Teledyne Technologies Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Teledyne's Second Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, we will have a question and answer session and instructions for queuing up will be provided for you at that time. And as a reminder, this conference call is being recorded. At this time, I'd like to turn the conference call over to your host, Jason Van Weese.

Operator

Please go ahead, sir.

Speaker 1

Good morning, everyone. This is Jason Van Wees, Vice Chairman. I'd like to welcome everyone to Teledyne's Q2 2024 Earnings Release Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian CEO, Edwin Rox Senior Vice President and CFO, Steve Blackwood and Melanie Civek, EVP, General Counsel, Chief Compliance Officer and Secretary.

Speaker 1

President and COO, George Bob would have joined us, but after getting stuck in airports late last week and the weekend, George came back with COVID and is being isolated. Anyway, after remarks by Robert, Edwin and Steve, we will ask 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 based on 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, both via webcast and dial in will be available for about 1 month.

Speaker 1

Here's Robert.

Speaker 2

Thank you, Jason, and good morning and thank you for joining our earnings call. In the Q2, Teledyne achieved all time record free cash flow, allowing us to deploy approximately $852,000,000 through July on debt repayment, acquisition and stock repurchases. Non GAAP operating margin increased from last year and increased in each of our 3 largest segments. Total sales and earnings increased sequentially and exceeded our most recent expectations. Although year over year comparisons remain especially difficult in certain commercial market such as industrial automation and electronic test and measurement.

Speaker 2

Nevertheless, strong defense related sales at Teledyne Flayer and our own legacy space based infrared imaging business partially offset the expected declines in industrial imaging systems. Furthermore, despite the anticipated year over year decline in certain instrumentation product lines, total instrumentation sales were a 2nd quarter record due to exceptional performance of our marine instrumentation businesses. Primarily driven by our aerospace and defense businesses, orders were greater than sales for the 3rd consecutive quarter and we ended the period with record backlog. Therefore, we're reasonably confident that quarterly sales will again increase sequentially and we will return to year over year sales growth in the second half of in the Q2, our quarter end leverage remained at 1.7 and we plan to continue stock repurchases in the balance of 2024 as well as pursue acquisitions. I will now turn the call to Edwin, who will further comment on the performance of our 4 segments.

Speaker 3

Thank you, Robert. This is Edwin, and I will report on the first report on the digital emitting segment, which represents 54% of Teledyne's portfolio. And like Teledyne as a whole, this segment is a mix of longer cycle businesses such as defense, space and healthcare combined with shorter cycle markets including industrial automation, semiconductor inspection and infrared components and cameras for applications ranging from factory condition monitoring to maritime navigation. Q2 2024 sales declined 6.8% compared with last year. As expected, sales to industrial machine vision markets declined approximately 30% year over year.

Speaker 3

However, this was partially offset by increased sales from freight defense and from Telenet's space based infrared imaging detectors. Furthermore, for the 4th consecutive quarter, healthy margins across the entire FLIR business portfolio helped us protect overall operating margin even given the significant year over year reduction in sales of our typically highest contribution margin product lines. I will now report on the other three segments, which represent the remaining 46% of Doubleback. The Instrumentation segment consists of marine, environmental and test and measurement businesses, which contributed a little over 24% of sales. For the total segment, overall 2nd quarter sales increased 1.6% versus last year.

Speaker 3

Sales of marine instruments increased 16% in the quarter, primarily due to strong offshore energy and subsea defense sales. Sales of environmental instruments decreased 1.6% with greater sales of drugs, the recovery and laboratory instruments offset by lower sales of process gas emission monitoring systems and gas and flame safety analyzers. Sales of photonics test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers, decreased 15.8% year over year on a tough quarterly comparison versus 2023. Overall Instrumentation segment operating profit increased in the 2nd quarter with GAAP operating margins increasing 136 basis points to 26.1 percent and 134 basis points on a non GAAP basis to 27.2%. In the Aerospace and Defense Electronics segment, which represents 14% of Stellan sales, 2nd quarter sales increased 4.5% driven by the growth of commercial aerospace and defense microwave products.

Speaker 3

GAAP and non GAAP segment operating profits increased year over year with segment margin increasing approximately 77 basis points. For the Engineered Systems segment, which contributes 8% to overall sales, 2nd quarter revenue decreased 8.7% and operating profit was impacted by lower sales and unfavorable program mix. I will now pass the call back to you, Robert.

Speaker 2

Thank you, Edwin. In conclusion, our 2nd quarter performance was a testament to the strength of our balanced business portfolio. We also continued our proven strategy of increasing margin in those businesses which are growing, while reasonably protecting margins in businesses with more challenging markets. Our current full year earnings outlook is identical to the last quarter with some markets such as industrial automation and electronic test and measurement remaining difficult, although year over year comparisons are easier in the second half. While the outlook for our global defense, energy and aerospace businesses remains strong and is supported by our record backlog.

Speaker 2

Finally, we continue to review acquisition opportunities. But given the strength of our balance sheet and cash flow, we also plan to continue purchasing our own stock under our current 1.25 $1,000,000,000 authorization. I will now turn the call over to Steve.

Speaker 4

Thank you, Robert, and good morning. I will first discuss some additional In the Q2, cash flow from operating activities was $318,700,000 compared with 190 $500,000 in 2023. Free cash flow that is cash from operating activities less capital expenditures was $301,000,000 in the Q2 of 2024 compared with $163,200,000 in 20 3. Cash flow increased in the 2nd quarter due to stronger working capital performance. Capital expenditures were $17,700,000 in the Q2 of 2024 compared with $27,300,000 in 2023.

Speaker 4

Depreciation and amortization expense was $77,800,000 for the Q2 of 2024 compared with $80,000,000 in 2023. We ended the quarter with approximately $443,200,000 Now turning to our outlook. Management currently believes the GAAP earnings per share in the Q3 of 2024 will be in the range of $4.02 to $4.16 with non GAAP earnings in the range of $4.90 to $5 and for the full year 2024, our GAAP earnings per share outlook is $15.87

Speaker 5

to $16.13

Speaker 4

and we are affirming our prior non GAAP outlook of $19.25 to $19.45 I will now pass the call back to Robert.

Speaker 2

We would like to take your questions. John, if you're ready to proceed with the questions and answers, please go ahead.

Operator

Certainly. Ladies and gentlemen, for questions, please press Once again, there's 10 for questions. And if you decide choose to withdraw from the queue, press 10. Again, we'll pull you out of the queue. Our first question is going to come from Jim Ricchiuti with Needham and Company.

Operator

Please go ahead.

Speaker 6

Hi, thank you. Good morning. I was hoping to get a little bit more color on the bookings, the book to bill. It sounds like the positive book to bill was largely driven by the Aerospace and Defense business. But I wonder if you could just elaborate on what you saw from an order standpoint in the quarter?

Speaker 2

Thank you, Jim. First, you're correct in generally overall, but I think our overall book to bill was 1.07. It was digital imaging was close to 1 like 0.98. Instrumentation was just over 1 at 1.04. But as you said, aerospace and defense was very strong at 1.41 and engineered systems also strong at 1.25 resulting a combined book to bill of 1.07 for the complete company.

Speaker 6

Got it. That's helpful, Robert. If we think about the backlog, the longer cycle backlog and as it converts into the second half to revenue. Is that mainly defense converting? I'm wondering what other areas of the longer cycle business might drive growth in the second half?

Speaker 6

And maybe related, what kind of expectations do you have for the short cycle business in the back half? Thank you.

Speaker 2

Let me start with the first part. Defense is obviously, as you said, very important and is got the long cycle business that's doing really well. The second area is energy. And that's our marine instruments businesses. They've done exceptionally well for the year and we'll continue to do so.

Speaker 2

And then the third area is aerospace, both aerospace from the computers that we have on commercial aircraft to aerospace and the aerospace from our imaging sensor businesses. Now going back to the commercial shorter cycle businesses, What we're seeing is, we think that digital imaging as a whole, total digital imaging should be relatively flat in the second half of the year, that's year over year flat, which is good because it declined in the first half of the year. Some of the recovery that we're seeing is early signs that come from our MEMS, microelectronic mechanical systems, which are kind of like the canaries in the mine. We are seeing some uptick in orders there, which is encouraging, especially from semiconductor industry. And then we also have some indications that our machine vision systems, as example, have stabilized and book to bill is reached 1 or a little better, which is encouraging.

Speaker 2

We're hoping that these trends will continue with semiconductor coming back and inspection businesses that we have picking up and some of our high end thermal cameras also doing better than they have. So I think overall, we're positively inclined towards the second half of the year.

Speaker 6

Got it. That's helpful, Robert. Thank you.

Speaker 2

Thank you, Jim.

Operator

Our next question comes from Andrew Buscaglia with BNP. Please go ahead.

Speaker 7

Hey, good morning guys.

Speaker 2

Good morning, Andrew.

Speaker 7

Yes. So long that line of questioning. Can you talk a little bit about test and measurement has been a tough market, a little bit weaker in Q2, but in line I think with what you guys were suggesting. How do you see that playing out? Do you still feel like your expectations for down 10% for the year are valid?

Speaker 2

Yes, about that. I'd say not to be picky, but it's we have 9.9%, which is very close to your 10%. But that's also a tale of 2 cities there. In our test and measurement, as you know, Andrew, we have 2 businesses. 1 is the oscilloscope business and the other one is our protocol business, which are basically rules for communication within devices and devices and the cloud.

Speaker 2

That business, the protocol business is coming back faster and is doing better, a little bit better. It's the oscilloscope business, which is lagging. Having said that, we've took cost out in that business. And fortunately for us, we took the cost out very early and the margins of instruments have remained pretty well. We anticipate, for example, about almost 94 basis points improvement in our total instrument portfolio, even with part of TNM being weak, partially because our Marine is very strong and our environmental businesses are doing okay.

Speaker 2

So I don't know whether that answers your question fully or not. Yes.

Speaker 7

No, that's helpful. And maybe sticking with instrumentation, yes, marine has been really strong. Presumably, you have good visibility there. What can you parse out what's driving that exactly and the confidence that that continues into the second half? How should we think about that for the full year?

Speaker 2

2 areas. 1st is the offshore oil production and discovery. We have as you know, we have instruments that are deployed in streamers to look down at acoustic signals that bounce from the ocean floor and determine whether there's oil and gas there. That's a strong business and continues to be. The other part is, of course, our connector businesses.

Speaker 2

They are doing really well. We actually, we're almost at capacity in that business. And then the second part of the marine business is the defense part of the business. As you know, we have defense, unmanned vehicles, underwater vehicles. We also provide connectors for submarines.

Speaker 2

That business is doing really well and our underwater vehicle businesses are doing really well. So it's a combination of offshore, oil production and discovery and defense and security.

Speaker 7

Okay. Thank you.

Speaker 2

For sure.

Operator

Next is Connor Walters with Jefferies. Go ahead please.

Speaker 8

Hi guys. Thanks so much for taking my questions. Just to start off, any update to the free cash flow guidance for the year despite somewhat constrained top line in the first half, free cash flow is tracking well ahead of your $1,000,000,000 target. What do you expect for the year and what are some of the drivers just given such a strong start in the first half?

Speaker 2

That's a good question, Conor. I don't want to be effervescent about that because in the first two quarters, we've generated $576,000,000 of free cash flow. I think in the second half, we have some bond payments coming due. We have some taxes coming due. So I think it's going to be less.

Speaker 2

We are hoping that our free cash flow would be above $900,000,000 That's where we're sitting right now with the front end being heavily loaded. But having said that, we're confident enough in our cash position to continue our purchases of our own stock.

Speaker 8

Okay, got it. That's very clear. And maybe just jumping over into defense a little bit more. We've seen a lot of technology announcements for Teledyne, some new wins in areas such as loitering munitions. Just given this, how are you thinking about the fence going forward?

Speaker 8

And any divergence within the exposure in A and D Electronics and Engineered versus where you are in digital imaging?

Speaker 2

No, I think let's just look at the major programs that announcements that keep coming out. There's a whole slew of them. The most important one, I would say that's new is our loitering unmanned aerial vehicle, which now is weaponized, what we call Rogue 1. And we already have our first order for over 100 systems for that. And it competes very well against the competition, both in terms of precision, but also with the fact that you can send these vehicles to Target.

Speaker 2

And if you decide to bring them back, you can do that easily. That's a distinguishing picture. And of course, the other part is the accuracy. The next example, as you may know, is again, staying with vehicles are very small mini drones. We sold a whole bunch of them over the years, what we call Black Hornet Net 3, which are about 6 inches in size.

Speaker 2

Black Hornet 4 was introduced this year and we got the 1st production order for about almost 1,000 systems recently. We expect that that program will continue and be a very strong contributor to our defense businesses. And these orders are from the U. S. Government right now.

Speaker 2

Then we have, as I mentioned, we have the inserts for the Virginia ore connectors for the Virginia and Columbia class submarines. Those businesses have really good backlogs and are doing well. We also have drones that come out of our Canadian operations, the R70 and RL80. We have orders for those and we also have counter UAV systems that are being deployed in Europe. And finally, this is our examples.

Speaker 2

We have a very lightweight uncooled target recognition system, what we call the FWS, Family of Weapon Systems. That's we have the development order for it and we have the first production order for it. Those 2 combined over $70,000,000 and expect about $500,000,000 in IDIQ contracts. So, they're just examples. I think our defense businesses, especially flare defense has picked up the pace very well and is we're very excited about that.

Speaker 8

Great. That's super helpful. I'll leave it there.

Speaker 2

Thank you.

Operator

Next question is from Joe Giordano with TD Cowen. Please go ahead.

Speaker 9

Hey, good morning. Robert, you said you're seeing some stability in the machine vision business, which is good to hear. I think you mentioned it was down 30 year on year. What was that compared to 2Q? And what's the expectation for like 3Q and 4Q?

Speaker 9

What was that versus 1Q and what's the expectation in 3Q, 4Q versus the second quarter?

Speaker 2

Well, I think basically they were down 30 in Q1 and Q2 as Edwin indicated. I think that's now going to be about 10% and 10% in Q3 and Q4. So for the year, would be about 20%. So it's going to improve. Partially, it's improving.

Speaker 2

Partially, it's because cuts are getting easier to be frank and very straightforward about it. That market began softening last year in Q3. So the comps are going to get easier. But also we're seeing, as I indicated before, we're seeing some uptick in certain areas. And as you know, semiconductor industry is coming back and coming back strong and our products are used in the inspection systems all over the world.

Speaker 9

And just to be clear, like are the dollars for that business in 2Q higher than 1Q? And will they be higher in like the second half dollars versus 1 half dollars?

Speaker 2

I think our expectations right now are that they'd be relatively flat. Maybe a little better in the second half. And I don't want to be certainly in Q4, we expect it to be stronger. But right now, we have to be very careful not to drink our own bathwater because while things are looking well good, we have both the vision systems, which are visual systems as well as our infrared systems. So we have we're looking at the combo there.

Speaker 2

And I think flat would be a good word with Q4 picking up.

Speaker 9

Okay. We're also hearing some people talk about like Boeing finally telling suppliers to cool off a little bit. I know that their production has gone down, but they've been still receiving components from suppliers at the same pace. Are you seeing any of that where they're pushing back a little bit?

Speaker 2

We're not seeing that as much. There's some rotation going on there in our OEM products, but we're not only supplying OEMs. We're also the aftermarket business there is very important to us and we're doing okay there. I think overall, our aerospace business is pretty healthy.

Speaker 9

Good. I'll get back in queue. Thanks guys.

Operator

Next question is from Guy Hardwick with Freedom Capital Markets. Go ahead please.

Speaker 5

Hi, good morning.

Speaker 2

Good morning, Guy.

Speaker 5

Going back to the free cash flow issue, what's your sense for when you look back on this year where you would have deployed the free cash flow in terms of acquisitions, share repurchases and debt repayments?

Speaker 2

Well, Guy, we think because our free cash flow was so strong in the 1st two quarters And you have to also keep in mind our liabilities, which is our debt. Our debt is set up pretty well. It's fixed. It's only we will pay have to pay like $150,000,000 in October timeframe. Other than that, our payments start in 2026.

Speaker 2

And if you roll everything that we owe over the years, our interest payments are about 2.35%. Now, for the year, we think that we will continue buying our stock, maybe depends on the stock price, right? We bought back quite a bit in the first half of the year. We expect to continue to do that, but we're also looking at acquisitions at the same time. So we're balancing the 2 as we go forward.

Speaker 2

Right now, because of our very serious efforts in eightytwenty and ability to generate cash, we think that we're in a really good situation. We just renewed our line of credit for another 5 years. We haven't touched it. We have about $1,200,000,000 untouched. So, with no debt payments, big ones coming due, our interest rates being 2.35% over the many years, We feel good that we can do whatever we want.

Speaker 2

Right now, focused on buying back stock and looking at acquisitions as well.

Speaker 5

Okay. Thank you. And just so as a follow-up, would you mind updating us on your margin expectations by segment or has nothing changed since the last quarter?

Speaker 2

No, I can do it if you wish. I can do it for the full year. We think that for the full year in instruments, as an example, it should be up about 90 to 100 basis points, which is pretty healthy for us. We'll go from what was last year at 26.6% to 27.5% plus. In digital imaging, we think that margins for the year may go down a little bit, even though I mentioned the headwind that we have there.

Speaker 2

But if you look at the whole portfolio, while margins went down in our Dalsay A2B businesses, they went up significantly in our FLIR businesses. So we think they might go down modestly, maybe 30 basis points for the year, maybe 20. Aerospace and Defense, I think we're doing really well, maybe over 100 basis points. And Engineered Systems, which is our smallest segment, I think margins are going to be going down primarily because of the first half. And overall, we think the segment margins should be about 14, 15 basis points up from last year considering all the headwinds that we have, that's pretty good.

Speaker 5

Okay. Thank you.

Speaker 2

Thank you.

Operator

Next question is from Rob Jamieson with Vertical Research Partners. Go ahead please.

Speaker 9

Hi, thanks guys. I guess just real

Speaker 10

quick one clarification just with digital imaging. Should we in the next 2 quarters, 3Q, 4Q, is there much differential between the quarters on margin to kind of get to that down 20, 30 basis points?

Speaker 2

Well, let me see if I can answer that well. I think in the first half, if you look at Q1, the margins were about 21.8% overall in digital imaging. You look at Q2, they dropped about 20 basis points to 21.6. We think in Q3, it will pick up to over 22%, 22.2% maybe and then go as high as 23% in Q4. So we should end the year at 22.2 even with a weak first half.

Speaker 2

So I think margins are going to keep improving both because of the cost action that Edwin and his people have taken but also because some of the markets are coming back.

Speaker 10

Perfect. That's helpful. I was actually going to ask about that next. And look,

Speaker 9

I know this is a

Speaker 10

pretty small part of your business, but I just wanted to ask a little bit more on the oscilloscope within instrumentation, test and measurement. Just wondering your competitors this morning cutting their outlook on delayed R and D spend and government and China related spend. Just curious, if there's anything in the end market, end markets that you're seeing within test and measurement on the oscilloscope side that's maybe weaker or starting to improve more or is it just all kind of a little bit soft and lagging the protocols business? Any additional color there would be great.

Speaker 2

Yes. I think you've explained it very well. I think people are hesitant to spend discretionary CapEx. So the high end oscilloscope where you make really good money is slowed down. We expect the whole business to be done about 10% year over year.

Speaker 2

But having said that, as with many other years, we were probably the first one out of the box early in the year in April to 1. And subsequently, you see everybody else, of course, having to do the same. The advantage that we had in doing that was that in knowing that the market was going to soften, we took cost out late in Q4 and early in Q1. And as a consequence, the margins in that business have been exceptionally healthy.

Speaker 10

Yes, absolutely. Now thank you for that. I appreciate you all taking my questions.

Speaker 2

Of course. Thank you.

Operator

We have one more in queue. We're going now to Jordan Lianney from Bank of America. Go ahead please.

Speaker 11

Good morning. Thanks for taking the question. How should we think about if the U. S. Puts more restrictions on to ASML and Tokyo Electron?

Speaker 11

What would that impact be for the digital imaging segment?

Speaker 2

I don't see that impacting us much. We supply product to their customers. I don't want to mention the name, but this is a large customer and we they use this is a U. S. Customer and they use as ASML equipment, which uses a critical part that we make in our MEMS factories.

Speaker 2

We don't expect to see a change in that because we're frankly supplying the customers of ASML and it's not a huge business, maybe $20,000,000 $25,000,000 business but very profitable.

Speaker 4

Got it. Thank you.

Speaker 2

For sure.

Operator

At this time, we have no additional callers in queue.

Speaker 2

Thank you very much, John. I'll now ask Jason to conclude the conference

Speaker 1

call. Thanks, Robert, and thanks, everyone, for joining us this morning. If you have follow-up questions, of course, feel free to e mail me or call me at the number on the earnings release. All our earnings releases are available on our website as is this webcast. And John, if you could conclude the call and give the replay information, it would be much appreciated.

Speaker 1

Thank you.

Operator

Absolutely. Ladies and gentlemen, a recorded replay of this conference call will be available from today at 10 am Pacific through August 24 this year, 2024 at midnight. To access the replay from domestic areas, call 866-207-1041, enter the access code 5,6,230,764. International callers use 402 970-847 and the same access code 5,623,764. Once again, replay available from 10 am Pacific today through August 24.

Operator

Domestic callers use 866 207-1041. International callers use 40297008 47 and the access code for either is 5,6,237

Remove Ads
Powered by Quartr
Earnings Conference Call
Teledyne Technologies Q2 2024
00:00 / 00:00
Remove Ads