it would probably be more like early 2024 or sometime in 2024.

Speaker 4

Got it. Thanks very much.

Speaker 2

Thanks, Jim.

Operator

And next we can go to Greg Konrad with Jefferies. Please go ahead.

Speaker 5

Good morning.

Speaker 2

Good morning, Greg.

Speaker 5

Maybe just to revisit Digital Imaging, Is there any way to kind of decompose the organic growth just given your short cycle commentary? When you think about healthcare, Machine vision, space and maybe the legacy FLIR business, just kind of what trends you're seeing? And you mentioned being more cautious on sort cycle, like How are you thinking about digital imaging for the year?

Speaker 2

Well, first, let's start with Q1, organic and that's also do what you suggested, which is stay with first What we would call our historical digital imaging, which is DALSA, E2B and associated companies. There we had a healthy organic growth in Q1 of 6.2%. Healthcare Grew 9.2% and MEMS grew 8.8%. So overall, we're very happy with that. And some of those Like a smaller cycle, Vision Systems had a healthy growth rate there.

Speaker 2

On the clear side of the equation, which would be the newer Digital Imaging. We have both positives and negatives. Overall, we have a contraction of about 4.8%, But that was primarily driven by our unmanned systems and primarily in the Unmanned Drone Vehicle Systems. As I said, after the quarter, we've had some very healthy awards In our UAVs, which are unmanned air vehicles, surveillance defined, It was +5%. Tomography was down a little bit, a little under 4 But uncooled and cooled cores, which are our infrared cores, they were up 3% And Industrial Vision System was up almost 19 over 19%.

Speaker 2

So it was a mixed bag. The drag down for that business was primarily in the Defense and Primarily Unmanned Ground Systems. Now we had a little softness In Tomography and Maritime, which is our marine businesses. But overall, I think we were okay. We just have to fill out the backlog

Speaker 5

And this Might just be miss modeling on my part, but I mean margin seemed a little light in digital imaging In the quarter, can you maybe talk about price mix going forward and how you're expecting margins to trend for the year given your commentary? I think you still expect them to be up just to a lesser degree than the total 40 for the company.

Speaker 2

Well, Right now, what I see is, I expect the margins to be up about 30 basis points for the year. Let's start with the year. And this is the overall Digital Imaging margin. So let me Put that on one side. I think in Q2, we'll improve sequentially on our margins and we should be fine.

Speaker 2

And we've had we're also going to take some price actions to make sure that we get there. On the overall for the company, we think the margins now would increase 40 basis points for the year. And if we can have better price increases going forward, we should improve on that. So, when I look at it, I say, look, if we're not instruments businesses, we're going to have margin For the year of almost 80 basis points, digital imaging about 30 basis points, Aerospace and Defense is so healthy that I'll be happy to just keep our 27.1% Operating margin, Engineered Systems will probably increase 50 basis points and overall the segments 40 basis points and the company about 40 basis points. That I hope that helps you.

Speaker 5

That was perfect. I'll leave it at 2. Thank you.

Speaker 2

Thank you.

Operator

And next we have Elizabeth Grenfell With Bank of America, please go ahead.

Speaker 3

Hi, good morning.

Speaker 2

Good morning, Gabby.

Speaker 3

Could you Give us some color on defense on a consolidated basis for the quarter and then what your expectations are for defense growth On a consolidated basis for the year,

Speaker 6

thank you.

Speaker 2

Yes. Sure. I think overall, In Q1, Defense was flat year over year. And we think for the year, It will be probably lowtomidsingledigitgrowth in our defense businesses. The primary reason, again, I'm saying the U.

Speaker 2

S. Government programs were flat, primarily driven, as I said, but The unground vehicles, unmanned ground vehicles, we think for the year, We're probably growing the mid single digits in the all defense.

Speaker 3

Great. Thank you

Speaker 2

very much. Appreciate it, Esther.

Operator

And next we can go to Joe Giordano with TD Cowen. Please go ahead.

Speaker 7

Hey, good morning, guys.

Speaker 4

Good

Speaker 7

morning, Phil. You talked about pulling forward some revenue from 2Q into 1Q. Can you Give some detail there as to like where it was and what that means for that business from here?

Speaker 2

I think basically, we pulled in about $10,000,000 and most of that was in instruments Most of that was in our Marine businesses. We shipped more underwater vehicles in Q1 that we'd We had some really good orders. We actually have good orders for Q2 also. So That was just to ensure that we hit what we expected to And also, as I said, that was affected by the fact that we're having improvements In our supply chain, we're seeing improvement, significant improvement and expect that to continue the rest of the year Based on what we're seeing and based on what the Chief of Procurement is doing with various companies. So That's why we pulled it forward.

Speaker 2

We felt we could and did.

Speaker 7

No, that makes sense. Now when I think about the full year guide, I mean, so you come in Basically at the high end of your guide here, you're guiding the 2nd quarter, high end is basically in line with consensus. You guys tend to beat, you're holding the full year. Understanding that the macro is uncertain, like, are you trying to give the impression that the second half is weaker than you thought 3 months ago or you kind of like derisking that full year guide? Like how should we think about the what read between the lines there?

Speaker 2

Between the lines, I don't think it's going to be weaker except if something terrible happens. It's I feel good about look, as you know, we're always more conservative. I can go out and Say we're going to make a lot more in our earnings per share and we probably could. On the other hand, With the uncertain environment that we're facing with semiconductors being down, everybody is projecting semiconductors will recover in 2024, not this year, Both equipment and supply. And we obviously we serve those markets.

Speaker 2

I'm being cautious as we always are. But I don't think the second right now, I don't think the second half is going to be weaker. I think it's going to be actually stronger. If you look at earnings per share, They have to improve in the second half of the year for us to make the 2019, 2010 that we projected or 2019, 2020 if you want to take the high end.

Speaker 7

Yes. Okay. Two more quick ones for me. You started off the year free cash flow was pretty high. Like what are your expectations For the year now, does that go up higher than what you thought before?

Speaker 7

And then just curious on the supply chain improvement and the lack of having to pay As much great market, like how much benefit is that of that 40 bps, like how much you're getting from there? And where is it getting offset from in other elements of cost? Thank you.

Speaker 2

Let me start with the free cash flow. We're going to beat last year's free cash flow by a couple of $100,000,000 Let's just say $850,000,000 is our current estimate. I hope we can do better than that. And we have just continued deleveraging the company, gets ready for when all of this is uncertainty is behind us and Use our capability and ability to buy things that have not perhaps done as well in this Coming back to the supply chain, we've seen improvement in Q1. Last year In Q1, we our brokerage we bought about $23,000,000 of goods from brokerage and that those we pay 70% premium, let's say.

Speaker 2

This year, Q1, the same type of thing cost us about half as much as that. And so that's a savings, obviously. But more importantly, if you look at revenue That's being affected by the shortages. That is improving, which is much more comforting to me because it makes Our revenue projections a little more predictable because we don't have we're not missing a lot of revenue Because we don't have parts. So there's improvements in the supply chain.

Speaker 2

We're seeing that. There's improvements The premium that we're paying and also the fact that We're not going to miss as much revenue because we can't ship products because they're sitting on the shelf waiting for 1 or 2 parts.

Speaker 7

Thanks very much.

Speaker 2

For sure.

Operator

And next we've got Guy Hardwick with Credit Suisse. Please go ahead.

Speaker 8

Hi, good morning.

Speaker 2

Good morning, Guy. I think

Speaker 8

the previous Good morning all. I think the previous guidance for at group level was a 50 basis points improvement in the adjusted margin. So Now guiding to 40. So what are the kind of the main parts of the change? And is it biased towards digital imaging?

Speaker 2

Actually, what we have is a mixture. January, you're perfectly correct. We guided 50 basis And now we're guiding 40 basis points. We're taking Some guidance down in instrumentation from January to today. We have over 100 basis points.

Speaker 2

We have posted to 80. Digital Imaging, we're taking down About 10 basis points all in. Aerospace and We're actually guiding flat and we had it going down. And so that's good. And then in Engineered Systems, we have a moderate up, which is smaller business, but we still have a moderate 45 basis points or so up.

Speaker 2

So overall, I think we'd be at 40. Again, We hope to do better than that. And the way to do better than that is if we can stick some more price increases in our portfolio because Inflation is moderating. Nevertheless, our Wages are going up 4.5% to 5%. Our purchasing of direct and indirect goods It's going up with inflation.

Speaker 2

And so we have to catch up a little more with Price increases to make up for those in order to keep our be able to increase our margins. That's the kind of uncertain part. How much can we gain from price increases? 1st quarter, we were okay. We made up what we paid out and we're a little positive actually.

Speaker 2

So, the rest of the year, can we keep that pace of reasonable price increases to make up for inflation in both Good as well as wages.

Speaker 8

And is the intention to be price cost neutral or do a little bit better than that?

Speaker 2

I'd like to do better than that for sure. Last year, we were negative By 60 basis points, this year I hope to be positive.

Speaker 8

And just to follow-up on the broker purchase, I Believe that you said that it was SEK 70,000,000 incremental last year. What does your guidance imply in terms of lowering that SEK 70,000,000

Speaker 2

It's hard to tell at this point, but if I were to Take the Q1 and project it out, I'd say half.

Speaker 8

So potentially $35,000,000 to $40,000,000 lower?

Speaker 2

Yes, dollars $70,000,000

Speaker 8

lower broker purchases?

Speaker 7

Yes, yes.

Speaker 2

Approximately. Again, that's a moving target. So far, we've been Successful. As the semiconductor industry has gone down, as you can expect, The parts that were in shortage, some of them have become available. Some of them are the harder parts to get the FPGAs, etcetera, are Still harder to get.

Speaker 2

So it's a mixture. But things are improving, which makes me feel positive.

Speaker 8

And just one final one for me. Is there any sort of mix effect either positive or negative in digital imaging in terms of the margin?

Speaker 2

No, I don't believe so.

Speaker 8

Okay. Thank you.

Speaker 2

For sure.

Operator

Stanley?

Speaker 6

Hey, good morning, everyone.

Speaker 2

Good morning, Kristin.

Speaker 6

Robert, on the supply chain, just want to follow-up on the premiums paid to brokers for component sourcing. So you've talked about how that's declined. And is that because traditional sources have reopened and therefore you're now sourcing less parts from these brokers Or are you seeing more availability of parts and there's not as much of a scarcity and therefore their premiums have declined? Can you provide more color on what's driving the dynamic there?

Speaker 2

Yes. The big picture is that We're able to buy more from the OEMs than from brokers. We Obviously, prefer to buy from OEMs because the prices are stable, but it might be price increases versus last year. But brokers, you end up paying premiums of 70% to them. So That's the big picture.

Speaker 2

And the availability is improving. It's very interesting, Just anecdotally, there have been a few brokers that have called us asking us if we want some of their parts. Last year, we were out there begging for parts. And obviously, if that were to happen, I look at that as they have some obsolete There were some excess supply and we buy them, but we buy them at a discount to what we pay to the OEMs. So The market is improving.

Speaker 2

I like that.

Speaker 6

Great. And then, you mentioned that you anticipate that you can pass Whatever inflation costs that you have into pricing, so that should be a net positive for you. But can you talk about the demand environment? What's been the customer sensitivity to pricing? And right now, if you look at the financial markets, we've had 2 regional bank failures last month and there's more uncertainty today.

Speaker 6

Is that macro environment affecting your customers' decision for capital purchases or to have some sort of a pricing sensitivity?

Speaker 2

Yes. The answer to it is yes. On the other hand, Because we're in such a diverse market, if you look at some of our longer Cycle businesses, as I mentioned, like Marine, we're energy dependent, some of our defense businesses, Others, they're not as price sensitive to what's happening in the financial market. Some of our shorter cycle Yes. We have to be careful that we don't increase prices and lose to the competition lose market share to the competition.

Speaker 2

But in some areas like healthcare, where we make x-ray panels that are very high resolution, A very low dosage, there we have pricing power. And so it's a mixture. Overall, When I say uncertainty about the economic uncertainty, I'm speaking exactly to what you pointed out. Some of the uncertainty in the financial market that's sipping out into other markets as well.

Speaker 6

Great. Thank you for the color. And if I could sneak a last one in. When you look at your overall portfolio, what percent of it would you say You have more pricing power versus what percent would have more pricing sensitivity?

Speaker 2

I think about 40% of our portfolio, we have more pricing power and 60% is more sensitive. Because the 60% in some ways, it depends on the global macro environment. As you may know, The way our portfolios evolve, today we sell about 20 2% to the government, 28% U. S. Commercial 50% commercial and defense outside the U.

Speaker 2

S. So the macro global macro

Speaker 6

Great. Thank you very much.

Speaker 2

For sure.

Operator

And currently, we have no further questions in queue.

Speaker 2

Thank you, Brad. I appreciate that. I'll now ask Jason to conclude our conference call.

Speaker 1

Thanks, Robert, and thanks everyone for joining us this morning. Of course, if you have follow-up questions, please feel free to call me at the number on the earnings release or e mail me For those who have my contact information, Rod, if you could give the replay information, we would greatly appreciate it. Thank you.

Operator

Certainly. Thank you. Ladies and gentlemen, the conference will be available for replay after 10 o'clock today and running through May 26 at midnight. You can access the AT and T replay system at any time by dialing 1-eight sixty six-two zero seven-ten forty one and entering the access code 8,000,000,000,000,000 9,700,847. Those numbers again, 1-eight sixty six-two zero seven-one zero four one.

Operator

International parties, 4029700847 with the access code 8,989,173. That does conclude our call for today. Thanks for your participation and for using AT and T Teleconference. You may now disconnect.

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